Working out the future for European pensions
The EU launches a public debate on the future of pensions. Article by Commissioners László Andor, Michel Barnier and Olli Rehn. Financial Times.
The worst economic crisis in decades has aggravated the long-term challenges facing European pension systems, stemming from a rapid ageing of the population. Meanwhile, rising public debt puts a significant burden on public finances, potentially putting longterm growth prospects at risk.
These twin challenges have serious implications for the adequacy and sustainability of our pensions. We clearly need a considered reflection on pensions in the European Union: on how pension policy can support our two goals of economic growth and social cohesion. This is what the European Commission’s Green Paper Towards adequate, sustainable and safe European pension systems published in July 2010 sets out to do.
The Green Paper has opened a wide-ranging debate on both the shortterm budgetary and longerterm structural challenges and asks for views from everyone with a stake in these issues. What will people’s pensions look like in the future? How will our systems stand up to any future crisis, financial or other? We need to address these questions now.
The organisation of national pension systems is a national responsibility and the Green Paper fully respects this. The European Commission does not advocate a “one-size-fits-all” approach to pensions. But it is vital to note we do face common challenges.
We must be realistic about the future retirement age and recognise that as we live longer and longer, we face choices: pensioners who are poorer, higher contribution rates or more people working more and longer.
Although the Commission does not set pensionable ages – this is a purely national responsibility – the challenge of an ageing population is common. To secure both the sustainability and adequacy of future pensions, working longer seems to be one of the most viable options.
It is also important that more workers work more. Of course, higher employment rates must be facilitated. Health and safety at work must continue to be improved. Flexibility, training opportunities for older workers and addressing age discrimination are also key – and are therefore being supported by the EU through the European Social Fund.
Considering both the opportunities and constraints of labour markets is vital when reflecting on how to extend “contributory” working lives. It is also crucial to acknowledge that changing labour markets can affect pension adequacy. More individuals are faced with broken careers, moving in and out of fulltime work and often starting with short-term contracts. The impact on pension entitlements for such individuals must be considered.
A further change in the labour market is the move towards more flexibility and in particular higher mobility across sectors and between countries. Increased free movement is a solid achievement of the European project, but the reality is that there are still barriers, one such being pensions.
Social security pensions are co-ordinated by EU regulations to help make sure that people moving between EU countries are not disadvantaged. But people can still lose out because supplementary pensions are only covered by separate and rather minimal rules. The consultation gives the opportunity to achieve new impetus to find a more comprehensive solution.
The Green Paper recognises the increasing reliance on both supplementary and funded pensions, and in particular the move towards more coverage by defined contribution schemes. Scheme members must understand how defined contribution schemes differ from defined benefit ones as they plan for their retirement.
Relevant questions are: what information does the individual need in order to make the right decision? Could regulation or default positions help? How should the pay-out phase be designed?
Good regulation makes a difference as it supports economic activity along a stable growth path. Poorly designed regulation would place an unjustified burden on pension funds and employers, thereby undermining economic efficiency. We need to ensure that funded pensions stand up to major financial crises.
There are still considerable barriers to cross-border activity in the field of pensions and the Green Paper highlights that the Directive on Institutions for Occupational Retirement Provision might therefore need to be reviewed. Furthermore, some funded pension schemes are covered by EU regulation, while others are not.
Similar schemes can be covered by different EU rules and the boundaries can be unclear. Pension providers need to plan for the long term with as much certainty as possible. We ask whether it might be useful to define clearly what a “pension product” entails.
It is also important to consult on the future solvency regime for pension funds. Given that a new solvency regime (Solvency Ⅱ) will apply to EU life insurance undertakings (which in some member states are significant providers of pension products), it is necessary to review the solvency rules for pension funds. In this context, the Solvency Ⅱ rules could perhaps be a good starting point.
No matter how welldesigned, the solvency rules for pension funds will never lead to a zero-failure regime. For the participants in the pension fund it is crucial to consider what happens in these circumstances.
EU level legislation provides for the protection of employees’ rights to supplementary occupational pensions, but there remains considerable flexibility for member states to determine the extent of protection offered.
We want to support member states in their efforts to adjust pension policy to be apt for the future. What should our role look like? The consultation phase for the Green Paper will last until November 15.
Please be a part of the dialogue via: http://ec.europa.eu/social/main.jsp?langId=en&catId=89&newsId=839&furtherNews=yes
László Andor, Michel Barnier and Olli Rehn are European Union commissioners