Active Ageing and Pension Policies in the Context of the European Employment Strategy

2. Reform of the Pension Systems1

In 1999 the European Commission presented its Communication on a Concerted Strategy for Modernising Social Protection. This communication, which focused on four key objectives — including ‘to make pension systems sustainable’ — was the start of a long-term Europewide reform process in the area of pensions.
The Laeken European Council of December 2001 decided that Member States should cooperate on the question of reform of the pension system by seeking to achieve common objectives, namely, the adequacy of pensions, the financial sustainability of pension systems and the adaptability of pension systems (modernisation). The method to be used was the open method of coordination (OMC).
There has been substantial progress in reforming pension systems since 2003. Disincentives to work longer have been reduced and incentives strengthened; links between contributions and benefits have been tightened; and life expectancy has been further taken into account in pension systems. Moreover, the provision of supplementary pensions has been promoted and legislative frameworks have been improved.
Furthermore, some Member States have also tackled old-age poverty by increasing the levels of guaranteed minimum pensions.
Some Member States have introduced major reform packages. Germany, in addition to 2001 reforms (which led to a lower increase in first-pillar pension levels and the creation of State-supported, funded, voluntary, second- and third-pillar pensions), undertook, through the Sustainability Act of 2004, measures aimed at bringing levels of contribution rates into line with levels of benefits paid out. It also introduced a sustainability factor into the pension indexation formula, requiring additional adjustments if the ratio between contributors and beneficiaries worsens. In France, the 2003 reform improved long-term sustainability via an increase in the number of contribution years required for a full pension (this will be further increased in line with future increases in life expectancy), as well as via strengthened incentives to work longer.
Members of the public and private schemes are also treated more equitably now. In Austria, the 2004 and 2005 reforms make a major step towards a more sustainable pension scheme through a stronger link between contributions and benefits as well as an increase in the number of contribution years needed for a full pension. Incentives to work longer were also increased and incentives to take up early pensions decreased through a so-called bonus/malus system. This reform also introduces a much more uniform pension system across the public and private sectors and introduces the indexation of pensions to prices as of 2006. The Finnish pension reform, implemented mainly in 2003-2005, increased incentives to work by providing a higher accrual of pension rights for older workers and overhauling early retirement arrangements. It will also introduce a ‘life-time coefficient’ with the affect of adjusting future pensions in line with increases in life expectancy. Lithuania (in 2004) and Slovakia (in 2005) introduced a funded tier to their social security pension system, which will strengthen the sustainability of the statutory pay-as-you-go old-age pension scheme in the long run.
Concerning occupational and private pension schemes, the legislative framework was notably improved by the Netherlands and the United Kingdom. In the Netherlands, the principles for a new Financial Assessment Framework for supplementary pensions were established in 2004. These set tighter requirements, in particular for the size of reserves for collective private pension arrangements.
The Member States have continued adapting their existing systems. For example, Spain, Portugal, Belgium and Ireland have increased the levels of their guaranteed minimum pensions beyond the statutory index adjustments, while the United Kingdom has implemented Pension Credits. Portugal has strengthened incentives to work longer and fostered more equitable treatment of members of different schemes. Incentives to work longer have also been developed in a number of Member States including Luxembourg, the Netherlands (favourable tax conditions for the take-up of early pensions have been reduced and an innovative life-course arrangement, replacing early retirement arrangements, was introduced in 2006) and Italy (the 2004 reform plans a gradual increase of the age requirements for seniority pensions).
