Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions - Draft Joint report by the Commission and the Council on Adequate and sustainable pensions
Date: 2002-12-17
Institutions: European Commission
Subjects: long-term financing, pension scheme, population ageing, public finance, retirement conditions, supplementary pension

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 17.12.2002
COM(2002) 737 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE
EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

Draft

Joint report by the Commission and the Council on
Adequate and sustainable pensions

Executive Summary ................................................................................................................... 5

Adequacy of pensions ................................................................................................................ 5

Financial sustainability of pension systems ............................................................................... 6

Modernisation of pension systems ............................................................................................. 7

Overall assessment ..................................................................................................................... 7

1.

2.

2.1.

2.2.

3.

Introduction.................................................................................................................. 9

The challenge of population ageing: demographic trends and public perceptions .... 11

Population ageing....................................................................................................... 11

Public perceptions ...................................................................................................... 13

Adequacy.................................................................................................................... 22

3.1.

Objective 1: preventing social exclusion ................................................................... 22

3.1.1. Minimum pension guarantees .................................................................................... 22

3.1.2.

The risk of poverty among older people .................................................................... 25

3.1.3. Conclusion: Eliminating poverty risks in old age ...................................................... 29

3.2.

Objective 2: enabling people to maintain living standards ........................................ 30

3.2.1. Access to mechanisms for enabling people to maintain their living standard to a

reasonable degree after retirement ............................................................................. 30

3.2.2.

Likely evolution of replacement rates........................................................................ 34

3.3.

Objective 3: promoting solidarity .............................................................................. 35

3.3.1.

Solidarity between generations .................................................................................. 35

3.3.2.

Solidarity among the elderly ...................................................................................... 36

3.3.3. Ageing and the likely evolution of inequalities ......................................................... 38

3.3.4. Conclusion: the future of solidarity............................................................................ 39

4.

Financial sustainability of pension systems ............................................................... 43

4.1.

Objective 4: raise employment levels ........................................................................ 44

4.1.1. Brief analysis of the current labour market situation (e.g. unused employment

potential) .................................................................................................................... 45

4.1.2. Main measures envisaged for raising employment.................................................... 47

4.1.3. Analysis of the financial impact of the envisaged employment rate growth (excluding
that of older workers) on pension systems................................................................. 48

4.1.4. Conclusion ................................................................................................................. 49

4.2.

Objective 5: extend working lives.............................................................................. 50

2

4.2.1. Current labour market participation of older workers................................................ 51

4.2.2. Medium and long-term targets regarding the employment of older workers ............ 53

4.2.3. Measures to raise employment rates of older workers............................................... 53

4.2.4. Assessment of the financial impact of longer working lives ..................................... 57

4.2.5. Conclusion: working longer is a powerful way of ensuring financial sustainability of
pension systems.......................................................................................................... 58

4.3.

Objective 6: Making pension systems sustainable in a context of sound public
finances ...................................................................................................................... 59

4.3.1.

The current and expected impact of pension systems on public expenditure ............ 60

4.3.2. Contributions of public pension schemes .................................................................. 62

4.3.3. General measures to ensure the financing of public pensions expenditure ............... 64

4.3.4. Conclusion: financial sustainability of public pension systems and sound public

finances ...................................................................................................................... 69

4.4.

Objective 7: adjust benefits and contributions in a balanced way ............................. 71

4.4.1. Reducing the burden on future generations ............................................................... 71

4.4.2. Maintaining pensions adequacy ................................................................................. 73

4.4.3. Conclusion: Risk sharing between the active and the retired .................................... 74

4.5.

Objective 8: ensure that private pension provision is adequate and financially sound74

4.5.1. Current and envisaged role for occupational and private pension provision ............. 74

4.5.2. Regulatory frameworks for private pension provision .............................................. 77

4.5.3. Reducing administrative costs ................................................................................... 79

4.5.4. Conclusion: contribution of funded schemes to future pension provision................. 81

5.

Modernisation: Responding to changing needs ......................................................... 82

5.1.

Objective 9: adapt to more flexible employment and career patterns........................ 82

5.1.1. Access to pension rights............................................................................................. 82

5.1.2.

Portability of pension rights ....................................................................................... 84

5.1.3. Conclusion: Improvements needed in second pillar provision .................................. 85

5.2.

Objective 10: meet the aspirations for greater equality of women and men.............. 85

5.2.1. Gaps in the pension situation of men and women...................................................... 86

5.2.2. Gender differences in pension legislation .................................................................. 87

5.2.3. Measures to promote greater gender equality in pension systems............................. 88

5.2.4. Conclusion: impact of pension systems on gender equality ...................................... 90

3

5.3.

Objective 11: demonstrate the ability of pension systems to meet the challenges .... 91

5.3.1. Monitoring of pension systems .................................................................................. 91

5.3.2. Mechanisms for building political consensus ............................................................ 92

5.3.3.

Information to beneficiaries ....................................................................................... 93

5.3.4. Conclusion: information as a driver of change .......................................................... 94

6.

6.1.

6.2.

General conclusions and next steps ........................................................................... 96

Meeting the common objectives ................................................................................ 96

Further co-operation at EU level................................................................................ 99

ANNEX - Country summaries ............................................................................................... 101

BELGIUM.............................................................................................................................. 104

DENMARK............................................................................................................................ 108

GERMANY............................................................................................................................ 112

GREECE ................................................................................................................................ 116

SPAIN…………. ................................................................................................................... 120

FRANCE ................................................................................................................................ 124

IRELAND .............................................................................................................................. 128

ITALY 132

LUXEMBOURG.................................................................................................................... 136

THE NETHERLANDS .......................................................................................................... 140

AUSTRIA............................................................................................................................... 144

PORTUGAL........................................................................................................................... 148

FINLAND .............................................................................................................................. 152

SWEDEN ............................................................................................................................... 157

UNITED KINGDOM............................................................................................................. 162

4

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE
EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

Draft

Joint report by the Commission and the Council on
Adequate and sustainable pensions

EXECUTIVE SUMMARY

Several  European  Councils,  from  Lisbon  to  Barcelona,  have  highlighted  the
challenge  of  an  ageing  population  and  its  implications  for  the  maintenance  of
adequate and sustainable pensions. This challenge was underlined in the conclusions
of  the  Stockholm  European  Council  in  March  2001,  which  laid  the  ground  for  the
open method of co-ordination on pensions. This process was finally launched by the
Laeken  European  Council  in  December  2001  on  the  basis  of  eleven  common
objectives  under  the  three  headings:  safeguarding  the  capacity  of  systems  to  meet
their  social  objectives,  maintaining  their  financial  sustainability  and  meeting
changing societal needs.

National Strategy Reports on Pensions were submitted in September 2002, in which
Member  States  present  in  detail  how  they  are  trying  to  meet  the  eleven  common
objectives.  Subsequently,  the  Commission  services  analysed  the  National  Strategy
Reports with a view to assessing the achievement of the eleven common objectives.

Adequacy of pensions

All  Member  States  ensure  that  most  people  earn  pension  rights  and  provide  a
minimum  level  of  income  to  older  people  who  earned  insufficient  pension
entitlements.  An  important  achievement  of  pension  systems  is  that  old  age  is  no
longer synonymous with poverty. In many Member States, the poverty risk of older
people is lower than for younger people. Particularly in those Member States where
poverty risks remain high, a broad range of measures to improve minimum income
guarantees and various benefits in cash and in kind are being introduced.

Pension  systems,  through  public  earnings-related  schemes  (first  pillar),  private
occupational  schemes  (second  pillar)  and  individual  retirement  provision  (third
pillar),  provide  good  opportunities  for  most  Europeans  to  maintain  their  living
standards  after  retirement.  As  a  result,  and  in  combination  with  other  tax-benefit
policies  for  pensioners,  older  people,  in  most  Member  States,  generally  achieved  a
fair, and in some Member States even relatively high, living standard. The maturing
of  the  pension  systems  and  the  greater  participation  of  women  have  contributed  to
raising  average  pension  levels.  In  the  future,  many  Member  States  expect  further
improvements in  pension provision, inter alia,  through  allowing  individuals  to  earn
additional pension  rights by postponing their retirement  and  encouraging  the  social
partners  to  establish  sector-wide  pension  schemes  based  on  mandatory  collective
agreements. Whilst most pension income will continue to be provided by first pillar
schemes, Member-States are also promoting private provision.

Member States have built strong redistributive elements into their first pillar pension
schemes, notably in the  form of  minimum  pension  guarantees or  credits  for certain
periods  without  pensionable  income  (e.g.  unemployment,  parental  leave  etc.).  This

5

has  contributed  to  reducing  income  disparities  among  pensioners,  often  more  than
among  the  population  as  a  whole.  Greater  reliance  on  occupational  pension
provision, often supported by collective agreements, or public pension provision with
strong solidarity elements and with a strong link between contributions and benefits,
will increase the adequacy of pensions and promote fairness between generations.

Financial sustainability of pension systems

Over  the  past  few  years,  Member  States  have  recognised  the  urgency  of  making
pension systems financially stable in view of the limited window of opportunity that
exists before the ageing population takes effect. In this context, an approach based on
raising  employment  rates,  reducing  public  debt  levels  and  reforming  pensions
systems, also underpinning the Broad Economic Policy Guidelines, has been widely
incorporated in Member States’ strategies.

All  Member  States  see  their  efforts  to  raise  employment  rates  as  an  important
element  in  their  long-term  strategy  for  making  pensions  sustainable.  Higher
employment rates imply that more people can shoulder the financing of benefits and,
thus,  that  benefit  levels  can  be  maintained.  Projections  of  public  pension
expenditure1  indicate  that,  if  the  Lisbon  employment  targets  were  to  be  achieved,
with  continued  employment  growth  beyond  2010,  the  increase  of  public  pension
expenditure  as  a  percentage  of  GDP  could  be  reduced  by  about  one  third  in  2050,
compared  to  the  baseline  scenario  of  unchanged  policies.  This  means  that  higher
employment rates alone will not solve the problem of the financial sustainability of
pension systems..

Currently,  most  Europeans  retire  before  reaching  the  statutory  retirement  age.  If  a
one-year  increase  in  the  effective  retirement  age  could  be  achieved  without
increasing pension entitlements, the expected pension expenditure rise would be cut
by 0.6-1 percentage points of GDP in 2050. This means that a one-year increase in
the  effective  retirement  age  would  absorb  about  20%  of  the  average  expected
increase  in  pension  expenditure  in  2050.  Member  States  have  declared  their
commitment  to  delay  the  take-up  of  early  pensions  and  are  in  the  process  of
reforming  early  pension  systems  and  labour  market  policies.  However,  in  many
cases, the  pace of  reforms  falls  short  of  what  is  required  to  achieve  the  Stockholm
and  Barcelona  targets  for  the  employment  rate  of  older  workers  (50%  by  2010
compared to 38.5% today) and for an increase in the effective retirement age by five
years by 2010.

Some Member States have put, or are putting, in place comprehensive strategies for
ensuring  the  sustainability  of  pension  systems  and  public  finances  as  a  whole  in
accordance  with  the  three-pronged  strategy  incorporated  in  the  framework  of  the
Broad Economic Policy Guidelines. However, large expenditure increases on public
pensions are projected for most Member States and, in addition, some countries are
still hampered by high debt ratios and the need for budgetary consolidation. Further
reforms in  all three areas are needed, in particular  further pension reforms  in  those
Member  States  which  have  not  yet  safeguarded  the  long-term  sustainability  of
pension systems.

Member  States  realise  that,  in  view  of  the  high  financial  burden  of  rapidly
deteriorating  dependency  ratios,  fairness  between  generations  will  be  at  risk.  To

1

Carried out by the Member States in 2001 under the auspices of the Economic Policy Committee.

6

                                                
prevent adverse effects on employment, care should be taken to avoid increasing the
total tax burden, in particular on labour, and to achieve a sustainable balance between
taxes on labour, on the one hand, and other forms of taxation, including on capital,
on the other. Several Member States have addressed the consequences of the baby-
boom generation on pension systems by establishing reserve funds in public pension
schemes  with  the  aim  of  avoiding  large  increases  in  contribution  rates.  Many
Member  States  have  also  created  better  opportunities  for  supplementary  private
provision  and  private  funding,  thus  reducing  pressures  for  public  expenditure
increases.  A  few  countries  have  changed  their  public  pension  systems  to  notional
defined-contribution  systems,  with  the  aim  of  stabilising  contribution  rates  across
generations  and  incorporating  better  incentives  to  work,  thus  contributing  also  to
meet the objective of higher employment rates.

Financial  sustainability  of  funded  pension  provision  depends  on  the  sound
governance of the funds and on the performance of financial markets. The risks for
funded  pension  provision  can  be  greatly  reduced  through  effective  supervision  and
prudent asset management. The directive on institutions for occupational retirement
provision,  currently  under  discussion  in  the  Council  and  the  European  Parliament,
will be a major step of progress in this regard.

Modernisation of pension systems

Statutory schemes, by and large, respond well to the challenge of providing pensions
for  atypical  (part-time,  temporary,  self-employed  workers)  and  mobile  workers.  In
contrast,  the  situation  in  the  second  pillar  schemes  cannot  yet  be  regarded  as
satisfactory:  atypical  workers  continue  to  be  less  well  covered  by  occupational
schemes  and,  in  many  Member  States,  workers  who  change  jobs  tend  to  end  their
careers with reduced  occupational  pension  rights  compared  to  workers  who  remain
with the same employer.

Member  States  are  gradually  adapting  their  pension  systems  to  the  evolving  social
and economic roles of men and  women.  They  are  moving  to  new  rules  that  aim  at
facilitating  the  reconciliation  between  family  responsibilities  and  work  for  both
parents.  However,  in  spite  of  such  measures  and  increased  labour  market
participation of women, significant differences between women’s and men’s pension
entitlements will persist for a long time to come.

Finally, most Member States have made efforts to improve the transparency of their
pension systems, both at the level of systems as whole and with regard to individual
entitlements.  They  also  acknowledge  the  importance  of  consensus  building  for  the
development and reform of pension systems.

Overall assessment

The first comprehensive assessment of national pension systems and policies at EU
level shows that Member States are moving towards financially sustainable pension
systems that will be able to provide adequate pensions in the future, in particular at
the time when  population ageing accelerates. Member States  are fully aware of the
interdependence  between  financial  sustainability  and  adequacy  in  the  context  of  an
ageing  society:  the  financial  sustainability  of  pensions  systems  is  a  necessary
precondition  for  an  adequate  provision  of  pensions  in  the  future,  while  ensuring
adequacy is a precondition for obtaining political support for the necessary reforms
of pension systems.

7

The  national  strategy  reports  present  a  wide  range  of  positive  developments  with
regard  to  the  common  objectives.  While  financial  challenges  have  been  the  main
driving force for reforms, Member States have taken care not to undermine the social
objectives  of  their  pension  systems  and  are  making  efforts  to  adapt  their  pension
system  to  changing  societal  needs.  This  balance  between  social  and  financial
concerns is key for the political success of pension reforms. All Member States have
started  their  reform  processes  and  a  number  of  Member  States  have  implemented
major,  a  few  even  radical,  reforms  during  the  1990s.  Notwithstanding  this,  a  large
number of countries see the need for further reforms in order to safeguard the long-
term sustainability of their pension systems as well as sound public finances.

The  momentum  behind  the  reform  process  to  secure  the  sustainability  of  adequate
pensions  must  be  maintained.  These  reforms  should  be  seen  in  the  context  of  the
coordinated efforts by the Member States to implement the growth strategy required
by  the  Lisbon  summit,  including  structural  and  fiscal  reforms  and  better  and  more
productive  public  investment.  Many  Member  States  face  very  high  expenditure
increases  in  their  pension  systems  under  current  policies  and  have  yet  to  take
measures  to  cope  with  these  financial  challenges  without  jeopardising  adequacy.
Improving incentives for older workers to remain longer on the labour market will be
particularly  important.  This  can  be  achieved  notably  by  strengthening  the  link
between contributions and benefits. Moreover, the financial basis of pension systems
can  be  strengthened  through  increased  public  and  private  funding.  Finally,  future
adequacy  also  depends  on  the  adaptation  of  pension  systems  to  more  flexible
employment  and  career  patterns  and  to  the  changing  roles  of  men  and  women  in
society.

Ageing will start to produce its effects on pension systems within the next ten years
in many Member States. It is therefore urgent to put in place credible  and effective
strategies and to give clear signals to citizens about what they can expect from their
pension systems and what they have to do to achieve an adequate living standard in
retirement.

8

1.

INTRODUCTION

Several European Councils have highlighted the challenge of ageing populations, in
particular  its  implications  for  maintaining  adequate  and  sustainable  pensions.  The
Lisbon  Council  (2000)  stressed  the  need  to  study  “the  future  evolution  of  social
protection  from  a  long-term  point  of  view,  giving  particular  attention  to  the
sustainability  of  pensions  systems  in  different  time  frameworks  up  to  2020  and
beyond, where necessary”. This was followed by the endorsement at the Gothenburg
Council (2001) of three broad principles  for modernising  pension systems,  namely:
“safeguarding  the  capacity  of  systems  to  meet  their  social  objectives,  maintaining
their financial sustainability and meeting changing societal needs”.

A  joint  report2  by  the  Social  Protection  Committee  and  the  Economic  Policy
Committee  addressed  to  the  European  Council  in  Laeken  (December  2001),  called
for  the  use  of  the  open  method  of  co-ordination  in  the  area  of  pensions  “to  help
Member  States  progressively  develop  their  own  policies  so  as  to  safeguard  the
adequacy of pensions whilst maintaining their financial sustainability and facing the
challenges of changing social needs.” It set out eleven common objectives under the
three principles endorsed at Gothenburg.

Finally, the Barcelona Council (2002) called “for the reform of pension systems to be
accelerated to ensure that they are both financially sustainable and meet their social
objectives”  and,  in  this  context,  stressed  “the  importance  of  the  joint  Commission
and Council Report on Pensions to the Spring 2003 European Council, to be drawn
up on the basis of the National Strategy Reports due in September 2002.” As input to
the  latter  report,  Member  States  submitted  National  Strategy  Reports  in  September
2002 in which they present in detail how they are trying to meet the eleven common
objectives. These reports show that Member States have taken, and are continuing to
take, a variety of measures to address the eleven objectives. With regard to goal of
financial  sustainability  of  pension  systems,  Member  States  have  integrated  in  their
approaches the three-pronged strategy to tackle the budgetary implications of ageing
populations established at the Stockholm Council and thereafter incorporated in the
2002 Broad Economic Policy Guidelines. The three prongs are: raising employment
rates, reducing public debt levels, and  reforming pensions systems themselves. The
aim is to contain pressures on public finances and place pension systems on a sound
financial  footing.  The  measures  taken  by  the  Member  States  include,  in  particular,
limiting the flow into early retirement schemes, increasing incentives for lengthening
working lives and retiring later, and increasing future budgetary margins by reducing
public debt or building up public pension reserve funds.

The  responsibility  for  designing  and  managing  pension  systems  remains  with  the
Member  States,  in  accordance  with  the  principle  of  subsidiarity.  While  there  is  no
intention  to  change  this,  it  is  now  widely  accepted  that  the  adequacy  and
sustainability of pension systems have implications that go beyond national borders.
This  was  first  accepted  in  the  area  of  economic  policy  and  public  finances:  the
stability  of  the  common  currency  depends  on  sound  fiscal  policies.  Ageing
populations represent a major challenge for public finances in view of the fact that a

2

Quality  and  viability  of  pensions  –  Joint  report  on  objectives  and  working  methods  in  the  area  of
pensions

9

                                                
share of around one tenth of the EU's GDP is currently devoted to public spending on
pensions.

However, ageing is also a major challenge for the ability of pension systems to meet
their social objectives, namely to provide adequate and fair incomes to older people
and prevent poverty in old age. From a European point of view, it is also important to
ensure that increasing numbers of migrant workers who have earned entitlements to
pensions  in  different  Member  States  can  rely  on  receiving  the  benefits  they  were
promised and will not have to claim social assistance in their country of residence.

As  requested  by  the  Stockholm  and  Barcelona  European  Councils,  the  impact  of
rising age-related expenditures on public finances is assessed in the framework of the
Stability  and  Growth  Pact.  Each  year,  Member  States  submit  their  Stability  and
Convergence  Programmes,  which  provide  targets  for  achieving  the  long-term
sustainability  of  public  finances.  In  addition,  the  Laeken  European  Council  which
endorsed  the  working  methods  and  common  objectives  for  the  open  method  of
coordination  of  pensions,  states  that  this  latter  process  “takes  its  place  alongside  a
range of existing, well functioning EU processes which, as part of their wider remit,
deal with aspects of pension policies”. Moreover, it requires that this process “does
not change the respective responsibilities of policy makers at European and national
level”. The open method of co-ordination launched at the Laeken European Council
establishes an integrated framework which will take into account the existing policy
co-ordination  activities  in  other  areas  (economic  policy,  public  finances  and
employment, in particular) and feed its results into the further development of these
other processes.

A  major  benefit  of  this  new  co-operation  will  be  to  promote  mutual  learning.
Member States are faced with many similar problems – and most of all the common
challenge  of  ageing  populations.  Far  from  imposing  constraints  on  national  policy
makers,  the  open  method  of  co-ordination  will  increase  their  ability  to  assess  their
relative  performance,  raise  awareness  of  other  policy  options  and  promote  a  better
understanding of the advantages and problems of these different options.

This  report  is  the  first  comprehensive  analysis  of  national  strategies  in  the  area  of
pensions  and  presents  how  Member  States  are  responding  to  the  challenge  of
population  ageing  while  taking  into  account  the  three  broad  goals  of  adequacy,
sustainability and modernisation.

10

2.

THE  CHALLENGE  OF  POPULATION  AGEING:  DEMOGRAPHIC  TRENDS  AND  PUBLIC
PERCEPTIONS

2.1.

