Retirement on the breadline

State benefit cuts are affecting 80-90 percent of Europeans, says Michael Rentmeister

Transcript

With austerity the new normal for Europe, pensions are changing, and people can no longer rely on the state to look after them in their old age. Michael Rentmeister, CEO of OVB Holdings, discusses the most common traps people fall into when trying (or not trying!) to plan their financial future.

European CEO: Pensions are changing: no longer can most people solely rely on the state to look after them in their old age, which means financial planning is becoming more fundamental to people’s future than ever before.

With me now is Michael Rentmeister, CEO of OVB Holdings, to explain what people should be doing to ensure a comfortable older age.

Well Michael, you’ve stated that state benefit cuts are affecting 80 to 90 percent of Europeans. Now this sounds drastic; what is the current situation when it comes to pensions? And does it differ between different countries?

Michael Rentmeister: For many years, the OECD has been highlighting a clear trend, which shows that public pension schemes are not working any more.

Today we have a situation in which people now entering working life will have a maximum pension totalling 50 percent of their net income. And the consequence of this will be poverty in old age, which not only concerns people who have low levels of education or training, but also well educated people; in particular, the middle class in Europe.

European CEO: Well obviously now it’s vital for people to take charge of their own pensions, but how can they even start to understand the different options that are available to them, and pick the right one?

Michael Rentmeister: The main problem is actually the fact that many people know they will eventually need private pension provision. In contrast to consumer behaviour, they do not view such provision as being a necessity, and over the last 30 years, I have never heard anyone say the following without prompting: “I need to do something about my pension provision.”

After all, looking ahead 40 years isn’t considered to be sexy or trendy. Insurance products and provision products are low interest products, and it is therefore important to approach people, and this is something that can also be done by insurance intermediaries, to talk with them about their requirements, not least to show them that solutions exist.

European CEO: Are there any common traps or mistakes people make when planning for the future?

Michael Rentmeister: It all starts when people decide it’s something that they would prefer not to think about at all – along the lines of: “If I ignore it, maybe things will turn out all right somehow in the end.”

Secondly, there is the fact that those who have actually done something often believe that having looked into it once and done something once is enough.

The third factor is that many people say: ‘Well, with the potential outgoings that I have, it isn’t actually possible for me to make reasonable provision for a pension.’ And this is actually wrong, as many people do not know that they can, of course, build up a decent pension provision for their personal needs over a long period even with small contributions.

It is exactly here that advisors and intermediaries are so important, in order to inform, to create transparency and to build knowledge in this area. This is exactly the responsible task which makes it so important for there to be a healthy insurance and financial intermediary sector all over Europe.

This is also an important feature of the business model of my company: OVB. The fact that our people start by analysing the situation in a very clear and systematic way, before then providing respective recommendations, giving advice and ensuring the provision of a long-term service on this basis.

European CEO: What do you make of the UK’s dramatic pension freedom changes that were made last year, that allow people to take a lump sum out of their pension pot?

Michael Rentmeister: We ourselves, do not work in the UK, we rather take the view of ensuring that the systems are developed in such a way that we can motivate and encourage people to persevere with actually making provision for their old age.

Please let me give you an example from Germany: In the 1960s, we still had a situation in which women who didn‘t want to continue working were entitled to receive their pension contributions in the form of a one-off payment. With these women, however, it quickly became clear that this led to genuine gaps in their provision in old age, so that they were then given the opportunity to make new payments into the system which enabled them to acquire or buy new pension rights.

However, this is something that many of them couldn’t afford to do. But the problem is that the taxpayer, i.e. the general public or the next generation, is always forced to pay for the mistakes made with the system and the subsequent corrective action. Our message, which also applies to the UK, is that, actually, interventions in pension systems have never amounted to being a positive step forwards for the general situation in any country of which we are aware. And it is possible that this may also be the situation in the UK.

European CEO: Well finally, how do you see pension systems in Europe evolving? And at the end of the day, wouldn’t it be better for people to just use the money they’ve earmarked for their pensions in other investments?

Michael Rentmeister: I think that multi-layered insurance schemes, especially those in continental Europe, have proven to work.

On the one hand, we have the pay-as-you-go schemes, and on the other hand, those with the development of capital based on individual contributions. The pay-as-you-go schemes however, have to be more honest. This is because one thing is clear: they have all a demographic problem, one particular problem, in that they only work if the respective national economy in the country is also working effectively.

Therefore, those who can’t rely on living in a country that has a strong national economy won’t be able to rely on pay-as-you-go systems.

On the other hand, to additionally build up private provision for old age with contributions funded by capital, is a sensible idea which definitely requires encouragement. The pension payments which the pay-as-you-go schemes are now able to afford are far too low to be able to maintain a satisfactory standard of living in a recipient’s old age.

However, I firmly believe that having such coexisting schemes in this way is a good idea, and that it is also good when people don’t put all of their assets in one basket, and instead say: ‘Okay, we’ll spread them around.’ That’s why it is clearly logical to have both of these systems at the same time, rather than it being a case of ‘either/or’.