EU Pension Trends Matti Leppälä, Secretary General / CEO PensionsEurope 16 October 2014 Rovinj, Croatia 1
Lähde: World Bank 2
Pension debt big (implicit debt, % of GDP, 2006) Source:Müller, Raffelhüschen and Weddige (2009)
EU-27 Estonia Bulgaria Luxembourg Romania Czech Republic Lithuania Slovenia Sweden Slovakia Denmark Latvia Finland Poland Spain Cyprus Netherlands Malta Austria United Kingdom Hungary France Germany Ireland Portugal Belgium Italy Greece Norway Iceland Public debt big and growing (explicit debt) General government debt, by country % of GDP (at current prices) EU-27 2000 EU-27 2010 Source: Eurostat (online data code: tsdde410)
The impacts on public pensions Public spending in pension as a percentage of GDP in 2010 and projection to 2060 Member States Spending 2010 Spending 2060 Austria 12.8 13.6 Belgium 10 14.7 Denmark 9.1 9.2 Germany 10.4 12.8 Greece 11.7 24.1 Spain 8.4 15.1 France 13 14 Ireland 4 8.6 Italy 14 13.6 Luxembourg 8.7 23.9 The Netherlands 6.6 10.5 Portugal 11.4 13.4 Finland 10 13.4 Sweden 9.5 9.4 The UK 6.6 9.3 EU 15 10.2 12.6 Source: European Commission 5
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. 6
Consequences Reduction first pillar pensions till 2060 (compared to 2010) UK Cyprus Hungary Ireland Denmark Czech Republic Lithuania Bulgaria France Portugal Malta Germany Italy Finland Estonia EU-27 Austria Spain Luxemburg Sweden Slovakia Greece Poland 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 only be 2 Replacement rates will decrease when not reforming the pension system -60-50 -40-30 -20-10 0 10 20 30 40 % Source: European Commission (2012) 7
European Pensions Landscape Large public pensions, less funding France, Spain and Greece Reforms of 1 st pillar into NDC (mandatory) Hungary, Poland and Sweden Some shift from public to private pensions (voluntary) Germany, Italy and Belgium Already developed 2 nd pillar, a lot of pension savings Netherlands, Denmark, Ireland, Switzerland and UK
Pension funds in relation to the economy As % of the GDP Source: OECD Pension Markets in Focus 2013
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 Link between 1st pillar pensions and pension savings 2nd pillar 160 140 120 Net Replacement Rate Public Pension (Median Earner) Assets Pension Funds (% GDP) 100 80 60 40 20 0 10
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 Reverse developments in some CEEC Countries (Poland, Czech Republic, Hungary)
Developing pension fund governance to secure future retirement income in Europe 1 2 DB Plans in Europe: characteristics & trends Characteristics: Collectivity & Risk sharing Wide diversity of risk mitigating instruments and character of pension benefit across Member states DB under pressure: Increasing longevity Financial crisis low interest rate environment Regulatory framework Trends: Reinventing DB From hard and fast guarantees to more conditional benefits
Growing importance of DC Growing importance at both international and European level: DC pension funds assets in OECD countries increased from 30.3% to 35% between 2001 and 2011(OECD) DC schemes are dominating in Cnentral and Eastern European Countries: DB still dominate in countries with large occupational pension sector (UK, NL). However, there is a shift away from DB: In UK for instance, only 16% of DB schemes are completely open compared to 31% in 2008.
Relative share of DB and DC pension funds assets (2011) 14
Shift DB to DC Risk employer Pure DB DB contribution based Various hybrids DC with guarantees Pure DC Risk employee 15
Developing pension fund governance to secure future retirement income in Europe DC Plans in Europe: characteristics 1 6 & trends Wide diversity of DC plans: Coverage Level of contribution Pension provider (pension funds, insurers, investment funds) Investment choice (one or more options) Risk-reduction mechanisms (life-cycling, guaranteed returns, intergenerational risk-sharing) Increasing shift DB/DC (UK,IE, Multinationals) Role of auto-enrolment and good defaults
Different reasons for shiting to DC Globalisation Difficult for companies to raise contributions, hence labour costs to recover funding short-falls in DB plans. Ageing population Contribution bases have started to diminish as the number of working people is decreasing relative to the number of pensioners. Regulatory framework DC relieves companies from having to account for volatile changes in pension. 17
Prerequisites for a good pension system Prerequisites for all pension systems: Effective central government, fiscal stability, economic growth, wellestablished 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). 18
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