Population ageing

Over the coming decades, the EU will face a significant acceleration of demographic
ageing  due to  three main  factors: (i)  the baby-boom  generation  reaching  retirement
age, (ii) continuing increases in life expectancy, and (iii) decreased fertility since the
1970s.  The  first  of  these  factors  will  create  a  temporary  demographic  imbalance,
while the effects of the two other factors are continuous. However,  all three factors
combine  to  produce  a  major  financial  challenge  for  pensions  systems  over  the
coming decades when the number of pensioners will rapidly increase and the size of
the working-age population will diminish. There is a risk that the resulting increased
old-age  dependency  ratio  places  an  unsustainable  financial  burden  on  the  active
population  in  the  future,  while  at  the  same  time  adversely  affecting  the  Europe's
economic growth potential.

It is expected that, by the  year 2050, Europeans will live at least four  to five years
longer than today (see chart 1 below). Given that today’s remaining life expectancy
at 65 is about 15 ½ years for men and 19 ½ for women, an increase of 5 years will
raise the cost of providing the same pension level by 25 to 30 percent. This, however,
is only about half of the demographic challenge that Europe has to prepare for. The
other major change stems from the  fact that large cohorts born after  World  War  II,
the baby-boom cohorts, will reach retirement age and  subsequent cohorts are  much
smaller as a result of lower birth rates.  This  can  be  seen  from  Europe’s  population
pyramid (see chart 2) where people between 35 and 55 are currently very numerous.
In the coming 10 to 15 years these large cohorts will start retiring and drawing their
pensions.

Life expectancy at birth

2000

Increase 2000-2050

Left : Men - Right : Women

Chart 1

90

88

86

84

82

80

78

76

74

72

70

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

Source: EUROSTAT Population projections - Baseline scenario

11

Chart 2

Population Pyramid in 2000 - EU15

Men

90+

1906-1910

85-89

1911-1915

80-84

1916-1920

75-79

1921-1925

Women

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

5

20

15

10

1926-1930

1931-1935

1936-1940

1941-1945

1946-1950

1951-1955

1956-1960

1961-1965

1966-1970

1971-1975

1976-1980

1981-1985

1986-1990

1991-1995

1996-2000

0

million

5

10

15

20

Source: EUROSTAT Population projections - Baseline scenario

The  combined  effect  of  large  cohorts  reaching  retirement  age  and  rising  life
expectancy  will  be  a  doubling  of  the  old-age  dependency  ratio,  i.e.  the  number  of
people of retirement age (65+) in relation to the working-age population (15-64). In
the  year  2000,  the  over-65s  represented  about  one  quarter  of  the  working-age
population; by 2050 it will be nearly 50%.

Old-age dependency ratio a)

2000

2050

Chart 3

65

60

55

50

45

40

35

30

25

20

15

10

5

0

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

a) Number of people aged 65 years and over as a percentage of people aged 15-64.
Source: EUROSTAT Population projections - Baseline scenario

12

The  Stockholm  European  Council  in  March  2001  addressed  the  demographic
challenge of an ageing population in which people of working age  will constitute a
smaller part of the total population. It stated that "[t]he number of retired women and
men will increase rapidly, while the share of the working-age population will start to
diminish by 2010. This will create substantial pressure on social welfare systems, in
particular  pensions,  health  care  systems  and  care  for  the  elderly.3  The  union  and
member states are acting now by defining new approaches (…). The coming decade
offers  an opportunity to  address the demographic  challenge  by  raising  employment
rates, reducing public debt and adapting social protection systems, including pension
systems."

2.2.

Public perceptions

The potential impact of these demographic developments on pension systems causes
serious concern in all Member States. Awareness of the problem has been growing,
both  among  policy  makers  and  citizens,  as  is  shown  by  the  results  of  a
Eurobarometer  survey  conducted  by  the  Commission  in  the  Autumn  of  2001  (see
chart below).4

Chart 4

The population in our country is ageing, due to lower birth rates and increasing life 
expectancy. Do you think that in the future this will pose...? 

EUROBAROMETER 56.1  AUTUMN 2001

0%

20%

40%

60%

80%

100%

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

A major problem (3.0)

Don't know                  

A minor problem (2.0)

No problem at all (1.0)

3

4

The Commission will examine the issues of accessibility, financial sustainability and quality of health
and long-term care systems for the elderly in a separate communication.
The Commission announced its intention to carry out a survey on pensions  and  pension  reform  in  its
Communication of 11.10.2000 on "The Future Evolution of Social Protection from a Long-Term Point
of  View  :  Safe  and  Sustainable  Pensions  (COM(2000)  622  final).  The  aim  was  to  gauge  public
awareness and expectations regarding the modernisation of pension systems. This section only presents
a  small  selection  of  results  that  are  particularly  relevant  in  the  context  of  this  report.  A  more
comprehensive  analysis  of  the  results  is  forthcoming.  Questions  were  presented  to  representative
samples  of  the  population  aged  fifteen  years  and  over  in  each  Member  State.  The  regular  sample  in
standard  Eurobarometer  surveys  is  1000  people  per  country  except  in  Luxembourg  (600)  and  in  the
United Kingdom (1000 in Great Britain and 300 in Northern Ireland).

13

                                                
Awareness of these demographic challenges, which are mainly seen as a problem for
public pension schemes, probably leads many Europeans to take a rather pessimistic
view  of their future  state  pension  entitlements.  A majority  of  Europeans  expects  to
have  some  difficulties  getting  by  on  their  state  pension,  and  there  is  a  large
proportion of people  who  have no  clear idea on  what  to  expect:  nearly  30%  of  the
people interviewed responded ‘Don’t know’.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

With my state pension I will get by....

EUROBAROMETER 56.1  AUTUMN 2001

Chart 5

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

with great difficulty (1.0)

with difficulty (2.0)

don't know                  

easily (3.0)

very easily (4.0)

The results may reflect doubts about the future viability of statutory pension schemes
and a lack of confidence in government policies, but also, at least in some countries,
some  confusion  about  what  is  meant  by  ‘state  pension’.  In  any  case,  confidence  is
fairly high regarding the financial situation after retirement which depends not only
on income from different pension schemes, but also on other factors such as savings
and  home  ownership.  This  more  general  question  on  people’s  anticipated  situation
after retirement shows that about 20% of Europeans are worried about their situation
after  retirement, whereas  more  than  60%  express  confidence.  The  highest  levels  of
confidence can be observed in the Nordic countries. It is also interesting to note that
fewer people responded ‘Don’t know’ to this question on the overall situation after
retirement.

14

Chart 6

What do you anticipate your situation will be after retirement?

EUROBAROMETER 56.1  AUTUMN 2001

0%

20%

40%

60%

80%

100%

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

I will be able to enjoy
retirement without having
to worry about money

I will have to watch my
spending, but will be able
to live reasonably well

I have not thought
about it, but I am
quite confident

Don't know

I have not thought
about it, but I am
quite worried

I will find it very
difficult to make
ends meet

An  obvious  policy  response  to  increased  life  expectancy  would  be  to  raise  the
retirement  age  so  that  the  balance  between  time  spent  working  and  time  spent  in
retirement  remains  unchanged.  This  would  make  it  possible  to  maintain  adequate
pension  levels  without  having  to  raise  contributions  or  tax  rates  to  finance  pension
schemes.  It  may  not  be  necessary  to  raise  the  statutory  pensionable  age  which  is
typically 65 years in most Member States. In practice, only a minority of people stay
on the labour market until they reach the statutory pensionable age. Most Europeans
intend  to  retire  between  56  and  60,  and  very  few  expect  to  be  still  on  the  labour
market after age 65 (see chart 7).

15

Chart 7 At what age do you intend to retire?

%

45

40

35

30

25

20

15

10

5

0

%

45

40

35

30

25

20

15

10

5

0

50

45

40

35

30

%

25

20

15

10

5

0

B

D K

D

G R

E

EU ROBARO M ETER  56.1 
AUTUM N 2001

<  40           

40-45       

46-50       

51-55       

56-60       

61-65       

> 65            

F

IRL

I   

L   

NL

< 40           

40-45       

46-50       

51-55       

56-60       

61-65       

> 65            

A     

P

FIN 

S   

UK

EU 15  

< 40           

40-45       

46-50       

51-55       

56-60       

61-65       

> 65            

16

Changing attitudes with regard to retirement practices will be a major challenge for
policy  makers.  Clearly,  raising  the  statutory  pensionable  age  will  not  be  a  popular
policy  response  to  the  challenge  of  demographic  ageing:  fewer  than  a  quarter  of
Europeans would support such a move (see chart 8).

Chart 8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

The age of retirement should be raised

EUROBAROMETER 56.1  AUTUMN 2001

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

Strongly agree (4.0)

Slightly agree (3.0)

Don't know                  

Slightly disagree (2.0)

Strongly disagree (1.0)

However,  maintaining  the  current  standard  retirement  age  does  not  mean  that  one
cannot raise the effective labour market exit age  and bring it closer to the statutory
pensionable  age.  It  is  also  worth  pointing  out  that  the  average  retirement  age  was
higher  in  the  1960s  than  it  is  today,  even  though,  at  the  time,  remaining  life
expectancy at 65 was much lower and the health status of people aged 65 less good
than it is today or than it is likely to be in a few decades.

Raising  the  effective retirement age  requires that incentives for  longer  labour  force
participation  be  built  into  pension  schemes.  This  can  take  the  form  of  a  close
actuarial link between contributions and benefits, an idea that is, in principle at least,
supported by public opinion (see chart 9).

17

The amount of one's pension should be strictly based on the amount of 
contributions one has paid into the pension scheme

0%

20%

40%

60%

80%

100%

EUROBAROMETER 56.1  AUTUMN 2001

Chart 9

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

Strongly agree (4.0)

Slightly agree (3.0) Don't know                  

Slightly disagree (2.0)

Strongly disagree (1.0)

At the same time the view that older workers should make room on the labour market
for younger and unemployed people is still widely held. The 'lump-of-labour' fallacy,
i.e. the idea that there is a given number of jobs that needs to be shared in as fair a
manner  as  possible  still  appears  to  be  deeply  rooted  in  public  opinion.  But  this  is
certainly not the case everywhere. In Denmark, the Netherlands, the UK and Ireland,
where  public  awareness  of  age  discrimination  recently  has  been  raised  by  large
debates and government agency campaigns, the majority is equally emphatic in their
disagreement with the proposition. Since it is not so long ago that attitudes in these
countries  were  similar  to  those  presently  held  by  the  majority  it  would  appear  that
sentiments  can  develop  and  change  when  people,  over  a  sustained  period,  are
exposed to debates on these issues.

18

People in their late 50s should give up work to make way 
for younger and unemployed people

EUROBAROMETER 56.1  AUTUMN 2001

0%

20%

40%

60%

80%

100%

Chart 10

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

Strongly agree (4.0)

Slightly agree (3.0)

Don't know                  

Slightly disagree (2.0)

Strongly disagree (1.0)

A  majority  of  Europeans  also  still  thinks  that  retirement  should  be  mandatory  at  a
fixed age, but again opinions differ considerably between Member States. The case
of  Italy  is  interesting:  there  appears  to  be  strong  support  for  mandatory  retirement,
but this did not prevent the government to introduce (over a long transition period) a
highly flexible systems where individuals have a large degree of  freedom to decide
when they want to retire and to determine their pension level through the choice of
the moment when they retire.

Chart 11

Older workers should be forced to retire at a fixed age

EUROBAROMETER 56.1  AUTUMN 2001

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

Strongly agree (4.0)

Slightly agree (3.0)

Don't know                  

Slightly disagree (2.0)

Strongly disagree (1.0)

19

Earning  additional  pension  entitlements  by  postponing  one’s  retirement  can  be  an
important  way  of  ensuring  that  pension  provision  remains  adequate  in  a  context
where  replacement rates are being reduced in response to a less favourable balance
between  the  active  and  the  retired.  However,  this  idea,  which  is  already  being
implemented in some reformed pension systems, is not yet widely accepted by public
opinion (see chart 12).

Chart 12

Someone who retires after the normal retirement age should 
receive a higher pension

EUROBAROMETER 56.1  AUTUMN 2001

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

Strongly agree (4.0)

Slightly agree (3.0) Don't know                  

Slightly disagree (2.0)

Strongly disagree (1.0)

The idea that pensioners should be allowed to earn some income in addition to their
pension – another way of encouraging labour market participation of older workers
and of ensuring better living standards for pensioners – is more widely accepted, but
there  is  still  a  significant  proportion  of  Europeans  who  think  that  it  should  not  be
possible to combine income from work with a pension (chart 13).

20

Pensioners should be allowed to earn as much as they want
on top of their pension

EUROBAROMETER 56.1  AUTUMN 2001

0%

20%

40%

60%

80%

100%

Chart 13

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU15

Strongly agree (4.0)

Slightly agree (3.0)

Don't know                  

Slightly disagree (2.0)

Strongly disagree (1.0)

These  highlights  from  the  Eurobarometer  survey  appear  to  indicate  that  public
attitudes in several Member States  lag  behind a  reform  process that is already  well
engaged. Creating greater awareness of what reform measures are needed and what
the benefits from these to older workers, pension contributors and pensioners can be
should therefore be a priority, particularly as far as the link between employment and
pension systems is concerned.

21

3.

ADEQUACY

Pension  systems  are  one  of  the  major  social  achievements  of  our  time.  They  have
successfully reduced the risk of poverty in old age, so much so that older people are
often less at risk of living in poverty than younger people. Pension systems are also
an  important  feature  of  modern  economies.  They  make  the  elderly  economically
independent of their descendants, allowing people of working age to be more mobile
than if they lived in traditional three-generation households.

Most  people  can  enjoy  their  pension  at  an  age  when  they  are  still  fit  and  healthy.
Thus retirement is regarded as an important reward at the end of one’s working life,
enabling people to start new projects and to change their life style.

Although pension systems differ considerably from one Member State to another, all
Member States pursue similar social goals as outlined in the Joint report to Laeken
on  Quality  and  viability  of  pensions:  prevent  poverty  among  the  elderly;  allow
people to maintain, to a reasonable degree, their living standard after retirement; and
promote solidarity within and between generations.

3.1.

Objective 1: preventing social exclusion

Ensure  that  older  people  are  not  placed  at  risk  of  poverty  and  can  enjoy  a  decent
standard of living;  that they  share in the  economic well-being  of  their  country  and
can accordingly participate actively in public, social and cultural life5.

3.1.1. Minimum pension guarantees

An important feature of European welfare systems is  the existence  of provisions to
guarantee  a  minimum  level  of  resources.  In  the  case  of  working-age  people  there
may  be  a  concern  with  how  such  means-tested  social  assistance  schemes  interact
with the incentive to work. In the case of people above the retirement age there are
no such concerns. Moreover, it is certainly more accepted that older people receive a
guaranteed income from the state than younger people who could be expected to earn
a living for themselves.

Consequently,  older  people  generally  enjoy  a  better  level  of  minimum  protection
than  working-age  people.  Denmark  and  the  Netherlands  provide  a  universal,  non-
means-tested flat-rate pensions linked (indirectly in the case of NL) to earnings to all
persons who have been residents at working age. The new Swedish pension system
includes  a  guarantee  pension  that  is  only  means-tested  against  income  from  the
statutory earnings-related pension scheme. In other countries tighter means-tests may
apply to such top-up benefits designed to raise incomes to the guaranteed minimum
level.  However,  comprehensive  means-tests  may  act  as  a  disincentive  to  save  for
ones  own  retirement.  The  UK  is  addressing  this  problem  with  the  new  ‘Pension
Credit’, a means-tested entitlement that allows people to combine income from their
pension  saving  with  means-tested  benefits  so  that  their  income  rises  above  the
guaranteed minimum.

5

In this respect, benefits and tax advantages other than pensions should also be taken into account where
appropriate.

22

                                                
It  is  important  to  stress  the  subsidiary  nature  of  many  of  these  schemes.  Pension
systems are generally designed to prevent poverty in old age, rather than alleviating
it, by ensuring that everyone builds up sufficient entitlements in public and/or private
schemes  to  remain  financially  independent  of  their  relatives  or  public  social
assistance.  The  minimum  guarantee  schemes  generally  act  as  an  ultimate  social
safety  net  for  those  with  incomplete  careers  (e.g.  women,  immigrants)  or  very  low
earnings  during  their  working  lives.  Germany,  France  and  Austria  stress  that  the
number of people relying on minimum provisions declined substantially over recent
decades  as  a  result  of  better  pension  entitlements  earned  in  the  pension  system.
Greece  and  Italy  report  the  opposite  trend,  but  this  is  due  to  the  fact  that  the
minimum amounts were raised.

Table 1 below illustrates the diversity of minimum income guarantees in the Member
States; however, comparisons are difficult in view of the different modalities of such
mechanisms  –  sometimes  even  within  a  given  country.  In  some  countries,  the
minimum income guarantee takes the form of a flat-rate benefit that is awarded after
a  full  contribution  career  (UK,  IRL)  or  on  the  basis  of  residence  (NL,  DK).  A
majority  of  Member  States  offer  top-up  payments  to  raise  earnings-related  pension
entitlements to a specified minimum level. These mechanisms are usually sufficient
to  provide  an  adequate  minimum  except  for  people  with  incomplete  insurance
careers  or  people  who  have  not  been  residents  in  the  country  for  long  enough.  In
such cases, fully means-tested social assistance benefits are available.

Table 1:

Minimum income guarantees for older people

Income guarantees for older people

Type of income guarantee
Minimum pensions (minimum 30 years
insured full-time employment)

B

Minimum pension entitlement for each
career year (minimum 15 years of
employment; at least 1/3 of full-time)

Social assistance for the elderly over 62
(65 from 2009 onwards) (GRAPA)

Residence-based state pension
(Folkepension)

DK

Supplementary Pension (ATP)

Social assistance

D

Minimum pensions (different from fund
to fund) and dependent on insurance
period (before or after 1.1.1993).
Pension supplement given subject to a
means-test (EKAS) for all non-rural
pensioners

GR

Amount
Depends on career length. Max.
per year for salaried worker:
€ 11793.71 (household) or
€ 9438.10 (single), for self-
employed worker: € 9401.16
(household) or € 7050.60
(single).
Automatic price indexation.
Calculated on the basis of
minimum guaranteed pay for a
21-year old (€ 1163.02 per
month).

Per year single € 7163,
couple € 4775.40 (per
individual)
Linked to prices (discretionary
adjustments possible every two
years).
Linked to private sector
earnings.
Single: € 14190
Living in a couple: € 10390 per
year

€ 2732 per year for full-time
employment and after having
paid contributions since 1964.

23

Means-test

Coverage

1/3 of pensioners

Entitlement only if total
monthly pension does not
exceed € 1084.53
(household) or € 867.63
(single).
Household income and
wealth

The basic amount is
reduced on the basis of
income from work earned
by the beneficiary. The
pension supplement is
reduced on the basis of
total earnings.
No

99% of all pensioners

68% of all pensioners

Income and wealth of
beneficiary and partner
Top-up of low pensions to
minimum level without
means test.
Means-tested pension
supplement.

Around 186 000 in 2000

Primary IKA pension:
some 70% of pensioners
receive the minimum
pension.

Income guarantees for older people

Type of income guarantee
Basic pension (equal to the rural pension)
for all uninsured people over 65

Guaranteed minimum contributory
pension for persons having contributed
for at least 15 years

Non-contributory pension
“social wage”
Old-age minimum (‘minimum vieillesse’)
for people over 65
Minimum plus supplementary allowance
(allocation supplémentaire)

Contributory flat-rate old-age pension

Non-contributory flat-rate social welfare
pensions for people aged 66+
Minimum pension supplement
(integrazione al trattamento minimo)
Minimum pensions for people over 70
Old-age allowances for people over 65
(assegno sociale and pensione sociale)
Minimum pension (depending on number
of insurance years; full amount after 40
years)
Guaranteed minimum income

Residence-based state pension

Minimum pension (‘compensation
supplement’)

Minimum pension (percentage of the
minimum wage net of social insurance
contribution. Level depends on career
length.
Non-contributory social pension
Minimum integration income (social
assistance)
Residence-based national pension

E

F

IRL

I

L

NL

A

P

FIN Social assistance

Residence-based guarantee pension for
people aged 65+

Maintenance support for elderly persons
aged 65+ (social assistance)
State pension

Amount

Means-test
Yes, for uninsured people

Yes

>65 years: € 385.50 per month
or €453.98 per month with
dependant spouse (14 payments
per year).
<65 years: € 343.87 per month
or € 406.16 per month with
dependant spouse (14 payments
per year).
€258.68 (14 payments per year) Yes

Single: 6 835 €
Couple: 12 257 € per year
€2,807.72 per year minimum
plus supplement €4,024.86 per
year for a single person
Single: €147.30 per week

Single: €134 (weekly) to be
raised to €200 by 2007
€5104 per year

€6713.98 per year
€4557.41 per year plus age-
dependent top-up
€1190 maximum per month

Single: €942 per month
Couple: €1413 per month
Single person: € 869/ month.
Married and unmarried persons,
both 65 and over (also 2 men or
2 women sharing a household):
€ 598/ month for each person.
630
Single:
Couple:
900
(monthly, 14 payments per year)
65-100% of net minimum wage

Yes

Yes

No

Yes

Yes

No

Yes

None

Pension and other income

Yes
Yes

Single: €467.32
Spouses: €411.75

Means-tested against
other pension income only

Mainly as a supplement to low
pensions for exceptional
expenses
Single:
Couple:

SEK 82200
SEK 146600 per year

Yes

Only public earnings-
related pension taken into
account.
All other incomes, wealth

£75.50 per week in 2002/3

No

Minimum income guarantee for people
aged 60+ (income support, social
assistance)

Single: £98.15
Couple £149.80 per week

Pension Credit for people over 65 (will
replace the minimum income guarantee
as from 2003)

Single: £100
Couple £154 per week
Increased in line with earnings

Yes, but with higher
capital disregards than for
beneficiaries of income
support
Yes, but more generous
disregards for wealth and
a gradual reduction of
benefits against other
pensions.

