European Financial Services Round Table
Message to ECOFIN Council
The European pensions crisis – what is to be done?
Introduction
Most Europeans remain totally unaware of the danger that unsustainable state pension
systems pose to their futures. If Member States and the EU fail to act rapidly and prioritise
change, millions of Europeans will face inadequate resources in old age, compromising
Europe’s proudly and painstakingly achieved social models.
As a result of the ageing of Europe’s population – increased life expectancy and falling birth
rates - public pension expenditure is on course to rise by as much as 30% in the next 40 years
unless prompt action is taken. An alternative to a 30% increase in costs is a reduction in
benefits of a similar amount. The potential impact on individuals would be of enormous
concern. The issues must be faced today and appropriate changes put in place.
The challenge of ageing populations and the need for pensions reform has featured at
several European Councils in recent years. In particular the Barcelona Council of 2002 issued
a call for reform to be accelerated to ensure that pension systems are both financially
sustainable and meet their social objectives. The forthcoming Brussels Council on economic
issues will further debate co-ordinated pension reform in the EU.
Such resolutions are warmly welcomed. The European Union has no mandate to reform
national pensions systems and the responsibility falls squarely to national governments, who
must approach the common task with new methods of co-ordination.
The EU however should guarantee access to markets and the EFR supports the aims of the
draft prudential supervision Pensions Directive, along the lines of the Prudent Person Principle
approach to investment, as a first tentative step towards a single market in pensions.
The European Financial Services Round Table is closely following the debate. It vigorously
supports the call for reform and is keen to contribute to solutions to the impending crisis. Last
year the EFR published a report, ‘One Europe, One Pension’ (www.efsrt.org), which
highlighted the fact that most state sponsored schemes will not be able to deliver benefits to
tomorrow’s pensioners at the same rate as for current pensioners without unsustainable
increases in costs.
We see private funded pensions standing alongside a reformed state pension system as the
way forward.
We fully support the three pillar model of pension provision – state,
occupational pensions and personal or individual pensions. We need a new balance, which
reflects the needs of each member state and its citizens. Within the second and third pillars
themselves there is also a need for balance and flexibility in benefit design and for new
choices for individuals and their employers. Above all we need to see a transfer to a more
capital based system, certainly for private pensions but the issues for public systems must also
be debated. This transfer will be gradual but must begin at once. Failure to reform means
that future generations of workers will face unacceptable levels of taxes which will put at risk
the inter-generational solidarity which underpins the current unfunded PAYG systems.
The following analysis prepared by EFR may provide useful input to the developing debate.
The extent of the crisis
Economic Policy Committee figures for the growth in public pension expenditures, without
further reform, are stark.
Public pension expenditures to people aged 55 or over, before taxes, as percentage of GDP
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
EU
2000
14,5
10,0
10,5
11,3
12,1
11,8
12,6
4,6
13,8
7,4
7,9
9,8
9,4
9,0
5,5
10,4
2020
16,0
11,4
13,8
12,9
15,0
12,6
15,4
6,7
14,8
8,2
11,1
13,1
9,9
10,7
4,9
11,5
2040
18,3
13,7
14,0
16,0
15,8
16,6
23,8
8,3
15,7
9,5
14,1
13,8
16,0
11,4
5,0
13,6
Table 3.5 Budgetary challenges posed by ageing populations: EPC/ECFIN/655/01
Such additional costs, paid for by the contributions of those at work, cannot be assumed by
the system and are thus unsustainable. It is clear that reform is necessary.
The pensions gap
The EFR has attempted to calculate the pensions gap if governments maintain expenditures at 2000 levels as a percentage
of GDP, but individuals retiring in future aspire to a state pension of the same percentage of earnings as those retiring in
2000. We estimate the additional ANNUAL savings to close the gap building up over the next 40 years as follows:Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
bn Euro
11,65
10,53
9,84
3,11
137,46
109,69
6,03
6,10
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
Total
bn Euro
55,33
No data
22,88
6,29
26,38
12,61
38,49
456,39
Some of the gap may be filled by the redirection of existing savings but this will still leave a
big hole. Savings must increase if aspirations for income in retirement are to be fulfilled.
Approaches to reform
Sustainability depends on an appropriate balance between contributors and beneficiaries.
Systems developed when there were fewer pensioners, with more modest benefits, and
growing workforce numbers. That balance is changing. Governments cannot ignore the
realities of longer life expectancies and falling birth rates.
Whilst governments can change the balance by, for example, raising retirement ages or by
promoting increased participation in the labour force, such approaches – which are to be
encouraged - are partial solutions in reducing public expenditure. Governments can hardly
fully solve the pension gap issue in this way. They will surely have to reduce benefits, thus
reducing pensioners’ welfare and creating the need for private funded pensions.
Individuals must be encouraged to make more provision for their own retirement. Action is
required to make this alternative a practical and attractive reality for tomorrow’s pensioners.
The nature of retirement is changing. Increasingly people will not move from full time work to
full time retirement overnight; instead they will reduce working over a number of years, with
the same employer or with a new employer. Pensions must reflect this. A wide range of
products can be provided to meet the diverse needs of people in terms of risk structures,
financial guarantees, biometric risk including life long annuities, and differing risk horizons.
