The future of pensions in Europe

Europe’s population is ageing, pension expenditure keeps increasing, and preparations for this vary markedly from country to country. The cost of social security pensions to public finances raises the pressure to develop pension systems. Issues pertaining not only to sustainable financing but, increasingly often, to the adequacy of pensions dominate the agenda of the European pension debate. The change in working life challenges the principles of pension provision that determine the accrual of adequate pensions.

The fundamental structures of pension systems are very stable, but pension reforms are still carried out in all countries. They aim at the same goals: the financial sustainability of the system and the adequacy of people’s pension benefits. Reforms mostly focus on existing benefits, for instance by raising the retirement age or by revising the regulation of risk-taking associated with investments. Often, the pension system is supplemented with automation, for instance by binding the retirement age to life expectancy or the pension level to the sustainability of financing.

Large system changes mean policy decisions between the basic principles of pension provision. Balance is sought, for instance, with regard to the question of who bears the risks of the pension system. In many European countries, the trend in the development of earnings-related pensions has been to move away from defined benefit schemes more towards defined contribution schemes, where responsibility and risk are shifted to the individual.

Country specific recommendations also extend to pensions

The EU has a desire to regulate and supervise pension systems, because pensions form a substantial part of public finances in many countries and pension institutions are often major financial actors. With the EU’s economic coordination, the general government finances of Member States – and indirectly also the pension systems – are under supervision.

Within the framework of financial steering, the Commission also gives recommendations pertaining to pension systems. In very exceptional economic conditions (e.g. Greece), the steering power of EU-level institutions may even have extended concretely to the pension policy of an individual Member State.

In the main, however, the structure of the pension system and pension benefits fall within the competences of the Member States. There has been disagreement between the Commission and the Member States on the content of the annual pension policy recommendations for each country. Finland has also opposed the practice where recommendations are given on the details of the pension system.

When statistics are compiled, earnings-related pension assets are included in Finland’s public finances by the Commission’s decision. In Finland’s national accounts, earnings-related pension assets are therefore part of the public sector and affect the sustainability estimates of public finances. However, by law, earnings-related pension assets are reserved for managing pension provision, and they cannot be used, for example, to cover deficits in other public finances or support national economic policy goals.

For several years already, the Commission’s most important pension recommendations for the Member States have been the linking of the retirement age to life expectancy, the elimination of early retirement and the raising of the real retirement age. In general, the country-specific recommendations received by the Member States have emphasized the financial sustainability of pension systems more than the adequacy of pensions.

In the 21st century, and in the pension reform that entered into force at the start of 2017, Finland has made changes in line with the recommendations. Among other things, the decision has been made to bind the retirement age to life expectancy.

A carrot towards supplementary pensions

The EU’s approach in pension provision is to distribute pensions from the perspective of the division into pillars so that they rest on all three pillars. In other words, people’s pension consists of the statutory social security pension (1st pillar), occupational pensions based on employment relationships (2nd pillar), and private provision, or supplementary pensions (3rd pillar).

In the EU Commission, the emphasis in the development of pensions has been on supplementary pensions. Supplementary pensions are widely used in many EU countries and are in line with the principle of free competition. Underlying factors also include the poor state of public finances and the burden on them caused by social security pensions. Unlike social security pensions, the promotion of supplementary pensions is an area where the Commission has more competence.

Supplementary pensions are often seen as a means of achieving adequate pension provision in the future. However, it is hard to see how groups vulnerable from the perspective of a sufficient pension level, such as temporary workers and the self-employed, would markedly benefit from the promotion of private supplementary pensions in relation to statutory pensions. People also tend to undeprepare when they are themselves responsible for saving. In addition, the gender gap between pensions is wide in countries that emphasize employer-specific and trade-specific supplementary pensions.

When developing supplementary pensions, it is important that the age and manner of drawing them are tied to the nationally determined, statutory retirement age so that the creation of substantial early retirement paths can be prevented. Other types of alternatives could hinder the realization of the goals set for the extension of careers

Overall, supplementary pensions can be excellent for complementing statutory pension provision but they cannot replace, for instance, its wide coverage and mandatory nature. Both features are essential, among other things, for protecting vulnerable groups on the labour market and, in general, for securing adequate income during retirement years.

Increasing pressures to develop the social dimension

For a long time, development of the EU’s Economic and Monetary Union (EMU) focused mainly on the regulation and supervision of fiscal policy and on promoting competitiveness and economic growth. In recent years, there has also been discussion in the EU on whether the Economic and Monetary Union should have a social dimension. There are significant pressures to pay more attention to social issues and employment affairs than at present.

The latest step in developing the social dimension of the European Union is the European Pillar of Social Rights. For its part, the pillar project has investigated whether the EU legislation on social issues is up to date on the turbulent labour markets and whether economic discipline should be counterbalanced by developing indicators for social performance. The pillar is a proclamation of principles and does not oblige the Member States legally. Time will tell whether these major policy principles are transformed into EU legislation to any greater extent.

The pillar project has also featured pensions. The proclamation focuses on measures to ensure gender equality and living in dignity in old age and on challenges posed by new forms of work. One good feature about the discussion of pension issues in the pillar is that the adequacy of pensions and the sustainability of financing are examined together, for instance in pension reforms, so that both are achieved.

We agree with the pillar’s objectives in many respects. They can be advanced in the Member States and through the existing EU-level monitoring structures, such as the European Semester. However, in the opinion of the earnings-related pension sector, the main responsibility for employment and social affairs should remain with the Member States. The EU’s competences in social security matters should not be increased.

Future visions of the Economic and Monetary Union are taking shape

Development of the Economic and Monetary Union is one of the EU’s most important and most difficult missions. Regulation of the EU’s public finances, supervision, coordination and economic policy steering became noticeably tighter following the economic and debt crisis that began in 2008. Since then, the economic situation has improved slightly and flexibility has been sought for economic discipline. In the long term (by 2025), it is still difficult to predict the direction that the deepening of the EMU will take between centralized control and solidarity.

The current EU Treaties define the division of competences between the EU and the Member States. At present, many fiscal policy and social policy initiatives concerning transnational solidarity and shared responsibility clash with the limits of competence. The earnings-related pension sector’s position is that the current division of competences must be respected.

Over the last few years, development of the EMU has been discussed and outlined in a number of EU-level and domestic reports and reflection papers. From the point of view of the earnings-related pension sector, the essential issues in the development of the EMU are:

• It is important that Finland is involved in the development of the EMU. The euro is important for reducing pension providers’ investment risks, but also for pensioners as a factor maintaining price stability.
• The development of a more optimal currency union should focus on promoting stability rather than redistribution. Increased risk sharing would raise the pressure to concentrate the euro countries’ decision-making to the Union level and to be more forceful in steering structural reforms.
• Statutory pension provision and its reform must remain the responsibility of the Member States in practice. When pension policy is pursued responsibly and with a long-range perspective, it should be close to the Member States and their citizens.
• The assets and contributions earmarked for financing earnings-related pensions must be kept outside any tools used to even out economic cycles. The pension pledge is not a cyclical phenomenon. It is a long-term social contract built on the foundation of national institutions.