24

S

UK

Coverage

700 000 individuals for
OGA pension;
34000 for the uninsured.
15% of pensions paid by
the general scheme in
2001 (23% in 1995)

Around 470000 in June

2002
Around 766 000 in 2000

60% of all pensions
(expected to rise to 86%
by 2016)
40% of all pensions

About 39% of people over

65

About 1.8 million people
About 6.2% of people
over 65

15.4% of all pensioners in

2000

0.9% of all pensioners in
2000
100% (of those with full
residence records)

11.6% of pensioners in
mid-2002 (14.4% in
1989)
33.7% of pensioners in
the general scheme
(invalidity and old-age)

Around 13000 men and
14000 women
55% of pensioners.
Full amount: 10% of
pensioners
5-6% of people aged 65
and over

98% of pensioner units
have income from it (in
2000/1)

Around 50% of
households over 60

3.1.2.

The risk of poverty among older people

Many of these schemes were introduced only recently or are in the process of being
introduced.  Member  States  also  report  efforts  they  have  made  recently  to  raise
minimum  protection  levels  for  the  elderly.  This  should  be  borne  in  mind  when
analysing  the  results  of  the  European  Community  Household  Panel  (ECHP).  The
latest available data reflect the income situation in 1998. The ECHP income data do
not  reflect  home  ownership  (as  imputed  rent)  and  hence  fail  to  capture  a  major
determinant of living standards. The wide range of benefits in kind (e.g. health and
social services,  free  public  transport,  reduced  prices for  various  goods  and  services
such as telephone connections, energy etc.) that are available to the elderly in some
Member  States  are  also  not  covered.  It  also  needs  to  be  borne  in  mind  that  ECHP
income  data  are  assessed  for  households  and  then  individualised  using  an
equivalence scale.6 Thus income data based on the ECHP are not individual incomes
of  men  and  women  or  of  older  or  younger  people,  but  a  share  of  the  household
income in which these individuals live. Higher poverty risks for women – or lower
average incomes – therefore mean that women are more likely to live in a household
at  risk  of  poverty  or  with  a  lower  household  income.  The  ECHP  does  not  cover
people  who  do  not  live  in  private  households,  but,  for  instance,  in  residential  care.
Finally,  poverty  risks  measured  by  reference  to  an  income  threshold  (e.g.  60%  of
median  income)  give  an  incomplete  picture  of  the  situation.  A  minimum  income
guarantee  set  just  above  the  income  threshold  will  ensure  very  low  risk-of-poverty
rates  even  though  the  actual  income  situation  would  be  only  marginally  different
from  the  one  resulting  from  a  minimum  income  guarantee  slightly  below  the
threshold.  Such  an  effect  may  explain  for  instance  the  big  gap  in  several  Member
States between the proportion of people living in households with less than 60% of
median income and households with less than 50% of median income (see chart 14).

The  data presented  in  chart  14  show that poverty  risks  vary  considerably  from  one
country  to  another  and  that  they  are  usually  higher  for  women  than  for  men.
However, the introduction of a new minimum guarantee or an increase in the level of
this  guarantee  can  change  the  picture  substantially.  This  could  for  instance  be  the
case  for  the  UK  where  the  new  Pension  Credit  will  make  significant  progress
towards  ending  pensioner  poverty.  Unfortunately,  the  effects  of  better  minimum
income  guarantees  can  only  be  observed  with  a  long  time  lag  in  European  income
survey data.

6

For details, see the methodological note on background statistics in the country summaries annex.

25

                                                
At-risk-of-poverty rate a), people aged 65 years and over

at 50% of median

at 60% of median

From left to right: Men - Total - Women

Chart 14

45

40

35

30

25

20

15

10

5

0

B

DK

D

GR

E

F

IRL

I   

L   

NL

A  

P

FIN 

S   

UK

EU
15  

a) See methodological note to the background statistics in the country summaries annex.
Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish
data will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

26

Table 2: Risk of poverty (% of people under the poverty line) and income level of people
aged 65+ as a % of the income of people aged 0-64 years, 1998 (ECHP)

Country

50% poverty line, ECHP
Aged 65+

0 - 64

60% poverty line, ECHP
Aged 65+

0 – 64

Relative
income level
of those
aged 65+
(ECHP)
76
68

6
5

11
7

22
31

97
74
91
90

6
12
14
8
(8.4)
10
13
6

11
18
19
14
(14.6)
17
19
14

12
12
(2.7)
6
25
7
10
(5)
14
8
4
(5)
4
10
22
6
(3)
3
11
9

B
DK
(NSR)
D
GR
E
F
(NSR)
IRL
I
LUX
(NSR)
NL
A
P
FIN
(NSR)
S
UK
EU 15
Explanations:
The  income  concept  both  in  the  columns  of  poverty  ratios  and  that  of  the  average  income  is  the  equivalised
disposable  income.  This  is  defined  as  the  household’s  total  disposable  income  divided  by  its  ‘equivalent  size’  to
take into account its size and composition. The equivalence  scale  is  the  OECD modified scale,  which counts the
first adult (i.e. person aged 14 or over) as 1.0, each other adult as 0.5 and each child aged under 14 as 0.3.
For  instance,  a  household  of  one  adult  is  equivalent  to  1,  a  household  of  two  adults  is  equivalent  to  1.5,  and  a
household of two adults and two children (under 14 years) is equivalent to 2.1.
ECHP = European Community Household Panel; NSR = National Strategy Report

11
33
16
19
(11.3)
34
14
8
(10.3)
7
24
33
17
(10.9)
8
21
17

69
96
99
(94)
93
84
76
78
(90)
83
78
89

6
6
12
5
(4.3)
5
12
10

11
10
18
10
(9.6)
10
19
15

For the EU as a whole, the risk of poverty for older people was only slightly higher
than for the population below the age of 65, mainly as a result of the lower incomes
of women. Men over 65 are no more exposed to the risk of poverty than men below
65. However, the 1998 data indicate that around 17% of people over 65 are at risk of
poverty if 60% of median income is used as a threshold and about half this proportion
if  50%  of  median  income  is  used.7  Older  people  are  therefore  exposed  to  a  similar
level of poverty risks as the population as a whole..

7

Age  65  can  be  regarded  as  representative  of  the  statutory  pensionable  age  in  most  Member  States.
However, in some countries the standard retirement age is lower for women or both  men and  women
(France: 60). Moreover, in practice most people withdraw from the labour market before they reach the
age of 65. Using age 60 as a threshold would result in observing lower poverty risks and higher relative
living standards of older people.

27

                                                
At-risk-of-poverty rate at 60% of median income a):
Difference between people aged 65 years and over and people aged 0-64

Men

Total Women

Chart 15

i

s
t
n
o
p
e
g
a
t
n
e
c
r
e
P

26

24

22

20

18

16

14

12

10

8

6

4

2

0

-2

-4

-6

-8

B

DK

D

GR

E

F

IRL

I   

L   

NL

A     

P

FIN 

S   

UK

EU 15  

a) See methodological note to the background statistics in the country summaries annex.
Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish
data will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

The  oldest  pensioners  (aged  75  and  over)  tend  to  be  more  at  risk  of  poverty  than
younger  pensioners.  This  may  be  due  to  several  factors:  older  cohorts  may  have
earned lower pension entitlements (for instance through employment in sectors with
less  well  developed  pension  provision  or  under  legislation  that  resulted  in  less
generous pensions); inflation may have eroded the purchasing power of an individual
pension benefit since the time when is was first claimed; there may be more single-
person households of widows and widowers without sufficient survivors’ benefits to
maintain  the  same  equivalised  income.  Women  represent  a  majority  of  these  older
pensioners over 75.

28

 
 
At-risk-of-poverty rate at 60% of median income a):
People aged 0-64, 65 years and over and 75 years and over

0-64 years

65 years and over

75 years and over

Chart 16

50

45

40

35

30

25

20

15

10

5

0

B

DK

D

GR

E

F

IRL

I   

L   

NL

A     

P

FIN 

S   

UK

EU 15  

a) See methodological note to the background statistics in the country summaries annex.
Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish
data will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

The  future  need  for,  and  hence  cost  of,  these  minimum  guarantees  will  very  much
depend on whether future pensioners will have earned sufficient pension entitlements
under public and private schemes to lift them above the guaranteed minimum levels.
Structural  change  in  the  Southern  European  countries  has  resulted  in  more  people
having completed long careers with good pension insurance cover. Increased female
labour  force  participation  will  raise  women’s  individual  pension  entitlements.
Finally,  as  will  be  discussed  under  objective  2  below,  the  development  of
supplementary  private  provision  is  likely  to  compensate  in  several  countries  for
somewhat less generous public pension benefits, notably as a result of index-linking
to  prices  rather  than  earnings  and  automatic  adjustment  mechanisms  sometimes
linked to a switch to defined-contribution schemes. Most Member States expect that
minimum guarantee schemes will continue to play a residual role and will not have
to cater to a large proportion of the pensioner population.

3.1.3. Conclusion: Eliminating poverty risks in old age

All  Member  States  have  provisions  which  provide  a  minimum  level  of  income  to
older  people  who  have  not,  for  one  reason  or  another,  earned  sufficient  pension
entitlements in their  own  right.  In  1998,  older  people,  in  the  EU  as  a  whole,  faced
about  the  same  risk  of  poverty  as  people  below  the  age  of  65.  In  several  Member
States, however, poverty risks are significantly higher for older people. It remains to
be  seen  whether  the  measures  for  improving  minimum  pension  levels  and  the
dynamics  of  pension  systems  (more  pensioners  with  full  careers  etc.)  will  reduce
poverty risks over the coming years.

29

3.2.

Objective 2: enabling people to maintain living standards

Provide  access  for  all  individuals  to  appropriate  pension  arrangements,  public
and/or  private,  which  allow  them  to  earn  pension  entitlements  enabling  them  to
maintain, to a reasonable degree, their living standard after retirement.

The purpose  of  pension systems is not limited to ensuring that older  people  do  not
have to live in poverty. They should also provide arrangements that allow people to
maintain,  to  a  reasonable  degree,  the  living  standard  they  achieved  during  their
working lives.8 The Member States recognise this need and most of them cater for it
to  a  significant  extent  within  the  (earnings-related)  statutory  pension  schemes.
However, they also create opportunities for additional private provision in collective
(second  pillar)  or  individual  (third  pillar)  schemes,  and  encourage  such  pension
savings notably through tax incentives.

Member  States  generally  do  not  have  explicit  targets  regarding  the  level  living
standards  after  retirement  compared  to  the  situation  before  retirement.  Germany  is
committed to maintaining replacement levels of 67-68% under the first pillar in 2030
for  a  worker  on  average  earnings  and  45  insurance  years,  but  this  figure  is  rather
theoretical and not  necessarily  representative  of  real  pension  outcomes.  Greece  has
recently  adopted  a  law  which  aims  at  adjusting  replacement  rates  to  the  70%-rate
from  the  primary  pension  scheme  for  all  employees  by  reducing  replacement  rates
for  older  cohorts  and  increasing  them  for  younger  cohorts.  Finland  has  a  target  of
60%  income  replacement  through  the  statutory  scheme,  irrespective  of  the  income
bracket (maximum level for a full career of 40  years).  These  examples  concern the
first  pillar.  Regarding  second  and  third  pillar  provision,  implicit  targets  can
sometimes  be  deduced  from  tax  rules.  Contributions  to  pension  schemes  are  only
deductible from earnings up to a certain amount. In the Netherlands, this amount is
limited to what is needed to achieve a gross replacement level of 70% of gross final
earnings after a 40-year career.

3.2.1.

Access  to  mechanisms  for  enabling  people  to  maintain  their  living  standard  to  a
reasonable degree after retirement

In most Member States statutory pension schemes provide earnings-related pensions,
thus  contributing  to  maintaining  one’s  living  standard  after  retirement.  Benefits
under these pension schemes are related to earnings either during a specified number
of years towards the end of the career or increasingly during the entire career.

In three Member States,  Denmark,  Ireland  and  the  Netherlands,  statutory  provision
consists  mainly  of  flat-rate  pension  benefits.  In  the  UK,  in  addition  to  the  flat  rate
pension, the "State Second Pension" provides an earnings-related additional pension
which is particularly beneficial to people on low incomes. Others may choose to opt
out  in  favour  of  private  occupational  or  personal  retirement  provision.  In  these
countries, the ability to maintain one’s living standard after retirement depends to a
large  extent  on  access  to  private  occupational  or  personal  pension  provision.
Achieving good coverage rates of such private schemes and adequate benefit levels
will  therefore  be  important  goals  for  policy  makers.  Tax  incentives  alone  will  not

8

This will normally require a lower income as older people tend to have less family obligations, no more
work-related expenditures and are more likely to own their accommodation.

30

                                                
automatically result in comprehensive coverage, and several Member States rely on
the  collective  bargaining  system  to  achieve  better  coverage.  Table  3  below
summarises  information  from  the  national  strategy  reports  on  the  importance  of
private pension provision, mainly through occupational schemes.

Table 3:

Access to private pension schemes

Country

Year

Belgium

1999

Denmark

1998

Germany

1999

Greece

Spain

2001

France

1999

Ireland

2002

Italy

2001

Luxembourg

Netherlands

Austria

2001
2000

2001

Importance of private pension schemes
(cid:1)  Beneficiaries: 12.8% of all those receiving public old-age pension
(cid:1) 
35% of all employees pay contributions to an occupational pension
scheme9.
82% of full-time employees aged 15-59 pay contributions to a
labour market pension scheme

(cid:1) 

(cid:1)  ATP recipients = 68% of population over 66
(cid:1) 

28% of employees in commerce and 64% in industry were covered
(in the former East Germany, figures are 16% and 20%). Overall, in
the  former  West  Germany,  around  half  the  male  employees  last
employed  in  the  private  sector  of  the  economy  receive  an
occupational pension in old age.

(cid:1)  Public  sector  employees:  87%  of  men  and  52%  of  women  last
employed  as  public  service  employees  in  former  West  Germany
were awarded a supplementary public service pension in 1999. The
public  service  (excluding  civil  servants  as  such)  is  covered  by
collective agreements concerning special supplementary provision.
7% of total old-age income stems from the second pillar. Third pillar
arrangements account for 10% of old age income.

(cid:1) 

(cid:1)  Occupational pension provision mainly limited to international
companies. Auxiliary funds to be developed into occupational
pension schemes.

(cid:1)  Only 10% of the 5.89 million people covered by a pension plan

(individual life and group insurance funds, social provision mutual
funds, occupational plans) are member of occupational pension
schemes, compared to a total of 16.290 million people paying into
the social security system in 2002.

(cid:1)  Voluntary occupational schemes pay around 1.7% of total pension
benefits (basic scheme and compulsory occupational schemes) to
employees and self-employed workers. Information on book
reserves managed directly by companies is not available.
46.8% of total workforce aged 20 to 69 are members of their
employer's occupational pension scheme

(cid:1) 

(cid:1)  Overall coverage of private schemes amounts to nearly 51%.
(cid:1) 

8.7% of workforce contributing in the public pension scheme pay
contributions to a supplementary pension scheme (both collective
and individual): private employees=13.8%, public employees=0.0%,
self-employed=3.7%; men 16.3%, women 9.5%.

(cid:1)  Occupational pension provision mainly limited to companies of the

financial services sector.

(cid:1)  A new type of personal pension plan was introduced in 2002.
(cid:1) 
91% of all employees are member of second pillar schemes
(cid:1) 
83% of pensioners households receive a supplementary pension
(cid:1) 
283000 have acquired rights to an occupational pension under a
funded pension scheme (<10%).
35000 receive an occupational pension from a funded pension
scheme (<2% of pensioners).

(cid:1) 

9

These figures underestimate coverage because they do not take into account second pillar pensions from
sectoral pension plans governed by the Fund for Security of Existence (construction and metallurgical
industry), pension promises made by employers to individual employees and voluntary supplementary
pensions for the self-employed.

31

                                                
Country

Year

Portugal

2000

Finland

Sweden

United
Kingdom

1999

2001

2000/
2001

(cid:1) 

(cid:1) 

(cid:1) 

Importance of private pension schemes
293.530 participants in pension funds (closed or open) in 2000 -
184.075 in closed pension funds.
106.323 beneficiaries in 2000 as compared to 2.528.926 total retired
population in 12/2001.
2nd pillar pension benefits = ½ % of GDP (1st pillar statutory
schemes = 12% of GDP)

(cid:1)  Approximately 90% of workers are covered by some form of

(cid:1) 
(cid:1) 

(cid:1) 

collective pension scheme agreement.

60% of pensioner households had income from an occupational
pension. 71% had investment income including private pensions.
44% of working age population are contributing to an occupational
or personal pension (males: 51%, females: 37%).

Policy  instruments  for  promoting  private  pension  provision  are  tax  incentives,
typically  in  the  form  of  the  EET  tax  model  (contributions  are  Exempt,  investment
income  is  Exempt,  benefits  are  Taxed),  direct  financial  support  in  the  form  of
subsidies  (as  introduced  by  the  latest  German  pension  reform),  or  rules  that  make
membership in such schemes mandatory.

Trade unions and employers’ federations have a particularly important role to play in
several Member States. In the Netherlands, Denmark and Sweden the social partners
conclude  collective  agreements  on  occupational  pension  provision  at  the  level  of
sectors.  Membership  in  these  schemes  is  mandatory.  As  a  result,  coverage  rates  of
such  schemes  are  particularly  high,  up  to  91%  of  employees  in  the  case  of  the
Netherlands.  Other  countries  (B,  D,  E)  are  now  following  this  approach  or  are
preparing  measures  to  do  so;  Italy  is  also  considering  to  make  the  participation  in
private funds mandatory.

Thanks  to  statutory  schemes  and  binding  collective  agreements,  membership  in
pension schemes ensuring fairly high income replacement levels after a full career is
compulsory for a vast majority of workers in most Member States. Only Ireland has
no compulsory  earnings-related  provision,  and earnings-related pension levels from
mandatory  schemes  are  comparatively  low  in  the  UK  and  Belgium  for  people  on
higher incomes. In the UK, employees who are not contributing to the state scheme
are  obliged  to  be  members  of  an  occupational  or  personal  pension  scheme  which
meets  certain  specific  criteria.  Belgium  has  a  low  replacement  rate  compared  to
Member States with an earnings-related pension system.

incompatibilities  of  mandatory  sector-wide
There  are  fears  about  possible 
occupational pension schemes with European competition law. The Court of Justice
of  the  European  Communities  regards  such  schemes  as  undertakings  and  hence
requires a case-by-case assessment of whether mandatory membership is justified by
social  goals.10  So  far,  competition  law  has  not  been  a  serious  obstacle  to  the
development  of  sector-wide  mandatory  occupational  pension  schemes,  but  national
policy makers may need greater legal certainty.

Employees  may  be  free  to  decide  whether  to  contribute  to  an  employment-related
pension  scheme  or  to  save  in  a  personal  retirement  scheme  that  has  nothing  to  do
with the employment relation. However, offering supplementary pension provision in

10

See  in  particular  judgement  of  the  European  Court  of  Justice  of  21  September  1999  in  case  C-67/96
(Albany International).

32

                                                
the  employment  context  makes  sense  because  the  aim  is,  ultimately,  to  replace
income from work. Arranging pension insurance for groups is also usually cheaper.
Finally, choosing the right product for retirement savings can be extremely difficult
for most consumers. The UK and Ireland have a tradition of voluntary provision of
occupational pensions and are addressing issues of gaps in coverage and complexity
by introducing new pension plans, namely the so-called ‘stakeholder pensions’ in the
UK  and  ‘Personal Retirement Savings Accounts’ in  Ireland. Both  are voluntary  for
the employee, but employers have to make such pension products available if they do
not have an occupational pension scheme.

Third pillar provision can also be difficult to distinguish from other individual efforts
to  provide  for  an  adequate  living  standard  after  retirement.  These  include  in
particular  home  ownership  which  makes  a  significant  difference  in  terms  of  living
standards,  but  is  unfortunately  not  yet  captured  by  the  European  Community
Household  Survey  (which  does  not  include  imputed  rent  in  incomes).  Other
mechanisms that  contribute  to  maintaining  living  standards  after  retirement  include
the provision of health and long-term care – which becomes increasingly  important
as people grow older –, housing support and certain advantages such as free public
transport, television licenses etc.

The tax system can also make a significant contribution to raising the relative living
standard  of  older  people.  Replacement  rates  net  of  taxes  are  higher  than  gross
replacement  rates  reflecting  progressive  tax  rates  and  special  provision  for
pensioners and older people. Furthermore, retired people do not have to pay certain
social insurance contributions. Without taking into account all these factors, it is not
possible to assess whether pension levels are adequate. Gross replacement rates are
therefore not sufficient to assess the adequacy of a pension system.

Bearing  in  mind  the  limitations  of  European  Community  Household  Panel  data
discussed in the previous paragraph and under the first objective, it can be observed
that incomes of people over 65 are not far below those of people below the age of 65.
There are significant differences between men and women, with a surprisingly large
gap in Sweden which may be due to the preference for individual rather than derived
(survivors’) benefits.11 However, the interpretation of such results  requires  that  one
takes  into  account  the  type  of  household  in  which  people  live,  as  ECHP  data  only
cover household and not individual incomes.

11

The loss of one’s partner results in a sharp drop in household income if the partner’s own income is not
partially replaced by a survivor’s benefit. This will particularly affect older women who are more likely
to survive their partner than men.

33

                                                
Income of people aged 65 years and over as a percentage of 
income of people aged 0-64 a)

Men

Total

Women

,

Chart 17

1,10

1,00

0,90

0,80

0,70

0,60

0,50

B

DK

D

GR

E

F

IRL

I   

L   

NL

A     

P

FIN 

S   

UK

EU 15  

a) See methodological note to the background statistics in the country summaries annex.
Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish
data will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

3.2.2.

