The pension trapeze safety net
Pensions should be part of a cradle-to-grave provision by the state. No nation can allow its people its people to fend for themselves in old age. Or can they?
Money for pensions is getting tighter. Social solidarity is loosening. The net effect could be a reduction is in state support for pensions.
Levels of state pension provision, of course, vary widely across Europe. Some, like Portugal’s, are generous. Others, like the UK’s, are niggardly. Yet European states all face the same problems - ageing populations and the need to reduce social security spending to meet the budgetary criteria of monetary union. This is leading to a progressive reduction in the level of state provision.
Governments hope desperately that the private sector will be able to fill any gap left by the withdrawal of state provision. Yet in some countries, the gap has widened rather than narrowed. In a recent report for the UK’s Pensions Policy Institute, 80 pension experts concluded that the private sector cannot be expected to make up the shortfall and that the state pension in the UK should be significantly increased.
So what should the role of the state be in pensions provision? Should it play a greater or a smaller part? We wanted your views.
As with so many pan European topics the answers to some extent depended on which European country our respondents were based. It was also a survey in which it was possible to give diametrically opposing views depending on which country you are talking about
Should the state provide pensions at all? Here there is near unanimity. Only a very small minority of the pension fund managers and administrators who responded to our survey - one in 35 - believes that it is not the business of the state to provide old age pensions
Yet a majority - two out of three of respondents - think that the state should not be the majority provider of retirement income. A significant number qualify this, however, by saying that this role should be limited to looking after the lower paid.
The manager of an Irish pension fund suggests the state should be the main provider of pensions “for the lower income section of the population”. A UK manager develops this by exempting the state from any duty to be a majority pensions provider for the better off: “The state should be the principal provider for the lower paid, not for those on above average salaries.”
A Danish pension fund manager suggests the demarcation line for the state’s role here is simple: “Blue collar, yes. White collar, no.”
One of the arguments in favour of a limited role for the state in pensions provision is the cost of this provision. A clear majority - two thirds of our respondents - agree with the proposition that, within Europe, the state can no longer afford to be the principal provider of pensions.
Again, some respondents qualify this view. One UK pension fund manager suggests that, whatever the cost, the state must remain the principal pensions provider for the lower paid.
A substantial majority - five in seven respondents - agree that state provision in many European countries is unrealistically generous and should be gradually reduced. In most countries this will mean raising the retirement age. One Swiss pension fund manager points out that state pensions are too generous “especially as far as retirement age is concerned”.
A Swedish pension fund manager says the view one takes depends on the country: “In some countries state provision is definitely unrealistically generous. In others it is not.”
Faced with the prospect of an ageing population and a decreasing dependency ratio, governments must make difficult but necessary choices, he adds. “The poverty level in the future, depending on longevity or other foreseeable factors, demands that decisions about tax incentives and other measures are taken by politicians in order to protect society from the cost that would arise if people cannot support themselves in the future.
“Taxing income now or later, taxing returns now or later, adjusting society to the change in demographics, adjusting society to the number of people with incomes derived from the farming sector or whatever are political choices that must be taken now, not later.”
So should people expect less or more from their current state pension provision? In the UK, pensions experts have decide that people should expect more, but that is because the level of universal pensions provision in the UK is low compared with the rest of Europe. In other countries, there is a recognition that people will have to expect less.
This is borne out by the response to our survey. Two in three respondents say that people should expect less in the future. However, a number of respondents say that this depends largely on the country of origin.
Yet ageing populations are a pan-European rather than purely national phenomenon. As the manager of an Irish pension fund observes, “the demographics aren’t promising anywhere”.
And a Danish pension fund manager say the reduction in state pension benefits should not affect the poor’s chance of help: “The state should have the possibility to pay some additional pension for very poor people,” he says.
A majority - two thirds - think that the state should concentrate on the one role that only the state can perform - the prevention of poverty. This should be its priority, says one UK manager .
A smaller majority - four out of seven respondents - think that a state-funded pension system should do more than guarantee against poverty in retirement.
It should be universal, one pension fund manager says: “It should be inclusive – the solidarity approach – for high and low earners. If only for the latter, then there is a risk of means testing, marginalisation, less solidarity , less incentive for private supplementary cover.”
Yet one UK manager says that the state should do “only marginally more” than protect against poverty. Others say that the prevention of poverty is task enough.
As for the private sector, two in three managers agree that the state’s role is to enable and encourage the private sector to do what it does best; that is, provide earnings-related pensions on a voluntary basis.
Yet one size does not fit all. The manager of a French pension fund points out that “this is difficult in countries with significant civil service”. And the manager of a Swiss pension fund says the provision of earnings related pensions should not necessarily be on a voluntary basis.
Most managers - five out of seven - think that people should look to private pensions to fill the gap left by low state pensions. A similar majority feel that the state should be able to compel people join a private sector pension fund.
But there are worries that compulsion to save, like taxation, is regressive. A UK pension fund manager says “logically one would think yes, to prevent a gap appearing, but on balance probably not, as it would hurt the lowest paid most”.
Most respondents - three in five - agree that the state should gradually allow the private sector to take more share of pensions provision. There is some dissent with this view. The manager of a Swedish pension fund argues that the switch should be from the state to the individual rather than to the private sector.
Finally we asked what share of pension provision the state should contribute. Many of our respondents pointed out that this was impossible to answer without knowing the income level. The rich do not need the same level of support as the poor. A Danish manager suggest that the share should be a third for white collar and two thirds for blue collar workers.
Generally, pension fund managers think that a one third is an appropriate share for the state, and only one in 10 managers think that the state share should be as high as two thirds.
So it seems that the private sector still has an important part to play in pensions provision. The state may provide a poverty safety net below the pensions trapeze, but the private sector’s role is still to encourage people to fly higher.