By Mervyn Kohler - 31st January 2012
It seems that the delay in publishing the white paper is to toughen it up
Mervyn Kohler
Pension reform is now central to tackling the EU’s current economic woes, argues Mervyn Kohler.
Europe has seen a lot of pension reform in the last decade. Mandatory, state-run pension schemes – the ‘first pillar’ – have been scaled back as unsustainable. To improve adequacy, there has been a growth of mandatory, privately managed ‘second pillar’ schemes – nine new ones in the last 10 years. These have not proved shock-proof as the economic and financial crisis deepened. One of commission president José Manuel Barroso’s first actions was to provide a road map out of the recession, the EU2020 strategy, and, within that, working longer and stimulating private pensions were cardinal points. Pensions have long been seen as vulnerable to demographic ageing, but the recession had upped the risks.
The pensions green paper proceeded leisurely through consultations and reviews, and into the development of a white paper, but meanwhile the economic news was getting markedly worse. A perfect storm of slowdown in the global economy, the sovereign debt crisis and the upsets in the financial sector led to truly miserable autumn economic forecasts, with EU growth in 2012 at 0.6 per cent and unemployment still at 10 per cent throughout 2013. Pension reforms were becoming more urgent. An imperative was to prolong working lives, lifting some of the pressure off pension schemes, and at the same time contributing to the holy grail of economic growth.
Low interest rates have produced poor annuities and played havoc with pension fund investments, seriously depressing second pillar schemes when governments wanted to see them assume a larger proportion of pension obligations. The sovereign debt crisis, and the inability in some states to collect tax income, means that there is a serious risk of national indebtedness rising just to finance the first pillar schemes.
The trouble is that the policy prescriptions are difficult. Longer working lives mean raising pension ages. Most member states are doing so gradually, but far too slowly to drive the economy out of its present gloom. But working longer also means spending on training and life-long learning, investing in workplace reforms, and incentivising part-time working (which can clash with current pension schemes). Underpinning first pillar schemes means seeking higher contributions at a time when incomes are flat, while incentivising second pillar schemes might mean common approaches to tax-relief policies – not an easy EU proposal.Reinforcing second pillar schemes calls for regulatory reform - with Brussels talking about devices such as Institutions for occupational retirement pensions and solvency II. Not straightforward when different member states are concerned with their domestic financial services sectors.
Meanwhile the show rolls on. The annual growth survey 2012 was published early, in November 2011, to try to inject more urgency into Europe’s stuttering recovery. It highlighted pension reform, and the relevant section is worth quoting in full. Member states should be, “pursuing the reform and modernisation of pensions systems... by aligning the retirement age [sic] with increasing life expectancy, restricting the access to early retirement schemes, supporting longer working lives, equalising the pensionable age between men and women and supporting the development of complementary private savings to enhance retirement incomes.”
It seems that the delay in publishing the white paper is to toughen it up. Signing it off involves three directorates and the president’s office. Pension reform has become central to EU crisis management involving sovereign debt, creaking decision-making processes, and member state self-interest. Quite a cocktail.
Mervyn Kohler is a special advisor at Age UK and UK member of AGE Platform Europe's expert group on social protection
