The member states have their backs to the wall with an ageing population and a lingering economic and financial crisis and are multiplying their efforts to guarantee citizens a viable and adequate pension. These include raising the retirement age, after more than 40 years of moving in the opposite direction.

This evolution seems inevitable given the latest projections: the EU had four persons of working age (15-64) for every person over 65 in 2008 but, by 2060, the ratio is expected to have dropped to two to one. Actual retirement age for now is 61.7 for men and 60.5 for women, compared with the official ages of 64.3 and 62.7, respectively.

This imbalance is expected to lead to a 23% increase in public spending on pensions. Combined with a certain loss of faith among citizens, these projections oblige European governments to review the question of the viability (sustainability) and adequacy (sufficient income to allow a decent standard of living) of pension systems.

FOUR AREAS OF REFORM

According to the French Retirement Observatory, four areas of reform have been under review in recent years. The first, and certainly the one getting the most media attention, consists of pushing back actual retirement age, either explicitly by raising the age for payment of pension rights or implicitly by lengthening the period of payment of contributions required for a full pension. The second consists of increasing sources of financing, either directly through higher contributions or indirectly through a widening of premium payments, for example.

The third area under review is the possibility of decreasing the relative level of pensions either through a direct reduction in annuity rates under defined contribution schemes, or indirectly through a change in the rules for pension increases or a lengthening of the base employment period.

The last possibility would be to introduce or further develop capitalisation in ‘pay as you go’ pension schemes. To compensate for the drop in public pension schemes, the reforms also concern the development of second and third pillars, particularly through the use of tax incentives. Some countries have chosen to strengthen collective systems at company or sector level, while others are encouraging individual systems.

LESSONS OF CRISIS

European citizens are starting to lose faith in pension systems - 58% doubt the government’s capacity to finance them and look after the elderly in the coming decades - which have been weakened even further by the crisis. According to the Organisation for Economic Cooperation and Development (OECD), “the crisis has exacerbated the long-term structural problems faced by retirement systems in many countries due to the ageing of the population”. Private pensions funds were the first to be hit: in 2008, they lost 23% of the value of their investments, ie some US$5,400 billion. The Netherlands and the United Kingdom were particularly affected. Public pension schemes have not gone unscathed either, since income from social contributions has declined due to rising unemployment and redistribution expenses have risen to compensate for lower pensions, adds the OECD.

This has been the case for both non-revised systems and those that have already been reformed, warns the joint report by the Social Protection Committee (SPC) and the Economic Policy Committee (EPC), which calls for study of the role of funded retirement schemes and interactions between the public and private pillars. “The crisis highlights the need to review the level of exposure on the financial market. It is essential to strike a better balance, for those saving for their retirement and for pension providers, among risks, security and yield,” adds the report.