The Role of Social Partners in Pension Reforms in an Ageing Europe

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1 The Role of Social Partners in Pension Reforms in an Ageing Europe Bernhard Ebbinghaus School of Social Sciences & Mannheim Centre for European Social Research (MZES), University of Mannheim, Germany

2 Pension reform a hot topic for unions.

3 I. Political dynamics of pension reform Global paradigm shift: Reforming pensions is one of the biggest challenges of the 21st century! (OECD) High expenditure, partly due to early exit from work Demographic problem of pay-as-yougo pensions! Part II: Raising retirement age, phasing out early retirement options Part III: Shift toward (pre)funded pensions, the multipillar strategy What role for the interests of workers and retirees? First: Political and membership strength

4 I.2 Challenge: demographic ageing & older political clout (Left: old age support ratio working people per aged 65+) (Right: older people (60+) voting in national elections % all votes) ESS % votes UK 42.0 France 41.9 Germany 41.8 Switzerland 39.2 Italy 38.7 Sweden 36.5 Hungary 33.8 Poland 33.3 Netherlands 33.2 Ireland 31.2 Ebbinghaus, Bernhard (2015) "Demografische Alterung und Reformen der Alterssicherung in Europa Probleme der ökonomischen, sozialen und politischen Nachhaltigkeit", Kölner Zeitschrift für Soziologie und Sozialpsychologie (KZfSS), 67 (S1):

5 I.3 Union membership & votes in national elections Current & previous union membership varies considerable, Nordic on top Current & previous union members are voting block in Nordic countries Source: European Social Survey (2012) 6, V2.1; weighted; own calculations.

6 I.4 Declining membership & bargaining coverage a) Union membership (net union density), b) Union density and bargaining coverage, Nordic erga omnes extension of collective agreements! decline Sources: own calculations; adj.coverage & net density: Visser (ICTWSS 4.1) 2013

7 I.5 Social governance: influence of social partners STATE unilateral consultation What influence do the social partners (unions and employers) exert in welfare states? (here: pension reform) selfadminstration delegated Policy-making & Implementation tripartite concertation bipartite self-regulation EMPLOYER(S) UNION(S) Old politics thesis: organized labour welfare state expansion New politics thesis: policy feedback blame avoidance for cuts Veto power thesis: unions have quasi-veto power concertation needed?

Goal sustainability Pension reform direction: Raising retirement age by phasing

8 II.1 Reform of the social contract Challenge for reformers: How to reverse early retirement? How to respond to demographic ageing? Goal sustainability Pension reform direction: Raising retirement age by phasing out early exit options Shifting from pay-as-you-go DB to funded DC pensions Problem: changing the social contract!

9 II.2 Reform politics: changing the social contract Changing from generational contract to funded pensions? Pay-As-You-Go Pensioners Employees Children Savings Pensioners Employees Children Pension (returns) Pensioners Employees Children Double payer problem! Status quo interests of contributors and beneficiaries Electoral concern of politicians (blame avoidance) Protests by unions (e.g. strikes in France 1995, 2010) Concertation as consensual strategy to overcome reform blockage No radical but smaller, gradual or long-term reforms: Parametric, technical reforms, depolitisation (automatic adjustments) Gradual reforms, exemptions for older cohorts (grandfathering) Layering: supplementary pensions (e.g. German Riester pension)

10 II.3 Early retirement: exit rate: men aged F I NL Rise of early retirement: Early retirement common since oil chocks in 1970s Externalization coalition of social partner But less, yet cyclical exit in liberal & Nordic (UK, S) D UK S Bernhard Ebbinghaus: Reforming Early Retirement in Europe, Japan and the USA, Oxford University Press, 2006; pbk. 2008; and updates by Ebbinghaus & Hofäcker (Comparative Population Studies, 2013)

11 II.3 Early retirement: exit rate: men aged F I NL D UK S Rise of early retirement: Early retirement common since oil chocks in 1970s Externalization coalition of social partner But less, yet cyclical exit in liberal & Nordic (UK, S) Reversal efforts: Cut back on earl retirement pathways since 1990s Shift toward active ageing (life long learning) D, NL: significant reversal but F, South & East belated Bernhard Ebbinghaus: Reforming Early Retirement in Europe, Japan and the USA, Oxford University Press, 2006; pbk. 2008; and updates by Ebbinghaus & Hofäcker (Comparative Population Studies, 2013)

