Commission evaluates Member States' national pension strategies

The European Commission issued in December 2002 its first comprehensive analysis of national pension systems in the EU Member States. It assesses the adequacy of national pension systems and their ability to face the challenge of an ageing population.

On 17 December 2002, the European Commission issued a proposal for a joint report from the Commission and the Council of Ministers on 'adequate and sustainable pensions'. The report has been issued in the context of the need to respond to the challenge of an ageing population and the implications that this development has for maintaining adequate and sustainable pensions in the EU. The Stockholm European Council meeting in March 2001 (EU0104208F) laid the ground for applying the 'open method of coordination' on the issue of pensions - ie the process of developing EU strategies (such as the European employment strategy) through the setting of common objectives and agreed indicators, regular reporting and the identification of best practice

This process was launched by the Laeken European Council in December 2001 (EU0201231N), containing 11 objectives grouped under the following three headings:

• safeguarding the capacity of pension systems to meet their social objectives;

• maintaining the financial sustainability of pension systems; and

• meeting changing societal needs.

Member States submitted national strategy reports on pensions in September 2002, in which they detail how they are trying to meet the 11 common objectives. The proposed joint report analyses the national reports.

Adequacy of pensions

The report finds that all Member States ensure that most people earn pension rights. They also provide a minimum level of income to older people, meaning that old age is no longer synonymous with poverty. In fact, in many Member States, the poverty risk of older people is lower than that for young people.

The report characterises pension systems as comprising three pillars:

• the first pillar of public earnings-related schemes;

• the second pillar of private occupational schemes; and

• the third pillar of individual retirement provision.

As a result of the combination of these three pillars and other tax-benefit policies, the report notes that older people generally achieve a standard of living that is fair and sometimes high. In addition, the maturing of pension systems and the higher participation of women has raised average pension levels. Improvements in income are expected in the future by allowing individuals to earn additional pension rights by postponing retirement and encouraging the social partners to establish sectoral schemes.

Although most pension income is achieved by means of the first pillar of earnings-related state provision, Member States are also promoting private provision.

The Commission also notes that Member States have built redistributive elements into their first-pillar pension schemes in the form of minimum pension guarantees or credits for periods without pensionable income. It notes that greater reliance on occupational provisions or public provision with strong solidarity elements will increase adequacy and promote fairness between generations.

Financial sustainability of pension systems

Member States have been attempting over the past few years to make their pension systems financially stable before the effects of the ageing population take hold. Efforts have included raising employment rates, reducing public debt levels and reforming pension systems.

Public pension expenditure projections show that if the employment targets agreed at the March 2000 Lisbon European Council (EU0004241F) (an overall employment rate of 70% and a female employment rate of 60% by 2010) are achieved and employment growth continues beyond 2010, the increase of public pension expenditure as a percentage of GDP could be reduced by around one third in 2050. Further, if a one-year increase in the effective retirement age could be achieved without increasing pension entitlements (most Europeans currently retire before reaching the statutory retirement age), the forecast pension expenditure increase could be cut by between 0.6 and 1 percentage points of GDP in 2050.

However, although Member States have declared that they are committed to reforming early retirement systems, the pace of change is, the Commission notes, currently too slow to meet the Stockholm and Barcelona (EU0203205F) targets of an employment rate of 50% for older workers and a five-year increase in the effective retirement age by 2010.

Further, large expenditure increases on public pensions are expected in most Member States and some countries are hampered by high debt ratios and the need for budgetary consolidation. The report therefore maintains that further reforms are needed, particularly in those Member States which have not yet safeguarded the long-term sustainability of their pension systems.

The report also maintains that in view of the 'rapidly deteriorating dependency ratios', care should be taken to avoid increasing the tax burden on labour if Member States want to prevent adverse effects on employment. Some Member States have established reserve funds in public pension schemes in order to avoid large increases in contribution rates. Others have created opportunities for supplementary private provision and private funding, thus reducing pressure on the public system. Others have changed their public systems to notional defined-contribution systems.

Modernisation of pension systems

Public pension systems appear to be well suited to providing pensions for part-time, temporary and self-employed workers, according to the report. However, occupational schemes 'cannot yet be regarded as satisfactory' in that 'atypical' workers are less well covered by these schemes. Further, in many Member States, workers who change jobs tend to end their careers with reduced occupational pension rights compared with workers who remain with one employer.

The report also notes that Member States are adapting their systems to the evolving social and economic roles of men and women, by moving to new rules that aim to facilitate the reconciliation between work and family life for both parents. Nevertheless, it maintains that significant differences between women’s and men’s pension entitlements will persist for a long time to come.

Overall assessment

The report states that this first analysis of Member States’ pension systems shows that they are moving towards financially sustainable systems that will be able to provide adequate pensions in the future. There has also been a wide range of positive developments and, while financial challenges have been the main driving force for reform, Member States have taken care not to undermine the social objectives of their pension systems and are making efforts to adapt their systems to the needs of their societies. It stresses that this balance between social and financial concerns is key for the political success of pension reform.

Although all Member States have embarked upon pension reform, some see the need for further reforms in order to safeguard the long-term sustainability of their pension systems and ensure sound public finances.

However, the report stresses that the momentum behind the reform process must be maintained. Many Member States face very high expenditure increases in their pension systems under their current policies and have yet to take measures to cope with this. It recommends that improving incentives for older workers to remain longer in the labour market, in addition to adapting pension systems to more flexible employment and career patterns and to the changing roles of men and women in society, is vital.

The report ends by saying that the ageing population will begin to have an effect on pension systems within the next 10 years and therefore it is imperative to put into place 'credible and effective strategies and to give clear signals to citizens about what they can expect from their pension systems and what they have to do to achieve an adequate living standard in retirement'.

Commentary

This first joint analysis of Member States’ pension schemes shows that much has been done in terms of initiating reforms of national pension systems. All Member States know that there is a need to ensure that their pension systems are sustainable, can provide adequate levels of income for retired people and can meet the challenges of changing society.

However, there is obviously much left to be done. One of the key challenges for the coming decade remains the demographic problem of an ageing population, which means that current 'pay-as-you-go' systems will be put under enormous strain as the ratio of workers to retired people falls drastically. Individual countries are tackling this problem in a range of ways, including placing more emphasis on occupational and private individual schemes, by adapting state schemes and by trying to encourage people to remain longer in the labour market.

Given the scale of this task over the coming years, this European strategy of pensions coordination will be a valuable tool in charting progress and helping Member States to learn from one another. (Andrea Broughton, IRS)