Pensions after the Crisis: A comparative analysis of

recent reform processes

David Natali

natali@ose.be

Observatoire social européen

Pensions after the crisis

S1. Key questions

S2. European pension models• main challenges

S3. Assessing the impact of the crisis• public and private pensions

S4. Most Recent Reforms

S5. Conclusion, ‘food for thoughts’

S1. Key questions

• What impact of the crisis ?

• Is there a common trend in reforming pensions after the crisis?

«Race to the bottom»?

• What challenges/strategies for the future?

S2. European Pension Models (before the crisis)

S2. European pension models

Multi-pillar Social insurance 1st Generation 2nd Generation 1st Generation 2nd Generation

Public schemes’ Goal

Basic protection (poverty

prevention) Salary savings

Salary savings (some adequacy)

Salary savings (some adequacy)

Private schemes’ coverage

Mandatory or quasi-mandatory

Mandatory Voluntary Mandatory or

quasi-mandatory

Earnings-related schemes

(mainly) Private Public/private (mainly) Public (mainly) Public

S2. European pension models

Source, Ebbinghaus 2010

S1. European Pension Models, main challenges and reform trends (before the crisis)

• Population Ageing• Cost-containment (indexation; retirement age; actuarial principle)

• Adequacy/Labour Market Transformations• Modernisation (contribution credits; minimum benefits; minimum contributions)

•Viability/Economic and Employment Growth• Cost-containment• Modernisation (shift from contributions to taxes;

role of pension funds)

2. Taking stock of 20 years of reforms, effective cutbacks

Gross replacement rates 2007/60 (EPC, 2009)

S3. Assessing the Impact of the Crisis

a. Financial crisis (pension funds)

b. Economic crisis (first pillar schemes, stabilisers)

c. Budgetary crisis (first pillar schemes)

S3. Funded SchemesPension funds’ nominal investment rate return in selected OECD countries (OECD 2010)

S3. Reserve Funds, First pillarPension funds’ nominal investment rate return in selected OECD countries (OECD 2010)

S3. Assessing the impact of the crisis, b) first pillar, automatic stabiliser

Expected increase in social expenditures between 2007 and 2010 (EPC, 2009)

S3. Assessing the impact of the crisis, b) first pillar, economic/employment effects

(EPC, 2009)

• Employment is expected to decline: nearly 8 million job losses for 2009/10, in contrast to the net job creation of 9½ million during 2006-08

• Potential growth rate of the euro area and that of Denmark, Sweden and the UK are expected to be cut in half in 2009-2010 compared with 2008, i.e. from a growth rate range of 1.3%-1.6% to 0.7%-0.8%

S3. Assessing the impact of the crisis, c) first pillar, budgetary effects

Sustainability gap, % GDP (S2= IBP+LTC) (EPC, 2009 and Zaidi, 2010)

S4. Most Recent Reforms

S4. Multi-pillar systems, 1st gen.Main challenges Reforms

First pillar (PAYGO)

Low protection

Financial viability

Special one-off payments Indexation

Retirement age increase

Supplementary funds

Financial Viability (Under funding)

Low and uneven protection

Increased Premiums/ Lower Indexation /Lower benefits (NL)

Auto-enrolment (UK)

More protection for a-typical workers (UK)

More effective regulation (NL; UK)

Early access to the benefits (UK)

S4. Multi-pillar systems, 2nd gen.Main challenges Reforms

First pillar (PAYGO)

Decreasing protection

Financial viability

Special one-off payments

Retirement age increase (HUN; PL)Further restriction of early retirement (PL)Reduced indexation (HUN)

Increased contributions (ROM)

Re-nationalisation (HUN; ROM)

Supplementary funds

Financial viability (Under funding)

Low and uneven protection

Decreased contributions (PL; LT)

More effective regulation (PL)

Reduction of charges (PL)

S4. Social Insurance systems,1st gen.

Main challenges Reforms

First pillar (PAYGO)

Decreasing protection

Financial viability

Special one-off payments Increased minimum benefits (BEL; ITA; FRA)

Retirement age increase (FRA; ITA)

Additional resources and further restriction of early retirement (FRA)

Use of reserve funds (FRA)

Supplementary funds

Financial viability (Under funding)

Low and uneven protection

Decreased contributions , decided by contributors (ITA; GER)

More effective regulation

S4. Social Insurance systems,2nd gen.

Main challenges Reforms

First pillar (PAYGO)

Decreasing protection

Financial viability

Special one-off payments (SWE)

Tax credits (SWE)

Increased minimum benefits (FIN)

Automatic adjustment (SWE) to be revised

Supplementary funds

Financial viability (Under funding)

Low and uneven protection

More effective governance

S5. Conclusion

• Common traits of reforms

• short-term increase of benefits and/or reduction of taxes• active ageing (increased retirement age, incentives for employers)• more effective regulation of supplementary schemes (reducing charges and increase protection)

• Any convergence?

• Race to the bottom? More complex reform packages• A ‘U-turn’ in some CEE countries

S5. Conclusion, food for thoughtsKey challenges Reforms done

so farAlternative paths?

Ageing Active ageing(automatic policymaking)

Job qualityIncrease employment (for all ages)Flexible retirement(different age for different categories;Soft exit from the labour market)

Adequacy One off measuresMinimum benefitsNew social risks

Minimum benefitsNew social risksRedistribution (Tax policy)

Viability of pension funds

More effective regulation

What role for pension funds?Regulation Governance (Administraive charges)

Annex. What distributional effects?

Trends of net replacement rates through reforms (Zaidi, 2010)

Annex. What distributional effects?

Trends of net replacement rates through reforms (Zaidi, 2010)

Annex. What distributional effects?

Trends of net replacement rates through reforms (Zaidi, 2010)