1. The European Pension Challenge Harry Smorenberg CEO – SCC – The Netherlands 1

2. THE BIG ISSUES Pensions on their own will in most cases fail to deliver the ideal income base Employers cannot afford more Employees cannot afford more Society cannot afford more Only pensions people think pensions are great A revolutionary, innovative approach is required 2

3. From “Green Paper” to “White Paper” Sustainable balance between work and retirement Securing the safety of pensions More transparant pensions with better awareness and information Strengthening the internal market for workers and pensions Focus: adequate and sustainable pensions in Europe 3

4. European Pensions Reality Almost every known system for delivering a pension is represented somewhere in Europe Historical backgrounds to the various national schemes ensure huge diversity Unique challenges: –The most profound of these is to enable Europe’s pension systems to support Europe’s labor mobility –Although the EU guarantees its citizens the right to work anywhere in the Union, one still cannot easily port a pension from one EU country to another –Different systems, different contribution methods, different taxation treatments all combine to make Europe one workplace but still many pension jurisdictions Display of great variety Harry Smorenberg - October 20114

5. True Challenges Balancing the Pillars Shift in Risk Ageing Europe New Roles & Responsibilities Harry Smorenberg - October 20115

6. Pillars 6

7. PILLAR1. STATE PENSIONS2. OCCUPATIONAL PENSIONS3. INDIVIDUAL PENSIONS ObjectiveMinimum income –Reduce or avoid absolute pensioner poverty Decent retirement income on top of state pension Personalise pension provision –More flexible: handles periods of unemployment or employment in another country –Suited to modern “portfolio careers” FundingPay-As-You-Go –Utilises state taxation powers –Sensitive to demographics Often fully funded –Sensitive to financial markets –Risk shared between members of the scheme Fully funded –Sensitive to market levels at encashment and annuity interest rates –Risk individualised SolidarityVery high solidarity –Compulsory national system –Contribution according to income High solidarity –Often compulsory (for members or companies) Low or no solidarity –DC only: your pension relies on your own pot ChallengesAffordability Rising pensioner numbers supported by falling workforces Complicated interaction with welfare / social security / income support Increasingly at odds with the move away from “40-year career” Considerable risk and cost burden for employers Not optimal for small start-ups or self-employed No cohort support: risk is left with those least able to bear it Inadequate financial education for the ordinary citizen Significant risk of inadequate financial resources at retirement Balancing the Pillars Harry Smorenberg - October 20117

8. Balancing the Pillars STATE PENSIONS Dominating First Pillar Danger to government budget Political decisions; badly adapted to real needs Bureaucracy OCCUPATIONAL PENSIONS Dominating Second Pillar Paternalism Problems if companies fail, leaving people unprepared and unprotected INDIVIDUAL PENSIONS Dominating Third Pillar High costs (management charges, etc.); may even lead to capital destruction Under-saving always a threat SOLUTION Balance Pillars Role for both Defined Benefit (DB) and Defined Contribution (DC) DC solution in Europe needs development Harry Smorenberg - October 20118

9. Monoculture is dangerous ProblemSolution

10. Shift in risk Harry Smorenberg - October 201110 Shift in risk

11. Split DC* vs. DB Assets Drivers of DC Growth UK pension funds * Ex personal and stakeholder DC assets. Data source: Mercer (2009), Watson Wyatt (2010). Continuous shift from DB to DC In Many Markets, DC is Now the Dominant Retirement Plan Model

12. Implications of Shift to DC Globally, growth of DC assets is outpacing DB DC assets now represent 42% of the total pension assets in seven largest markets Financial crisis accelerated shift to DC by forcing more companies to close DB schemes Value of private pension assets worldwide has declined Some challenges facing DC models are due to their origins as supplemental rather than primary retirement savings plans 12

13. Implications of Shift to DC Many DC participants need more support in selecting their investments People are not saving enough, investment choices are sometimes inappropriate – poor asset allocations are a major challenge for DC More information and education is needed to drive participation Level of participation in DC plans is often too low – active engagement by employers is also necessary to make DC work for participants Less dialogue with asset management community Trustees’ fiduciary responsibilities within the DB space mean they lead innovation and are a source of good ideas Strengthening the DC model also requires regulatory changes Strengthening regulatory frameworks in many countries to meet exposed vulnerabilities – likely convergence of regulatory approaches to enhance employee participation, investor protection and plan governance Fiduciary issues to reviewAs the issues facing pensions become more challenging and diverse, there is a need to review fiduciary board membership qualifications to improve risk management 13

14. More innovation in DC Plan sponsors, plan providers and regulators must work together to design plans that: –Incentivise people to save –Provide the options necessary to achieve an optimal outcome –Auto enrollment is key feature of DC (with ‘opt out’ option) –Employer-matched contributions (powerful incentive to save !) Design of default investment option is key –Growing interest in target-date funds = heavily passive, very transparent, and comparatively low cost –Research shows that increasing the number of funds reduces 401(k) participation and leads to poorer choices (TIAA-CREF Institute) –Trend is toward fewer fund options and lower costs, also driven by fee disclosure requirements and increased fee-related litigation Harry Smorenberg - October 201114

15. Towards hybrid DC Harry Smorenberg - October 201115 New risk sharing arrangements in Europe - Economizing DB - Dressing up DC Conclusion: trend towards (more) hybrid schemes

16. Ageing 16

17. 200001500010000500000 100001500020000 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90+ MalesFemales European population (age groups and sex) 2008 2060 Harry Smorenberg - October 201117

18. Longevity is the greatest pension industry challenge DC versus DB means: work longer / save more DC contributions have remained significantly and constantly lower than DB contributions Big shift in employee / employer behavior and expectations –Performance management –Career paths / training - education –Redundancy terms –Remuneration models 18 You don’t get older …you get better !

19. New Roles Harry Smorenberg - October 201119

20. New roles and responsibilities Financial literacy –Education (early start with ‘economics’) –Simplicity Commitment Financial Service Industry –From budgetting to financial planning’(aggregation) –Consumer protection –Restore and maintain ‘trust’ –Increase transparency –Treat clients as partners Essentials of solidarity –Commitment to society –Fundamental values Harry Smorenberg - October 201120

21. Working Population Average Age Fertility Rates Pension Costs Labour Force Harry Smorenberg - October 201121

22. Personal Incentives Social and cultural innovation to reinvent retirement Private retirement provision is essential Governance issues due to financial illiteracy Individualization: less loyalty – need for structured planning Axes: Income – Health – Pensions (interdependencies) New class of communications needed Repositioning of Pensions: “Managing personal financial continuity continuously; in balance with a desired life-style” Harry Smorenberg - October 201122

23. CONFIDENCE CRISIS? MOST COMMON REASONS GIVEN BY EMPLOYEES FOR NOT JOINING A PENSION SCHEME No spare income My home is my pension No access Benefit too far off Not worth doing Too complicated Don’t trust greedy pension/investment firms Harry Smorenberg - October 201123

24. Trust Harry Smorenberg - October 201124