Real pension returns across the EU are dangerously low

– they will not meet future pension needs

Watching your pension sail awayBrussels, 09/10/2018. Europe’s pension savings gap remains dangerously large, exceeding €2 trillion a year, which is about equivalent to 13% of Europe’s GDP (Mind the Gap 2016, Aviva). This is by far the biggest financial issue facing EU citizens, their children and grandchildren, believes Better Finance in Brussels.

With government pensions on the decline, and occupational ones covering only a minority of EU citizens, public authorities claim the only solution is to save more and earlier for retirement. Yet this advice ignores a key reason why too many long-term and pension savings fail to provide for an adequate replacement income – insufficient and sometimes even negative long-term real returns (net of inflation and fees).

In fact, saving “more and for longer periods” will not even remotely address the issue, since even saving 10% of activity income for 30 years will, with a zero real net return, only provide about 12 % of previous earned income into retirement.

Inadequate long-term returns

It is time, Better Finance believes, that governments address the real reason why returns are so low. Their research into real net returns of European pension savings shows that fees and commissions are the main culprits, high enough to severely hurt returns for pension savers. Asset allocation and taxes on long-term savings are also to blame, and both continue to rise across the EU.

In addition, pension savings products too often significantly under-perform capital markets, and sometimes even destroy the real value of pension savings over the longer term.

Where investment returns have improved in recent years (bonds and equities), thanks in large part to a prolonged bull market dating back to 2011, the group’s latest study shows that most long-term and pension savings products did not. On average, their returns were not even remotely close to those of capital markets.

Overall, a direct balanced (50% European equities / 50% European bonds) investment from a European saver in capital markets at the eve of the 20th century, would have returned around +60% in real terms (net of fees and taxes), which translates to an annual average real return of +2.64%.

Opacity of fees partly to blame

According to Better Finance managing director Guillaume Prache, “there is hope that the EU will eventually tackle the opacity issue. Following a Better Finance proposal in 2015, the European Commission launched an action as part of its ‘Capital Markets Union’ Action Plan to enhance the transparency of past performance and fees for long-term and pension savings products. The EC sent a request to the European Supervisory Authorities (ESAs) last year and the first reports of the ESAs are due by the end of this year.”

“Unfortunately,” he continues, “that alone will not be enough to improve the overall real returns of long-term and pension savings to ensure pension adequacy. If EU policymakers are at all serious about addressing the ticking pensions time-bomb in Europe, urgent action is needed. To this end Better Finance has published a Policy Recommendation (pages 6-71 of the 2018 report “Pension Savings – The Real Return”) that would go a long way towards addressing this most urgent threat to the well-being of EU citizens.”

More information

“Pension Savings – The Real Return”, 6th edition 2018, covers 16 countries and over 85% of the EU population.

Better Finance (The European Federation of Investors and Financial Services Users)
Rue du Lombard 76, 1000 Brussels, Belgium
Tel. +32 2 514 3777 Fax. +32 2 514 36 66

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