Some pension laws provide for periodic reviews as a basis for next steps in the reform process. For example, Spain renewed the Toledo Pact, thereby underlining the importance of dialogue with the social and economic players involved when it comes to monitoring present and future reform measures. Parliament is reviewing progress and future reform measures every five years.
As a response to future increases in life expectancy, a number of reforms are designed to stabilise pension systems through automatic adjustment mechanisms (as in SE, FI, PL, LV or DE) or periodically required reviews and adjustments (in AT, IT or FR). These adjustments will also promote a life-cycle approach.
A number of recent reforms have strengthened the benefit/contribution link of pension systems. Funded and national defined contribution schemes establish a strong link and links have been strengthened also in many defined-benefit schemes. This has occurred, firstly, through the introduction of longer contribution periods required for a full pension; secondly, by calculating full pensions on the basis of life-time earnings instead of final salary, thus reflecting more accurately contributions over an entire career, rather than just wage progression in later years; thirdly, by applying actuarial reductions/increases for early/deferred retirement, thereby contributing to a culture in which early retirement becomes less prevalent (this has occurred in a number of Member States, such as AT, FR, FI, ES, PT, NL or IT), this link having been already strengthened by previous reforms in many Member States, such as DE, BE or LU, HU, EE, LV, LT, PL, SK, SI or SE).
However, reinforcing the link between contributions and benefits has to be combined with a careful monitoring of the accrual of pension rights during breaks in careers — such as for childcare, other care responsibilities, on account of unemployment, sickness or for educational purposes — to ensure both adequacy and equity in retirement.
Less and less people follow the standard career of full-time, lifelong employment. Career breaks and part-time work are becoming more frequent. Member States have started to review pension provision for workers with atypical careers, with a view to easing access to statutory and supplementary pension schemes. For example, some Member States, in particular where the link between contributions and benefits has been strengthened, allow people to acquire pension credits for periods of short term contracts, part-time and voluntary work as well as for some types of break in the working career such as child and old-age care, education and unemployment.
Most of the Member States are gradually phasing out differences in legal retirement ages between men and women. Generally, workers who change employer frequently are better served by statutory schemes, and many statutory schemes have moved towards accommodating short-term contracts, while supplementary pension schemes (notably those which are linked to an individual employer), can disadvantage mobile workers.
Given the rising importance of supplementary schemes, some Member States (DK, DE, NL, UK) have improved the portability of supplementary pension rights which pose obstacles to workers’ mobility.
More and more countries have switched to price, or close to price, indexation both for earnings-related schemes and for minimum pension schemes.
Several countries see a role for private pension provision as part of the total pension provision. This has traditionally been the case in Member States (like DK, NL and UK). Moreover, the importance of private pension provision has essentially been increased by the introduction of a funded tier of statutory schemes in a number of Member States including SE, PL, HU, EE, LV, LT and SK. Furthermore, a great number of countries have increased provisions for occupational or private schemes that complement public pensions (DE, IT, AT).
In all but a few Member States the public pay-as-you-go pension schemes are expected to remain the principal source of income for pensioners. This will allow Member States to maintain a degree of redistribution and solidarity that is necessary to provide fair incomes to all older people. Privately managed schemes, as well as reserve funds of pay-as-you-go schemes, have to operate at a sufficiently high level of security and efficiency. Rules on acceptable investment risks and prudent assumptions about future returns are important safeguards if their implementation is well enforced and monitored, while efficiency also means ensuring that administrative charges are kept low.