A standard for single market pensions
Last year we proposed a standard that ensures the best possible combination of
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Security – a fund will be properly managed and sums contributed will be safeguarded.
Efficiency – the cost-effectiveness of the operations of the provider.
Flexibility – the ability of the pension plan to adapt to the changing employment,
residency and other life circumstances of the pension holder.
Transparency – full, frank and easily understood disclosure of the terms and provisions of a
pension scheme or plan.
Information provision – timely, accurate and user-friendly statement of the projected
pension income at retirement: consistent from member state to member state.
Portability – the ability to transfer a pension or annuity at a ‘fair’ transfer value.
Mobility – the ability to change jobs, country of employment or country of residence or
retirement without penalty; the ability of employers to obtain EU-wide pension schemes.
User-friendliness – pension matters will be presented in a fashion that enables individuals
and employers to easily understand where they stand and make decisions accordingly.
These guiding principles apply within and across member states. We recommend them as a
blueprint for the encouragement of funded pension provision.
A single market for private pensions is needed
EFR encourages the Council of Ministers to create a genuine open and transparent Single
Market for private pensions in which costs, prices and charges will come down and quality
will go up. Only competition, not regulation, can achieve that. EFR urges Member States to
agree the same taxation principles for pensions (the “EET” model) removing tax
discrimination from non-domestic providers. This is a prerequisite for portability of pensions
which must become a reality. We must also avoid national restrictions on product features.
A study for the EFR last year (The Benefits of a Working European Retail Market for Financial
Services, www.efsrt.org) highlighted consumer benefits from increased product choice and
lower prices in a single market. In ‘One Europe, One Pension’ we estimated that reductions
in fund management costs combined with the effects of greater competition generally
might increase pensions by 10% or more for a given level of savings.
We all have a role to play
A single market is not enough to solve the crisis.
Political leadership is also required to
persuade citizens of the need for action so that they are enthusiastic advocates of reform.
Massive education and information campaigns have to be launched to alert young people
to the new challenge. Important tax incentives will be required to encourage savings.
Both the Commission (in driving the Single Market) and national governments, with
responsibility for welfare and taxation policies, have crucial roles in creating solutions. These
should avoid further divergence of provisions systems arising from the initiatives of member
states. Reform should be within a European context and not lead to isolation of member
states from general trends as is the risk for Belgium with its minimum guarantee requirement.
And individuals, employers and the financial services industry must be involved as well.
EFR understands the challenge of persuading people to save more. But there are lessons
from past experience. For example, UK experience shows the importance of employers in
pension provision, especially where provision is voluntary. In the Netherlands and elsewhere
the importance of fiscal incentives and the consistency of the approach is well known. In
Germany and Belgium there is particular concern that product complexity and burdensome
regulation can be inhibitors to saving. In Italy and Spain people generally underestimate the
consequences of increasing life expectancy as well as the need for long-term planning:
people are too optimistic about future pensions.
A call to action
The EFR calls for a wide ranging debate on the future of Europe’s pension systems and is
ready to play its part. We look to governments to acknowledge the scale of the problems;
to explain the issues to the electorate; to build a consensus for reform – and then to begin
the process itself. Only then can tomorrow’s pensioners have a realistic prospect of seeing
their reasonable expectations fulfilled. We urge Europe’s political leaders to rise to the
challenge. Europe’s citizens deserve nothing less.
European Financial Services Round Table
5 March 2003
Members and Mission of the EFR
A group of leading European banks and insurers formed the European Financial Services
Round Table (EFR) in 2001. The purpose of the EFR is to provide a strong industry voice on
European policy issues relating to financial services. The initial objective is to support the
completion of the single market in financial services. Members of the EFR believe that a
single market will bring substantial benefits to customers including increased competition
and greater innovation. These benefits will help to drive down prices and deliver a wider and
better choice of financial products to customers.
Pehr G Gyllenhammar
Chairman, EFR and Chairman, Aviva
Dr. Rolf E. Breuer
Chairman of the Supervisory Board, Deutsche Bank
Henri de Castries
Président du Directoire, AXA
Hans Dalborg
Chairman of the Board, Nordea
Rijkman Groenink
Chairman of the Managing Board, ABN-AMRO Bank
Ewald Kist
Chairman of the Executive Board, ING Group
Jean Laurent
Le Directeur Général, Crédit Agricole
Sir George Mathewson
Chairman, Royal Bank of Scotland
Sir Peter Middleton
Chairman, Barclays
Michel Pébereau
Président du Conseil d’Administration, BNP Paribas
Alessandro Profumo
Chief Executive, UniCredito Italiano
Francisco González Rodriguez
Chairman, BBVA
Anton van Rossum
Chief Executive Officer, Fortis
Dr. Hans-Jürgen Schinzler
Chairman, Munich Re
Dr. Henning Schulte-Noelle
Chairman of the Board of Management, Allianz
Kees J. Storm
Member of the Supervisory Board, AEGON