The New Pension Mix in Europe

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INTRODUCTION

The New Pension Mix in Europe

Reform Trends, Policy and Political Challenges, Open Research Questions

David NATALI

Introduction

Pensions policy attracts an enormous amount of interest on the part of policy analysts and scholars. The last years have provided evidence of the huge amount of research monitoring pensions across Europe (see e.g. Ebbinghaus, 2011a; 2015; Casey, 2012; Guardiancich, 2013; Naczyk and Domonkos, 2016; Torp, 2015). Yet we still need to improve our knowledge of this policy field.

This book looks at the most recent developments in pension policy and politics in Europe and tries to advance our understanding of the field in three respects. Firstly, while a large literature has focused on the reforms passed between the 1980s and early 2000s, we still need to improve our knowledge of the most recent reform wave. In the wake of the recent economic and financial crisis, Europe has seen an impressive reform effort that still needs a systematic assessment in terms of its consequences for the institutional design of pension systems and their distributional outcomes. Secondly, in a context marked by ongoing reforms, it is crucial to assess the long-term sustainability of pensions. We refer here to both the financial sustainability of pension schemes (both public and private) and their social sustainability. The latter refers to the adequacy of present and future benefits. In this case too, much of the literature looks at the effects of the reforms passed in the 1990s and early 2000s, but we still know little about the impact of the most recent reforms. Thirdly, we need to further analyse the politics of pensions and the way policymakers and stakeholders interact in order to address the major challenges to pensions. While much of the literature on the politics of pensions in the 1990s and ← 17 | 18 → early 2000s stresses the resurgence of concertation, this does not seem an accurate reading of the more recent evolution of pensions politics.

For all these reasons, we see an urgent need to shed light on two decades of reforms, and on the consequences of the pension mix in Europe for pensioners’ well-being and the long-term sustainability of pension institutions. This is particularly the case after the recent economic crisis when each of the three aspects mentioned above has seen important changes. Since 2008, the institutional design of pension systems has been altered. The more evident change has consisted of the halt – at least in some countries – of the spread of private pension funds. In the same period, projections have shown improvement in the financial viability of the systems paralleled by more evident risks for the future adequacy of pension benefits. The last years have, then, proved that the trade union movement risks a more marginal role in pension politics. In many countries, reforms have been passed without any major concertation, while the European Union (EU) has had a more evident influence, especially in the countries hit most by the crisis. As a consequence of these trends, we see the emergence of a “new” pension mix in Europe, with new institutional settings, new challenges and opportunities for its long-term sustainability, and new traits in the policymaking process.

This introduction aims at guiding the reader through the review of pension reforms in Europe. In line with the research questions at the core of the volume, sections one to three take stock of the comparative literature on pensions that is mainly focused on the reforms of the last decades, up to the more recent economic and financial crisis. Here we provide background information which the present volume will update and/or revise on the basis of evidence provided by the most recent policy and political dynamics.

Section one refers to the first research question at the core of the book: What are the key traits of 21^st century pension systems across Europe? It provides a summary of two decades (1980s-2000s) of pension reforms in selected EU members. The focus here is on the end result of reforms (in terms of revised pension models and measures aimed at cost-containment and the safeguarding of social adequacy of pensions). Section two refers to the second research question at the core of the volume: How sustainable are the reformed systems? It shows that reformed pension systems have to face huge socio-economic challenges that put pressure on their long-term sustainability. Section three introduces two of the issues related to the third research question: Are social partners and trade unions seeing a decline ← 18 | 19 → in their role in pension politics? The section takes stock of the literature on the role of trade unions and social partners in general in 21^st century pension politics. We also refer to the role of the EU in shaping the domestic reform process. Section four concludes by providing an outline of the volume.

1.  Pensions across Europe: past reform trends (the 1980s, 1990s and early 2000s)

As is stated above, both the editor of and the contributors to the book aim to address three research questions, concerning: the output of reforms, their outcome, and their political dynamics. The first question relates to the current structure of pension models in Europe. What are the key traits of 21^st century pension systems across Europe? Here we aim to summarize policy change and stability over the last few years.

Analytically, we follow Ebbinghaus (2005: 17), setting three scenarios for institutional transformation: path stabilization, when marginal adaptation to environmental changes occurs without changing core principles; path departure, in case of gradual adaptation through partial renewal of institutional arrangements and core principles; and path switching, intervention that ends self-reinforcement dynamics and gives way to a new institution. Contemporary literature proves that, in the last two decades, reforms have deeply altered the pension mix inherited from the past: the role of the state has clearly changed, and private forces (private funds, investors and social partners) have seen their roles change as well (Casey, 2012; Hinrichs and Jessoula, 2012). And reforms never stop. Since the Great Recession, we have seen a further round of reforms. Thus, the actual interplay of institutions must be reassessed. A precise map of pension systems, the role of different programmes and their interaction is one of the core objectives of the volume.

In recent decades, most European countries have been engaged in an ongoing process of reform, moving towards greater financial sustainability of their pension systems, while also retaining and sometimes strengthening their commitments to system adequacy and equity. As others have shown, policymakers, rather than aiming simply to retrench public spending, have also sought to reorganize pension institutions and programmes and modify their distributional outcomes (see e.g. Hausermann, 2010; Bonoli and Natali, 2012). In the following, we focus on the new policy paradigm that has marked reforms, and on the main policy output and outcomes of the reform process. This is background information from ← 19 | 20 → which the following chapters will proceed, looking then at the most recent evolution of pensions.