Likely evolution of replacement rates

Future  levels  of  pensions  in  relation  to  earnings  (income  replacement  levels)  will
depend on a number different factors. The national strategy reports show a tendency
for statutory schemes to become somewhat less generous as a result of a variety of
adjustments. Several countries  extended – or  are  still  in  the  process  of  extending  –
the period of an individual’s earnings history that is used for calculating the pension
entitlement  (e.g.  F,  E,  P,  FIN).  Thus  instead  of  using  the  years  of  highest  earnings
towards  the  end  of  the  career,  earnings  during  a  much  longer  period  or  even  the
entire  career  are  taken  into  consideration.  This  will  usually  lead  to  lower  pension
levels, particularly if past earnings are not fully adjusted for (nominal) wage growth.

Pension  levels  can  also  be  lowered  through  adjustments  in  the  formula  used  to
calculate  benefits.  One  significant  development  has  been  the  introduction  of  a
demographic  adjustment  factor.  In  the  new  Swedish  and  Italian  pension  schemes
rising  life  expectancy  will  lower  the  replacement  rate  unless  people  postpone  their
retirement.

Among  the  countries  with  predominantly  flat-rate  public  pensions,  the  Netherlands
and Denmark are committed to maintaining the link to average earnings so that the
replacement rate should remain unchanged. The UK guarantees a link to prices (with
a minimum of 2.5%) for the basic state pension, and links the means-tested minimum
(Pension  Credit)  to  earnings.  Ireland  is  committed  to  raising  the  minimum  non-
contributory  pension  substantially  by  2007  and  is  likely  to  raise  contributory
pensions  as  well  so  as  to  ensure  that  the  latter  remain  above  non-contributory
benefits; replacement rates can therefore be expected to rise over the medium term.

34

A distinction needs to be made between theoretical and empirical replacement rates.
In  some  countries  the  statutory  earnings-related  pension  schemes  yield  very  high
replacement  rates  for  a  full  career.  However,  in  certain  cases,  current  average
pension levels turn out to be low compared to current earnings, reflecting maturing
pension systems and incomplete careers or underdeclaration of earnings in the past.
In  Southern  European  countries,  economic  modernisation  and  the  employment
changes  that  this  implies  will  lead  to  better  pension  outcomes  in  the  future.  Rising
female  labour  force  participation  in  all  Member  States  will  also  result  in  higher
average  pensions.  Thus  the  trend  towards  less  generous  benefit  rules  will,  to  a
significant  extent,  be  counterbalanced  by  the  effects  of  longer  careers  and  higher
incomes.

An  important  way  of  preserving  the  adequacy  of  pensions  from  statutory  schemes
will be to allow people to earn additional pension rights by working longer. This is
particularly the case in the Swedish and Italian pension systems which are becoming
actuarially  neutral.  The  Italian  report  shows  that  it  will  be  possible  to  achieve  a
similar replacement rate to today’s typical worker retiring after 35 years at the age of
60  by working  40  years  and  retiring  at  65.  France  does  not  intend  to  raise  the  low
retirement age of 60, but the number of contribution years needed for a full pension
was raised from 37½ to 40, a measure that will require many white collar employees
to stay longer on the labour market while blue collar workers (who started to work
early in  life  and  tend  to  have  a  lower  life  expectancy)  can  continue  to  retire  at  60.
Although pension supplements for postponing retirement have been introduced in a
number  of  countries  further  reforms  are  required  in  most  Member  States  to  allow
people  to  improve  their  benefit  entitlements  by  working  longer  (see  objective  5,
below).

Regarding  private  pension  provision  it  can  be  expected  that  their  contribution  to
incomes  will  rise  in  most  Member  States.  This  will  reflect  the  fact  that  the
development  of  occupational  pension  schemes  even  in  countries  with  the  highest
coverage  rates  is  still  recent  (by  the  standards  of  pension  systems).  The  number  of
pensioners with entitlements for a complete career can therefore be expected to rise
significantly over the coming decades.

Information  presented  in  the  national  strategy  reports  does  not  allow  systematic
comparisons of current or future replacement levels in the Member States. Work is in
progress  in  the  Indicators  Sub-Group  of  the  Social  Protection  Committee  to  try  to
calculate  replacement  rates  showing  and  their  evolution  as  a  result  of  pension
reforms. It is not possible to assess whether the confidence expressed in the national
strategy  reports  is  justified,  as  future  pension  levels  are  very  difficult  to  project  in
view of the further reform measures that are required and the uncertainty  about the
performance of financial markets.

3.3.

Objective 3: promoting solidarity

Promote solidarity within and between generations.

3.3.1.

Solidarity between generations

Member States seek to ensure that people above pension age have  a decent income
relative to the population as a whole. In this respect, most Member States report that
the relative income situation of older people generally is good or at least satisfactory.

35

This point is broadly supported by the ECHP data presented in chart 17, especially if
one  take  into  account  that  ECHP  data  may  underestimate  the  relative  wellbeing  of
older households. Greece and France state that older people are likely to benefit from
greater  wealth  they  are  holding,  particularly  in  the  form  of  home  ownership.
According  to  French  national  statistics  pensioner  households  have  a  disposable
income  equivalent  to  91%  of  the  average.  Finland  reports  average  pensioner
household  income  at  90%  of  the  level  for  the  population  as  a  whole  (during  the
economic slowdown of the early 1990s, the figure stood at more than 100%).

Most  national  strategy  reports  refer  to  their  pay-as-you-go  system  as  the  main
mechanism for ensuring solidarity between the young and the old. However, pay-as-
you-go  should  not  be  understood  as  a  synonym  of  solidarity.  Clearly,  the  first
generation  of  pensioners  in  a  pay-as-you-go  scheme  did  benefit  from  national
solidarity  (instead  of  solidarity  within  families).  For  subsequent  cohorts  there  may,
however,  be  a  clear  link  between  contributions  and  benefits  that  implies  little
redistribution.

Moreover,  solidarity  features  can  also  be  found  in  funded  pension  schemes.  The
Dutch  report  cites  the  fact  that  its  funded  second  pillar  schemes  are  usually  of  the
defined-benefit  type.  This  also  can  have  a  redistributive  (from  working  to  retired
generation)  character,  as  the  working  generation  may  have  to  partially  compensate
during times of low investment returns through higher contributions,  while  in good
investment periods, surpluses can be passed on to the next generation. On the other
hand, even pay-as-you-go systems can have features that act against the principle of
solidarity: in schemes where pensions are based on final earnings, redistribution can
occur in favour of those with rising earnings who typically also have incomes above
the average.

This  possibility  of  unfair  redistribution  through  the  pension  system  was  one  of  the
motivations for the replacement of the old Swedish and Italian pension schemes by
new  ones  which  are  based  on  actuarial  neutrality  implying  that  the  total  value  of
pensions  reflect  the  sum  of  contributions  made  during  working  life.  Redistribution
takes  place  within  the  earnings-related  scheme  between  men  and  women  (through
unisex actuarial factors) and in favour of other categories through pension credits and
guarantees financed from the general budget and hence taxation.

Actuarial  neutrality  in  pension  schemes  does  not  prevent  public  authorities  from
granting additional pension rights for people on low incomes or in respect of periods
during  which  an  individual  was  not  able  to  earn  an  income  and  pay  contributions.
The  mechanisms  to  ensure  guaranteed  minimum  incomes  to  older  people  or  to
improve their living standards (see under objectives 1 and 2) are clear expressions of
solidarity.  Member  States  also  grant  pension  rights  for  certain  periods  without
contribution  payments,  e.g.  periods  devoted  to  child  care  or  care  for  elderly  or
disabled people, to higher  education or periods  of unemployment  or incapacity  and
illness. There appears to be a tendency to strengthen these solidarity mechanisms in
the  Member  States  which  are  often  financed  out  of  the  general  budget  rather  from
contribution revenues.

3.3.2.

Solidarity among the elderly

Several  Member  States  state  as  either  an  explicit  or  strong  implicit  goal  of  their
pension  systems  the  promotion  of  a  more  equal  distribution  of  income  among  the

36

pensioner  population  compared  to  the  population  as  a  whole  (Spain,  Belgium,
Greece,  Italy,  Netherlands,  Sweden).  Chart  18  shows  that  the  spread  between  the
incomes of the 20% at the top of the distribution and the 20% at the bottom is more
even among the population over 65 than for the age group 0-64, with the exception
of  Greece,  Denmark,  Germany,  Austria  and  Belgium  where  other  factors  outweigh
the equalising effect of public pensions).

Inequality of income distribution a)

0-64 years

65 years and over

Chart 18

8,0

7,0

6,0

5,0

4,0

3,0

2,0

B

DK

D

GR

E

F

IRL

I   

L   

NL

A     

P

FIN 

S   

UK

EU 15  

a) Ratio of total income received by the 20% with the highest income within a given population (top quintile) to that
received by the 20% of the same population with the lowest income (lowest quintile). See also methodological note
to the background statistics.
Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish
data will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

Member States highlight a range of features of their first pillar schemes that should
reduce income inequality among the elderly. Indeed most Member States cite in this
respect the re-distributive mechanisms of their systems and, in particular, guaranteed
minimum  pensions  or  incomes  for  older  people  and  pension  credits  for  periods  of
childcare,  sickness  or  unemployment.  The  Netherlands  points,  for  example,  to  the
fact that, in its 1st pillar pay-as-you-go system, all residents build up an entitlement at
an  equal  rate  annually.  Belgium  lists  a  number  of  provisions  of  its  system  which
redistribute  income  form  the  wealthiest  to  the  poorest  pensioners.  They  include
minimum  and  maximum  pension  rates,  a  charge  (cotisation  de  solidarité)  which  is
levied on the highest pensions and contributions for health insurance which are only
levied above a threshold.

Solidarity  mechanisms  within  pension  systems  have  important  implications  for
gender equality. Due to their lower current and past labour market participation and
earnings, women receive lower pensions than men, but benefit more from minimum
pension guarantees and pension credits for  child care periods. The Netherlands and
Sweden  also  point  out  that  the  use  of  unisex  actuarial  factors  represents  a
redistribution  in  favour  of  women  who,  thanks  to  their  longer  life  expectancy,
receive their pension for a longer period than men.

37

Most  national  strategy  reports  note  that  older  pensioners  tend  to  receive  lower
pensions  than  younger  pensioners.  A  variety  of  factors  lie  behind  this.  The
calculation of pension entitlements by reference to final salary confers an advantage
on  the  most  recent  pensioners.  Progressive  improvements  in  coverage  and  in  the
conditions  under  which  insurance  entitlements  are  calculated  have  benefited  those
who were most recently part of the labour force. The proportion of  women  rises in
the  higher  age  classes,  and,  because  of  their  lower  individual  pension  entitlements
and  low  survivors’  benefits,  the  average  income  in  higher  age  classes  will  be
reduced.  As  a  result  older  pensioners  are  disproportionately  represented  among
recipients of minimum pensions. While acknowledging this tendency, Member States
point to the fact that continued attention to the improvement of minimum provisions
and other solidarity mechanisms go some way to correcting the income distribution.
France cites national figures which show that the average gross pension of the oldest
pensioners is 60% of that of the youngest pensioners. However, taking into account
taxes and other deductions as well as benefits provided to pensioners, the figure rises
to 90%.

Belgium,  and  Italy  acknowledge  that  income  inequalities  among  pensioner
households  are  a  matter  of  continuing  concern.  Italy  states  that  incomes  are  more
unequal  among  the  youngest  pensioners,  reflecting  the  increased  importance  of
occupational pensions (which tend to be less re-distributive) and income from other
sources (notably capital) for this group. The UK states that the incomes of the richest
20% of pensioners rose by 80% between 1979 and 1996/7, while those of the poorest
20% of pensioners rose by only 30%, This is attributable to the growth in private and
occupational pensions, a trend from which the poorest pensioners have not benefited.
Reforms  introduced  since  1997  have  therefore  focussed  resources  on  the  poorest
groups.

Finally,  Italy  and  Greece made the  point  that the  historic  accumulation  of  different
pension funds for different occupational groups, which have shown different rates of
return  to  their  members  represents  another  dimension  of  inequality  among
pensioners.  Thus  the  consolidation  of  the  system  and  the  creation  of  cross-system
fairness is, and has been, an aspect of their policies.

3.3.3.

Ageing and the likely evolution of inequalities

Several national strategy reports discuss the likely evolution of inequalities and how
solidarity can be maintained in the light of demographic ageing. Denmark makes the
point  that  new  current  and  future  pensioners  are  more  likely  to  be  in  receipt  of
occupational  or  other  savings-based  pensions.  Accordingly,  Denmark  projects  that
replacement  rates  will  continue  to  rise  and  that  at  the  same  time  income  among
retired  people  will  be  more  evenly  distributed.  Thus,  on  the  basis  of  the  current
characteristics  of  their  system,  solidarity  between  and  within  generations  can  be
maintained.

Most  Member  States  argue  that  their  systems  will,  on  the  basis  of  current  societal
trends  (e.g.  towards  higher  female  labour  force  participation)  and  thanks  to  the
improvements  to  basic  pension  guarantees  perform  better  in  meeting  these  twin
solidarity  goals  in  the  future.  Only  a  few  Member  States  refer  to  possible  negative
impacts on solidarity goals resulting from adjustments that were made in the interests
of  maintaining 
the  financial  sustainability  of  public  systems.  Thus  Italy
acknowledges  that current  levels  of  replacement  rates  are  set  to  fall.  Germany  also

38

projects  a  fall  in  replacement  rates  from  the  1st  pillar,  but  offers  strong  support  for
funded  pension provision to compensate  for this loss.  Italy, too,  intends  to  develop
supplementary pensions to compensate for reduced public benefits.

Some  Member  States  refer  to  the  increased  pressure  on  systems  stemming  from
longer  life  expectancy.  The  financial  implications  of  this  trend  can  be  made  more
manageable  by  a  move  towards  defined-contribution  schemes  so  that  pension
schemes  will  take  account  of  longer  lives  when  determining  pension  amounts.
However,  the  Dutch  national  strategy  report  explicitly  refers  to  the  fact  that  under
defined-benefit  schemes  longer  life  expectancy  has  no  direct  implications  for  the
amount  of  pension  paid.  The  Netherlands  also  point  to  a  study  which  compared
defined benefit pension plans with intergenerational solidarity to defined contribution
pension plans without this form of solidarity. The study found that contributions to a
defined contribution scheme would have to be 25% higher than to a defined benefit
scheme to cover the same risk of a decline in the pension result.

The  Swedish  national  strategy  report  adds  another  dimension  to  the  concept  of
solidarity. In the new statutory pension scheme, both the pay-as-you-go element and
the  premium  (funded)  element  will  be  adjusted  to  reflect  increases  in  average  life
expectancy  for  successive  age  cohorts.  The  report  explains  that  the  mechanism  is
designed to ensure a constant return on pension contributions for all individuals and
cohorts. With such a constant  rate of  return, higher  life  expectancy  has  to  translate
either into higher contributions rates or longer working lives. As the contribution rate
is fixed people are invited to extend their working lives if they want to maintain the
same pension level as earlier cohorts.

3.3.4. Conclusion: the future of solidarity

Public  support  for  solidarity  elements  in  pension  systems  is  strong  and  Member
States  have  strengthened  many  of  them  in  their  recent  reforms.  This  should  put  in
place effective safeguards against poverty risks, but may not be sufficient to prevent
the  average  incomes  of  older  people  falling  behind  those  of  younger  people  or  to
prevent  greater  income  disparities  among  the  elderly.  Greater  reliance  on  private
pension provision could increase inequality as private provision mirrors more closely
earnings  and  tends  to  be  more  accessible  to  people  on  higher  incomes.  However,
many  Member  States  promote  wider  access  to  these  schemes.  A  major  factor  that
will  determine  future  inequality  between  the  young  and  the  old  and  among
pensioners  will  be  the  evolution  of  pension  rights  for  women.  They  represent  the
majority  of  older  people  –  and  currently  those  with  the  lowest  incomes  (see  also
objective  10,  below).  Better  tools  for  monitoring  the  effectiveness  of  solidarity
mechanisms are required.

39

Table 4:

Overview of the national strategies for ensuring the adequacy of pensions

B

DK

D

GR

E

F

IRL

Main elements of the strategy to ensure the
adequacy of pensions

Pension provision will continue to be ensured mainly
through the earnings-related statutory pension scheme.
This scheme will be complemented by occupational
schemes to be set up by collective agreements so as to
prevent a significant decrease in replacement rates.
Minimum resources are guaranteed through provisions in
the pension system and a special social assistance scheme
for the elderly (GRAPA).

A universal flat-rate pension is paid to all persons over 65
on the basis of residence. Income-tested supplements are
available. A statutory supplementary scheme (ATP)
provides a small contribution-based, but not earnings-
linked income supplement. Occupational pension
schemes based on collective agreements expanded
rapidly since the late 1980s and now cover more than
80% of the workforce.
The earnings-related statutory pension scheme is the
main source of income in old age. A slight decline in its
replacement level is to be compensated for by increased
private provision which receives substantial financial
support through tax rebates and grants (targeted at lower
income groups). The minimum income guarantee through
the social assistance scheme has been made more
effective by disregarding the income situation of
descendants.
Public earnings-related pensions from a variety of
pension institutions (primary insurance and auxiliary
funds) are the predominant source of income. A large
number of pensioners receive minimum benefits (non-
contributory from OGA, contributory from the various
funds). A means-tested pension supplement (EKAS) is
granted on a uniform basis to raise incomes above the
minimum pension. Auxiliary funds are to be developed
into occupational pension schemes.

The public earnings-related pension scheme is the main
source of income. An income floor is guaranteed through
contributory (after 15 contribution years) and lower non-
contributory minimum pensions. The development of
occupational pensions is to be boosted, notably in SMEs,
through collective bargaining.

A two-tiered first pillar provides high replacement rates.
The first tier is the public scheme with stronger solidarity
elements; the second tier is based on collective
agreements and has a strong link between contributions
and benefits. There is little scope for second pillar
provision. A minimum income is guaranteed in the form
of a minimum pension or a lower non-contributory
means-tested benefit.
The first pillar provides contribution-financed flat-rate
benefits. These are at a slightly higher level than the
means-tested social assistance pensions which are
designed to cover living expenses and are to be raised
substantially over the coming years. Income maintenance
is achieved through voluntary occupational and private
pensions which are encouraged through a favourable tax
treatment. However, if coverage does not increase
substantially over the next three years other measures
will be considered.

Observations

Social assistance to the elderly is index-
linked to prices and additional two-yearly
adjustments are possible. In the absence
of the latter poverty risks could increase.
Replacement rates in the first pillar tend
to decrease and it remains to be seen
whether second pillar schemes will
develop sufficiently to compensate.
Moreover, pension provision for the self-
employed may need to be improved.
The flat-rate pension is linked to earnings
and should therefore continue to prevent
effectively severe poverty conditions.
However, the relative income of the
elderly is moderate, but will improve as a
result of the massive development of
occupational pensions.

Poverty risks in old age are low and the
relative income level of the elderly is
high. Recent reforms should improve the
situation of low-income pensioners and,
provided government-supported
supplementary pensions develop well,
income replacement should remain
adequate.

The Greek pension system has to face a
challenge in terms of adequacy: high
poverty risks, low relative living
standards and high inequality. This risks
are currently mitigated by family
solidarity. Adequacy should improve as
more people retire after a full insurance
career and thanks to the consolidation of
schemes and equalisation of entitlements
across cohorts.
Poverty risks are low and relative living
standards of older people high. The
Spanish public pension scheme offers
high theoretical replacement rates. It can
be expected that this will translate into
increasing pensions as more pensioners
have full insurance careers.
Poverty risks are low and relative
incomes high. Adjustments in benefit
levels to maintain financial sustainability
are unlikely to threaten adequacy,
especially if working longer allows
individuals to achieve a better pension
income.

The announced increases in public
pension benefits should reduce poverty
risks particularly among older women. A
more comprehensive coverage of second
or third pillar schemes will be required to
raise the relative income levels of
pensioners in the long run. Ireland is the
only Member State without compulsory
income-related pension provision for a
majority of workers.

40

I

L

NL

A

P

FIN

S

Main elements of the strategy to ensure the
adequacy of pensions
A new notional defined-contribution pension scheme is
being phased in. This will reduce replacement rates
compared to the current defined-benefit scheme, but
offers the opportunity to achieve similar levels through
longer careers. The government also promotes
occupational pension schemes, notably through the
transformation of severance pay schemes into pension
schemes. An income floor is guaranteed through the
minimum pension.
The earnings-related statutory pension scheme provides a
high level of replacement income, thus limiting the need
for supplementary pensions. Their development is,
however, promoted by the government. The minimum
pension is proportional to the number of contribution
years. Social assistance is available as a last resort.
A universal flat-rate pension is paid on the basis of
residence. The amount is linked to the net statutory
minimum wage which is based on average earnings.
Maintaining living standards is the task of occupational
pension schemes which, thanks to binding collective
agreements, cover more than 90% of the workforce.

The public earnings-related pension scheme ensures a
high level of income replacement. As a result, the need
for supplementary schemes is limited. The government
seeks, however to promote their development, through
the transformation of severance pay into old-age
provision. A minimum pension is guaranteed in the form
of a top-up of insufficient pension rights.

The public earnings-related pension scheme offers
theoretically high replacement rates. However, due to low
earnings and short careers, actual pensions are low on
average. The importance of 2nd and 3rd pillar provision
has declined recently. The priority of the government is
to raise minimum pensions to the level of minimum
wages so as to combat poverty among the elderly.

The earnings-related statutory pension scheme aims at
providing a replacement rate of 60% even for people on
high earnings. Supplementary pensions play a minor role.
A basic national pension is paid to people whose
earnings-related pension is less than about €1000. The
amount also depends on the length of residence in
Finland.

The new earnings-related pension system links benefits
strictly to contributions. The amount of the pension will
decline as longevity rises or average earnings fall. Low
earnings-related pensions are topped up to a guaranteed
level that is index-linked to inflation. The guaranteed
amount depends on length of residence. Occupational
pensions cover about 90% of the workforce.

