1. Anne Maher Chief Executive The Pensions Board Ireland 6 April 2006 Pensions 2006 – Is there real change?

2. 2 Agenda  Increase in regulation  Pension reform/moving risk  EU Pensions Directive – as catalyst for change 2

3. 3 Increase in Regulation Why regulation is necessary “Pension funds are set up to serve as a secure source of funds for retirement benefits” (OECD) And so we regulate to Control commercial relationships between parties whose knowledge or power is unequal Avoid risk of market failure of a financial institution Avoid abuse of Government tax encouragements Foster public trust in pension provision And not to Thwart good pension provision 3

4. 4 Increase in Regulation Issues  Recent ‘scandals’ led to mass of new regulations covering pension plans, providers, advisers and accounting requirements  Loss of balance between necessary regulation and unnecessary cost  Different focuses needed for DB and DC  Wide variation between countries  Is regulation really effective?  Regulatory excess blamed for ‘murder’ of pension plans 4

5. 5 Increase in Regulation Is Regulation ‘Murdering’ Pension Plans?  Employers say that new UK solvency requirements and Pension Protection Fund are driving DB plan closures However  If regulator suggests weakening regulation there are cries of potential misselling  Are employers really more concerned about actual COST of pension provision? “Income from pensions down by 80% in 10 years”  And do employees really value pensions? 5

6. 6 Increase in Regulation Conclusion  Regulation is necessary But  Regulators/supervisors should: Avoid knee-jerk regulation Review regulatory regimes on regular basis Test effectiveness Consider indirect impacts  Regulation is one influence on employer decisions but not the big one 6

7. 7 Pension Reform/Moving Risk Pension Reform  Increasing recognition of pension issue at national and individual levels  Is happening in almost every country  Responses being considered Raising retirement age Increasing contributions/taxes Reducing benefits Voluntary or mandatory?  Germany, US, UK, Norway, New Zealand, Ireland……. all considering major reform 7

8. 8 Pension Reform/Moving Risk What is Risk?  The prospect of some event occurring which will cause disruption to the expected view of the future  Hazard, chance of bad consequences, exposure to injury or loss  Main pension risks are: Investment Longevity Market failure Fraud 8

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10. 10 Pension Reform/Moving Risk Moving Risk  Three parties State Employers Individuals 10

11. 11 Pension Reform/Moving Risk Moving Risk  State role Provide framework Provide supervision to protect beneficiaries Should it have guarantee role for mandatory systems? Seen as target for blame, for example: “Giving misleading impression on security of pension schemes” (UK) “Failure of Government to implement European law to protect workers pensions” (UK) 11

12. 12 Pension Reform/Moving Risk Moving Risk  States concerned about: Sustainability of State systems Perceived guarantees Effect on the markets (for example, LDI and long dated bonds) Effect on overall economy Social effect  States trying to shift risk 12

13. 13 Pension Reform/Moving Risk Pensions Expenditure as % GDP France12.6% Germany12.5% Ireland 3.7% Italy15.7% Netherlands10.6% Spain 8.4% Sweden13.0% United Kingdom11.6% Source: Eurostat. Figures 2003 13

14. 14 Pension Reform/Moving Risk Moving Risk  Employer role Key to private pension system Increasingly ‘reluctant’ involvement Favour DC over DB  Employer concerns Effects of regulation and accounting standards on ability to pay dividends, change ownership, raise loans (and can even trigger company collapse) Volatility and cost Breaking a promise? Employer competitiveness and national competitiveness 14

15. 15 Pension Reform/Moving Risk Moving Risk  Employers In UK closing DB schemes to new entrants, future accruals or even totally In Ireland many DB schemes change to DC for new entrants Netherlands employers generally holding on to DB German employers setting up CTAs (or maybe IORPs?) 15

16. 16 Pension Reform/Moving Risk Moving Risk  Individual Role To consider his/her position In DC individual carries the risk Now demands flexibility and choice  Individual Concerns Lack of expertise Inability to bear risk  Individual Is likely to have increasing responsibility, for example ‘quasi mandatory’ approach in New Zealand and being considered elsewhere 16

17. 17 Pension Reform/Moving Risk Conclusion  States are unlikely to take on more liability  Global shift from DB to DC unlikely to reverse  So shift of risk to individual is likely to continue 17

18. 18 EU Pensions Directive Progress  Directive supposed to be implemented by September 2005  In January 2006 only 10 Member States had notified full implementation of Directive  Discriminatory taxation is still an issue in some Member States – 18 identified by EFRP  Protocol between supervisors has been adopted 18

19. 19 EU Pensions Directive Types of Cross-Border IORPs  Existing plans which relocate  New employer sponsored cross-border plans  New commercial cross-border arrangements 19

20. 20 EU Pensions Directive Who is Interested  Multinational employers For pooling or merging  Employers with existing pension plans For regulatory or financial advantage  Commercial IORPs providers Looking to sell pensions cross-border 20

21. 21 EU Pensions Directive Influences on Change of Location  Tax arrangements  Investment opportunities  Pension tradition/services available  Availability of tried and tested pension skills/resources  Regulatory/compliance structures and environment  Ability to accommodate countries outside EU 21

22. 22 EU Pensions Directive  Pensions Directive Is first step in single market for pensions Provides a framework for change Investment/asset pooling is happening Liability pooling and centralised administration are next steps And there will be increased EU-wide competition amongst providers  Full Pan-European Pension Funds Will take time But WILL come about 22

23. 23 Pensions 2006 – Is there real change? In conclusion  We are seeing change  Change in regulation, shift of risk and (tentative) moves to EU single market for pensions  These affect plan sponsors, beneficiaries and the industry  And will lead to a very different pensions landscape 23