Top 1000 Pension Funds: Urgent public pension reforms needed
To meet EU and IMF demands to cut its public debt, Portugal is proposing to raise the pension age and cut benefits across the board, says Cécile Sourbes
Portugal has come a long way in its efforts to reduce its debt since the EU and the IMF placed the country under an economic and financial assistance programme in 2011. To that end, the Portuguese government has been particularly active over the recent years in trying to reduce its first-pillar pension expenditure.
Similarly, the government has also been trying to reinforce the second and third pillars. Data from the Portuguese association of asset management and pension funds (APFIPP) released in July show that, as of 30 June this year, total net assets in the second pillar stood at €14bn.
Even though this figure represents a slight decrease from the €14.1bn recorded as of the end of March 2013, it does represent a jump of 8.1% since June 2012.
The urgency of reforming the pension system also extends to the first pillar. Faced with a growing budget deficit of 7.1% of GDP compared to 6.2% in December last year, the country seems to have reached a point of no return.
The situation is even more critical in that Portugal failed to meet its deficit target this year. Under the adjustment programme agreed with the EU and the IMF, the country was supposed to bring its deficit down to 4.5% of GDP in 2014 and 2.5% in 2015.
Additionally, a report published by the OECD in May pointed out some worrying facts. It stated that public social expenditure in the country amounted to 26% of GDP in 2012, with healthcare outlay and pensions making up the lion’s share of public social spending. The organisation consequently called on Portugal to recalibrate its pension entitlements and scrap early retirement in order to restore its fiscal health.
On 3 May 2013, the government announced a new set of measures to reform public-sector pensions. The reform bill, which is currently being discussed by several political parties and social partners, was presented to the Council of Ministers on 3 August.
One measure aims to raise from 65 to 66 the retirement age for public and private-sector workers. According to the bill, the legal retirement age at 65 will remain possible, but at a lower rate of pension.
Also, the government plans some controversial pension cuts of up to 10%. If approved, the cuts would apply across the board and relate to final-salary pensions, which are higher for those who entered retirement before the 2005 reference year. However, lower pensions will be protected. According to the government, those cuts alone should enable Portugal to save around €672m.
But the rise in the legal retirement age, as well as the pension cuts, will probably depend on any alterations to the ‘sustainability factor’. The sustainability factor, which was part of the 2006 pension reform, is being used in the formula to calculate pension benefits and aims to address the impact of life-expectancy increases on the social security. It has been calculated as the ratio between life expectancy in 2006 and life expectancy in the year prior to retirement since it became applicable to pensions paid from 2008.
The government is also seeking to take into account new economic criteria other than solely life expectancy to calculate the sustainability factor, which will certainly have an affect on future pension benefits.
Needless to say, all of the measures listed above appear controversial. But, in order to ease the tension with social partners and Portuguese workers, the government has argued that it would reverse the cuts if the economic situation improved, as defined by a GDP growth rate of 3% and the budget deficit of less than 0.5% of GDP for two consecutive years.
Portugal will almost certainly try to reform its public pension system at full speed if it wants to show the IMF and the EU that it is doing its very best to minimise its deficit.
In the meantime, another option for the government would be to continue promoting company and individual saving plans. No measure has been announced so far in this regard, however.
But consideringthe state of the Portuguese public social expenditure, it would not be surprising to see employees being asked, sooner or later, to build up their own reserves for their pensions.
This would also come in line with the requirements set by the European Commission in February 2012 in its White Paper on Pensions in which it requires all EU member states to further strengthen their supplementary pension systems.