Observations

Poverty risks of older people are low and
relative incomes high. The reduction in
replacement rates as a result of the
introduction of the new pension scheme
can be offset by working longer and
possibly a greater contribution of
supplementary schemes to incomes. A
large number of atypical workers appear
to have only minimal pension provision.
If current pension levels are maintained
and as more women earn significant
pension entitlements there should be no
adequacy problems.

The Dutch system protects the elderly
better against the risk of poverty than the
young and provides good relative living
standards for men and relatively less so
for women. Women's occupational
pension rights can, however, be expected
to increase.
The system is designed to provide
adequate pensions to people with a good
insurance record. As more women with
more complete career histories draw their
pension, poverty risks should be reduced
and relative living standards might rise
even if public pensions are somewhat
reduced.
Portugal has to face the challenge of
poverty risks low relative living
standards. The envisaged measures to
raise minimum pensions should alleviate
problems in the short run. In the longer
run the situation should improve as more
people retire with complete career and
contribution histories.
The system appears to offer effective
protection against poverty provided that
the value of the national pension does not
fall significantly in relation to earnings.
Opportunities for earning a higher
pension will be improved thanks to a
higher rate of accrual of pension rights for
older workers.
The design of the earnings-related
pension system, including the automatic
stabilising mechanism, shifts all financial
risks to beneficiaries. However, pension
rights can be increased by working longer
or a combination of part-time work and a
partial pension. The value of the
guarantee pension is linked to prices
rather than earnings.

41

UK

Main elements of the strategy to ensure the
adequacy of pensions
Entitlement to a flat-rate basic pension linked to prices is
acquired through earnings-related contributions. A
compulsory earnings-related tier also exists in the first
pillar, which offers improved accrual rates for lower
earners; others may choose to contract out in favour of an
occupational or personal pension plan. Apart from that,
supplementary pension provision is voluntary.
‘Stakeholder pensions’ have been introduced to enhance
access to supplementary private pensions. Minimum
income guarantees linked to earnings have been
strengthened, and the new Pension Credit provide
additional amounts to reward people who have modest
incomes from occupational and personal pension
servings.

Observations

The improved minimum income
guarantee should reduce poverty risks for
older people. Voluntary occupational and
personal provision is well – established
for many but the challenge is to increase
coverage ensure people are saving enough
to meet their expectations for retirement.

42

4.

FINANCIAL SUSTAINABILITY OF PENSION SYSTEMS

Whether  future  pensions  will  be  adequate  will  depend  on  our  ability  to  secure  a
sustainable  financing  of  pension  systems  in  the  face  of  rapidly  ageing  societies.
Clearly,  adequate  pension  provision  cannot  be  financed  indefinitely  through
government  borrowing.  Nor  can  we  expect  funded  pension  schemes  to  deliver  the
expected real benefit levels if the economy does not produce sufficient resources for
the  active  and  the  retired.  All  pension  schemes,  regardless  of  the  financing
mechanism they use (funding or pay-as-you-go) transfer a share of the current output
of the economy from the active to the retired.12

In  view  of  the  challenge  of  ageing  populations,  the  Joint  Report  to  the  Laeken
Council  on  the  quality and viability of  pensions  stated  that  “Member  States  should
follow  a  multifaceted  strategy  to  place  the  pension  systems  on  a  sound  financial
footing".  This  strategy  should  be  based  on  a  suitable  combination  of  policies
reflecting  the  five  objectives  under  the  heading  ‘financial  sustainability’.  The
objectives that should secure financial sustainability are the following:

– 

– 

– 

– 

– 

achieve a high level of employment;

offer effective incentives for the participation of older workers, in particular in
pension systems (extend working lives);

reform  pension  systems  in  appropriate  ways  taking  into  account  the  overall
objective of maintaining the sustainability of public finances. At the same time
sustainability  of  pension  systems  needs  to  be  accompanied  by  sound  fiscal
policies, including, where  necessary,  a  reduction of debt13. Strategies  adopted
to  meet  this  objective  may  also  include  setting  up  dedicated  pension  reserve
funds;

ensure that pension provisions and reforms maintain a fair balance between the
active and the retired;

ensure that private and public pension schemes can provide pensions with the
required efficiency, affordability, portability and security.

The  open  method  of  co-ordination  on  pensions  for  which  these  objectives  were
defined  needs  to  take  into  account  the  progress  that  is  being  made  in  the  areas  of
employment and public finances, but the co-ordination of policy efforts in these latter
areas will continue to take place in the well-established  co-ordination  processes for
economic  and  employment  policies.  In  particular,  the  long-term  sustainability  of
public  finances,  including  the  expected  strains  caused  by  the  demographic  changes
ahead,  is  examined  in  the  context  of  the  Stability/Convergence  Programmes  (in
accordance with the  conclusions  of  the  Stockholm  European  Council),  whereas  the
employment  of  older  workers  remains  a  priority  within  the  European  employment
strategy. Therefore, particular efforts have been made in the text below to ensure that

12

13

Countries which have large net foreign assets can, by running a current account deficit, use the output
of other economies for providing resources to their retired population.
Member States strategies to ensure sound and sustainable public finances are reported and assessed in
the framework of the BEPG and the Stability and Growth Pact and should be in accordance with these.

43

                                                
the  information  provided  by  Member  States  in  their  national  strategy  reports  on
pensions is consistent with that provided in the Stability/Convergence Programmes14,
the Broad Economic Policy Guidelines and the national action plans for employment.
It  is  important  that  the  conclusions  from  these  different  policy  co-ordination
activities  be  consistent  with  each  other.  In  the  following  sections,  Member  States’
pension  systems  and  strategies  for  the  future  are  examined  in  respect  of  the  five
objectives presented above.

4.1.

Objective 4: raise employment levels

Achieve a high level of employment through, where necessary, comprehensive labour
market  reforms,  as  provided  by  the  European  Employment  Strategy  and  in  a  way
consistent with the BEPG.

Raising  the  activity  and  employment  rates  of  the  presently  inactive  and/or
underemployed  in  the  working  age  population  is  the  main  way  in  which  Member
States can counteract the shrinking of the workforce that will result when the baby-
boom cohorts begin to retire. The negative impact of demographic developments on
employment  and  economic  growth  potentials  can  be  alleviated  by  lower  levels  of
unemployment and more persons of working age participating in the labour market.
Governments  have  little  influence  on  demographic  old-age  dependency  ratio;  even
massive immigration  – the  demographic  variable with the  greatest  flexibility  in  the
short  run  –  could  not  prevent  the  sharp  rise  in  the  old-age  dependency  ratio.
However,  what  matters  for  the  sustainability  of  pension  systems  is  the  economic
dependency ratio, i.e. the number of pensioners in relation to the number of people
who are actually in employment. Europe has considerable scope for improving  this
economic dependency ratio by achieving the ambitious employment goals set by the
Lisbon and Stockholm European Councils (see chart 19).

14

The  Stability/Convergence  Programmes  of  the  Autumn  2001  were  available  for  the  analysis  of  this
report, since the 2002 Programmes arrived to the Commission only in November-December 2002.

44

                                                
Employment rates and the Lisbon and Stockholm targets (2001)

Targets in brackets

Total (70%) Women (60%)

Older workers 55-64 (50%)

Chart 19

%

90,0

80,0

70,0

60,0

50,0

40,0

30,0

20,0

10,0

0,0

B

DK

D

GR

E

FR

IRL

I

L

NL

A

P

FIN

S

UK

EU15

Source: EU-LFS, EUROSTAT

4.1.1.

Brief  analysis  of  the  current  labour  market  situation  (e.g.  unused  employment
potential)

All countries, except Austria, have seen improvements in their overall employment
rates since the mid 1990’s, and all stress their commitment to the employment targets
agreed in Lisbon and Stockholm, although several express concern about the recent
slow-down  in  employment  growth.  Moreover,  in  a  number  of  countries,  the
employment  performance  has  to  improve  markedly  before  even  the  overall  targets
come within easy reach. Some of these (e.g. Belgium, Spain and Italy) acknowledge
that further efforts will be called for.

45

Table 5

Progress towards the Lisbon and Stockholm targets

2001

Total employment rate (15-
64)
Change
2000-01
-0.7
-0.1
0.4
-0.3
1.4
1.1
0.6
1.1
0.3
1.2
-0.1
0.6
0.9
0.9
0.2
0.7

Change
1995-01
3.8
2.8
1.1
0.8
10.4
3.6
11.4
4.0
4.2
9.6
-0.4
6.2
6.4
1.8
3.2
4.0

B
DK
D
GR
E
FR
IRL
I
L
NL
A
P
FIN
S
UK
EU15
2010
Target
Source: Eurostat, LFS

59.9
76.2
65.8
55.4
56.3
63.1
65.7
54.8
62.9
74.1
68.4
68.9
68.1
71.7
71.7
63.9

70%

2001

Female employment rate (15-
64)
Change
2000-01
-1.0
0.4
0.9
-0.2
1.6
1.0
0.9
1.5
0.8
1.8
0.5
0.8
1.1
1.1
0.3
1.0

Change
1995-01
5.4
5.3
3.5
2.8
10.7
4.0
13.4
5.7
8.3
11.6
1.1
6.9
6.4
1.1
3.3
5.3

50.5
72.0
58.8
40.9
41.9
56.1
55.0
41.1
50.9
65.2
60.1
61.1
65.4
70.4
65.1
54.9

2001

Older workers employment
rate (55-64)
Change
2000-01
-2.2
2.3
0.2
-0.7
2.1
0.7
1.5
0.3
-2.3
1.4
-0.2
-0.7
3.7
1.7
1.5
0.8

Change
1995-01
1.2
8.2
0.0
-3.0
6.8
1.4
7.7
-0.5
0.7
10.5
-1.5
5.3
11.2
4.0
4.8
2.6

24.1
58.0
37.7
38.0
38.9
31.0
46.8
28.0
24.4
39.6
28.6
50.3
45.7
66.5
52.3
38.5

More than 60%

50%

The  three  employment  rate  targets  (total,  for  women  and  for  older  workers)  are
obviously  closely  related  to  each  other.  The  overall  employment  rate  can  only  be
raised if unused labour force potentials are mobilised – and these are most likely to
be found among women and older people of working age. Progress may be slowed
down be the need to change attitudes, to  raise the  employability of people who  are
currently not employed and, particularly regarding female labour force participation,
the  need  for  substantial  investments  in  care  facilities  for  children  and  other
dependants as was pointed out in the Greek report.

Although  the  unemployed  still  constitute  an  important  immediate  labour  force
reserve in several Member States, higher employment levels will need to be achieved
mainly  by  mobilising  presently  inactive  among  women  and  older  workers  (see
objective  5  below).  Spain  and  Greece  expect  that  immigrants  will  generate  an
important extra supply of labour; this may include immigrants already in the country
whose  situation  is  regularised.  The  Spanish  national  strategy  report  stresses  the
important  contribution  of  foreign  workers  to  the  current  favourable  financial
situation  of  the  social  insurance  system.  The  number  of  foreigners  covered  by  the
social security system more than doubled from 332,000 in 1999 to 792,000 in 2002.
Improving the employment rates of immigrants and their offspring form part of the
strategies  of  Denmark  and  Sweden.  In  other  national  strategy  reports  the  issue  of
immigration and labour market integration of immigrants receives little attention.

In view of their  fairly tight  labour market situations, Denmark and  the Netherlands
also point to the potential labour reserves among people on disability benefit and the
socially excluded.

Having already achieved the employment targets – or being close to them – does not
prevent  Member  States  from  intensifying  their  efforts  to  further  raise  employment

46

levels. Sweden, Denmark and Finland relate their employment objectives and targets
directly to the prospective shrinking of their labour forces. In order to counteract the
demographically  induced  drop  in  their  labour  supply  these  Member  States  will
intensify  their  efforts  to  activate  all  of  working  age  and  to  achieve  an  earlier  entry
into and a later exit from the labour market.

A steady structural growth in female activity and employment rates is a key mid- to
long-term  objective  for  Austria,  Germany,  Spain,  Greece,  Ireland,  Italy,  the
Netherlands and Portugal.

4.1.2. Main measures envisaged for raising employment

National action plans for raising employment are developed within the framework of
the European Employment Strategy. Member States were asked to highlight the most
important  of  their  employment  measures  in  their  national  strategy  reports  on
pensions.

Italy  and  Germany  are  planning  major  labour  market  reforms  that  are  expected  to
significantly  boost  employment  levels  and  lower  unemployment.  Denmark  is
preparing an action plan for “More people in work”, which is focussed on ensuring
that work pays and securing more efficiency and flexibility in the initiatives to find
people a job.

For most Member States higher employment rates are expected to result from many
interconnected,  yet  somewhat  smaller  initiatives  and  policy  measures.  Sweden’s
general efforts to raise employment rates (which include setting national employment
targets)  are  organised  along  4  axes:  1.  Strengthening  the  work  incentives  in  tax
benefit  systems;  2.  Active  labour  market  policies  and  efficient  job-matching;  3.
Quality  in  work  and  better  health  in  working  life  and  4.  Education  and  lifelong
learning.  Variations  of  these  four  themes  can  be  found  in  the  employment
endeavours  of  several  Member  States.  Finland  focuses  on  how  the  overall
employment  performance  may  be  improved  through  a  supportive  environment
including  occupational  safety  and  health  care  services,  life-long  learning  measures,
rehabilitation  programmes  and  an  environment  favourable  to  entrepreneurship  and
business  start-up.  France  discusses  the  positive  impact  on  employment  levels  of
recent anti-discrimination and equal opportunity legislation.

A  few  countries  have  detailed  estimates  of  the  relative  contribution  of  different
means  to achieving the  overall  employment  targets.  Denmark,  which  plans  to  raise
employment  by  about  133.000  persons,  expect  20.000  of  these  to  come  from  the
ranks of the presently unemployed thanks to better incentives, while about half of the
remaining 113.000 is estimated to derive from older workers postponing retirement
as  a  result  of  the  new  incentive  structure  in  the  early  retirement,  disability  and  old
age  pension  schemes.  Finally,  efforts  to  create  higher  employment  rates  for
immigrants and their offspring and to reintegrate formerly socially excluded groups
are expected to deliver the rest.

Countries with low female participation rates (e.g. Spain, Greece, Ireland) generally
expect these to improve through a combination of cohort-linked, cultural changes in
gender  roles,  investments  in  a  steady  expansion  of  care  facilities  for  children  and
other  dependants  and  measures  that  improve  the  reconciliation  of  work  and  family
life. Countries with lower activity rates than the countries listed above (e.g. Austria,

47

Belgium, Germany, The Netherlands) also tend to emphasise that a wider realisation
of gender equality in pay and working conditions will be necessary.

A  number  of  countries  with  less  developed  nursery  child  care  facilities  offer  fairly
generous  support  to  women  who  take  extended  career  breaks  to  care  for  their
children  in  their  first  2-3  years.  Naturally  such  policies  may  primarily  reflect
priorities in family policy. Yet, with a view to the impact on employment rates and
the  difficulties  for  many  women  of  returning  to  the  labour  market  after  a  long
absence, the question arises whether it would not be better to use these resources to
invest in an expansion of child care services to speed up the return of women after
parental leave.

Several  Member  States  (e.g.  Austria,  Belgium,  Germany,  Greece,  Spain  and
Portugal)  use  social  protection  contribution  rebates  to  create  and  reinforce  demand
side  incentives  in  order  to  increase  the  employment  opportunities  of  workers  that
experience employment problems. In Austria these are particularly targeted on older
workers.  Spain  offer  exemptions  or  reductions  to  employers  hiring  women,  young
people and those of more than 45 years of age. Adaptations to personal income tax
systems  (e.g.  individualised  tax  treatment,  tax  credits)  are  also  being  made  to
improve labour supply incentives.

Many  Member  States  furthermore  expect  the  basic  design  features  and  recent
reforms of their pensions and tax systems to have an employment promoting effect.
Germany  points  to  the  employment  friendly  aspects  of  the  public  pension  system
with  its  tight  connection  between  employment  periods  and  the  build  up  of
entitlements and highlights how recent reform have reinforced basic work incentives
in  the  contribution/benefit  formula.  The  report  also  insists  on  the  employment
enhancing effects of medical rehabilitation benefits aimed at helping people return to
or  retain  their  job.  As  a  result  of  a  total  re-engineering  of  their  pension  systems,
Sweden  and  Italy  have  greatly  strengthened  the  work  incentive  effects  and
employment friendliness of the public pension system. Various incentive-reinforcing
reforms on a lesser scale have similarly been applied in most Member States.

Almost all Member States have experienced a substantial net immigration from third
countries in the last decade. Spain explicitly counts on a steady influx of immigrants
to  stem  the  erosion  of  its  population  of  working  age.  Greece  also  thinks  that  a
positive  contribution  from  immigration  is  likely,  but  its  points  out  that  while
immigrants  create  greater  room  for  manoeuvre  for  pension  systems  in  the  short  to
medium  term,  they  also  build  their  own  pension  entitlements  which  naturally  will
have  to  be  honoured  in  the  longer  run.  Other  Member  States  are  aware  that  the
positive  potential  of  immigration  can  only  be  realised  when  a  full  economic  and
social  integration  of  immigrants  have  been  realised.  The  Netherlands,  Sweden  and
Denmark  are  among  the  ones  that  indicate  that  raising  the  employment  rate  of
immigrant and ethnic groups have become an important priority.

4.1.3.

Analysis of the financial impact of the envisaged employment rate growth (excluding
that of older workers) on pension systems

As mentioned above, more employment will generate additional pension rights in the
future,  thereby  resulting  in  higher  pension  entitlements,  notably  for  women,  and
hence  increased  pension  expenditure.  The  mobilisation  of  labour  reserves  among
women  and  older  workers  is  also  likely  to  require  extra  investments  and  spending

48

(e.g.  training,  child  care  facilities).  On  the  other  hand,  there  will  be  tax  and
contribution  revenues  not  giving  rise  to  new  entitlements  (e.g.  health  insurance
contributions),  savings  on  transfer  payments  and  a  larger  GDP.  So  the  effect  on
public  finances  and  the  overall  economy  is  positive.  Moreover,  as  more  women
become  employed  and  build  their  own  pension  rights  a  higher  level  of  social
protection  will  be  achieved  as  pensioner  couples  will  have  a  higher  household
income.

Only a few Member States present calculations of the impact of higher employment
rates on pensions expenditure. In estimations conducted by France, the impact of a 1-
percentage  point  rise  in  employment  rates  would  lower  the  share  of  pension
expenditure  in  GDP  by  between  0.2  and  0.4  percentage  points  by  2040.  In
comparison,  the  effect  of  a  1-year  rise  in  the  average  retirement  age  without
increasing  pension  entitlements  is  equivalent  to  a  drop  in  pension  spending  of  0.6
percentage of GDP.

4.1.4. Conclusion

All  Member  States  see  their  efforts  to  raise  employment  rates  as  an  important
element  in  their  long-term  strategy  for  making  adequate  pension  provision
financially  sustainable.  Even  for  present  high  achievers  such  as  Denmark,  Sweden
and the UK raising employment rates counts as an important feature of their pension
strategy.  As  emphasised  by  Italy  and  others,  higher  employment  rates  are  a
precondition  for  achieving  adequacy  as  well  the  sustainability  objectives.  Higher
employment rates imply that more people can shoulder the financing of benefits and
thus that benefit levels can be maintained.

The long-term impact of higher employment levels on future pensions expenditure is
difficult  to  assess  and  the  national  strategy  reports  generally  do  not  present
comprehensive  assessments.  However,  the  EPC  projections  on  pension  expenditure
growth  included  a  number  of  sensitivity  analyses,  notably,  a  scenario  called  ‘the
Lisbon  scenario’.  This  scenario  assumed  an  increase  in  employment  rates
corresponding  to  the  Lisbon  targets  in  2010  and  continued  employment  growth
beyond  this  year.  The  results  indicated  that  such  a  continuous  increase  in  the
employment rates would  absorb  about  one  third  of  the  pension  expenditure  growth
according to the baseline scenario, leaving the increase at about 2 percentage points
of  GDP,  compared  to  slightly  over  3  percentage  points  in  the  baseline  scenario.  In
other  words,  higher  employment  rates  can  only  alleviate  the  financial  challenge  of
the ageing populations but not offset it. A similar result has been presented also in an
OECD  study  which  estimated  that  a  gradual  5-percentage-point  increase  in
employment would, on average, reduce the rise in the ratio of pension expenditure to
GDP  by  about  0.5  percentage  points  with  respect  to  the  baseline  scenario  of  no
reform.

Obviously  the  potential  impact  of  increased  employment  (of  women  and  older
workers in particular) will be highest in those Member States where dependency on
social benefits and early retirement can be reduced most. As several of these also are
the  most  affected  by  ageing,  raising  employment  rates  is  of  crucial  importance  in
overall policy responses to ageing – particularly during the next decade or two where
they can alleviate the financial impact of the retirement of the baby boomers.

49

Most of the national strategy reports contain a general presentation of efforts to raise
employment, but only link them to pensions in a broad sense. Moreover, when labour
force  reserves  are  identified,  this  tends  to  be  done  in  a  very  broad  way  with  little
discussion of how the reserves can be mobilised and what the associated cost would
be.  While  Member  States  are  underscoring  the  importance  of  higher  employment
rates, it is clear that achieving the  Lisbon targets will require further labour  market
reforms in most Member States.  In addition, the achievement of these targets alone
will not solve the problem of the financial sustainability of pension systems.

4.2.

Objective 5: extend working lives

Ensure that, alongside labour market and economic policies, all relevant branches of
social  protection,  in  particular  pension  systems,  offer  effective  incentives  for  the
participation  of  older  workers;  that  workers  are  not  encouraged  to  take  up  early
retirement  and  are  not  penalised  for  staying  in  the  labour  market  beyond  the
standard  retirement  age;  and  that  pension  systems  facilitate  the  option  of  gradual
retirement.

