EU support needed for 'new' Europe
Much more co-ordinated action is needed at EU level to speed up pension reforms in the new member states, which are likely to suffer from an even greater demographic imbalance than “old” Europe, a conference in Brussels heard on November 14.
The new member states were also told how they should work towards adopting a consistent three-pillar pension structure broadly in line with the rest of Europe – and not look at the World Bank’s way of doing things, even though most of the poorer Eastern bloc remain eligible for World Bank support.
Pragma Consulting, who hosted the conference, have recently issued a report that the new member are suffering from a “major ageing problem combined with excessive pension promises in the unfunded first pillar” and often have “insufficient reserves in the second private pillar”.
“Enlargement of the EU and the common challenge of ageing offer an opportunity to compare the state of affairs related to pensions,” Koen de Ryck, managing director of Pragma, told the conference.
De Ryck said that of particular concern is the lack of defined benefit (DB) schemes in the new member states, and called for more to be done to promote them. “DB schemes allow for high levels of benefit security, solidarity and risk sharing, and protect participants and beneficiaries from market and longevity risks,” said de Ryck.
Jaap Massen, chairman of the European Federation for Retirement Provision (EFRP), added to this that he would rather see a combination of DB and defined contribution (DC) schemes used in national pension systems, rather than any one system on its own. “Diversity is the key to survival,” he said.
The conference also considered how Europe’s under-performing economy and high unemployment could negatively impact on pension reform.
“Europe right now is a low-growth environment, with scarce resources transferred from the young to the old,” said Edwin de Boeck, managing director of KBC Asset Management. “Any pension reform in the EU should be consistent with the objectives of raising employment rates and economic growth potential in all member states.”
In this context, De Boeck also highlighted the benefit in terms of growth that EU accession to has brought the new member states, allowing them to better cope with the challenge of an ageing population.
Declan Costello, head of the labour markets unit in the Commission, also emphasised the importance of boosting employment and growth in Europe in order lessen the negative impact of an ageing population. Costello said that it was crucial to meet the Lisbon goals of 70% employment as soon as possible – although he admitted that this would now probably not be achieved before 2013, despite the original target date being 2010.
Costello said that, providing the Lisbon targets can be met, there will be a “window of opportunity” between 2012 and 2017, where the employment rate will continue to rise despite a steady decline in the working age population. Between 2017 and 2050, when the Commission’s projections end, Costello predicts that there both employment and working age population will fall.
Another key point to emerge from the discussions was the discrepancy between the EU15’s three-tier pension structure and the model that many of the new member states employ, which is much more aligned with the World Bank.
In World Bank terminology, the second pillar consists of mandatory funded pensions (whether occupational or personal) and the third pillar consists of voluntary funded provisions (whether occupational or personal). Europe, on the other hand, tends to use the second pillar to refer to occupational pensions (whether mandatory or voluntary) and the third pillar for individual pensions.
Having pension structures that differ significantly across Europe with no proper EU co-ordination is “awkward”, said de Ryck, although he recognised that care has to be taken not to trample on national competences. According to de Ryck, five of the new member states – Hungary, Poland, the Slovak Republic, Latvia and Estonia – have aligned their pension reforms with the World Bank rather than the EU.
Meanwhile, the World Bank is working towards splitting its own three-pillar terminology into five distinct pillars. Richard Hinz, an economist with the Bank, told the conference that this adjustment would help allow for a more accurate view of the individual risks of different market instruments. “It will also provide a social safety net to help reduce poverty among the elderly,” said Hinz.
But the new World Bank way of doing things found little support at conference, and simply provoked renewed calls that the EU’s classic three-tier structure should not be abandoned for another untried and untested model.
Peter Kraneveld, special adviser at Dutch pension fund PGGM, took particular issue with the World Bank model and urged all member states, young and old, to consider instead the structure proposed by the EFRP, whereby all work-related pension provision goes in pillar two and all social security provision goes in pillar one.
Kraneveld said that pillar two needed urgently beefing up in the new member states, which is something that the World Bank model does not encourage. He added that the World Bank’s reliance on individual rather than collective contracts, which tend to be more efficient, was the wrong approach.
Wrapping up the conference, Massen said that there is no one size fits all solution to pension reform. “New and old member states can and should learn from one another,” he said, adding that it is the role of the EU to act as “enabler, co-ordinator and stimulator”.