Coverage of the occupational pensions directive has overshadowed another development, that of the so-called ‘open method of co-ordination’ approach to pension fund reform in the EU. Largely unnoticed is the fact that the commission is to produce its first formal policy document on pensions at the end of the year.
At its simplest, the notion of an ‘open method of co-ordination’ is a set of common European objectives for pension funds and pension fund reform being sought at a national level. To conform to this method of reform, member states are expected to report later this year on every aspect of their pension fund industries- not just the present state of the industry, by any reform programmes.
The commission has been working on this idea for more than a year but it wasn’t until recently that the Parliament endorsed it. At a plenary session in April, MEPs passed a resolution drafted by the Italian MEP Carlo Fatuzzo by 368 votes to 40, with 56 abstentions.
In short, the resolution stresses the urgency of pension reform given the demographic problems faced by the EU. It calls on the commission to organise and support (in conjunction with member states) a series of campaigns to inform and educate people in terms of pensions and the state of reform.
As to what constitutes an ‘open’ approach, the clearest definition is included in a joint report by the social protection committee and economic policy committee submitted to the council back in November but which remains largely unchanged.
It says: “in accordance with the principle of subsidiarity, the open-method of co-ordination involves agreeing broad common objectives, translating these objectives into national policy and, as part of a mutual learning process, monitoring progress periodically and, as far as possible, on the basis inter alia of commonly agreed and defined indicators.”
In Parliament, Fatuzzo stressed that member states are reluctant to cede any control on pensions matters and that, as such, the organisation and funding of pension schemes will remain a national issue.
Although the Parliament’s endorsement is the latest development, the idea of adopting this approach is the commission’s brainchild. Andrew Fielding, commission spokesman for employment and social affairs, explains.
“There are certain areas the EU cannot go and therefore the commission, as its operating arm, cannot go either and one of those is pensions. What the commission can do is have a look with member states at how the Europe-wide market works.”
The commission is unable to legislate to harmonise each pensions pillar and it accepts a member’s mix of provision and level of funding and payment is, and should remain, a national matter.
Fielding continues: “That said, member states have got together and decided that there are common problems in the majority of systems that relate to mid and long term financing of the state pension.” He describes the commission’s role, not as legislative but as a co-ordinator to examine the differences and to produce a common report, the first of which is due in December.
Member states have until September to file their so-called national strategy reports. In these submissions, they are expected to explain to the commission how they will ensure pensions remain adequate as the demographic situation deteriorates. This explanation applies to every pillar, not just to state provision.
From the outset, the goals of the ‘open’ approach have been broad. In the same paper submitted to the council, it says the method will aim to provide an reporting framework on all pensions-related issues and a framework through which various parties at the EU level can understand and monitor national strategies.
As a starting point, member states need to file a submission. They, suggests the paper, “Member states should submit national pension strategy reports which describe their comprehensive policy strategies for securing the sustainability of pension provisions and, where necessary, for modernising pensions systems.
“They should mainly focus on pension systems and contain information on reforms in all policy domains relevant to pension systems, which have been carried out or which are envisaged. If possible, they should also contain relevant data which will help to assess progress towards the broad common objectives, including the long-term sustainability of pension systems.”
Member states are free to choose which departments pull together the submission. Since each aspect of pensions is to be covered, it is expected that states will draw on various ministries and associations.
At the Commission level, the DG for employment and social affairs is heading the project, reflecting the fact that it is looking at pensions from a social policy opposed to a financial perspective. The DG will consult with other economics and finance departments.
Common policies at the EU level are unsurprising. Full details are available in the document* but in a nutshell, they are broken into three categories.
o Adequacy of pensions: Members should safeguard the capacity of pension systems to meet their social objectives.
o Financial sustainability of pension systems: Member states should follow a multi faceted strategy to place pension systems on a sound financial footing and
o The modernisation of pension systems in response to changing needs of the economy, society and individuals.
The commission will publish and publicise the report in December. “That will be quite a milestone because it will be the first time the commission has submitted a formal policy document on pensions,” says Fielding. This draft analysis drawn up from member state reports will be discussed by the commission and the council and then submitted to the Spring European Council in 2003.
The notion of open co-ordination has been around since the 1990s when it was first applied to employment laws and then to poverty in member states. But the idea of applying it to pensions is relatively new and also more complicated. When first applied to employment laws, most of the figures used to gauge the state of employment were readily available.
Eurostat made the job far easier as figures were to hand. Poverty was marginally more difficult to monitor, it being based on access to health, housing and education. With pensions, at issue is how to measure such diverse approaches.
At the outset, some member states questioned whether it was the correct tool for the job. Many have expressed concern that it is the first step in terms of centralising pensions policy and that it will turn into a shaming device.
Says Fielding: “we have tried to allay this fear and the big test will come in December. We will have to make sure that the presentation is a truthful one and one that doesn’t make comparisons where they cannot be made. Essentially what we are doing is co-ordinating a process of medium term pension fund reform.”
As the project is not bound by legislation, there is no formal means of enforcing the idea, although there is peer group pressure. What the December report will do is highlight weaknesses in member states’ pension systems and illustrate that something needs to be done.
As the project progresses, so the commission will continually refer back to the social protection committee in which the 15 member states are represented. This is seen as a check on the commission – to consult before it proposes any large changes to pension reform.
Says Fielding: “We are basically offering member states a third party to keep them on track, to give them back up at home and to make sure that reform progresses at the necessary pace. What we will not be doing is benchmarking one country against another, it’ll normally be one member state against itself over time.”
*A copy of the joint report by the social protection committee and economic policy committee is available at: /employment_social/soc-prot/social/index_en.htm