12 II.4 Raising retirement age & phasing out early exit Country Retirement age Special rules Beveridge / Multipillar model Finland : 63 (-0.4% p.m. (2005-); 62 <b % -63, 63+: -0%. Sweden Flexible NDC pension: (basic pension -1972: 67, -1998: 65) UK / 60 ( : 6065 b ); 6566: 2018/20; 67: 2034/36; 68: 2044/36 Netherlands (basic pension AOW) : 67 Flexible pension (NDC pension transferred into annuity based on unisex life expectancy), but guarantee pension only from age 65 (40 y.) gender difference will be phased out Phasing out of preretirement (1997-), reform of disability pensions 1990s Bismarck / Dominant public pillar model France (b : 62 by 2017) 2010 pension reform: seniority (40 y.- >41.5y), 65 (b : +2y. 67 by 2022) 2010 pension reform: without seniority Germany Public pension insurance: : Italy : 61 / 56 (w/ 36 y.) 65* (1996-: 6065 / 5560) 65 / 60 65* ( ) Czech : 6063 (2011: 62.4); Republic : 5763 (2011: 60.8, w/out, 56.8 with 5+) Poland ( : +3m.p.a. 67); 60 ( : +3m.p.a. 67); 1992-: 63/60 pensions phased by 2010s; 2007 age reform; but partial reversal seniority / *gender equalization following ECJ 2008 ruling without seniority / gender ER: -3 y. 6-7%p.a. child credits (1:-1;2:-2;3:-3;5+:-4) (ER for sp. grps & <b.1949) 2009-: bridging pens. for sp.grps

societies Pillar II: workplace-related funded pensions, traditionally defined benefit (DB), increasingly DC Pillar III: individual savings - defined contributions (DC) Pension system

13 III.1 Pension system architecture: One or multi-pillars? Lord Beveridge Chancellor von Bismarck (* ) (* ) Multipillar strategy to maintain financial sustainability Pillar I: public pay-as-you go pension not sustainable in ageing societies Pillar II: workplace-related funded pensions, traditionally defined benefit (DB), increasingly DC Pillar III: individual savings - defined contributions (DC) Pension system legacies: Bismarck-type pensions: public earnings-related pension with only belated private funded pension Beveridge-type pensions: multipillar systems with public basic pension & private pensions Different developmental space and timing for private funded pensions! Self-regulatory role for social partners in private pensions?

14 III.2 Public-private pension mix in Europe before the crisis Public and private pension expenditure (% GDP), OECD 2006 Public expenditure Private expenditure Total private pension assets (% GDP), OECD 2007 Italy France** Germany* Belgium Sweden United Kingdom Switzerland Netherlands Denmark Finland 1,1 8,1 7,7 7,5 6,7 5,4 4,8 12,0 11,9 11,7 9,2 4,2 9,5 1,1 8,9 3,1 10,5 5,5 3,6 9,0 9,0 10,3 12,2 12,2 11,9 12,1 Bismarck dominant public Beveridge multipillar Italy France Germany Belgium Sweden United Kingdom Switzerland Netherlands Denmark Finland State pensions crowded out private funded pensions Source: OECD Pensions Outlook 2008, own calculations.

15 III.3 The scope of (private) funded pensions Table 5: Pension assets, coverage, contributions and expenditure in Europe Private Pension expenditure Assets Private pensions coverage (%GDP) 2012 (%GDP) 2010 (%GDP) Total Private (%) {%} All funds Public funds Contributions Benefits Beveridge UK (34.2) {43.3} 88.7 d 2.9 d 3.2 Netherlands (46.0) {88.0} Finland (5.9) *{74.2} * *11.2 Sweden (14.0) {>90.0} Bismarck France (2.5) v{20.9} c 0.6 c 0.4 Germany (1.8) {71.3} Italy (1.8) {14.0} Poland (0.1) {56.5} Sources: own calculations; expenditure (2012): Pension Market in Focus 2013; coverage: OECD Pension Outlook 2012, Tab. 4.1, p. 105; Public pension funds: OECD (2011): Table 4; Private pension funds: OECD Global Pension Statistics database. Notes: (%) % of Total; {*} occupational and personal pension coverage in % of working age population; > underestimated; includes mandatory occupational pensions (partly funded private schemes);