Table 5: Evolution of theoretical replacement rates fromt 2005 to 2050
(click to enlarge)
Source: E.C., Adequate and sustainable pensions – Synthesis Report 2006, Luxembourg, 2006.

Table 6: Pension fund assets as a percentage of GDP
Source: INVERCO-EFRP- GDP data – Eurostat, quoted in ETUI-REHS, Education, 2007, Social Protection in Europe. Guide for Eurotrainers, p. 99.

3. European Pension Regulations and Directives

Regulation n° 1408/71 of 14 June 19712 on the application of social security schemes to employed persons, to selfemployed persons and to the members of their families moving within the Community, amended by Council Regulation n° 1606/98 of 29 June 1998 extending the field of application of Regulation 1408 to the special regimes of civil servants, guarantees:
• the aggregation of insurance or residence periods within the general schemes and the special schemes for civil servants in view of the acquisition of the right to benefits.
• equal revalorization of benefits for migrant workers and for nationals;
• aggregated pensions payable in the state of residence
Regulation 859/2003 extends the field of application of Regulation1408/71 to workers from third countries who are legally employed in the EU.
Directive 86/378/EEC of 24 July 1986 (amended by Directive 96/97/EC of 20 December 1996) on the implementation of the principle of equal treatment for men and women requires equal treatment with regard to occupational schemes which are regarded as pay.
Directive 98/49/EC of 29 June 1998 on safeguarding the supplementary pension rights of employed and self-employed persons moving within the Community guarantees:
• equality of treatment of migrant workers and national job changers as regards the preservation of vested pension rights: Member States must ensure the preservation of vested pension rights for members of a supplementary pension scheme in respect of whom contributions are no longer being made to that scheme as a consequence of their moving from one Member State to another, to the same extent as for members in respect of whom contributions are no longer being made but who remain within the same Member State;
• cross-border payments of supplementary pension benefits, net of any taxes and transaction charges which may be applicable;
• as far as posted workers are concerned, Member States must enable contributions to continue to be made to a supplementary pension scheme established in a Member State by or on behalf of a posted worker who is a member of such a scheme during the period of his or her posting in another Member State. Where contributions continue to be made to a supplementary pension scheme in one Member State, the posted worker and his employer shall be exempted from any obligation to make contributions to a supplementary pension scheme in another Member State.
Communication COM (2001) 214 final of 19 April 2001 from the Commission on the elimination of tax obstacles to the cross-border provision of occupational pensions, supplements the Pension Fund Directive of 2003 and calls for the elimination of unduly restrictive or discriminatory tax rules that can act as a major disincentive to individuals wishing to contribute to pension schemes outside their home Member State and pensions institutions that wish to provide pensions across borders (pan-European pension institution). Member States must ensure that they grant the same tax deduction for contributions to domestic pension institutions and those established in other Member States. Equal treatment must similarly be granted in relation to the tax treatment of benefits. Under nearly all tax treaties between Member States pension benefits are taxable in the State of residence of the pensioner.
Directive 2003/41/EC of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision aims at:
• establishing minimum prudential standards in order to ensure a high level of protection for the rights of future pensioners;
• ensuring that the institutions enjoy sufficient freedom to develop an effective investment policy;
• enabling a pension institution in one Member State (the home Member State) to manage company pension schemes in other Member States (the host Member States) by allowing cross-border management of occupational pension schemes while maintaining full compliance with the social and labour law of the host Member State.
Proposal for a Directive on improving the portability of supplementary pension rights, COM (2005) 507 final of 20 October 2005. In 2005 the European Commission proposed a draft directive on the portability of supplementary pension. The original objective of the proposal was to reduce the obstacles to workers’ mobility which stem from these schemes by improving the rights of workers moving within the Union and within the same Member State.
The proposal met with strong opposition in the Council. A breakthrough was achieved on the basis of a compromise proposal of the Finnish Presidency in November 2006.
On 20 June 2007 the European Parliament voted (under the co-decision procedure in first reading) a legislative resolution on this proposal which took over most of the amendments proposed by the Finnish Presidency.
The ETUC has regretted the minimalist approach adopted by the European Parliament in this matter and stressed that the Parliament has missed an opportunity to substantially improve the social rights of workers moving either within a Member State or within the Union and to significantly diminish the obstacles to their mobility. Not only has the provision in favour of employees moving from one company to another allowing them to transfer their ‘acquired rights’ been deleted from the text, but also the vesting period has been increased from two to five years!
A further matter that remains unresolved after the first reading in Parliament is the tax treatment of supplementary pensions: this important issue is not even raised, let alone resolved, by this initiative.

1 This chapter draws upon the EC report Adequate and sustainable pensions — synthesis report 2006.

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