1. European pension reforms
Master PPD
13 /02 / 2009
Olivier Bontout - DREES
Ministry of labour, family and solidarity,
Ministry of health, youth and sports,
Ministry of budget and public accounts

2. Pension reforms General framework A common challenge
Main developments in current reforms
Recent developments : labour market and pension prospects
Some outstanding issues
European approach - OMC

3. I – General framework
Broad meaning
Definitions
Organisation

4. Broad meaning Face major life risks Distribution of risks
Not only poverty relief in old age but also income replacement function

5. Size of government expenditures in 2003 (%GDP)‏
0,9
Housing, social exclusion n.e.c.
2,1
Family and children
Disability
1,8
Unemployment (including ALMP)‏
7,6
Sickness, health care
12,3
Old age and survivors benefits
26,8
Total Social Protection
49,0
Total Government expenditures (including interests)‏
EU 25
Source Eusrostat; New Cronos and ESSPROS

6. Social protection expenditures in 2003 (by function)‏
Data for Cyprus are not available. Source Eusrostat; New Cronos and ESSPROS

7. Funded vs. unfunded (PAYG) Reserves…
Definitions
Funded vs. unfunded (PAYG)
Reserves…
Defined benefit (DB) vs. defined contribution (DC)‏
NDC…

8. Organization of pension systems
Public – Social security
General and mandatory
Earnings related or flat rate
Minimum income provision
- within general pension schemes
- separate targeted benefits
Supplementary provision
Occupational (linked to employer)‏
Voluntary

9. Adjustments - three generations
Future tax-payers
Current tax payers
Current retirees

10. Adjusments - three channels
Adjusting benefits
Action on tax and contributions (including collection)‏
Working longer, Increasing retirement ages

11. II - A common pension challenge: adjustments needed
Increase in life expectancy and dependency ratios
Decline in effective retirement ages … reversal in recent years
Contribution rates – further increases ?

13. Life expectancy at 60 and activity rates 55-64
Source Eurostat for Life expectancy and ILO (ES and SE , FR , IT , UK )‏

14. Trends in dependency ratios/
15%
28%
1960
21%
33%
1980
14%
23%
35%
1990
40%
25%
18%
Ratio population 70+ /20-69
58%
39%
27%
Ratio population 65+ /20-64
80%
Ratio population 60+ /20-59
2050
2025
2004
Note : EU25. Source : Eurostat 2005 demographic projections.

15. Demographic trends : EU12 more affected, in particular after 2020 and 2040
Source : Eurostat 2008 demographic projections.

16. A common challenge
All systems are concerned: DB, DC, NDC, PAYG, funded,
European States are not interdependent:
public finance,
mobility,
common social rights and objectives,

17. III - Key elements arising from current 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

18. Key elements arising from current pension reforms (2)‏
Making pension systems more adaptable to structural changes in society
Develop secure private pensions complementing and partially replacing public pension provision

19. IV – Recent developments
Labour market – a recent reversal
Benefits – the key challenge of working longer
Private pensions
Flexibility in retirement shortly on web – CY calculations agreed recently
Based on replies to questionnaire and on comments received on the first version circulated by 2/3 of MSs.
So I would like to thank you for these comments and we also received a few more since last week.

20. Employment of older workers : a huge potential of progress
Recent improvements, but still huge potential
Still decreasing employment rate from age 55
Most transitions from employment to pensions are not direct
Between Member States : SIGNS of divergence in spite of average increase observed in recent years
Between genders : slow convergence
Between qualifications : signs of divergence
And these signs of divergence are raising questions on future adequacy as we know that most reforms include a stronger link between contributions and benefits

22. Recent increases of employment of older workers
Source : LFS

23. Older workers employment (55-59)‏

24. Older workers employment (60-64)‏

25. Part time employment (55-64)‏

26. Part time employment (55-64)‏

27. Decreasing employment rate from age 55
Declines clearly begins at 55 until 64
This highlights the key role of increasing employment rates from 55 – i nthe age bracket to reach the Lisbon target of 50%.