16 III.4 Governance & regulation of private pensions Conflicts of interests in supplementary pensions: Vertical conflicts = principal-agent problem (sponsor/financial agent) Horizontal conflicts: sponsor (employer) vs. beneficiary (worker) employer commitment: employer sponsors trust fund, implicit contract collective agreement: delegated to employer/union negotiations horizontal labourcapital conflict principalagent relations Individual: mainly exit option some voice less exit option voice through collective action / institutionalized power

17 III.5 Private pension governance: pros & cons Collective (= employer/unions co-manage collective scheme): Pooling of risks, broader coverage, lower administrative costs Balancing interests between sponsors & beneficiaries, informed decisions o But less personal choice, less attractive for higher income groups Collective funds are more like public pensions, consensus necessary Employer-led (= employer-sponsored pension fund or on the book reserves): o Limited representation of beneficiary interests o Risk of bankruptcy of firm: reinsurance needed o Underfunding problem for sponsors but also who owns surpluses? Employer interest in binding employees but higher costs & lower mobility Employer-funds can lead to conflicts of interests, thus requiring regulation Individual: Individual decision to save for old age: freedom of choice o Individual savings depends on financial literacy, foresight, and liquidity Individual responsibility but individualization of risks, regulation needed

III.6 Post-crash rethinking of multipillar pensions Financial market crisis 2008+ & Great Recession Low net returns Acute problem for

18 III.6 Post-crash rethinking of multipillar pensions Financial market crisis & Great Recession Low net returns Acute problem for DC pensioners Underfunding in DB funds Source: return on pension fund investment (%) in OECD Pensions in Focus, July 2010, Paris: 2010

19 III.7 Post-crash governance & regulatory issues The financial crisis has revealed major governance & regulatory gaps: Netherlands: DB underfunding: <105%, but time frame extendable by ministry Short-/long-term plans need approval, benefits cuts are possible United Kingdom: Protection fund premiums increase due to bankruptcy Public sector pensions (DB) under political pressure to change Switzerland Nominal interest rate set by Federal government, easing in crisis Conflict over who owns surpluses / deficits of pension funds! Germany Voluntary (Riester) pension: zero return guarantee but front fees Occupational pensions with book reserves under pressure Rising premiums for protecting book reserves or DB schemes See country chapters in Bernhard Ebbinghaus (Ed.), Varieties of Pension Governance, OUP 2011

20 IV. Conclusion & Outlook Social governance: Consultation & self-administration have become less important Successful concertation on pension reforms is highly contingent More self-regulation by social partners in collective pensions Social partners: Membership decline challenges representativeness Unions ability to negotiate pensions depends on bargaining power Social partners face difficult decisions in private DB pensions Employers move away from DB to DC: individualization of risks? Social contract: Pension is a deferred wage, (implicit) part of wage negotiations Raising retirement age needs concerted action (also of firms) Workers, employers and retirees have to adapt to new norms Political sustainability of pension policy requires trust in reforms

21 Further readings Monographs: B. Ebbinghaus (ed.): The Varieties of Pension Governance. Pension Privatization in Europe. Oxford: OUP Journal publications: B. Ebbinghaus: The Privatization and Marketization of Pensions in Europe: A Double Transformation Facing the Crisis, European Policy Analysis 1, B. Ebbinghaus: "Demografische Alterung und Reformen der Alterssicherung in Europa Probleme der ökonomischen, sozialen und politischen Nachhaltigkeit", Kölner Zeitschrift für Soziologie und Sozialpsychologie (KZfSS), 67 (S1) 2015: B. Ebbinghaus & D. Hofäcker: "Reversing Early Retirement in Advanced Welfare Economies: A Paradigm Shift to Overcome Push and Pull Factors", Comparative Population Studies (CPoS), (4): B. Ebbinghaus & T. Wiß: Taming pension fund capitalism in Europe: collective & state regulation in times of crisis Transfer 17/1, 2011: B. Ebbinghaus & N. Whiteside: Shifting responsibilities in Western European pension systems, Global Social Policy, 12(3) 2012:

Remodelling Pillars and Tiers:

Remodelling Pillars and Tiers: DEPARTMENT OF SOCIAL POLICY AND INTERVENTION Bernhard Ebbinghaus Professor of Social Policy, Department of Social Policy & Intervention Senior Research Fellow, Green Templeton College, University of Oxford