The panorama of occupational pensions in Europe Matti Leppl, - - PowerPoint PPT Presentation

The panorama of occupational pensions in Europe

Matti Leppälä, Secretary General / CEO PensionsEurope 2 July 2014 Lisbon, Portugal

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EU is facing demographic challenges

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Consequences

• Old age dependency will roughly

double

• In 2010 there were 4 people of

working age for each person 65 years or older, in 2060 there will

• nly be 2
• Replacement rates will decrease

when not reforming the pension system

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• 60
• 50
• 40
• 30
• 20
• 10

10 20 30 40 Poland Greece Slovakia Sweden Luxemburg Spain Austria EU-27 Estonia Finland Italy Germany Malta Portugal France Bulgaria Lithuania Czech Republic Denmark Ireland Hungary Cyprus UK

%

Source: European Commission (2012)

Reduction first pillar pensions till 2060 (compared to 2010)

Old-age poverty rates

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5 10 15 20 NL UK PT

Percentage of aged over 65 with income less than 50% of median household disposable income

Source: OECD, 2011

European Pensions Landscape

• Large public pensions, less funding
• France, Spain and Greece
• Reforms of 1st pillar into NDC (mandatory)
• Hungary, Poland and Sweden
• Some shift from public to private pensions (voluntary)
• Germany, Italy and Belgium
• Already developed 2nd pillar, a lot of pension savings
• Netherlands, Denmark, Ireland, Switzerland and UK

Pay as you go not sustainable

• Important to start promoting complementary funded pension system; “pay as you go”

system alone is not enough.

• “Complementary retirement savings can also help secure adequate replacement rates in the
• future. Some Member States have introduced pension funds to complement their public pay-

as-you-go pension schemes with private funded schemes, but there is much scope for further development of complementary pension savings opportunities in many Member States.” –

White paper on adequate, safe and sustainable pensions, European Commission, 2012.

• Differences within the EU: Pension fund assets as percentage of GDP

– Portugal 8,8% – United Kingdom 95,7% – The Netherlands 160,2%

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Pension funds in relation to the economy

As % of the GDP

Source: OECD Pension Markets in Focus 2013

Link between 1st pillar pensions and pension savings 2nd pillar

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20 40 60 80 100 120 140 160 Iceland Estonia Slovak Republic Poland Denmark Ireland Netherlands United Kingdom Switzerland Sweden Germany Belgium Hungary Norway France Czech Republic Portugal Finland Slovenia Italy Austria Spain Luxembourg Greece Net Replacement Rate Public Pension (Median Earner) Assets Pension Funds (% GDP)

EU: Country Specific Recommendations for Portugal 2014

– “Salary and pension cuts have been implemented in a progressive way, ensuring the protection of lower income earners and lower pensions.” – “Continued restructuring of state owned enterprises, ensuring their financial sustainability and tightly controlling pension and healthcare expenditure will be crucial.”

• “Develop a durable solution to ensure the medium-term sustainability of the

pensions system by the end of 2014.”

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Important for pension funds

• Economies of scale in governance, administration and asset management
• Risk pooling
• Sufficient contribution rates, often employers contribute
• Mandatory or semi-mandatory participation
• Policies that enable sufficient contributions and good investment returns
• Governance and alignment of interest due to participation of the main

stakeholders

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Pension trends across Europe

• Increase in number of DC schemes
• More focus on risk management, governance and disclosure
• Central issues (both DB and DC): how to deal with volatile financial

markets

Global comparisons: MERCER GLOBAL PENSION INDEX

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Mercer Index measures

• Adequacy
• Sustainability and
• Integrity

Denmark scores the highest e.g. because

• High benefit level
• High replacement rate
• Full vesting of rights
• High coverage
• High level of private

pension funding (in relation to GDP)

• High level of contributions
• High requirements in

supervision, reporting, governance

• Government can

formulate policies

Source: Melbourne Mercer Global Pension Index 2013

Global comparisons: GLOBAL AGING PREPAREDNESS INDEX

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• Essential to find a balance between

Fiscal Sustainability and Income Adequacy

• For countries in the middle in both indicators

some things in common:

• reasonable fertility rates,
• lean public pensions (i.e. reformed),
• mandated second pillar and
• good labor force participation rates.

Source of the picture: GAP Index, Jackson, Howe, Nakashima, CSIS 2010

Prerequisites for a good pension system

• Prerequisites for all pension systems: “Effective central

government, fiscal stability, economic growth, well- established financial markets, and adequate public and government understanding of and trust in them” (Barr 2002)

• “There can be no sound development of funded pensions

without real economic growth “(Holzman 2012).

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Reform in the Netherlands: Improve economies of scale

• The Netherlands wanted to increase the economies of scale of pension funds to

decrease the costs ie increase the pension benefits.

• Pension funds in the Netherlands decreased from 1100 to 375 since 2010.
• Costs have decreased since, the bigger the fund the smaller the costs.

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Source for the picture: Administrative costs, Pensioenfederatie 2011

Conclusion

• First pillar pension will be reduced
• “Pay as you go” not sustainable
• More workplace pensions needed for adequate and sustainable pensions
• More funded pensions are needed

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CONTACTS

Matti Leppälä, Secretary General/CEO

PensionsEurope

Koningsstraat 97 Rue Royale 1000 Brussels Tel.: +32 2 289 14 14 Fax: +32 2 289 14 15 www.pensionseurope.eu