28. The key role of reducing early exits from the labour market
Most transitions from work to retirement are not direct – which you can see here (these are provisional figures).
The share through retirement OR early retirement significantly is around 50% for and exceeds 50% significantly only for 65+

29. The key role of promoting longer working lives
Employment rates of older workers : some signs of divergence
Between States : divergence
Between genders : slow convergence
Between qualifications : divergence
Between Member States : SIGNS of divergence in spite of average increase observed in recent years
Between genders : slow convergence
Between qualifications : signs of divergence
And these signs of divergence are raising questions on future adequacy as we know that most reforms include a stronger link between contributions and benefits

30. Non convergence between MSs?
Average standard deviation of employment rates and 25-54
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)‏
-30- 30
Commission européenne

31. Slow convergence between Genders ?
Employment rates by gender for in EU
-31- 31
Commission européenne

32. Divergence between skill levels?
Employment rate of men in EU25
-32- 32
Commission européenne

33. Projected long term trends
Adequacy : theoretical replacement rates
Sustainability : expenditures projections
-33- 33
Commission européenne

34. The key role of promoting longer working lives
Longer working lives strongly impacts on :
adequacy – on individual replacement rates
compensation for declines induced by ongoing reforms (ISG-OECD theoretical replacement rates)‏
sustainability – on future expenditures
compensation for demographic pressure and decline of average benefit ratio (AWG projections)‏
Between Member States : SIGNS of divergence in spite of average increase observed in recent years
Between genders : slow convergence
Between qualifications : signs of divergence
And these signs of divergence are raising questions on future adequacy as we know that most reforms include a stronger link between contributions and benefits

35. Trend of replacement rates : effect of enacted reforms 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

36. How to compensate for this decline ? Working longer and private pensions
Source : Stylised illustration from ISG results on gross replacement rates

37. Trends of future pension expenditures
Source : AWG projections

38. Decomposition of trends of public pension expenditures (2004-2050)‏
Source : AWG projections

39. Development of private pensions
Private pensions vs state pensions: voluntary or mandatory DB or DC schemes, individual or occupational offered by companies exclusively or with some role played by the state.
The risk is shifted from the state to individuals/employers/private companies.
10-Nov-18
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

40. The role of private and supplementary pensions in the EU
An expected increase of the contribution of privately managed schemes to the income of retired people
But public PAYG pension schemes are expected to remain the principal source of income of pensioners in all but a few Member States
10-Nov-18
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

41. Current situation Very high (More or around 50%)‏ DK NL UKSE
DE IE
FI PT
Medium (between 10% and 25%)‏
BE EE
HU PL SI
CZ ES
LV LT
LU AT SK
EL FR IT
Low or negligible (<10%)‏
Average contribution to the income of retired people
Very high
(> 90%)‏
High
(between 50% and 90%)‏
Medium
(between 10% and 50%)‏
Low
(<10%)‏
Coverage (% of the workforce)‏
10-Nov-18
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

42. Current situation and expected evolution in selected countries
10-Nov-18
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

43. V - Some key issues Concerns about equity and poverty
Compulsion vs. incentives : private pensions and working longer
How to fully restore social and financial sustainability ?
-43- 43
Commission européenne

44. Key issues (1)‏ Concerns about equity and poverty
Risks related to inadequate pension provision
A revival of minimum income provision
-44- 44
Commission européenne

45. Projected evolutions : adequacy and sustainability
Source : Stylised illustration from ISG and AWG results (public pension schemes include the funded tier of statutory schemes)

46. A need for appropriate monitoring tools
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
-46- 46
Commission européenne

47. Poverty risk among elderly
Source Eurostat, income data
-47- 47
Commission européenne

48. Source : ISG results on gross replacement rates
Theoretical replacement rates : effect of indexation 10 years after retirement ( )
Source : ISG results on gross replacement rates

49. Key issues (2)‏
Compulsion vs. incentives : private pensions and working longer
Working longer : choice, incentives for earlier / deferred retirement, partial retirement
Private pensions : incentives and coverage
-49- 49
Commission européenne

