Commission européenne 1 -1- European Pension reforms International Forum on Pension Reform: Exploring the Link to Labour and Financial Market Reforms Bled

Commission européenne--11--

European Pension reforms European Pension reforms

International Forum on Pension Reform: Exploring the Link to Labour and Financial Market Reforms

Bled - Slovenija7-9 May 2007

O. Bontout, G. Fischer

European CommissionEmployment, Social Affairs & Equal Opportunities DG


Pension reformsPension reforms

➢A common challenge and approach in EU

➢Main developments in current reforms

➢Recent developments : labour market and pension prospects

➢Some outstanding issues


I - A common pension challenge:I - A common pension challenge:

adjustments needed adjustments needed

• Increase in life expectancy and dependency ratios

• Decline in effective retirement ages … reversal in recent years

• Contribution rates – further increases ?




Life expectancy at 60 and activity rates 55-64Life expectancy at 60 and activity rates 55-64

Source Eurostat for Life expectancy and ILO (ES and SE 1970-2000, FR 1968-2000 , IT 1971-2000, UK 1971-1991)Source Eurostat for Life expectancy and ILO (ES and SE 1970-2000, FR 1968-2000 , IT 1971-2000, UK 1971-1991)


40%25%18%Ratio 70+ /20-69

58%39%27%Ratio 65+ /20-64

80%58%39%Ratio 60+ /20-59

205020252004

Note : EU25. Source : Eurostat 2005 demographic projections.

7

Projected evolution of dependency ratios


A common challengeA common challenge

• All systems are concerned: DB, DC, NDC, PAYG, funded,

• Member States are not interdependent:

– public finance,

– mobility,

– common social rights and objectives,


Common European ApproachCommon European Approach

Pension systems to be reformed to ensure:• Adequate benefits: poverty and income

replacement• Financial sustainability• Adaptation to societal/ labour market change

Adequacy and Sustainability are mutually reinforcing : virtuous or vicious circle


European Action: the OMCEuropean Action: the OMC

Open Method of Coordination:

• National Strategy Reports 2005,

• Social Protection Committee to review progress und prepare for Council,

• Recently issued synthesis report (2006)

• New objectives adopted in Spring 2006


II - Key elements arising from II - Key elements arising from current pension reformscurrent pension reforms

• Strengthening incentives for working longer

• Developing a life-cycle approach and strengthening the link between contributions and benefits while reducing access to early paths out of employment


Key elements arising from Key elements arising from current pension reformscurrent pension reforms

• Making pension systems more adaptable to structural changes in society

• Develop secure private pensions

complementing and partially replacing public pension provision



III - Recent developmentsIII - Recent developments

• Labour market - a recent reversal

• Benefits - the key channel of working longer


Recent increase in employment of Recent increase in employment of older workers, but huge potentialolder workers, but huge potential

-10

0

10

20

30

40

50

60

70

80

BE

CZ

DK

DE

EE

EL

ES

FR IE IT

CY

LV LT LU HU

MT

NL

AT PL

PT SI

SK FI

SE

UK

eu25

2001-2004

1995-2001

1995

Source : LFS


Older workers employment (55-64)Trends in employment rates for older people (aged 55-64) in selected

EU Member States, 1992-2004

20

25

30

35

40

45

50

55

60

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: Eurostat, structural indicators

% o

f p

op

ula

tion

ag

ed

55

-64

DE ES FR IT UK FI


Older workers employment (55-59)


Older workers employment (60-64)


Part time employment (55-64)

15%

20%

25%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

eu15

eu25

eu27


Part time employment (55-64)

5%

10%

15%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

35%

40%

45%eu25 (men)eu15 (men)eu25 (women)eu15 (women)



• Between MSs ?

• Men / Women ?

• Less / medium and high skilled ?

Some risks of divergence ?


Average standard deviation of employment rates 55-64 and 25-54Average standard deviation of employment rates 55-64 and 25-54


Non convergence between MSs?

Source : LFS – Note : Total for all Member States available , EU* for a group of Member States where are available all the period long (BE, DK, DE, IE, EL, FR, IT, LU, NL, UK)

2

3

4

5

6

7

8

9

10

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Total 25-54

EU* 25-54

Total 55-64

EU* 55-64


Average standard deviation of employment rates 55-59 and 60-64Average standard deviation of employment rates 55-59 and 60-64


Non convergence between MSs?

5

6

7

8

9

10

11

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2004

2006

Total 55-59 Total 60-64 EU* 55-59 EU* 60-64

Source : LFS – Note : Total for all Member States available , EU* for a group of Member States where are available all the period long (BE, DK, DE, IE, EL, FR, IT, LU, NL, UK)



Slow convergence between Genders ?

0

10

20

30

40

50

60

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

eu27 - men eu15 - meneu27 - women eu15- women

Employment rates by gender for 55-64 in EU



Divergence between skill levels?

30

40

50

60

70

2000 2006

Low MediumHigh

Employment rate of men 55-64 in EU25



Projected long term trendsProjected long term trends

• Adequacy : theoretical replacement rates

• Sustainability : expenditures projections


Trend of replacement rates : effect of enacted Trend of replacement rates : effect of enacted reforms at a given retirement age 2005-2050reforms at a given retirement age 2005-2050

A trend toward a decline in most statutory schemes

Source : Stylised illustration from ISG results on gross replacement rates

2005 2050

Statutory pensions


How to compensate for this decline ? How to compensate for this decline ? Working longer and private pensionsWorking longer and private pensions

Source : Stylised illustration from ISG results on gross replacement rates

2005 2050

Additional fundedcontributions (about 5 percentagepoints more)

Occupational orvoluntary pensions

Working longerstatutory pensions (about 2 more years)

Statutory pensions


Trends of future pension expendituresTrends of future pension expenditures

Source : AWG projections



IV - Some key issuesIV - Some key issues

Concerns about equity and poverty

Compulsion vs. incentives : private pensions and working longer

How to fully restore social and financial sustainability ?



Key issues (1)Key issues (1)

Concerns about equity and poverty

• Risks related to inadequate pension provision

• A revival of minimum income provision



How to strengthen the role of minimum pensions and solidarity in pension systems ?

– Poverty risk among elderly remains generally higher than overall population

– Links between level of benefits, degree of means-test, incentives and indexation rules

– A need for appropriate monitoring tools



Poverty risk among elderlyPoverty risk among elderly

Source Eurostat, income dataSource Eurostat, income data


Theoretical replacement rates : Theoretical replacement rates : effect of indexation 10 years after retirement effect of indexation 10 years after retirement

(2005-2015)(2005-2015)

Source : ISG results on gross replacement rates



Key issues (2)Key issues (2)

Compulsion vs. incentives : private pensions and working longer

– Choice, incentives for earlier / deferred retirement, partial retirement

– Importance to review incentives structures: are incentives strong enough?

– But pension reform can not do everything


Retirement: incentives and behaviour

Source : Illustration from SPC report on flexible age of retirement (forthcoming), Replacement calculations from EU Commission-OECD project ‘’Modelling pension entitlements'



Key issues (3)Key issues (3) How to fully restore social and financial

sustainability ?

– Importance of an integrated approach– Development of automatic and semi –

automatic adjustment mechanisms: automatic mechanisms vs. regular reviews

– Importance of transparency


ConclusionConclusion

• Pension reform in progress

• Working longer: breakthrough needed

• Promoting longer working lives involves not only pension reform

• Improve transparency and governanceto allow policy decisions on priorities

Documents

Commission européenne 1 -1- European Pension reforms International Forum on Pension Reform: Exploring the Link to Labour and Financial Market Reforms Bled