1.1  The spread of the new pensions orthodoxy

The last two decades of reforms have been marked by the spread of a new pension paradigm.¹ Some have spoken of a multi-pillar paradigm (Bonker, 2005; Leimgruber, 2012), others of pension privatization (Orenstein, 2013). The new paradigm has consisted of the full or partial replacement of social security pension schemes (typical of the social insurance model) with pension systems based on individual, private pension savings accounts.

Reform trends around the world have been shaped by these policy ideas, which were first applied in Latin America in the 1980s and which then spread across continents. The fundamental critique of the role of the state in the area of pensions related to the excessive costs of social insurance systems (largely based on pay-as-you-go – PAYG – schemes) and the negative consequences on the viability of public budgets and the countries’ growth potential.² Administrative costs and problems in the governance of public schemes, with the emphasis put on the political risks of pension programmes, were put forward as further evidence of the shortcomings of the social insurance model and the need to shift towards a new paradigm. The changing socio-economic context, with the ageing of the population, was seen as a further stimulus for such a shift.

As Orenstein (2013) has stressed, pension privatization proved attractive to governments in that it promised to reduce the fiscal challenge, to cut state guarantees for old age and to foster economic growth and efficiency through the market. While many analysts and experts stressed the problems related to that paradigm – such as the damaging impact of recurrent financial crisis, the huge limitations of risk pooling, increased administrative costs, etc. – this model was implemented in many countries. Europe too has seen the spread of pension privatization. ← 20 | 21 →

Such a policy paradigm has been consistent with policy objectives (to provide protection against old-age-related risk through public and private schemes), a set of policy instruments and their setting. The latter two elements must be analysed if we are to see how the paradigm has been implemented in the different European countries. The way in which policymakers have designed the key rules of the system has had an influence on its operation (see OECD, 2013a). Five of these parameters seem crucial for the functioning of the system and its sustainability and will be described in the country chapters:

• The financing mechanism. Financial resources collected through taxes and/or social contributions can be used in accordance with the PAYG (pay-as-you-go) principle, in that contributions and/or taxes paid by the active section of the population are immediately used to pay benefits to the elderly; or they can adopt the fully-funded approach (resources are capitalized, saved and then paid out once those who provided them have retired). A third technique – so-called “virtual” funding – mixes these two: it consists of collecting financial resources (taxes, contributions) that are used to pay current beneficiaries (according to the PAYG method), but contributors see their future pension rights as strictly dependent on their contribution to the system (similarly to full funding), the rate of return set by government and life expectancy. This is called a “notional defined-contribution” (NDC) system. Evidence provided by the literature shows that methods of financing are crucial in shaping the interplay of pension pillars.

• The benefit structure. Pension benefits can be means-tested (targeted at people in need), flat-rate (homogeneous for the entire population), earnings-related (calculated on the basis of the last and/or best earnings of an individual’s working career), or contribution-related (i.e. the benefit level is determined by the contributions paid by the insured and/or his/her employer). As we see below, in the case of pension funds benefit calculations can be of a “defined-benefit” (DB) and “defined-contribution” (DC) type. In the former case, the “resources/benefits” balance is adjusted by modifying contribution rates while keeping benefits “defined”. In the latter, the balance operates in the opposite direction, by fixing contribution rates and letting benefits fluctuate according to individually accumulated resources or “rights” to resources (Arza, 2006: 10). As the country chapters prove, the calculation of benefits from supplementary pension funds (DB or DC) has had an ← 21 | 22 → impact on the consequences of the crisis on workers’ rights and the systems’ financial viability.

• Voluntary/mandatory access to pension funds. These are the rules concerning access to pension benefits that define the beneficiaries of a certain programme. They can be based on citizenship, need, work, payment of contributions (in the case of public and/or occupational schemes financed through payroll taxes), or, finally, private contracts, under which individual funds provide protection to the insured. What is of particular interest here is the access to supplementary schemes: it can be voluntary or mandatory. Recent reforms have seen the emergence of a third option: auto-enrolment. This mechanism encourages workers to contribute to pension funds, but allows them to opt out if they prefer.

• Pensionable age. This has proved a key parameter in pensions policy. Many of the recent reforms have consisted in an increase of the legal pensionable age, while some have set automatic mechanisms to link the latter to ageing and the improvement of life expectancy. Such a rule has the potential to influence both the financial sustainability and the social adequacy of statutory schemes. As a consequence, this is expected to alter the combination of first and supplementary pillars.

• Pension funds’ investment. Pension funds invest in different asset classes: bonds, equities, cash and deposits or alternative assets (such as land, buildings, loans, etc.). These strategies are largely shaped by regulation and the governance of funds. In turn, they say a lot about the actors involved in pensions policy (e.g. global financial markets, the stock exchange, domestic capital) and how pension markets evolve. As the OECD (2013b) has stressed, the investment strategies of pension funds are relevant not only from the perspective of retirement income but also because of their impact on the development of capital markets and the supply of capital for innovative enterprises.

The following country chapters will shed light on the spread of the new pension orthodoxy (its full implementation and/or its retreat) and the way in which national policymakers have set the key parameters of the new pension mix: the latter are crucial for designing the pensions system and assessing its outcomes. ← 22 | 23 →

1.2  Cost containment and recalibration