50. Private pensions – key issues
Coverage and solidarity
Fiscal incentives : efficiency, costs and equity issues
Risk sharing
Transparency and portability
Information and financial literature
Admin charges
Security
10-Nov-18
Directorate-General for Employment, Social Affairs & Equal Opportunities ─ Unit E4Réunion technique du COR - 11 juin 2008

51. Working longer Importance to review incentives structures
Labour supply
but pension reform can not do everything
Labour demand
-51- 51
Commission européenne

52. Retirement age and flexibility in retirement age
Ongoing changes
Retirement age and flexibility in retirement age
Adaptation of early exits schemes
-52- 52
Commission européenne

53. 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'

54. Compulsion vs. incentives :
Retirement age
Compulsion vs. incentives :
Changes in retirement age (DE, DK, UK)‏
More flexibility in choice of retirement age and transitions from work to retirement
combination, part-time work…
-54- 54
Commission européenne

55. Flexible age of retirement
Strength of incentives (notably for lower wages)‏
Conditions to combine earnings and pensions
Importance of accurate understanding of pension rules
Importance to open up labour markets

56. Early exits from the labour market
A high take- up
- around 20% of population on average
- Does not really decline from to 60-64
Reforms
in most European States are already on the way and
plans for further steps in about half States.
Trends
seems on decline though difficult to assess

57. Variety of take up of early exit schemes
HU, NL, LT, RO, FI, SE
BG, DK, EE, SI, SK, UK
IE, LV
Mainly disability FR
CY, DE, PT
No main take-up or others
BE, LU, PL
ES, CZ
Mainly unemployment or early retirement
Main benefits in take up
High
(>≥20%)‏
Medium
(Between 10% and 20%)‏
Low
(<10%)‏
Take up as a share of population 55-64
Table 1 provides an overview crossing levels of coverage and main type of take-up
Note: (*) stands for not available, (/) for not applicable (no scheme).
Source: National replies to the SPC questionnaire. These figures are generally taken from administrative sources
are not necessarily completely comparable. Figures generally refer to <To be added: include respective dates for Member States where and when different >.

58. Early retirement and unemployment benefits
Reforms aim in particular at :
Ensuring that employers bear the costs (at least a significant share),
Finding an appropriate manner to compensate for particularly demanding or hazardous jobs,
Tightening eligibility rules or closing schemes,
Improving working conditions and help unemployed older workers back into the labour market.
4 main dimensions arise from replies to questionnaire:
- Ensuring that employers bear the costs (all or at least a significant share),
Finding an appropriate manner to compensate for particularly demanding or hazardous jobs,
This relates in particular to categories with shorter life expectancy
Tightening eligibility rules or closing schemes,
Improving working conditions and help unemployed older workers back into the labour market.

59. Reforms of invalidity pensions
These reforms aim in particular at
offering better possibilities to combine benefits and work, retraining, improving adaptation of enterprises, including of workplaces.
strengthening incentives both for employers to employ the people with reduced capacity for work, while incentives for beneficiaries can also be reviewed to reduce barriers to returning to working life.
The prevention of invalidity and development of professional rehabilitation of people with health problems can also make an important contribution and it has to start from an early age.

60. 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
-60- 60
Commission européenne

61. VI – European approach OMC
Social protection systems (Pension and health) to be reformed to ensure:
- Adequate benefits (poverty and income replacement for pensions, access for health care)‏
- Financial sustainability
- Adaptation to societal / labour market changes
Adequacy and Sustainability are mutually reinforcing : virtuous or vicious circle
Objectives for social protection / pensions

62. Open Method of Coordination for Social Protection and Social inclusion
Definition of common Objectives and
Agreed indicators
National reporting
Evaluation in order to facilitate mutual learning and exchange of good practices

63. Streamlined OMC - indicators
Overarching indicators (14)‏
Groups of indicators by strand:
Social Inclusion
Pension
Health

64. Conclusion Pension reform in progress
Working longer: breakthrough needed
Promoting longer working lives involves not only pension reform
Improve transparency and governance
to allow policy decisions on priorities