Turkey’s accession to the EU, which was confirmed by member states at the end of last year, is something of a mixed blessing for Europe. Turkey brings with it a much younger workforce, but at the same time has an overly-generous state pension system, which the government is determined to overhaul by the end of 2005.
Meanwhile, pension fund managers have been warily eyeing the new company accounting rules, which came into force in Europe in January and require pension provisions to be much more visibly recorded on balance sheets.
And, after some months of inactivity in the field of pensions, the European Parliament has started to consider whether there are sufficient grounds to pursue the UK government in the European Courts for failing to properly regulate Equitable Life, with
serious repercussions for the more than 1m people who had their pensions tied up in the company.
Turkey: In December, after more than four decades of waiting, Turkey was finally told that it could join the EU club, although realistically its accession is still likely to be more than a decade away.
Turkey brings with it a much younger population, which could help to off-set Europe’s ageing crisis. Recent UN data show that Turkey’s average age is 26.5, compared with 46 among the ‘old’ EU countries and 55 among the newer member states that joined earlier this year. But, on the other hand, as the government realises, Turkey’s predominantly public pension regime is unsustainable in the long run, and must be reformed.
On a recent visit to Brussels, OECD chief Donald Johnston pointed out that migration is not, on its own, enough to resolve Europe’s pension crisis. He stressed that national
governments must urgently take
steps to reform their overly-generous pension systems, however politically unpopular such action might be.
Turkey has now almost completed
a radical overhaul of its public
pension system. This will no doubt please its European neighbours and the International Monetary Fund, which was becoming frustrated
with the loans that it gave to the
country being frittered away to finance an unsustainable social security programme.
Turkey is at a much earlier stage of demographic ageing than the EU, which the government says provides a window of opportunity for change. According to recent projections, the ratio of pensioners compared with those of working age will decrease steadily over the next 20 years, but will start to rise rapidly after this.
A key problem with Turkey’s pension system is the lack of private involvement. But the country hopes to turn this around with the introduction, by the end of 2005, of a legal framework to encourage the development of private pension schemes which, over time, will ease the burden on public retirement provision.
The authorities also say that they will merge the three separate pension bodies that exist at the moment into a single entity, thereby reducing administrative costs.
At present, public debt of Turkey’s pension system stands at 3.5% of GDP, which the government says, without reform, will rise to 7% by 2050. With the reform, the government hopes to decrease the level of debt to 1.5% of GDP by 2030 and, after 2050, to almost zero.
International Accounting Standards (IAS): From January 2005, Europe adopted a new set of standards for regulating firms that inspect company accounts, although some of the more contentious standards have been left out for the time-being.
The main changes that affect pensions fall under IAS19, which
requires pension entitlement for employees to be more accurately recorded on company accounts. In December, this standard was amended to bring it more in line with the UK’s FRS17, which allows pension provision to be recorded in a
separate statement, outside of the profit-and-loss sheet.
Those that drew up the new rules in the International Accounting Standards Board (IASB) do not foresee any particular problems with IAS19, especially now that it has been brought more in line with UK rules.
However, there remain concerns that the new standard requires a lot of estimation and assumption of pension liabilities, which could impose a large burden on companies, especially on smaller enterprises.
A spokeswoman for the Dutch Association of Industry-wide pension funds said: “When the scheme is a defined benefit plan, it can be well nigh impossible, for one thing because of the potentially large number of employers affiliated to an industry-wide fund, to calculate the employer’s percentage share.”
Equitable Life: The Equitable Members Action Group (EMAG), campaigning on behalf of the thousands whose pensions were hit by the near-collapse of life insurance company Equitable Life in 2000, has taken its battle to Europe, after what it describes as a cynical attempt by the British government to brush the fiasco under the carpet.
Before Christmas, Paul Braithwaite, the organisation’s general secretary, presented a 50-page petition to the European Parliament, asking them to refer the matter to the European Courts.
EMAG’s central argument is that, during the 1990s, the British government did not properly regulate the insurance industry, as it was required to under EU Directive 92/96/EEC. “The UK government has failed to deal responsibly with this issue”, said Braithwaite. “Now is the time to go over their heads.”
British Liberal Democrat MEP Chris Huhne is taking up the fight in Europe on behalf of EMAG, although Braithwaite fears that the sizeable number of Labour MEPs could move to kill the petition.
The Parliament’s petition committee must first endorse the petition, which could take between three and six months, before the entire house of MEPs can decide whether or not to refer it to the European Court of Justice.