European pension funds are facing tough choices of whether to index pensions under different regimes in member states as inflation surges across the continent, panelists said at the annual pension conference organised by the European Association of Public Sector Pension Institutions (EAPSPI) last week in Berlin.
Matti Leppälä, secretary general of PensionsEurope, said the impact of inflation on pension systems in Europe is very diverse.
“This level of inflation poses problems for whatever part of pension systems you are thinking about […] whether it is defined benefit or defined contribution,” he said.
In the Netherlands, where inflation hit 17% in September from 13.7% in August, the government is able to index first pillar pensions given the strong fiscal position, by 10% from 1 January 2023, said Matthies Verstegen, head of the Brussels Office of the Dutch Pensions Federation, Pensioenfederatie.
The average person in the Netherlands, however, receives half of their pension from the first pillar system and half from the second pillar. Pension fund boards are currently discussing the level of indexation for second pillar pensions.
Verstegen added: “On the one hand, they would like to index as much as possible […] to maintain the trust in the system that is transitioning from DB to DC. On the other hand, not indexing as much as allowed would give more room for pension funds to transition to the new system, with some cohorts that need to be compensated.”
There are considerable differences in the financial positions of pension funds, but Pensioenfederatie is noting that the larger schemes are considering indexing 2-3%, which is lower than the current inflation rate in the Netherlands, he said.
It is difficult to think that pensions are going to be indexed to the current level of inflation in Spain, at 9.3% in September, Amaia Aldasoro Iturbe, vice president of Elkarkidetza (EPSV de Empleo), the pension scheme in the Basque Country, said. She added that at the moment indexation is close to 3.5%.
Spain is considering reforming its pension system, increasing the retirement age from 66 to 67 years old, and expanding the second pillar system, Aldasoro Iturbe said.
In Finland, where the pension system is a DB framework with a pay-as-you-go element, pensions are increased annually based mostly of price fluctuations (80%), leading to a pension increase next year of 6-7%, said Piia Laaksonen, director of actuarial affairs at KEVA.
In Slovenia first pillar pensions indexation is based 60% on salary growth and 40% on the consumer price index, while second pillar pensions are voluntary without indexation, said Boštjan Vovk, board member of Modra zavarovalnica, a provider of supplementary pensions.
Inflation rate in Germany was up 10% in September compared with the same month the previous year, according to the country’s Federal Statistical Officen.
“We do not have mandatory indexation [in Germany] per se,” said Klaus Stiefermann, managing director of the German occupation pension association aba, noting that for Pensionskassen there is an indexation of 1% per year, but “with inflation rates going up to 10% there is a major gap with this mandatory [form of] indexation”.
For pension obligations on book reserves and support funds the employer has to assess the development of the consumer price index, and see if can indexation can be afforded, Steiefermann said, adding that it is an issue for members and a challenge for employers.
The government coalition of the Austrian People’s Party (ÖVP) and Greens has reached an agreement on 3 October to increase minimum pensions, including compensatory allowance, by 10.2% in 2023.
Retirees with a gross monthly pension of €2,360 will receive an increase of 5.8%, while retirees with a gross monthly pension of €1,700, without a compensatory allowance, will receive an increase of 8.2%.
Johannes Ziegelbecker, member of the executive board of Vienna-based Bundespensionskasse, warned, however, that returns on investments of DC schemes, which are predominant in Austria, might be not as high as inflation.
“There might even be pensions that are lowered, and some might increase a little bit,” he said, but liekly not at the level of current inflation.
Leppälä added that the valuation of assets has dropped this year but liabilities have gone down even more because of interest rate rises.
The move towards DC in Europe will continue, Leppälä said, looking at last week events in the UK pensions landscape regarding DB schemes’ LDI strategies, but problems also materialise with DC schemes as asset values drop and people lose out because of political and social turmoils, Leppälä said.