Anne Maher Chief Executive The Pensions Board Ireland 6 April 2006

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

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

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

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. 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. Pension Reform/Moving Risk Pensions Expenditure as % GDP France 12.6% Germany 12.5% Ireland 3.7% Italy 15.7% Netherlands 10.6% Spain 8.4% Sweden 13.0% United Kingdom 11.6% Source: Eurostat. Figures 2003 13

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. 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. 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. 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. 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. 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. 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. 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. 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. 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