Coordinating EU Pension Reform

EU pensions are said to be facing a gradually building solvency squeeze in the foreseeable future, and the European Commission has decided to get involved. While the Commission doesn’t have the power to directly legislate pension schemes, it can legislate in closely connected areas and can also put political pressure on EU Member States to adopt certain policy directions.

The Commission recently issued a White Paper proposing a range of initiatives for pension reform in order to create a financially sustainable pension system. It will seek to both encourage and incentivise Member States to promote approaches such as longer working (later retirement), supplementary pensions, and increased portability and protection of established private pensions, among other things.

The White Paper, follows-up on the issue addressed in the 2010 Commission’s Green Paper on Pensions, which presented guidelines for policy makers on pension rights of EU citizens moving and working within the EU. Moreover, the White Paper will also be used to re-open discussions on the portability of supplementary pension rights, as the proposed Pension Portability Directive has been blocked by the Council in 2007 due to disagreements over vesting rights.

Background

Pensioners constitute a substantial, and rapidly growing, part of EU population (120 million, 24% of total population): in 2008 there were four working persons for every retired one, in 2060 that proportion will decrease to two to one. Moreover, pensions weight significantly over national budgets: the EU average is of 10% of GDP, varying from 6% in Ireland to 15% in Italy.

Although pension reforms are being implemented throughout the EU, the Commission is convinced of the necessity of harmonised action, as the problems and challenges of the sector as a whole are common in all Member States.

Challenges for Pension Reform in Europe

The White Paper identifies four main challenges to sustainability and adequacy of pension systems in the EU:

Securing the financial sustainability of pension systems

Although many Member States have already started reform on their pension systems, the economic crisis has aggravated the situation and increased the urgency and ambition of such reforms.

Maintaining the adequacy of pension benefits

Pensions are the major source of income for 24% of Europeans. The ability of pre-funded pension schemes to mitigate risks and to absorb shocks should be improved, as the current economic crisis is demonstrates.

Raising the labour market participation of women and older workers

According to the Commission the participation of women and older workers in the labour market is too low. The scope for improvement in this regard is significant in many Member States and could almost neutralise the effects of ageing populations.

The role of Member States and EU in pensions

The EU action on pensions has so far addressed very specific issues in fragmented way, related to cross-border matters. Given the significant macroeconomic and social effects of pensions, The Commission considers there is a need for a more comprehensive approach.

Objectives of Pension Reform

The White Paper endorses as objectives the key five orientations for pension reform outlined by the Commission in the 2011 and 2012 Annual Growth Surveys, which emphasised the importance of securing a better balance between years spent working and in retirement, as well as promoting complementary retirement savings:

Link the retirement age with increases in life expectancy, in order to (partially) compensate for the earlier longevity growth and to stabilise the balance between working and retirement years

Restrict access to early retirement schemes and other early exit pathways, in order to remove unwarranted early retirement options

Support longer working lives by providing better access to life-long learning, adapting work places to a more diverse workforce, developing employment opportunities for older workers and supporting active healthy ageing

Equalise the pensionable age between men and women, in order to make a significant contribution to raising the labour force participation

Support the development of complementary retirement savings to enhance retirement incomes

Initiatives

The White Paper presents a series of initiatives to be taken at EU and national level to support national pension reform:

Balancing the time spent in work and retirement

The Commission believes this can be achieved by raising retirement ages and strengthening incentives to work longer. The White Paper presents specific measures in this regard:
a) Closely monitor and encourage pension and labour market reforms in line with the Annual Growth Surveys and the Country Specific Recommendations
b) Support the Employment Committee (EMCO), the Economic Policy Committee (EPC) and the Social Protection Committee (SPC) in their multilateral surveillance of pension reforms and offer financial support to Member States through the PROGRESS programme 
c) Identify and recommend best practice in reducing the gender gap in pensions
d) Raise awareness of the benefits and possibilities of working longer and stimulate the dissemination of good practices of age management in work places and labour markets
e) Support for policy coordination and joint work on enabling and encouraging older workers, women in particular, to stay longer on the labour market
f) Call on the social partners to develop ways of adapting work place and labour market practices to facilitate longer working lives for women and men
g) Encourage Member States to make use of the European Social Fund (ESF) for supporting active and healthy ageing
h) Consult the social partners on how unwarranted mandatory retirement ages could be revised in collective agreements and national legislation

Developing complementary private retirement savings

The White Paper indicates better access to supplementary schemes and their cost-effectiveness as major elements in this regard. Specific measures include:
a) Cooperate with Member States following a best practices approach to assess and optimise the efficiency and cost-effectiveness of tax and other incentives for private pension saving
b) Review good practice with regard to individual pension statements with the aim of encouraging Member States to provide better information to individuals for their retirement planning 
c) Review the IORP Directive in 2012 
d) Raising the quality of third-pillar retirement products for women and men and improving consumer information and protection standards via voluntary codes and possibly an EU certification scheme for such products
e) Develop a code of good practice for occupational pension schemes 
f) Resume work on a Pension Portability Directive setting minimum standards for the acquisition and preservation of supplementary pension rights in 2012. 
g) Assess extending the scope of Regulation 883/2004/EC on the coordination of social security systems as regards certain occupational schemes
h) Promote the development of pension tracking services
i) Investigate whether the tax rules concerning cross-border transfers of occupational pension capital and life insurance capital, life insurance contributions paid to providers established elsewhere in the EU and cross-border investment returns of pension and life insurance providers, including their income from real estate and capital gains present discriminatory tax obstacles to cross-border mobility and cross-border investments
j) Explore the need for removing contract law-related obstacles to the design and distribution of life insurance products

Enhancing the EU’s monitoring tools on pensions and strengthening synergies across policy areas

The Commission considers, given the increasing interdependence of Member States, that the EU’s involvement in Member State pension policies should be enhanced. The proposed measure in this regard is the release of a 2012 Ageing Report, a 2012 Sustainability Report (on public finances) and Pension Adequacy Report.

What Happens Next

The document has already drawn considerable attention from the private sector, with mixed reactions. The political environment will become clearer when the European Parliament and Council respond formally as they are expected to do during 2012.