Whereas  increasing  employment  in  general  is  important  and  necessary  for
responding  to  the  transitory  demographic  challenge  of  the  baby-boom  cohort's
retirement,  rising  life  expectancy  also  calls  for  measures  which  address  the
relationship between the lengths of time that people spend in work and in retirement.
This  requires  extending  working  lives  which  provides  a  socially  acceptable  way  to
address  the  issue  of  financial  sustainability.  Sweden  makes  this  point  strongly:
"…given that average life expectancy is increasing and health improving, the number
of  years  in  working  life  should  also  grow."  Maintaining  today's  low  effective
retirement ages will not be possible without either raising contributions and taxes or
lowering pension benefits.

However,  trends  over  the  past  few  decades  have  been  just  the  opposite  of  what  is
required to make pension systems sustainable. Whereas average life expectancy at 65
years of age has continued to increase by more than 1 year per decade, the average
effective  retirement  age  has  been  dropping  at  an  even  larger  speed  resulting  in  a
substantial  gap  between  statutory  pension  ages  and  the  real  average  age  at  which
people stop working. 30 years ago the labour force participation rates of older (male)
workers aged 55-64 in EU Member States were only 10-15 percentage points lower
than  those  of  prime-age  workers.  Today  the  difference  has  widened  to  40-50
percentage points in several Member States. The trend towards ever-lower exit ages
has been present in all Member States, largely as a result of labour market pressures
to  which  public  policies  and  collective  bargaining  practices  responded  by  offering
easy access to early retirement.

This past trend is already being reversed. Policies in the Members States have been
geared towards greater participation and higher employment rates of older  workers,
and recent years already show some progress. In order to maintain a sufficient labour
supply and to raise the overall employment rate in the face of ageing and shrinking
prime age labour forces it is necessary to raise the employment rates of older workers
and hence the effective labour market exit age. While shortages of younger workers
are likely to create  economic incentives for employers to  improve present  practices
of age management in work places and labour markets, market forces alone will be
unable  to  bring  about  the  necessary  changes.  Changes  to  the  tax/benefit  rules  –
notably  in  pension  systems  –  that  affect  employer  and  worker  decisions  about

50

retirement  will  have  a  crucial  impact  on  retirement  behaviour  and  thus  on  labour
supply.  These  issues  are  also  a  major  focus  within  the  European  Employment
Strategy and the Broad Economic Policy Guidelines.

Extending working lives does not necessarily imply raising statutory retirement ages
because the  effective  age  of the withdrawal from the  labour market is  currently  far
below the statutory retirement age in all countries. In fact it is questionable whether
there should be a uniform age limit at which people are supposed to retire. The UK
questions traditional assumptions around the pattern of working lives and  the  sharp
cut-off  between  work  and  retirement  and  suggests  that  pensioners  should  not  be
regarded as a separate section of the population whose productive life has come to an
end. Other countries, too, are moving towards greater flexibility regarding the age of
retirement and  are  revising the incentives of the pension  system  in  such  a  way  that
working  longer  will  be  more  rewarding.  Sweden  is  particularly  advanced  in  this
respect.

Individuals have different needs and preferences, and flexibility regarding the age of
retirement  is  also  important  to  allow  spouses  and  partners  to  find  the  best
arrangement  for  their  retirement.  Flexible  and  gradual  retirement  are  therefore
desirable goals in their own right, as was already recognised by a recommendation of
the  Council  of  10  December  1982  'on  the  principles  of  a  Community  policy  with
regard to retirement age'.

4.2.1. Current labour market participation of older workers

Chart 19 and table 6 (see objective 4, above) show that for the EU as a whole the gap
between the common employment target and actual employment rates is greatest for
the  group  of  older  workers  (55-64).  The  Barcelona  target  to  raise  effective  labour
market  exit  age  by  five  years  by  the  2010  represents  an  even  greater  ambition.  In
2001,  four  Member  States  (Belgium,  Italy,  Luxembourg  and  Austria)  had  a  gap  of
more than 20 percentage points to the target and a further five had a gap of more than
10 percentage points (Germany, Greece, Spain, France and the Netherlands). For the
EU as a whole the gap was 11.5 percentage points in 2001.

In the period between 1995 and 2001 the employment rate of older workers rose in
all but three Member States (Greece, Italy and Austria). For the EU as a whole the
improvement  was  2.6  percentage  points,  but  two  countries  achieved  increases  in
excess  of  10  points  (Finland  and  the  Netherlands)  and  another  four  in  excess  of  5
points (Denmark, Spain, Ireland and Portugal). Thus the reversal of the trend towards
earlier retirement has already begun, although the pace of reforms would need to be
accelerated  significantly  to  meet  the  Stockholm  and  Barcelona  employment  targets
for older worker. Pension reforms with a particular focus on  reducing incentives to
take up early pensions and improving incentives for working longer will be crucial in
that respect. Many countries judge that reforms, such as the removal of early pension
schemes  or  rises  in  the  age  of  entitlement  to  an  early  pension,  have  increased  the
employment rates of older workers and postponed the take-up of pensions.

Table 6 below presents an overview of present employment rates for workers (total
of men and women) in different age groups from age 50 till age 70+ . It also contains
an estimate of the effective labour market exit age based on labour force survey data.

51

Table 6:

Employment rates and average labour market withdrawal age, 2001

Employment rates

55-59
39,3
77,3
66,7
50,2
52,0
52,7
56,2
38,0
39,5
58,2
44,6
58,2
69,2
82,8
66,8
57,1

60-64
12,4
34,1
22,7
30,6
31,4
10,2
37,6
18,7
8,9
46,0
12,3
46,0
26,9
49,9
39,0
24,7

65-69
3,0
11,7
5,3
10,7
4,0
2,1
15,0
6,4
3,4 1)
28,4
5,6
28,4
5,7
14,2
10,9
6,8

Average age of withdrawal
from labour market 2000/2001
Men
Women
58,5
57,3
63,7
63,0
61,7
61,4
61,9
58,5
61,5
61,3
58,7
58,6
64,9
62,8
60,4
60,3
58,0
56,0
61,9
61,0
60,9
60,3
64,0
64,2
62,4
61,6
63,3
62,7
64,2
62,0
NA
NA

50-54
B
66,5
DK
83,9
D
81,6
GR
64,3
E
65,6
F
80,8
IRL
67,3
I
63,0
L
66,7
NL
74,9
A
76,1
P
76,6
FIN
86,1
S
87,9
UK
79,5
EU15
75,1
1) 2000 values
Source: Eurostat, LFS.
The average age of withdrawal from the labour market was calculated using the
methodology presented in Peter Scherer: "Labour market and social policy – occasional
papers No. 49: Age of withdrawal from the labour force in OECD countries", OECD,
DEELSA/ELSA/WD(2001)2 of 11 January 2002. The approach is modified by using
one-year instead of five-year age groups.

70+
0,6
1,6
1,6
2,1
0,5
0,6
4,7
1,9
0,0 2)
14,8
1,8
14,8
0,7
1,8
2,4
1,8

Total
58,1
63,6
61,6
60,4
61,4
58,7
64,3
60,4
57,5
61,7
60,9
64,5
62,2
63,2
63,2
NA

The data clearly indicate that withdrawal from the labour  market  is  influenced,  but
not determined by statutory retirement ages. One should keep in mind, however, that
withdrawal from the labour market does not necessarily mean a take-up of a pension
and,  similarly,  remaining  in  the  labour  market  does  not  imply  that  the  person  does
not receive a pension at the same time. On the contrary, periods of employment and
pension receipt can overlap, and it can be expected that in the future, when part-time
retiring  and accumulation of  earned income  and  pensions  is  likely  to  become  more
common, this overlap will become even  greater. Thus,  the indicator of the  exit age
from  the  labour  market,  which  underlies  the  data  presented  in  table  6,  is  likely  to
become a less reliable indicator of the effective retirement age, i.e. the average age at
which age people take up a pension.

There  are  big  differences  between  Member  States  in  the  thresholds  and  size  of  the
decline. While some Member States still have employment rates around 80% for the
55-59-year old group others are at less than half that percentage.  In some countries
employment  rates  exhibit  large  sudden  drops  from  one  age  group  to  the  next;  in
others they fall in a more gradual way.

These  differences  mirror  a  wide  range  of  institutional  arrangements  (e.g.  early
retirement,  unemployment  and  invalidity  schemes)  and  tax/benefit  structures.  Yet,
there are also other forces at work. There appears to be a cohort effect: in countries
where women started massively entering the labour market in the 1960s and 1970's
they  contribute  significantly  to  current  higher  employment  rates  of  older  workers.
This could, to some extent, explain the better performance in Denmark, Sweden and
the  UK.  In  other  countries  the  rapid  rise  in  female  labour  force  participation  took
place in the 1980s; these cohorts should raise the employment rates of older workers
within  the  next  decade  or  two.  However,  the  greater  tendency  of  women  to  leave
earlier  than  men  on  account  of  health  problems  (or  possibly  to  retire  at  the  same

52

moment as their spouse/partner) is regarded as a challenge in some countries which
already have high participation rates of women in their 50s and 60s. In some Member
States  different  employment  rates  of  older  male  and  female  workers  also  reflect
different statutory retirement ages.

4.2.2. Medium and long-term targets regarding the employment of older workers

The  majority  of  Member  States  indicate  that  they  are  committed  to  contributing  to
meeting the Stockholm targets. Only a few also mention the Barcelona target (raising
the  retirement  age  by  5  years).  However,  none  of  the  countries  acknowledging  the
Barcelona  target  have  precise  plans  for  how  this  target  can  be  met.  Few  Member
States (the Netherlands, Finland and Italy) have set quantified targets for raising the
employment rates of older workers.

In the absence of quantified targets some countries, such as Germany, report on their
general strategies for achieving high employment levels throughout the working life.
The UK underlines that its employment rates already meet the Lisbon and Stockholm
targets, but has made it a priority to further increase the employment rate of the over
50s  by  2006.  However,  the  determination  of  Member  States  to  achieve  higher
employment rates for  older  workers does  not  depend  on  their  present  performance.
Sweden, for example – with its rate of 66.5% for the 55-64-year olds well ahead of
all  other  Member  States  –  notes  that  the  supply  of  labour  from  older  workers  has
declined  over  the  past  decade  as  a  result  of  increased  labour  market  exits  via
disability  pensions  and  negotiated  retirements  and  regrets  that  in  2001  only  55  per
cent of the population aged 60-64 were participating in the labour force.

4.2.3. Measures to raise employment rates of older workers

In  principle  all  Member  States  recognise  the  need  for  ensuring  that  people  work
longer. Yet, the national strategy reports generally do not present a formal analysis of
the  incentives  emanating  from  the  full  tax/benefit  structure  in  relation  to  working
longer.  Nonetheless  many  national  strategy  reports  highlight  the  existence  of
disincentives to work in pension systems and present measures to address these.

Many  Member  States  have  already  taken  or  are  planning  to  take  measures  to
encourage  longer  working  lives.  These  include  a  large  range  of  initiatives  such  as
removing  early  retirement  schemes;  introducing  actuarial  reductions  for  early
retirement;  introducing  contributions  to  individuals  if  they  opt  for  retiring  early;
tightening  eligibility  conditions  for  a  disability  pension,  extended  unemployment
benefit or unemployment pension; rewarding with higher pension accrual rates when
a person continues to work beyond a certain age; and introducing flexible retirement
arrangements,  including  a  removal  of  the  statutory  retirement  age  and  allowing
flexible  part-time  working  arrangements.  An  overview  of  retirement  ages  and  the
possibility of combining earned income and a pension is presented in Table 7.

53

Table 7:

Flexibility in retirement in general first-pillar schemes (Source: MISSOC)

Standard
Retirement
Men: 65 Women: 62
(65 in 2009)

Deferred
Retirement
No deferred pension

Public old-age
pension scheme: 65
Supplementary
pension (ATP): 67

Public old-age
pension scheme: no
deferment possible
Supplementary
pension (ATP): up to
three years

65 years

Deferment possible

Accumulation
with earnings
Pension reduced if
annual earnings
exceed a certain
amount which is
higher after age 65.
Gradual reduction
beyond €30000 per
year.

Yes after age 65.
Pensions reduced if
annual earnings
exceed a certain
amount until age 65.

65 years

No deferred pension

Reduced pension

65 years

No upper limit

Early
Retirement

From 60 (subject to
28 years of
employment to be
raised to 35 by 2005)

No early pension
under the public old-
age pension scheme.
Supplementary
pension (ATP): from
65 (with actuarial
reduction)
Under strict
conditions until 2011
from 60, subject to 35
insured years from 63
with actuarial
reduction of 0.3% per
month
63 (severely disabled)
Full pension:
From 60 (arduous
work)

Reduced pension:
From 60
60 years (persons
insured before
1.1.1967)

B

DK

D

GR
(persons
insured
after
1.1.1993)

E

F

No early pension

60 years1

No upper limit

IRL

No early pension

I

L

NL
A

After 37 years of
contributions or at age
57 and 35 years of
contributions (for
private sector
employees).

60 years (480 months
insurance or
assimilated periods)
57 years (480 months
insurance)
No early pension
Men: 61½
Women: 56 ½
(61 ½ by 2029)

Retirement pension:
65 years
Old-age contributory
pension: 66 years
Old earnings-related
system:
Men: 65 years
Women: 60 years
New defined-
contribution system:
Actuarial benefits
from age 57 for men
and women.
65 years

No deferred pension

No upper limit

Until the age of 65

65 years
Men: 65 years
Women: 60 years
(65 by 2033)

No deferred pension
Unlimited possibility

54

Pension suspended in
case of gainful
activity. Combination
of partial pension and
part-time work
possible.
Subject to condition.
No pension if
employment with last
employer.
Yes after age 66

Possible after 40
contribution years or
upon reaching the
standard retirement
age. Otherwise not
possible (except for
the self-employed
with a reduced
pension)
Yes for normal old-
age pension.
Early retirement:
earnings up to 1/3 of
minimum wage
Yes
Standard retirement:
Yes
Early retirement:
pension discontinued
if monthly earnings
exceed €302

Flexibility in retirement in general first-pillar schemes (Source: MISSOC)

Early
Retirement
55 years (at reduced
pension after 30 years
of contributions)
60 (unemployed)
55 (unemployed, at
reduced pension)
55 (unhealthy work in
certain professions)
60 years
From 61 with
actuarial reduction
No early pension

Standard
Retirement

Deferred
Retirement

Accumulation
with earnings

65 years

Possible

Yes

65 years
65 years but right to
stay until 67 years
Men: 65
Women: 60 (65 by
2020)

No upper age limit
No upper age limit

Maximum of 5 years.
Deferment unlimited
from 2010

Yes
Yes

Yes

Despite the lower retirement age in France, there is a requirement of 40 contribution years for a full
pension)

P

FIN
S

UK

1

Denmark closed the so-called pre-early retirement  scheme  (a transitional allowance
for  people  aged  50-59  years  who  had  become  unemployed  and  contributed  to  the
unemployment benefit scheme for at least 25 years within the last 30 years) for new
entrants in 1996 and it will be fully phased out by 2006. The reform of  the Danish
voluntary early retirement scheme in 2001 obliges individuals to make contributions
to the scheme if they wish to opt for retiring early, thereby increasing incentives to
work longer.

Finland  has  decided  to  phase  out  the  unemployment  pension  scheme  during  the
period of 2009 and 2014. This has allowed unemployed people to retire at the age of
60,  having  received  extended  unemployment  benefits  for  five  years  at  the  most.
Finland  has  also  decided  to  close  the  so-called  individual  early  retirement  scheme
(disability pension scheme with weak eligibility conditions) at the end of 2003.

Germany  is  introducing  in  its  pension  scheme  reductions  (3.6%  of  the  benefit  per
annum) for all persons who retire before the age of 65 years. In France, the statutory
retirement  age  is  60,  but  a  full  contribution  record  of  40  years  is  required  (37½  in
public sector schemes); if people wish to retire before the age of 65 and do not have a
full contribution record, reductions are applied. On the other hand, the accumulation
of  pension  rights  after  the  age  of  60  is  restricted  if  the  person  already  has  a  full
contribution record.

Austria  has  sought  to  strengthen  work  incentives  through  a  number  of  changes
including raising the statutory early retirement age, abolishing early retirement due to
partial incapacity, increasing deductions for retirement before the standard retirement
age of 60 for women and 65 for men; increasing pension supplements for retirement
after  the  standard  retirement  age.  Furthermore,  the  provision  regarding  the
prohibition to work for persons drawing pension benefits was abolished. By contrast,
the financially advantageous possibility of a gradual labour exit before the statutory
retirement through part-time working is being maintained. These measures taken in
Austria are typical of many similar approaches in various other Member States.

Although these measures represent substantial changes in many pension systems, the
measures  taken  stop  well  short  of  eliminating  all  opportunities  for  early  labour
market  exit  or  ensuring  actuarial  neutrality  of  retirement  decisions.  In  particular,
while  early  retirement  is  increasingly  financially  discouraged,  the  rewards  for

55

working longer tend to remain weak implying a significant implicit tax on working
longer.

The challenge that Member States are facing is not only political, but has much to do
with poor labour market performance. Early retirement schemes were established as
a response to labour market problems which would otherwise have spilled over into
other  parts  of  the  social  protection  system,  notably  unemployment  and  invalidity
schemes.  Some  countries  took  flanking  measures  on  the  labour  market  to  avoid
undue  hardship  for  persons  becoming  unemployed  at  an  advanced  age  and  to
increase the employment opportunities for older workers.

Greece  explains  that  incentives  in  the  Greek  pension  system  cause  people  to  retire
officially from work as early as possible and then continue to work in an unofficial
capacity while drawing a pension. Premature retirement is indeed very common and
the  statutory  retirement  ages  (65  for  men/60  for  women)  are  of  purely  theoretical
significance. In 1998 fewer than 20% retired at the normal age while 80% used other
provisions  including  disability  pensions.  Italy  also  cites  problems  with  undeclared
work after retirement and envisages measures to bring working pensioners back into
the official economy.

Early labour market exit happens not just through early retirement schemes. Access
to  long  term  benefits  in  unemployment,  disability  and  sickness  pay  schemes  may
serve as functional alternatives. Limiting access to de facto early retirement therefore
often  involves  changes  in  the  conditions  of  a  number  of  schemes.  This  can  be
illustrated by the case of the Netherlands where the government presently is planning
a packet of initiatives to tackle a number of present disincentives which includes: the
abolition of favourable tax treatment for private early retirement schemes on a pay-
as-you-go  basis;  a  reduction  in  the  number  of  older  employees  claiming
unemployment benefit (by discouraging dismissals of employees aged 57½ and over
through  an  obligation  on  employers  to  contribute  to  unemployment  benefit
expenditure  and  by  reintroducing  the  obligation  to  seek  work  for  people  aged  57½
and over); a general reform to reduce the inflow of (older) people into the disability
scheme; the introduction of demand side incentives for hiring and retention of older
workers through targeted tax reductions for employers.

Disability  pension  schemes  can  become  an  alternative  route  to  withdraw  from  the
labour market depending on how strictly eligibility criteria are applied. A number of
countries  (Denmark,  Germany,  Netherlands,  Greece,  Luxembourg,  Austria  and
Sweden) have reviewed, or are in  the process  of reviewing,  their  disability  pension
schemes with a view to making conditions for granting a disability pension stricter,
strengthening  rehabilitation  measures  and  offering  suitable  alternative  work  instead
of granting a pension.

In several Member States the retirement age and the transition from employment to
retirement is made more flexible. The new  Italian and Swedish pension systems go
furthest:  the  'notional  defined-contribution'  approach  ensures  a  strong  actuarial  link
between contributions and benefits and allows individuals to choose when they want
to  retire  and  at  what  level  of  pension  income.  At  the  same  time,  the  actuarial  link
between contributions and benefits acts as a powerful employment incentive within
pension schemes.

56

Finland  is  introducing  a  flexible  retirement  age  between  62  and  68  years  as  from
2005 and offers higher accrual rates of pension rights at this age. Higher accrual rates
of  pension  rights  for  older  workers  are  applied  also  in  Luxembourg.  The  United
Kingdom stresses that people can receive statutory state pensions while continuing to
work  and  can  defer  receipt  to  earn  increments.  However,  in  many  Member  States,
retirement  remains  fairly  inflexible  and  working  longer  does  not  the  receive  an
actuarially fair reward.

The  many  changes  in  the  pension  and  other  systems  that  allow  the  exit  of  older
workers  from  the  labour  market  are  sometimes  accompanied  by  efforts  to  change
attitudes of employers and workers. The UK report explains that the government is
promoting  a  number  of  “active  ageing”  initiatives  ranging  from  the  Age  Positive
campaign against age discrimination in the run up to age legislation in 2006, the New
Deal for the over 50s looking for work, and sharing best practice between employers
around flexible retirement arrangements.

Clearly, raising employment rates of older workers and the effective retirement age
requires more than some changes to the parameters of pension systems. In the joint
Council/Commission report on "Increasing labour force participation and promoting
active ageing" for the Barcelona European Council in March 2002 it was emphasised
that  labour  market  participation  depends  on  the  interplay  between  four  factors:  the
availability and attractiveness of work; the balance of financial incentives; education
and  training;  and  a  supportive  environment  of  care-facilities,  transport  and
counselling.  The  report  thus  recommended  a  comprehensive  strategy  to  higher
employment  based  on  a  dynamic  life  cycle  approach  that  maximises  people's
capacity  to participate  over  the  whole  life  cycle.  Longer  working  lives  will  require
that the ability to work and employability are maintained at a high level during the
entire  working  life  through  a  combination  of  measures  to  provide  more  jobs  and
better  quality  in  work,  make  work  pay,  secure  higher  and  adaptable  skills  at  work
and make work a real option for all.

4.2.4.

Assessment of the financial impact of longer working lives

The  reforms  undertaken  and  envisaged  with  a  view  to  promoting  longer  working
lives are important steps into the right direction, notwithstanding the fact that impact
assessments  are  generally  not  available.  In  many  cases,  there  also  seems  to  be  a
mismatch  between  the  initiatives  undertaken  or  envisaged  and  the  magnitude  of
required results in employment rates and hence the contribution towards meeting the
financial challenge to pension systems.

