In search of a viable solution
A shift to capital funding in public-sector pension schemes is essential but the pace has to be set carefully, was the message at the 10th congress of the European Association of Public Sector Pension Institutions (EAPSPI) in Amsterdam. There are many possible solutions to the problems of future pensions, some of which are being experimented with across Europe.
Kees Van Rees, chairman of the European Federation for Retirement Provision (EFRP), believes that: “Given the magnitude of the problem and the relatively short time available, many answers and solutions need to come from the first pillar itself.” In his opinion the fundamental structure of state provision has to adapt to the growing number of pensioners, while funding has to be adopted to ensure future payments.
The funding of pensions is a massive problem area, not solely the result of national legislation but because of the markets themselves. Géza von Puskás, the chairman of AKA, one of Germany’s local government pension bodies, pointed out that if the German state pension scheme shifted to total capital funding it would “require an amount of no less than DM14trn”. Following this scenario, if European pay-as-you-go schemes were to restructure their financing momentarily the financial markets would not be able to absorb the sudden surge capital.
The pension structures of different European countries vary enormously, presenting the seemingly impossible task of assimilating them into a Europe-wide pension policy, yet the main problem for occupational schemes remains taxation differences. The EFRP suggests that “a pension vehicle in one member state of the_EU should be able to create separate sections that are tax approved in other member states, while remaining regulated in its home state,” says van Rees.
Former member of the European Parliament Johanna Boogerd-Quaak suggests that during the transition period from the current pay-as-you-go system to a partially funded system, the financing of the basic pension should be levied by extra measures, such as environmental and energy taxes. If alternative plans are not made, the
current active workforce will have to pay double to finance the current
pensions and their own future ones.
Many of the delegates were united in their praise of a system similar to the Dutch one and the fruitful lessons that can be learnt from the Dutch, Irish and UK experiences in capital investment. It is generally acknowledged that change is close, yet all the talk about a pan-European pension system might not lead to a comprehensive plan in the near future. Despite the “fine statements and treaty stipulations,” says Boogerd-Quaak, “less than 2% of all working Europeans have a job in a member state other than the state in which they have their place of residence, a percentage which is declining, moreover.”
There is much talk about capital funding in European public sector pension institutions, yet many fail to make definite plans to change the situation. Mathieu Scheepers, a senior pension policy analyst for the Dutch ABP fund, finds Europe more receptive to change than before. Scandinavian countries are the next in line.
Jari Sokka, director of strategic planning at the Local Government Pensions Institution (LGPI) of Finland, contrasts the state pension schemes with the possible future funded schemes. He sees the 1960s, when the Finnish state benefits were implemented, as an era of communalism, as opposed to the 1990s which was an era of individualism.
The LGPI has adopted a clear plan for the transformation of its pension scheme, which will lower the pension benefit from 66% of final salary to 60% of a personal career average, while there will be an increase in employee contribution and funding of the scheme through global investing. But the implementation of the plan will take time.
A change towards greater employee contribution will take place in Sweden this autumn, according to Ingemar Alserund, vice-president of KPA AB, as individual decisions and personal responsibility are stressed more heavily than in the past. Growing consumer concerns over the ethics of investment meant funds have had to avoid investing in areas that may be deemed ethically undesireable. According to recent studies, 8% of women in Sweden feel strongly about ethical issues.
The new Swedish system has been a success. “In the last five years, the markets gave the funds more money than insurance policies – independent funds have more money after recent outperformance and do not know what to do with it,” rejoices Alserund.
Bernard Cochemé, senior executive vice-president of the retirement programme of Caisse des Dépôts, the French body that manages public sector retirement programmes, compared the European systems to different methods of gardening: The more natural landscape gardening á l’anglais versus the more rigid, formal gardening á la francais.
Cochemé finds the Dutch system more like the formal garden, while the other systems look more like attempts in landscape gardening. He believes a hybrid system can be found that includes diverse national preferences to form a European agreement that will not challenge the various fundamental principles of European states.