Pension approaches in Europe9th Pension Seminar, Maastricht

27 January 2020

Matti Leppälä, Secretary General/CEO, PensionsEurope

The structure of pension systems according to the EU terminology: 3 pension pillars

1st pillar

3rd pillar

2nd pillar

1st pillar, statutory, public pensions, PAYG/tax based

2nd pillar, occupational pensions

3rd pillar, private personal pension products

1st pillar bis/funded tier

Supplementary pensions

The mix of PAYG and funded, public and private pensions and their role in retirement varies across economies

Gross pension replacement rates from mandatory public, private and voluntary private pension schemesPercent of individual earnings, average earner

Note: Theoretical gross replacement rates, full career worker, 2016 legislation.

Source: OECD data

No-one-size-fits-all solution in Europe

• The role and relevance of private supplementary pensions vary significantly depending on their role vis-à-vis public statutory pensions. There is no European approach in pensions. However, some common traits can be drawn:

– The highest coverage of occupational pensions can be observed in Northern European countries where occupational plans fulfil the key income replacement function in old-age and are mandatory (based on legislation) or quasi-mandatory (based on collective agreements).

– Occupational pensions were also designed to play a central role in the UK and Irish pension systems by topping up flat-rate public pensions. However, their coverage has been eroded in recent decades. Current policies aim to rebuild it (e.g. auto-enrolment).

– In Western European Member States with an earnings-related public pillar, occupational pensions play a more complementary role, yet in some (Belgium, Germany) have achieved coverage of over 50% of the labour force.

– Southern European Member States are mostly characterised by strong reliance on public pensions, with relatively little role for occupational pensions

– In the Central and Eastern European Member States (except Slovenia), the role of occupational pensions has been marginal or non-existent

Coverage of supplementary pensionsAs defined by EU

5

Many pensions left outside the scope of the EU

Common trends in recent reforms

• Most EU Member States have carried out gradual and in some cases substantial pension reforms over the last decades in order to enhance fiscal sustainability.

• The 2008-09 financial crisis prompted in many countries an acceleration of sustainability-enhancing pension reforms

• Shift from DB to DC/Hybrid schemes

• More recently, partial or full reversals of past systemic reforms need to re-balance adequacy and sustainability

• Some governments are responding to the expected inadequacy of the 1st pillar system and to the low participation in voluntary retirement savings by introducing, or taking into consideration to introduce, auto-enrolment to supplementary schemes (UK, LT, IT, PL + DE via collective agreements. IE considering).

• EU MS are transposing the IORP II Directive into national legislation: Some have, others have still not Some took this opportunity to consider wider reforms (e.g. Sweden, Ireland, France)

Risks are shifting

8

Risk

employer

Risk

employee

Pure DB = Unconditional DB with full indexation

Unlimited premium and funding obligation

Conditional indexation, premium and

funding obligation

Various hybrids

DC with guarantees

Pure individual DC

Risk

sharing

Conditional indexation, unlimited premium and

funding obligation

Collective DC

DB DC

“Given the current challenges and following the financial crisis, most MSs adopted reforms to ensure the sustainability of pension systems, sometimes overshadowing adequacy-focused safeguards”

In most countries replacement rates expected to fall.

Need for supplementary pensions increases.

Characteristics and trends in pension system design since 1995

10

25

unchanged as a share of GDP over the next few decades (Graph 20). In Latvia, the introduction of private pillars is more recent (in the 1990s), but because of the private pillar, total pension (as a share of GDP) can expand in the long term despite the public pillar being projected to fall slightly (Graph 21).

Graph 20. Netherlands - Pension/GDP Graph 21. Latvia - Pension/GDP

Source: Ageing Report (2015)

However, past reforms should in the long-run result in a reshaping of pension systems in some European countries, with private pillars increasingly supporting retirement incomes over time (Table 11 summarises the main trends in pension system design since 1995). According to the Ageing Report 2015, public pension spending should remain stable over the long run at the EU aggregate level, with 6 countries experiencing substantial decreases (close or above -2 pp of GDP in Croatia, Denmark, Latvia, France, Italy and Greece; at least by -0.5 pp of GDP in Sweden, Estonia, Spain, Portugal and Poland). In some of these countries, this downward trend will coincide with a significant increase in pension benefits provided by private schemes (e.g. Croatia, Denmark, Latvia, Sweden and Estonia).

Table 11. Characteristics and main trends in pension system design in EU countries

* This group includes countries that strongly reformed their 1st pillar (like in Greece, Italy and Austria) and / or

countries that introduced additional pillars (representing already a significant share of total pension expenditures, or

projected to do so in the long-run.