However, some important qualitative assessments are provided. Denmark judges that
the  abolishment  of  the  pre-early  retirement  scheme  and  the  tightening  of  the
eligibility rules in the disability and early retirement schemes have not resulted in an
increase  in  the  unemployment  rate  of  older  workers,  thereby  suggesting  that  an
increase  in  labour  supply  does  boost  employment.  Some  countries  judge  that  the
employment rates cannot be increased to such an extent that these alone could offset
a  major  part  of  expected  increase  in  pension  expenditure;  they  can  only  lower  the
expected increase in future expenditure.

The  Ageing  Working  Group  of  the  Economic  Policy  Committee  conducted  some
sensitivity analyses of the impact of raising the effective retirement age on pension
expenditure.  An  important  finding  was  that  the  impact  on  pension  expenditure  is

57

highly  dependant  on  the  design  of  the  pension  system  and  on  how  a  rise  will  be
achieved.  More  precisely,  it  depends  on  whether  such  a  change  in  the  effective
retirement age is achieved without granting additional pension rights. If, for instance,
an  increase  in  the  effective  retirement  age  by  one  year  could  be  achieved  without
increasing  the  replacement  rate,  e.g.,  by  postponing  the  take-up  of  a  disability  or
another  non-actuarial  early  pension  in  a  defined-benefit  scheme,  the  expected
pension expenditure rise would be cut by 0.6-1 percentage points of GDP (relative to
the baseline scenario). Thus a one-year increase in the effective retirement age would
correspond to absorbing, on average, about 20% of the expected increase in pension
expenditure in 2050.  In other words, by raising the effective  retirement age  by  five
years  –  as  called  for  by  the  Barcelona  European  Council  –  without  any  additional
accrual of pension rights, public pension expenditure could be kept, by and large, at
its  current  level.  If,  however,  the  additional  year  in  employment  leads  to  higher
pension rights – as would often be the case, notably in defined-contribution schemes
–,  the  impact  on  pension  expenditure  would  be  significantly  smaller.  Nonetheless,
even in this case, this reform would be beneficial in terms of increased contributions
and  greater  economic  output.  Moreover,  it  would  allow  pensioners  to  maintain  or
even improve their living standard.

In view of the fact that many of the measures reported in the national strategy reports
are quite recent, visible results are still fairly moderate in most countries  or largely
absent  in  some  countries.  As  regards  the  financial  incentives  to  work  longer,
relatively high implicit tax rates still exist and the additional years in employment do
not result in an increase in the life-time pensions in many Member States. It is also
clear  that  the  pace  of  reforms  to  date  is  insufficient  to  achieve  the  Stockholm  and
Barcelona targets for older workers.

4.2.5. Conclusion: working longer is a powerful way of ensuring financial sustainability of

pension systems

Working  longer  represents  an  important  way  of  increasing  employment  rates  in
general and, thus, a major contribution to improving the financial sustainability in a
context  of  demographic  ageing.  Member  States  are  well  aware  of  this.  However,  a
far  more  systematic  approach  to  the  impact  of  tax/benefit  structures,  employment
practices  and  the  expectations  of  individuals  is  clearly  called  for.  If  retirement
behaviour is to be sufficiently changed by the  year 2010, most Member States will
need to strengthen their policy efforts and to ensure that they are more far-reaching
and  better  coordinated  than  at  present.  The  Council  and  the  Commission  have
already  stressed  in  several  documents  that  priority  should  be  given  to  retaining
workers  longer  in  employment  and  to  removing  incentives  encouraging  early
retirement, as well as to reviewing incentive effects of tax/benefit systems in general
with a view of making them employment-friendly.15

15

See  conclusions  of  the  Barcelona  European  Council,  the  Broad  Economic  Policy  Guidelines,  the
Employment Guidelines, and the joint report to the Barcelona European Council on Increasing labour
force participation and promoting active ageing.

58

                                                
4.3.

Objective  6:  Making  pension  systems  sustainable  in  a  context  of  sound  public
finances

Reform  pension  systems  in  appropriate  ways  taking  into  account  the  overall
objective  of  maintaining  the  sustainability  of  public  finances.  At  the  same  time
sustainability of pension systems needs to be accompanied by sound fiscal policies,
including,  where  necessary,  a  reduction  of  debt16.  Strategies  adopted  to  meet  this
objective may also include setting up dedicated pension reserve funds.

The Commission and Council, in a joint report to the Stockholm European Council17
on the quality and sustainability of public finances and their contribution to growth
and  employment,  outlined  a  three-pronged  strategy  to  tackle  the  budgetary
implications of ageing populations:

–  Member  States  should  reduce  public  debt  levels  in  order  to  pre-empt  the

budgetary consequences of ageing populations.

–  Member States should undertake comprehensive labour market reforms, including
tax and benefit systems, in order to reach higher employment rates, in particular
among older workers and women.

–  Member States should undertake ambitious reforms of pension systems in order to
contain  pressures  on  public  finances,  to  place  pension  systems  on  a  sound
financial footing and ensure a fair intergenerational balance.

The  previous  two  sections  mainly  focused  on  raising  employment  rates  in  general
and  of  older  workers  in  particular,  with  a  view  to  assessing  how  labour  market
reforms  can  help  to  cope  with  the  challenges  posed  by  ageing  populations  to  the
financial sustainability of pension systems. This section focuses on the scope for pre-
empting the budgetary consequences of ageing through pension reforms themselves
and through increasing the budgetary room for manoeuvre by a reduction of  public
debt  or  the  accumulation  of  public  pension  reserve  funds.  It  examines  what
budgetary  challenges  Member  States  are  confronted  with  in  their  pension  systems,
how Member States are planning to reform them and, finally, how the reforms help
to  meet  the  overall  objective  of  financial  sustainability  of  pension  systems  and,
thereby, contribute to the financial sustainability of public finances as a whole. The
latter is examined in the framework of the Broad Economic Policy Guidelines and in
the context of the Stability and  Growth Pact, as  requested in the conclusions of the
Stockholm European Council and reiterated in the Joint Report to Laeken on Quality
and viability of pensions.

A  significant  proportion  of  total  pensions  expenditure  is  funded  through  public
budgets. This is subject to the requirements of reviewing pension systems and their

16

17

Member States strategies to ensure sound and sustainable public finances are reported and assessed in
the framework of the BEPG and the Stability and Growth Pact and should be in accordance with these.
Council  of  the  European  Union  (2001),  “The  Contribution  of  Public  Finances  to  Growth  and
Employment:  Improving  Quality  and  Sustainability”,  Report  of  the  Commission  and  the  (ECOFIN)
Council to the European Council (Stockholm 23-24 March 2001), 6997/01;
European Commission (2000), “Communication on the Contribution of Public Finances to Growth and

Employment: Improving Quality and Sustainability, COM(2000)846.

59

                                                
long-term  sustainability  in  the  context  of  the  Stability  and  Growth  Pact.  It  is
necessary  to  ensure  that  rising  public  spending  on  pensions  does  not  jeopardise
sustainable public finances. At the same time, however, sound management of public
finances and the reduction of public debt will ease the constraints on public finances
and help face the budgetary impact of ageing populations.

4.3.1.

The current and expected impact of pension systems on public expenditure

In  late  1999  the  Economic  Policy  Committee  established  a  working  group  (the
Ageing Working Group, AWG, consisting of experts from national administrations)
charged  with  carrying  out  projections  of  public  spending  on  pensions.  All
calculations  were  made  by  experts  in  national  administrations,  but  based  on  a  co-
ordinated  approach,  including  common  population  projections  made  by  the
EUROSTAT  and  commonly-agreed  assumptions  on  macroeconomic  developments.
The estimated impact of recent reforms was only included in the calculations if the
legislation concerning the reform had come into force by the end of 2000 (in some
countries in 2001). Thus, these calculations did not include the estimated impact of
the  most  recent  reforms  implemented  or  agreed  in  2001  or  later  in  some  countries
such as Germany, Portugal, Greece, Finland and the United Kingdom.

The  results  show  that  spending  on  public  pensions  accounted  for  an  average  of
10.4% of GDP in 2000, with variations ranging from 4.6% to 14.5%. The low levels
of public spending on pensions in Ireland and in the United Kingdom stem from the
fact that public schemes is these countries mainly provide flat-rate benefits, aimed at
providing a minimum level of retirement income, while supplementary pensions are
organised  through  private  schemes.  In  Ireland,  the  comparatively  small  pensioner
population  also  explains  the  low  expenditure  level.  In  most  EU  countries,  by
contrast, public pension provision is in the form of earnings-related pension schemes,
which  may  be  supplemented  by  means-tested  income  guarantee  pensions  or  social
assistance, with the result that the share of public pension provision rises to around
10% of GDP or more.

According  to  the  projections  by  the  AWG,  public  pension  spending  will  rise  by
between 3 and 5 percentage points of GDP in most Member States over the next few
decades under the baseline scenario which assumed that the policies in place in 2000
would remain unchanged.  The  differences in  the  expected  future  increase  in  public
spending are large between Member States. The United Kingdom is the only country
where the projection showed a decreasing share of GDP in pension spending  while
the  demographic  old-age  dependency  ratio  rises.  Relatively  small  increases  were
projected  for  Italy,  Sweden  and  Luxembourg.  In  Italy  and  Sweden,  the  small
increases can largely be attributed to the switch to new contribution-defined pension
schemes  with  close  actuarial  links  between  contributions  and  entitlements  and  a
benefit formula which takes account of life expectancy at the age of retirement. The
largest increases were projected for Spain (7.9 percentage points of GDP) and Greece
(12.2). In part this is due to the maturing of the pension system in these two countries
where  an  increasing  number  of  pensioners  will  have  full  insurance  careers.  In  the
remaining EU countries, the projected increases were between 3.7 and 6.2 percentage
points, whereas for the EU as a whole the increase amounts to 3.2 percentage points.

60

Public pension expenditure (including most public replacement incomes to
Table 8:
people aged 55 or over), before taxes, as a % of GDP; projections based on legislation in
force in 2000

2000

2010

2020

2030

2040

2050

peak
change

10,0
10,5
11,8
12,6
9,4
12,1
4,6
13,8
7,4
7,9
14,5
9,8
11,3
9,0
5,5
10,4

9,9
12,5
11,2
12,6
8,9
13,1
5,0
13,9
7,5
9,1
14,9
11,8
11,6
9,6
5,1
10,4

11,4
13,8
12,6
15,4
9,9
15,0
6,7
14,8
8,2
11,1
16,0
13,1
12,9
10,7
4,9
11,5

13,3
14,5
15,5
19,6
12,6
16,0
7,6
15,7
9,2
13,1
18,1
13,6
14,9
11,4
5,2
13,0

13,7
14,0
16,6
23,8
16,0
15,8
8,3
15,7
9,5
14,1
18,3
13,8
16,0
11,4
5,0
13,6

13,3
13,3
16,9
24,8
17,3

9,0
14,1
9,3
13,6
17,0
13,2
15,9
10,7
4,4
13,3

3,7
4,1
5,0
12,2
7,9
4,0
4,4
2,1
2,2
6,2
4,2
4,1
4,7
2,6
-1,1
3,2

B
DK 1)
D
GR
E
F
IRL 3)
I
L
NL 4)
A
P
FIN
S
UK
EU15

10,8

D (2002) 2)
14,9
Source: Economic Policy Committee (2001), “Budgetary challenges posed by ageing
populations: the impact on public spending on pensions, health and long-term care for the elderly
and possible indicators of the long-term sustainability of public finances”, EPC/ECFIN/655/01-
EN final.
1)

For Denmark, the results include the statutory labour market supplementary pension
schemes (ATP, SAP and SP);

4,1

2) New projections submitted by Germany to take account of the latest pension reform.

3)
4)

Germany indicated that the projections are based on the same assumptions as those used in
the EPC projections; however, coverage of pension expenditures is somewhat different.
For Ireland, the results are expressed as a % of GNP.
In the Netherlands, the second pillar is well developed. This has a direct positive impact on
the public pension scheme by reducing the burden of ageing populations on the first pillar.
However, there is also an important indirect implication: taxes on future pension benefits
(which are drawn from the private funds) are expected to be quite high and may partially
counterbalance the rise in public pension benefits.

In  their  National  Strategy  Reports  on  Pensions,  most  Member  States  consider  the
projections  made  by  the  EPC  to  be  sufficiently  accurate  to  illustrate  the  expected
trend  in  public  pension  spending.  Some  have  updated  the  Economic  Policy
Committee  projections,  for  instance  to  reflect  subsequent  reforms,  and  some  have
presented  additional  alternative  calculations  in  their  national  strategy  reports.  As
already stated above, the projections made by the EPC did not include the impact of
the  latest reforms  in Germany, Portugal, Greece,  Finland and  the  United  Kingdom.
Portugal reports an estimated increase in public pension spending from 9.7% of GDP
in 2000 to 12.1% of GDP in 2050, after taking into account the impact of the 2002
reform (compared to 9.8% to 13.2% in the EPC projections). Taking account of the
2002  reform  and  based  on  revised  population  and  employment  figures,  Greece
reports an estimated increase from 12.6% to 22.6% of GDP (EPC: 12.6% to 24.8%).
The  United  Kingdom  reports  that  public  pensions  spending  is  estimated  to  remain
broadly at its 2000 level when the impact of the reforms in 2002 is taken into account
(i.e.  around  5.5%  of  GDP  instead  of  4.4  in  the  EPC  projection).  Finland  considers
that the latest reform agreed in October 2002 will strengthen the contribution basis,
thereby reducing the need for raising the contribution rate on wages from the earlier

61

estimate of 10 percentage points to only 5 by 2050. Germany expects an increase of
4.1 percentage points of GDP (instead of 5 percentage points according to the EPC
projections).

Some other Member States have revised their projections, taking into account more
recent information for instance on population and employment developments. Some
also  provided  more  detailed  information  on  some  parts  of  the  pension  system,
notably  the  contribution-based  social  security  system.  Belgium  has  included  an
updated  projection  used  in  their  Stability  Programme  which  gives  a  more  global
picture of the impact of ageing on social security as a whole (+3.4 percentage points
of GDP). Nevertheless, the revised figures are only slightly different, thus allowing
the  conclusion  that,  by  and  large,  the  projections  made  by  the  EPC  are  robust  and
remain a valid illustration of the order of magnitude of expected increases in social
security pension spending.

4.3.2. Contributions of public pension schemes

The expenditure projections presented above highlight the financial pressures facing
public  pension  schemes.  However,  financing  arrangements  vary  from  country  to
country.  In  all  countries,  the  earnings-related  part  of  the  public  pension  system  is
generally  financed  by  contributions  levied  on  earned  income.  In  Ireland,  the
Netherlands  and  the  United  Kingdom,  the  flat-rate  basic  pensions  are  financed  by
contributions and only Denmark finances first pillar pensions through taxes. Means-
tested  minimum  pensions  are,  by  contrast,  financed  by  taxes  in  all  countries.  In
general,  statutory  social  insurance  systems  are  usually  separated  from  the  state
budget, but only in a few cases are there statutory obligations that require deficits to
be covered within the social security system itself. Large transfers from the general
budget  to  social  insurance  institutions  are  common,  also  reflecting  tax-financed
solidarity  elements  in  statutory  pension  schemes  (e.g.  means-tested  pension
supplements and pension contributions for periods of unemployment, child care etc.).

Under current policies, additional needs for public financing will arise in almost all
countries  which  will  require  increased  contributions,  higher  retirement  ages,  lower
benefits,  larger  transfers  from  the  general  budget  -  or  other  measures  to  support
that  are  as
financial  sustainability.  Member  States  respond  with  policies 
comprehensive  as  possible.  In  this  section,  however,  Member  States’  policies
regarding contribution rates are examined first.

So far, the strongest commitment to preventing increases in taxes and contributions
can be found in Sweden where the contribution rate to the new system is fixed and
necessary adjustments will only be made on the benefit side. Italy has moved in the
same direction with its reformed system, but the adjustment on the benefit side will
come fully into force only after a very long transition period. Germany is committed
to  keeping  contribution  rates  below  22%  and  government  is  obliged  to  propose
appropriate  measures  to  Parliament  if  the  15-year  projections  indicate  that  this
objective will not be reached.. The Netherlands intends not to raise the contribution
rate  above  18.25%.  The  deficit  in  the  pension  system  will  be  covered  by  transfers
from  the  reserve  fund  or  the  general  budget.  The  adjustment  of  the  Luxembourg
pension system will be made through the contribution rate which is very sensitive to
a possible decline in the number of cross-border workers: if the system can maintain
a relatively high growth trend in terms of the number of contributors, the impact of
the ageing national population can be offset to  a large  extent. Financial  stability  of

62

the Luxembourg system is ensured if the economy grows at about 4% p.a. thanks to
workers from neighbouring countries. Under current policies, Ireland and the United
Kingdom appear to need only little or no additional financing.

In  the  remaining  countries,  the  strategy  regarding  the  contribution  rate  is  not  very
clear.  The  National  Strategy  Reports  do  not  provide  precise  information  on  the
expected  evolution  of  the  contribution  rate  and  appear  to  suggest  that  the
contribution rate is one parameter which can be adapted according to financial need.
However,  this  adaptation  seems  to  be  possible  also  by  means  other  than  the
contribution  rate,  such  as  subsidies  from  the  central  government  budget  or  further
pension reforms. In several countries, room for manoeuvre will be created through a
reduction of public debt and/or the accumulation of reserve funds.

In many Member States, an increase in contribution rates on wages of between 5 and
10 percentage points would be required, corresponding to an increase in the total tax
burden  by  several  percentage  points  of  GDP.  Greece,  however,  faces  an
exceptionally large challenge as transfers from the general budget would have to rise
to 15.5% of GDP by 2050. Table 9 below summarises information from the national
strategy reports on the financing of public pension schemes.

Table 9:

Contribution rates in public pension schemes

Contribution rate, % of
wages1

37.94%
(social security)
Employer: 24.87%
Employee: 13.07%

223.25 DKK per month (about 2%)
Employer: 2/3
Employee: 1/3

19.1%
Employer: 9.55%
Employee: 9.55%

20% (if insured before 31.12.92)
Employer: 13.33%
Employee: 6.67%
30% (if insured after that date)
Employer: 13.33%
Employee: 6.67%
State:
10.00%
28.3% (social security, except
health care and unemployment
benefits)
Employer: 23.6%
Employee: 4.7%
14.85% (basic scheme)
Employer: 8.2%
Employee: 6.55%
9.5% (mandatory 1st-pillar
supplementary schemes)
12.5 – 16% (social security, except
health)
Employer: 8.5 – 12%
Employee: 4%
32.7%
Employer: 23.81%
Employee: 8.89%

Observations2

Means-tested minimum pensions are financed by taxes. The
contribution rate covers all branches of social security. Currently, the
social security system runs a deficit. A subsidy of 2.6% of GDP from
the state budget to the social security system was required in 2000. This
will increase to 5.5% of GDP by 2050.
The contribution rate covers the statutory supplementary pension
schemes (ATP and SP) for an average worker's wage. The flat-rate
public old-age pension and civil servants’ pensions are financed
completely by taxes.
Subsidies from the Federal budget account for 37% of pension
expenditure in 2002; the share is expected to decrease to 31% in 2030".
In addition, social assistance pensions are financed by taxes. A target
has been set that the contribution rate should not exceed 22% in the
future.
The contribution rate covers all branches of social security. Tax
subsidies to the financing of contribution-based pensions would have to
rise from the current 4.8% of GDP to 15.5% in 2050. In addition,
pensions of uninsured persons over 65 and civil servants are financed
by taxes.

The contribution rate covers contributory benefits for old-age, disability
and survivors' pensions and maternity benefits. The social security
sector is expected to produce a surplus until 2015, thereafter a deficit.
Means-tested minimum pensions are financed by taxes.

The contribution rate covers old-age and survivors' pensions; disability
pensions are covered by health insurance contributions. The public
pension scheme is currently in surplus (0.2% of GDP in 2000) but will
fall into a deficit of 3.8% of GDP in 2040 which would imply raising
the contribution rate by 10 percentage points.
Social insurance (flat-rate) pensions are financed by contributions.
Means-tested social assistance pensions are financed by taxes.

The deficit of the pension insurance system is currently 0.8% of GDP,
rising to 3.0% of GDP when social assistance pensions are included.
This deficit is expected to rise to 4.5% of GDP by 2010 and to remain at
this level until 2030.

B

DK

D

GR

E

F

IRL

I

63

L

NL

A

P

FIN

S

UK

1

2

Contribution rate, % of
wages1

Observations2

One third of the contribution rate is financed by taxes, as are the
guaranteed minimum income for old people and public sector
employees’ pensions. The future development of the contribution rate
depends on the growth rate. It is estimated that a rate of 26% can be
maintained for the whole period up to 2050 with a growth rate of 4%
p.a., but it would have to rise to 46% with a growth rate of 2%.
A target has been set to ensure that the old-age pension contribution rate
will not be raised above 18.25%. The contribution rate of 17.9% is
expected to produce a surplus until 2010. Thereafter, the deficit is
covered from the reserve fund and taxes. In addition, a contribution rate
of 1.25% is paid for the survivors’ scheme and a rate of between 7.09-
13.93% for disability benefit schemes.
Tax subsidies accounted for 23% of pensions expenditure. In the
absence of transfers from the budget the contribution rate would be 31%
in 2001 and would have to rise to 38% by 2050 under current policies.
The contribution rate covers all contributory benefits (pensions,
sickness, unemployment). Means-tested universal non-contributory
social pension and other benefits are financed by taxes (3.3% of GDP in
2000). The social security sector currently produces a surplus of 1.7%
of GDP, to turn into a deficit of 1.5% of GDP by 2050.
The earnings-related pension contribution for the private sector (21.7%)
is estimated to rise by 5 percentage points (taking account of the 2002
reforms and of the use of funded reserves). Means-tested (against
pension income) national basic pensions are partially financed by taxes.

