EU Agenda for Adequate, Safe and Sustainable Pensions

Commission White Paper, COM/2012/055 final

Pensioners represent a significant and fast-growing share of the EU population (120 million or 24%), particularly as the baby-boom cohorts reach retirement age and the number of prime working age falls. In 2008, there were four people of working age (15-64 years old) for every EU citizen aged 65 years or over. By 2060, that ratio will drop to two to one. The impact of demographic ageing is further aggravated by the economic crisis. Pensions represent already a very large share of public expenditure: 10% of GDP on average today, possibly rising to 12.5% in 2060. But with spending on public pensions ranging from 6% of GDP in Ireland to 15% in Italy today, countries are in rather different situations although they face similar demographic challenges. While the crisis affects pay-as-you-go pension schemes through falling employment, and hence decreasing pension contributions, funded schemes are hit through falling asset values and reduced returns.

While pension systems are largely a competence of member states, the EU can help with legislation on the matters that affect the functioning of internal market, with financial support for helping older workers to stay on the labour market, policy coordination and mutual learning. The reforms of the pension systems are evaluated within the Europe 2020 strategy. In 2011, 16 member states received a country specific recommendation concerning pensions and a further 5 signed up to pension reforms as part of their Memoranda of Understanding (for more details, see annex 3 of the White paper).

Pensions are the main income source for around a quarter of the EU's population today and younger Europeans will also come to rely on pensions later in their lives. Unless Europe delivers on decent pensions now and in the future, millions will face poverty in old age. Europe is also ageing as people live longer and have fewer children. From next year, the EU's working population will already start to shrink. Pensions are putting increased financial pressure on national budgets, especially with the added strain of the financial and economic crisis.

To support these efforts, the European Commission has published a White Paper on adequate, safe and sustainable pensions. It looks at how the EU and the Member States can work to tackle the major challenges that confront our pension systems. It puts forward a range of initiatives to help create the right conditions so that those who are able can continue working - leading to a better balance between time in work and time in retirement; to ensure people who move to another country can keep their pension rights; to help people save more and ensure that pension promises are kept and people get what they expect in retirement.

Coinciding with the 2012 European Year for Active Ageing and Intergenerational Solidarity, the White Paper builds on the results of a wide consultation, launched in July 2010. It cuts across different policy areas and is fully in line with the Commission's 2012 Annual Growth Survey. The measures at European level will support and complement national pension reforms.

The White Paper proposes, in particular, to:

·         Create better opportunities for older workers by calling on the social partners to adapt work place and labour market practices and by using the European Social Fund to bring older workers into work. Enabling people to work longer is a major focus of the European Year 2012 for Active Ageing and Solidarity between Generations;

·         Develop complementary private retirement schemes by encouraging social partners to develop such schemes and encouraging Member States to optimise tax and other incentives;

·         Enhance the safety of supplementary pension schemes, including through a revision of the directive on Institutions for Occupational Retirement Provision (IORP) and better information for consumers;

·         Make supplementary pensions compatible with mobility, through legislation protecting the pension rights of mobile workers and by promoting the establishment of pension tracking services across the EU. This can provide citizens with information about pension entitlements and projections of their income after retirement.

·         Encourage Member States to promote longer working lives, by linking retirement age with life expectancy, restricting access to early retirement and closing the pension gap between men and women.

·         Continue to monitor the adequacy, sustainability and safety of pensions and support pension reforms in the Member States.

Introduction to the White Paper

An ageing population presents a major challenge to pension systems in all Member States. Unless women and men, as they live longer, also stay longer in employment and save more for their retirement, the adequacy of pensions cannot be guaranteed as the required increase in expenditure would be unsustainable. By 2060, the life expectancy at birth for males is projected to increase by 7.9 years and by 6.5 years for females, when compared to 2010. And the problem is not far-off – it is upon us now as the baby-boomers retire and the working age population of Europe begins to shrink. This is reflected in an annual increase of around two million people aged 60+, almost twice as high as in the late 1990s and early 2000s. By contrast, the number of people of prime working age (20-59) will fall every year over the coming decades (Figure 1).

Together, longevity growth and the transition into retirement of the baby-boomers will have far-reaching economic and budgetary consequences in the EU, reducing the economic growth potential and exercising pressure on public finances.

These prospects are further aggravated by the current financial and economic crisis. Sluggish economic growth, budget deficits and debt burdens, financial instability and low employment have made it harder for all pension systems to deliver on pension promises. Pay-as-you-go pension schemes are affected by falling employment, and hence lower pension contributions. Funded schemes are affected by falling asset values and reduced returns.

It has thus become more urgent than ever to develop and put in place comprehensive strategies to adapt pension systems to changing economic and demographic circumstances. The challenges are massive, but surmountable, provided the right policies are put in place. Reforms of pension systems and retirement practices are essential for improving Europe’s growth prospects, and they are urgently required in some countries as part of current actions to restore confidence in government finances.

As the economies and societies of the Member States are becoming more and more integrated, the success or failure of national pension policies and reforms has ever stronger repercussions beyond national borders, particularly in the Economic and Monetary Union. The central importance of pensions for Europe’s social and economic success and the increased risk of cross-border spill-overs from national pension policies mean that pensions are increasingly becoming a matter of common concern in the EU. Indeed, the success of retirement reforms in the Member States is a major determining factor for the smooth functioning of the Economic and Monetary Union, and will affect the EU’s ability to achieve two of the five targets of the Europe 2020 Strategy – raising the employment rate to 75% and reducing the number of people at risk of poverty by at least 20 million.

This White Paper reflects these common concerns about problems in our pension systems and sets out an agenda for making pensions adequate and sustainable in the long term, by creating the conditions for a high level of labour force participation of women and men throughout their lives and enhancing the opportunities to build up safe complementary retirement savings. It suggests forward policy orientations and initiatives at the European level through which the EU can support national policy makers in their efforts to address reform needs, notably those highlighted in the Annual Growth Surveys 2011 and 2012 and specified in the 2011 country-specific recommendations.

This White Paper also reflects the results of the wide-ranging consultation launched by the Green Paper Towards adequate, sustainable and safe European pension systems [1]. Hundreds of stakeholders, as well as the European Parliament, the European Economic and Social Committee and the Committee of the Regions, have responded to this paper and expressed their expectation for pension issues to be addressed at the EU level in a comprehensive and coordinated way.

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