Our future income and the role market led solutions could play

Posted: Oct 18, 2017 by Instinctif Partners

Perhaps revelatory of my personal interest in  financial markets but hopefully also topical for the readers of this newsletter, one’s career trajectory and its implication on future income (from work) and more importantly on pension income have been a topic of conversation as of late. In a period where short term (like the shared economy) contracts are used extensively, industry disruptive changes in one’s career are not uncommon, the automation of the labour force is causing mass negative effects on employment in western Europe, life expectancy is on the rise, delayed retirement age is a matter of public responsibility and associated increased pressure on state funded pensions is bringing people onto the streets, the following conversation is arguably necessary. Times of what the French would call “l’Etat providence” (in a post WWII Keynesian perspective) are undoubtedly over and both citizens and policy-makers need to reconcile with that fact. The EU’s role in creating an environment that could foster a Single Market able to tackle such issues will be critical.

With that in mind, let us explore some policy options (the below is not an exhaustive overview of the solutions on offer) at the EU level.

In June of this year, the European Commission (EC) adopted a proposal for a “pan-European personal pension product” (PEPP) in an attempt not only to boost the EC’s CMU project but also to provide a savings alternative to EU citizens on a cross-border level. This standardised product would come on top of state-based, occupational and national personal pensions. However laudable the EC’s more obvious (and articulated) motives can be with regards to harmonization, the need to provide citizens with more choice and portability and better cross border protection is of utmost importance. One specific aspect of the PEPP stands out in our opinion: the underlying personal responsibility message sent (intentionally or not) to EU citizens as a sort of warning of things to come. The forward guidance implied in the PEPP is very revealing of the type of future that awaits us in the EU and arguably on a global scale. In short – a future where individuals can no longer cash a check from the same employer for 40 consecutive years, a future where bouncing in an out of employment becomes the rule rather than the exception, a future where people spend (theoretically) up to a third of their lives in retirement and where states can no longer honour their pension payments (and that’s excluding the odd financial crisis) is a very likely scenario. A study commissioned by Aviva pertains that Europe’s pension savings gap is projected to be €2 trillion a year for the period 2017 to 2057[1]. Although the PEPP caters specifically to issues of personal pension, its political message indicates the need for the EU to provide important societal solutions with the Single Market as its platform.

Public solutions to the ‘society 3.0’ issues listed above have hit mainstream national prominence in recent months especially with regards to the rejuvenation of an old idea: the universal basic income (UBI). Finland is currently carrying out a UBI pilot project and the Thomas Piketty supported socialist candidate in the recent French presidential candidate, Benoit Hamon, made it a corner stone of his manifesto. But implementation of an UBI never really gained the political traction that would indicate a potential application. This is in large part because of the inherent problems the application of an UBI could bring about on number of levels: budgetary, operational and ideological. We will refrain from delving too much into UBI models for that specific reason but also because more often than not such models are conceived as social justice recalibration models which are incompatible with the real issues at hand.

Little time however is allocated to market solutions. The latter group, as rightfully identified by the EC in its PEPP proposal, could play an important role in complementing the efforts of state initiatives.

Take insurers as an example (the EC also foresees EIOPA authorized banks, asset managers and other market entrants to benefit from the PEPP initiative). As prominent providers of personal pension plans in the EU, insurers could benefit significantly from projects like the EC’s PEPP (assuming operational suitability). Better yet however, is that the success of such products could spur experienced risk evaluators like insurers to further innovate with the aim to provide solutions to related issues and to consequently unburden EU member states.

The same rationalisation could be applied to income gap protection. Although usually associated to temporary disability or sudden death, income gap protection could easily be tailored and deployed to bridge the gaps created by modern career planning or unexpected short term redundancies and their associated marketplace recalibration through training programs. Much like personal pension products, income gap protection suffers from a lack of awareness (use, costs, benefits, etc.) and more importantly market fragmentation[2]. Insurers’ inherent ability to evaluate risk ex-ante would be far more cost effective than traditional ex-post evaluation of issues at hand and subsequent negotiation and application of regulation supposed to solve those issues. The PEPP initiative is arguably ex-ante in nature because it creates a product to regulate. A potential Single Market income gap protection initiative could follow the same blue print and in turn foster an environment conducive to further market innovation. There has been some good work in this area such as the European Collaborative Economy Forum’s report[3] which highlighted the role of insurance in the shared economy workspace.

We certainly wish to see the EC’s modus operandi with regards to the PEPP initiative replicated to further incentivise market led solutions to cater to a future we believe will be significantly different to the current status quo. The co-legislators’ handling of the sensitive issues (like harmonised tax relief) in the PEPP file will not only determine the viability of such initiatives but could in turn become a litmus test for similar projects in the future. The EU’s ability to provide credible solutions ex-ante to critical societal issues could be at stake.

In our view the task ahead requires a heavy effort by stakeholders to advance the debate. Waiting to fix this when the emergency hits will be too late.