RETHINKING DISTRIBUTION

Where dowe stand?

asset managers) [14] . Alternatively, a UCITS-style product (with revisions regarding the daily liquidity and other features) could be created with underlying assets and an investment strategy that aligns with expectations of long-term investors in relation to riskmanagement, fees and reporting requirements [15] . However, turning a savings product into a retirement solution which would offer guaranteed lifetime income to pensioners brings new complexities. These include the obvious investment and interest rate risks which the asset management industry is familiar with, but also longevity and early retirement risks, an issue generally tackled by the insurance sector. Two main components frame the discussion on this area. The first is the allocation of risk, and the second is the future development of voluntary pension and insurance schemes. If governments withdraw from pay-as-you-go systems, will the risks fall to the retirees, who must ensure that they set aside sufficient savings to draw down in the future, and if they fail to do so, end up suffering the consequences i.e. old age poverty? Or will the investment industry be bound to carry the risk, whereby if assets under management fail to produce the required returns needed for the steadily larger outflows of retiree income, the losses must be covered by the product manufacturer? We consider this on the Y axis of our figure 16. The development of the pension fund and insurance market will be highly dependent on the growth of voluntary pension and insurance schemes, and we consider the likelihood of this on the X axis.

Pay-as-you-go systems still guarantee minimum pensions for the near term but the recent financial crisis has impacted pension policy in the EU as national debts now surpass historic levels. The trend by which the extension of working lives combined with a gradual retreat by the state appears to have accelerated, as the economics of the pay-as-you-go system cannot be supported in the future due to a combination of government indebtedness and poor worker-retiree ratios. States are nowpushing towards longer working careers and reviewing pension benefit provisions with an eye on future affordability. Recent pension reforms are also developing mechanisms to encourage private personal savings, mostly through tax incentives andmandatory default schemes. However, voluntary pension and insurance schemes still represent a lowproportion of the market, the majority of which still mainly rely on pillar 1 (public finances). In addition, insurance products remain the preferred retirement voluntary products due to traditional risk expertise in the sector and regulatory and tax advantages. Savings in voluntary pension and insurance schemes will grow but at a slow pace With increased levels of public debt and expenditure (which in themselves require decades to reduce to acceptable levels), coupled with the growing liabilities of the state regarding retirement funding for the population, it is clear that current levels of state support are unsustainable. Hence, it can be expected that the incentives for voluntary retirement savings schemes are only likely to increase. States are likely to continue to put in place, despite their current level of deficits, incentives for voluntary retirement savings like preferential What dowe expect in the long term?

[14] EFAMA, Revisiting the landscape of European long-term savings, March 2010 [15] PwC/CACEIS, Ideal Fund: Reengineering the fund value proposition, June 2009

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