Source: Presentation inspired by Grech (2010)

Notes: i) Pension reforms since 1995 is included ii) Most of countries, attempting to develop a multi-pillar pension

system, introduced temporary / permanent measures following the financial crisis likely to have weakened the

expansion of private pension schemes (see Table 9). Despite such measures, some countries reporting private

pension projections for the 2015 AR, still project a substantial increase of such schemes (e. g. Estonia, Latvia and

Lithuania). Countries in italic are those where the intended reforms are still subject to uncertainties. iii) The Annex

contains a Table A7 providing more details on this classification.

0

5

10

15

20

2003

2007

2011

2015

2019

2023

2027

2031

2035

2039

2043

2047

2051

2055

2059

Pens

ion

expe

ndit

ure

Public Private

0

2

4

6

8

10

12

2003

2007

2011

2015

2019

2023

2027

2031

2035

2039

2043

2047

2051

2055

2059

Pens

ion

expe

ndit

ure

Public Private

Preserved overall pension

system architecture

Attempt to change pension

system nature / architecture*

Partial reverse back to old

model

Belgium

France

Luxembourg

Malta

Slovenia

Czech Republic

Finland

Portugal

Cyprus Poland

Spain Greece Hungary

Italy Slovakia

Austria

Bulgaria

Romania

Ireland Lithuania

Denmark Croatia

UK Latvia

Netherlands Estonia

Germany

Sweden

one dominant pillar

multi-pillar

Source: EC, Pension Reforms in the EU since the Early 2000’s: Achievementsand Challenges Ahead , December 2016, p.25

Policy measures in member states

The labor markets is changing and it affects pensions

• Social protection, including pension systems, has in many countries been geared primarily to full-time workers in standard employment

• However, the “real world” is different: around 40% of jobs in the EU today are either as self-employed (14%) or in an employment relationship other than permanent full-time work.

• Overall result: gaps in terms of coverage, access and benefit accrual (e.g. interrupted contribution periods and below-average income)

OECD classification of workers in non-standard forms of work: heterogeneity!

And still more…

• Platform-mediated work – "a form of employment that uses an online platform to enable organisations

or individuals to access other organisations or individuals to solve problems or to provide services in exchange for payment" (Eurofound 2018)

– Participation of three parties: platform, client and worker/service-provider – Platform-mediated work is about doing individual tasks or solving particular

problems, the work is outsourced, and done on-demand.– Work can be done as an employee or as a genuine freelancer

• Platform work– New kind of working environment where a platform company (1) splits jobs

into tasks, (2) controls the work performance (through technology), and (3) outsources the work to individuals who are not employees

– Changes the world of work: despite the control, job/tasks are outsourced to individuals. Platform workers have neither worker's rights nor the freedom of entrepreneurs.

Main pension issues raised by non-standard forms of work

• Coverage gaps– Main issues related to voluntary personal pension:

- income instability

- willingness to contribute

– Main issues related to workplace pensions:

- workers in non-standard forms of employment tend to be less represented collectively by trade unions.

- the role of social partners in pension policies is highly uneven across EU Member States and the unionization rates are decreasing this may limit the development potential of occupational pensions.

• A lack of transferability can hinder the build-up of adequate entitlements over the course of a career

• Impact on pension income adequacy

• Continuous development of new forms of work

Pensions gender gap is very big and much bigger than pay gender gap

Pay gender gap is between 4 % (RO) and 26 % (EE) NL 15 %

Some policy responses at EU level• High-Level Group of Experts on Pensions 2018-2019

• Recommendations to EC and members states in occupational and personal pensions

• Green Paper on Aging and Demography• Q4 2020

• European Pillar of Social Rights and related initiatives• Recommendation on access to social protection

• Holistic reflection on adequacy and sustainability• Pension Adequacy Report and the Ageing Report

• Next Pension Adequacy Report in 2021

• The Pan-European Personal Pension Product (PEPP)• Operational 2022

Structure of the report of High level group of experts on pensions

The Pan-European Personal Pension Product (PEPP)

Q1 2018 Q2 2018 Q3 2018 Q4 2018

Advantages for the providers

Advantages for the consumers

Advantages for the EU economy and society

European framework

Economies of scale

Facilitated cross-border distribution

More choice

Strong consumer protection

Low costs and fees

Default investment options (Basic PEPP)

Portability

Channeling savings towards long-term

investments

Strengthening theCMU

Facilitating cross-border mobility

EU-label / identity

Conclusions

• Many countries need to increase pension coverage and especially for workers in non-standard forms of employment

• Different approaches are required for different categories of workers

• Different solutions must be found in different pension systems, taking into account the design of the pension system and its objectives – More funded pensions needed, both occupational and personal

• Soft-compulsion (auto-enrolment with opt-out option) can be an effective solutions for increasing pension coverage

• Risks are increasingly on the individual• Gender pension gap is a major challenge