Initially announced for 23 June, the European Commission will publish its green paper on the future for pensions on 7 July. In the first draft, obtained by Europoliticsa few weeks ago, the EU executive makes various recommendations, including an increase in retirement age, the development of diversified pension systems and legislation for greater pension mobility. It also proposes to set up a common platform responsible for monitoring all aspects of pension policy and related regulations in an integrated manner and mentions the idea of creating a Union-wide system to guarantee welfare payments.

According to several sources, this very general green paper could subsequently lead to a more sector-based white paper matched with an impact assessment and draft legislation. For now, however, the aim is to review the problem as a whole, without limiting it, as initially planned, to funded pensions (for which there was EU competence). The public pillar, access to housing, health care and long-term care, the question of women, pension portability and solvency and insolvency standards will also be addressed in the paper.

TWOFOLD CHALLENGE

The challenge is huge: ensuring adequate and sustainable pensions, knowing that, by 2060, only two persons will be of working age for one person aged 65 or over, compared with four to one today. It is vital to waste no time and to start tackling both the quantitative (sustainability) and qualitative (adequacy) aspects of pensions, concludes the draft green paper.

The first subject addressed is pension adequacy. Replacement rates (the ratio between the net pension and the net salary at the time of retirement) under public pension systems are going to decline so it is important to give people the possibility of earning additional entitlement. These measures could include working longer and increasing access to supplementary pension systems. The draft green paper suggests certain options: sources of retirement income could be expanded and funded schemes made more secure by reducing the risk of investments in pension funds and improving risk-sharing. In parallel, the green paper sounds the alarm over pension sustainability: “Given the dire state of public finances and the projected unsustainable increase in public debt levels with unchanged policies, fiscal consolidation will be a binding constraint for some time to come on all policies, including pensions.” It stresses the role that could be played by the Stability and Growth Pact and higher labour productivity on public finances.

To meet these challenges, the Commission is considering setting up a common platform charged with monitoring all aspects of pension policy and related regulations. It would take account of their interconnections and bring together all stakeholders. “The Commission is keen to explore how best to render pension systems adequate, sustainable and safe in support of the EU’s wider economic and social objectives.”

WORKING LONGER

Precipitated by the effects of the crisis, there have been a number of announcements of pension reforms in recent weeks (particularly in Greece, Spain, Romania, France and Belgium). One of the main changes is an increase in retirement age. The statistics are alarming: one third of adult life is spent in retirement, while only about half of people over age 50 still work. This trend goes against the commitments made at the Barcelona European Council (which increased the age at which people stop working by five years) and the employment objectives set in the ‘Europe 2020’ strategy (75% employment by 2020). The Commission therefore urges the member states to explore how to keep people on the job longer. It suggests five ideas: 1. adjusting retirement age to developments related to life expectancy; 2. increasing the number of years of contribution; 3. providing for a gradual transition through lighter hours; 4. offering tax and social incentives to continue working; or even 5. establishing common European principles. The draft green paper nevertheless warns that the solution is not simply to raise pensionable age. Access to labour markets, training and adjustments need to be guaranteed to all, irrespective of age, gender and ethnicity. The European Social Fund could have a role to play.

ADAPTING TO NEW TRENDS

In the 21st century, Europe is undergoing considerable changes that are creating more and more challenges for pension systems: citizens are more mobile in a larger Europe and the crisis has underlined the vulnerability of pension systems. Obstacles to mobility have to be abolished to start. To limit the impact of such measures on pension schemes, the Commission suggests a revision of existing rules, such as 1. Directive 2003/41/EC on the activities and surveillance of institutions for occupational retirement provision (IORP Directive); and 2. accounting standard IAS19 (on employee benefits). It also encourages a new legal framework for a European private pension scheme, in parallel with existing pension schemes. Supplementary pensions, the main pension-related obstacle to the mobility of European workers, are also discussed. The green paper suggests the possibility of supervising them at EU level and establishing a follow-up system.

The Commission then tackles the risk factor, the limitless impact of which was brought to light by the crisis. It notes certain legislative inconsistencies, particularly in the diverging application of EU legislation at national level, the superimposition of different rules, market developments (transfer of schemes from defined benefits to defined contributions) and the need to make pension systems safer, and calls for improving the solvency regime for pension funds (by exploring a pension benefit guarantee system) and addressing the issue of a possible insolvency of the employer.

COMPILING, INFORMING, PROPOSING

The crisis has also shed light on the importance of information: an informed choice makes it possible to protect the (future) retired person financially and socially. The member states could therefore set up reliable services to facilitate consumers’ decisions on pension products. In parallel, pension statistics should be improved through an EU methodology for compiling statistics, concludes the draft green paper. Such measures could encourage best practice and enable the European Union to play its coordination role by providing rigorous surveillance and facilitating national reforms.

The draft paper is available at www.europolitics.info > Search = 273369

“Fiscal consolidation will be a binding constraint for some time to come on all policies, including pensions” // The draft green paper warns that the solution is not simply to raise pensionable age

Fourteen questions

 Fourteen very specific questions are laid out in this draft green paper. Their aim is to ensure the durability and appropriateness of pensions within the context of the ageing of the population, the mobility schemes in Europe and the functioning of the financial markets. EU institutions, member states, stakeholders as well as the public will have five months to answer.

1. How can the EU support member states’ efforts to strengthen the adequacy of pension systems? Should the EU seek to define better what an adequate retirement income may entail?

2. Is the existing pension framework at the EU level sufficient for ensuring sustainable public finances?

3. How can higher effective retirement ages best be achieved and how could increases in pensionable ages contribute? Should automatic adjustment mechanisms related to demographic changes be introduced in pension systems in order to balance the time spent in work and in retirement? What role could the EU level play in this regard?

4. How can the implementation of the ‘Europe 2020’ strategy be used to promote longer employment and to address age discrimination in the labour market?

5. In which way should the IORP Directive be amended to improve the conditions for cross-border activity?

6. What should be the scope of schemes covered by EU level action on portability?

7. Should the EU look again at the issue of transfers or would minimum standards on acquisition and preservation plus an EU-level tracking service for all types of pension rights be a better solution?

8. Which elements of the current EU legislation should be reviewed to ensure a consistent regulation and supervision of funded pension schemes and products?

9. How could European regulation or a code of good practice help member states achieve a better balance for pension savers and pension providers between risks, security and affordability?

10. What should an equivalent solvency regime for pension funds look like?

11. Should the protection provided by EU legislation against insolvency of pension sponsoring employers be enhanced and if so how?

12. Is there a case to modernise the current minimum information disclosure requirements for pension products (eg standardisation and clarity)?

13. Should the EU develop a common approach for default options about participation and investment choice?

14. What should be the main elements of a strengthened policy coordination framework at EU level to improve the design and implementation of pension policy through an integrated approach? Would the creation of a platform for monitoring all aspects of pension policy in an integrated manner be part of the way forward?