24%
Employer: 8%
Employee: 8%
8%
State:

17.9% (old-age pension)
1.25% (survivors' scheme)
Employee: 19.15%

22.8%
Employer: 12.55%
Employee: 10.25%
34.25% (contributory cash benefits)
Employer: 23.25%
Employee: 11%

23.7 – 26.6% (private sector)
27.45 (state sector)
(earnings-related and national basic
pensions)
Employer: 17.3 – 19.1%
Employee: 2 – 4.9%
18.91% (old-age pension)
1.7% (survivors' scheme)
Employer: 11.91%
Employee: 7%

The earnings-related pension system is a notional defined-contribution
system (16%) and a pre-funded defined-contribution system (2.5%);
these rates are to be kept constant in the future. Income guarantee
pensions (means-tested against public pensions), disability and
survivors’ pensions and contributions during career breaks are financed
by taxes.
The contribution rate covers the basic state pension and the additional
earnings-related pension (SERPS/State Second Pension). Means-tested
Minimum Income Guarantee/Pension Credit benefits and civil servants’
pensions are financed by taxes.

21.9% (social security except
health)
Employer: 11.9%
Employee: 10%
Source: European Commission, MISSOC 2002. The rates apply to the general, first-pillar social protection
schemes In many Member States, there are floors of ceilings for earnings which are subject to contributions.
Rates may also be different for the self-employed.
The observations are based on the information given in the national strategy reports.

Contributions to occupational and private pension schemes should be added to those
for  public  schemes  to  assess  the  overall  financial  effort  required  for  pension
provision.  In  Denmark,  for  instance,  the  contribution  rate  for  supplementary
occupational  pension  schemes  varies  between  8  and  16%  of  wages  and  in  Sweden
between  2  and  15%.  In  Sweden,  the  rate  tends  to  be  higher  for  people  on  high
earnings to ensure adequate replacement of earnings above the income ceiling in the
statutory  scheme.  In  Ireland,  typical  contribution  rates  are  at  11%  and  in  Italy  at
9.25%.

4.3.3. General measures to ensure the financing of public pensions expenditure

All Member States are aware of the financial challenge posed by ageing populations
and most have already made efforts aimed at ensuring the financial sustainability of
their statutory pension schemes. Reforms of pension systems have been carried out in
many  Member  States  during  the  last  decade,  aimed  at  containing  future  pension
expenditure.  More  recently,  Sweden  and  Italy  have  undertaken  a  radical
transformation of their pension systems into notional defined-contribution systems in
which financial sustainability is managed,  first  of  all,  through  a  close  link  between
contributions and benefits. Other countries, such as Finland, Germany and Portugal,
have recently made major adjustments to the parameters of their pension system with
the  aim  of  containing  future  pension  expenditure  growth  while  preserving  the

64

essential  structure  of  their  pension  system.  Countries  such  as  France,  Spain  and
Austria  have  recognised  the  need  for  significant  further  reforms  and  are  going  to
draw up new reform proposals within a  year or two. Some Member States, notably
Belgium,  Denmark,  Ireland,  Luxembourg  and  the  Netherlands,  have  operated  more
on the financial side with the aim of guaranteeing sound public finances and creating
reserves for increased future expenditure, while not planning any major reform of the
pension system itself. Greece took an important step in 2002 to overhaul framework
conditions  for  pension  provision  and  to  improve  the  credibility  of  the  pension
system, while measures for ensuring its financial sustainability have been postponed
to a later stage.

Most Member States consider reducing public debt or accumulating reserve funds as
important ways in which they can prepare for future spending requirements resulting
from  ageing.  Several  Member  States  underline  their  commitment  to  sound  public
finances  as  a  basic  element  of  the  strategy  to  cope  with  ageing.  In  addition,  these
commitments  have  often  been  underscored  by  establishing  reserve  funds,  often
outside  the  public  budgets,  which  will  allow  governments  to  maintain  adequate
pension  levels  for  the  baby-boom  cohorts,  thereby  mitigating  the  need  for  raising
taxes  or  contributions.  In  addition,  the  development  of  occupational  and  private
pension  schemes  provides  additional  resources  for  funding  future  pensions.  In  the
long  run,  however,  increased  life  expectancy  calls  for  permanent  adjustments  in
benefits, contributions or the length of working lives.

Significant  reserves  for  statutory  pension  schemes  already  exist  in  Luxembourg,
Sweden, Denmark and Finland where requirements for partial funding have already
been in place for a long time. New  reserve funds have recently been  established in
Belgium, the Netherlands, Spain, Greece, Portugal, France and Ireland. However, the
amount of assets accumulated so far in the recently established funds is low (except
in  Ireland  where  it  amounted  to  8%  of  GDP  in  2001).  The  general  intention  is  to
increase  such  assets,  to  varying  degrees  through  a  commitment  to  make  regular
transfers, before ageing populations require pension expenditures to increase. Ireland
is statutorily committed to make an annual contribution of 1% of GNP to the reserve
fund  each  year.  Similarly,  Greece  has  established  such  a  fund  in  2002,  with  a
commitment  of  a  contribution  of  1%  of  GDP  up  to  2015.  In  Spain  and  Portugal,
surpluses  produced  by  the  social  security  sector  will  be  set  aside  to  meet  future
pension  liabilities  (in  Portugal,  the  fund  receives  two  percentage  points  of  the
employees'  social  security  contributions,  in  addition  to  any  surpluses  of  the  social
security  scheme),  while  in  Belgium  and  the  Netherlands  savings  achieved  through
reduced interest payments due to the reductions of public debt will be put aside in an
ear-marked fund for pension liabilities.

Table 10: Pension reserve funds of the first pillar schemes, as a % of GDP

B
DK
D
GR
E
F
IRL 1)

Reserves
0.5
25
None
None
1
0.8
8

Year
2001
2000
2001
2001
2002
2002
2001

65

Year
2001
2002
2001
2001
2001
1999
2001
2001

I
L
NL
A
P
FIN
S
UK
Ireland: % of GNP.

Reserves
None
22
3
None
5
60
29
None

The  Netherlands  and  Denmark  also  expect  to  benefit  from  the  deferred  taxation  of
private pensions. In exchange for tax deductibility of contributions to private pension
schemes  and  the  exemption  of  the  schemes'  investment  income  during  the
accumulation  period,  pension  benefits,  when  they  are  paid  out  from  the  fund,  are
subject to  income  tax.  This  taxation model  will  raise  tax  revenue  at  the  time  when
public  pension  payments  are  large,  thus  helping  to  cover  increased  public
expenditure  due  to  ageing.  However,  due  to  lower  average  tax  rates  on  pensions
(either because of special tax rules applying to pensions or progressive income tax),
such deferred taxation implies a net subsidy. In other Member States, too, depending
on  the  level  of  pensioner  incomes  and  the  way  they  are  taxed,  governments  can
expect  to  recoup  some  of  the  increased  public  and  private  spending  on  pensions
through taxes levied on pensions, thus leaving the net public expenditure somewhat
smaller than the gross expenditure.

The financing of public pensions is not yet fully guaranteed by the measures taken to
reform  pension  systems  themselves  and  by  accumulating  assets  to  meet  future
liabilities.  In  order  to  avoid  large  increases  in  contribution  or  tax  rates,  Member
States  have  engaged  themselves  to  conduct  sound  macroeconomic  and  public
policies  as  well  as  structural  reforms  designed  to  deliver  stable  growth,  higher
employment  rates  and  reduced  debt  levels.  Many  Member  States,  for  instance
Belgium, Denmark, the Netherlands, Finland and Sweden, consider the reduction of
public debt as an essential prerequisite in the strategy to cope with the challenges of
ageing and have set specific targets to run annual surpluses in public finances for the
years to come. In addition, all Member States recognise the importance of increased
employment  rates  for  the  strengthening  of  the  contribution  base  as  well  as  for  the
achievement  of  sound  public  finances.  Finally,  a  number  of  Member  States  are
committed to undertaking further reforms in their pension systems.

Table 11: General government deficits and gross debts, as a % of GDP

B
DK
D
GR
E
F

Gross
debt 2001
107.6
44.7
59.5
107.0
57.1
57.3

Deficit
2001

Deficit
2002

-0.4
2.0
-3.8
-1.3
0
-2.7

0.4
3.1
-2.8
-1.2
-0.1
-1.4

66

Deficit
2001

Deficit
2002

1.6
-2.2
6.1
0.1
0.2
-4.2
4.9
4.8
0.7
-0.8

-1.0
-2.4
0.5
-0.8
-1.8
-3.4
3.6
1.4
-1.1
-1.9

Gross
debt 2001
36.4
109.9
5.6
52.8
63.2
55.5
43.4
56.6
39.1
63

IRL
I
L
NL
A
P
FIN
S
UK
EU

Source:  Commission  Economic  Forecasts,
Autumn 2002

However,  the  latest  development  regarding  public  deficits  and  debts  suggest  that
even achieving a balanced budget situation is a major challenge for many countries
and that  most countries  have  to  make  determined  efforts  to  produce  surpluses  with
the  aim  of  reducing  public  debt  or  building  up  reserve  funds.  Only  five  countries
(DK, E, L, FIN and S) are forecast to have a surplus in 2002; five countries (B, IRL,
NL, A and UK) are moving from a surplus in the previous year into a deficit; and in
the remaining countries (D, EL, F, I, P) the deficit is forecast to be even greater than
in 2001 with the exception of Portugal, which is already taking measures to reduce
the excessive deficit towards a balance. In the EU as a whole, the budgetary situation
worsened  significantly  in  2002,  from  a  deficit  of  0.8%  of  GDP  to  1.9%.  Although
this worsening is partially due to cyclical fluctuations, it also reflects slow progress
in implementing structural reforms in Member States and represents a setback for the
pension strategies.

Table 12:
sustainability of pension systems

Overview  of 

the  national  strategies 

for  ensuring 

the 

financial

B

Main elements of the strategy to ensure the
sustainability of the public pension schemes
The key element of the strategy is the consolidation of public
finances, based on continuous budget surpluses for a long
time to come and a significant reduction of public debt.
Savings from reduced interest payments will be transferred to
the ‘Ageing Fund’. The reduction in interest payments is
expected to be larger than the increase in all public age-
related expenditure.

DK

Ambitious targets have been set to run an annual surplus of
between 1.5% and 2.5% up to 2010 with the aim of reducing
public debt and to increase employment by 87.000 persons by
2010. No major revisions in the pension system are
envisaged.

Observations

The deficit of the social security
system is estimated to rise from 2.6%
of GDP in 2000 to 5.5% of GDP by
2050. This can be managed provided
that large primary surpluses can be
sustained for a long time to come as
foreseen in the Stability Programme.
Recent estimates show that public
finances are moving into deficit of
0.4% of GDP in 2002 and the debt
ratio was 108% of GDP in 2001.
Increase in pension expenditure (4 pp
of GDP) can be managed provided
that budgetary surpluses will be
achieved and the contribution base
strengthened through increased
employment.

67

D

GR

E

F

IRL

I

L

NL

Main elements of the strategy to ensure the
sustainability of the public pension schemes
The 2001 pension reform is expected to reduce the rise in
public pension expenditures (estimated at 4.1 percentage
points of GDP instead of the pre-reform estimate of 5 points)
while increasing subsidies for private pension saving. The
government aims at balancing the Federal budget 2006. A
ceiling has been set for the contribution rate and the
government is obliged to propose to parliament appropriate
measures if the 15-years-projections indicate a risk that the
contribution rate has to be raised above 20% (2020) or 22%
(2030).
The 2002 pension reform laid down provisions for a fairer
and more credible pension system (equalisation of
replacement rates for different cohorts). Financing measures
include the creation of a pension reserve fund and
strengthening the contribution base e.g. by lengthening the
required contribution period.

Budget discipline is to be enforced in all sub-sectors of the
general government thanks to the Budgetary Stability Law. A
reserve fund for future pension liabilities has been established
and the contribution base is expected to be strengthened
through increased employment. The social security sector is
expected to run a surplus up to 2015; thereafter the impact of
the population ageing will materialise.
A reserve fund for future pension liabilities has been recently
established. Reduced unemployment will only have a small
impact on the expected increase in pension expenditure. The
Government is committed to presenting a comprehensive
reform before the Summer 2003.

The key element is the statutory requirement for the
government to contribute annually to the Pension Reserve
Fund by 1% of GDP. The reserves are estimated to amount to
45% of GDP in 2025 and can only be used from 2026
onwards.
The Government’s strategy is based on improving conditions
for economic and employment growth; stabilising pension
expenditure at the current level relative to GDP would
require a growth rate of 2-2.2% p.a. The Government has
proposed to the Parliament an enabling act with the aim of
allowing the preparation of further reforms, including the
development of supplementary pension provision .

The strategy is based on the financing method for public
pensions. The contribution rate is set for a period of seven
years in such a way that it allows the reserve fund to be kept
at least at a level which exceeds 150% of annual pension
payments.
The Government’s strategy is based on the elimination of
public debt by 2025, which requires an annual budget surplus
between 1.25 and 1.75% of GDP up to 2025. In addition, tax
revenues from second pillar pensions increase tax revenues,
notably from 2020 onwards. A reform of the disability
pension scheme is envisaged with the aim of decreasing early
retirement.

68

Observations

Tax subsidies to the pension system
cover 37% of the current pension
expenditure. According to recent
estimates, the level of tax subsidies
will decrease to about 31% in 2030.
Additional reforms are likely to be
needed.
The deficit of public finances in 2002
is estimated at 3.8% of GDP.

Tax subsidies to the pension system
are expected to remain below their
2000 level of 4.8% of GDP until after
2020, but might rise then to 8.4% of
GDP in 2030 and 15.5% of GDP in
2050. Further reforms for ensuring
the financial sustainability of the
pension system are necessary.
The deficit of public finances in 2002
is estimated at 1.3% of GDP, and the
public debt ration at 107% of GDP in
2001.
The expected increase in public
pensions expenditure between 2020
and 2050 is one of the highest in the
EU (between 5 and 8 percentage
points of GDP). Further reforms for
ensuring the financial sustainability of
the pension system are needed.
The pension system risks running a
deficit from 2010; this is estimated to
reach 3.8% of GDP in 2040. The size
of the reserve fund is small (less than
1% of GDP) and can only meet part
of the ageing-related expenditure
increase. The announced reform is
necessary. The deficit of public
finances is estimated at 2.7% of GDP
in 2002.
Appears to be financially sustainable
at current benefit levels.

Tax subsidies to the pension system
were 3% of GDP in 2000 and are
estimated to rise to 4.5% or more
between 2010 and 2030. Further
reforms appear to be needed.
The deficit of public finances in 2002
is estimated at 2.4% of GDP, and the
public debt ration at 110% of GDP in
2001.
Appear to be sustainable if economic
growth is at least 4% p.a. A modest
growth of 2% p.a. between 2000 and
2050 would require raising the
contribution rate from 24% to 46%.
Appears to be financially sustainable,
despite the projected large increase (6
pp of GDP) in pension expenditure,
provided that budgetary surpluses will
be achieved.
Public finances are estimated to move
into a deficit of 0.8% of GDP in 2002.

A

P

FIN

S

UK

Main elements of the strategy to ensure the
sustainability of the public pension schemes
A reform proposal for pension schemes is envisaged in 2003.
In addition, the Government aims at increasing the
employment rate, both in general and that of older workers in
particular.

A reserve fund was established in 1989 and a reform of
public pension schemes was implemented in 2002. The
surpluses of the social security system, which are expected to
continue up to 2016, and two percentage points of the
employees' social security contributions are set aside in
reserve fund. The reserves of the fund are estimated to be
enough to cover increased expenditure up to about 2035.
The Government’s strategy is based on ensuring economic
and employment growth, reducing public debt and increasing
pension reserve funds beyond the statutory funding
requirement; the latter amounts to about one quarter of
pension liabilities. Major revisions in the pension system
were undertaken in 2001 and 2002.
The 1998 reform comes fully into effect in 2003 and
introduced a two-tier defined-contribution system comprising
a pre-funded part and a notional defined-contribution scheme.
The system responds to economic or demographic
developments. In addition, the government is committed to
achieving budget surpluses over the business cycle.
The latest revisions of public pension schemes will keep the
expenditure share of GDP constant, while it was expected to
decline before the reforms. The Government is committed to
sound public finances and to providing stable and secure
conditions for savings in occupational and private pensions.

Observations

Public spending on pensions is the
highest in the EU and is expected to
increase by about 4.2 percentage
points by 2040 (around the peak).
Further reforms appear to be needed.
Public finances are estimated to move
into a deficit of 1.8% of GDP in 2002.
A deficit in the social security sector
will emerge around 2016 and reach a
level of 1.5% of GDP in 2050.
Additional measures may be needed.
The deficit of public finances is
estimated at 3.4% of GDP in 2002.

Despite recent pension reforms and
an estimated increase in reserve
funds, there is a need to raise the
contribution rate by 5 percentage
points of wages. Additional measures
may be needed.
Appears to be financially sustainable
since benefits are automatically
adjusted if required by demographic
or economic developments.

Appears to be financially sustainable.

4.3.4. Conclusion:  financial  sustainability  of  public  pension  systems  and  sound  public

finances

The  size  of  the  challenge  faced  by  Member  States  in  their  public  pension  systems
varies.  This  is  due  to  many  factors,  such  as  different  underlying  designs  of  the
pension system, the strength and nature of reforms taken to date, the overall situation
of  public  finances  and  the  size  and  timing  of  demographic  changes  ahead.
Nonetheless,  all  Member  States  recognise  the  challenges  in  their  national  strategy
reports and are preparing strategies for the future. The elements recommended in the
Broad  Economic  Policy  Guidelines  for  ensuring  the  long-term  sustainability  of
public  finances,  namely  increasing  employment  rates,  reducing  public  debt  and
reforming  pension  systems,  are  recognised  and  integrated  in  the  strategies  outlined
by Member States.

In  the  United  Kingdom,  the  underlying  design  of  the  pension  system  and  notably
indexation methods for pensions explain why it does not face any major challenge in
the  financing  of  the  public  pension  schemes.  This  challenge  is  very  small  also  in
Sweden,  thanks  to  the  comprehensive  reform  of  the  pension  system.  The  Swedish
pension system appears to be well prepared for the ageing of the population as well
as for other societal changes.

In  a  large  number  of  countries,  comprehensive  strategies  for  coping  with  major
challenges  posed  by  population  ageing  are  already  in  place,  including  reforms
undertaken in the public pension system, measures to increase incentives to work and
retire later and efforts to conduct sound public policies and accumulate reserves for
increased future expenditure. This group includes countries such as B, DK, IRL, NL,

69

LUX,  P  and  FIN,  where  public  pension  systems  appear  to  be  close  to  being
financially  sustainable.  This  means  that  in  spite  of  major  increases  in  expected
pension  spending  the  strategy  seems  to  ensure  that  increases  in  contribution  rates,
subsidies  from  the  central  government  budgets  or  government  borrowing  are
manageable  without  major  reforms  of  the  pension  systems  themselves.  However,
whether  these  strategies  will  be  successful  often  critically  depends  on  ambitious
objectives set for various policies, notably public finance and employment policies,
as well as on overall macroeconomic developments.

Italy  already  undertook comprehensive  reforms in  its  public  pension  system  during
the  1990s.  However,  considerable  deficits  are  to  be  expected  in  the  future.  In
addition, the high  level of public  debt is a major constraint,  implying  tighter  limits
for the pension system as well. Therefore, further reforms appear to be needed. This
is  the  case  also  in  Germany  where  the  2001  reform  is  estimated  to  reduce  the
projected  increase  in  public  pension  expenditure  by  about  one  percentage  point  of
GDP, but leaves the expected increase still above the average increase for the EU. In
the  remaining  group  of  countries,  including  Greece,  Spain,  France  and  Austria,  the
expected increase in public pension expenditure is large and above the EU average.
In these countries, the announced reforms are indeed needed.

This  analysis  largely  confirms  that  the  recommendations  given  in  the  2002  Broad
Economic Policy Guidelines  for nine Member States were appropriate and, in most
cases,  will  remain  appropriate.  In  many  cases,  the  National  Strategy  Reports
themselves  state  the  need  for  reforms  and,  in  some  cases,  they  refer  to  measures
already taken this year, as is the case for Portugal and Finland.

The financial  sustainability of public  pension  systems  is  to  a  large  extent  linked  to
the sustainability of public finances as a whole. This is due to the fact that pensions
are  a  major  component  in  the  total  expenditure  of  all  general  governments  and  the
financing  of  pensions  often  involves  interventions  from  the  central  government
budgets. In a few countries, public pension systems are organised almost completely
within  the  central  government  sector,  while,  in  some  other  countries,  the
administration  of  public  pension  systems  is  organised  jointly  for  the  whole  social
security  sector.  Even  in  the  case  where  pensions  are  financed  by  ear-marked
contributions and managed in separate funds, these contributions are part of the total
tax burden, and their increase would be equivalent to a tax increase, unless they give
rise to better benefit entitlements. The burden of projected  increases  in  expenditure
will be shared among contributions, taxes and reserve funds, or postponed for future
generations  through  increased  borrowing.  Despite  the  fact  that  governments  are
building up pension reserve funds to cover future liabilities, subsidies from tax funds
and/or borrowing are expected to rise in many countries when the population ageing
materialises.

Finally, it needs to be borne in mind that the ageing of populations also affects other
age-related expenditure, notably  in  the  area of health  and  long-term  care which are
mainly  financed  by  taxes  and  contributions  in  all  Member  States.  Furthermore,  the
starting  position  of  public  finance  balances  and  the  level  of  public  debt  affects  the
long-term  sustainability  of  public  finances.  The  overall  sustainability  of  public
finances is and will be assessed in the context of the Stability and Growth Pact, based
on  the  information  provided  in  the  Stability  and  Convergence  Programmes.
According  to  the  latest  assessment,  presented  in  the  report  on  Public  Finances  in
EMU – 2002, there is a risk that long-term budgetary imbalances will emerge in half

70

the Member States: D, EL, E, F, I, A  and P, however, involving different levels of
risk  and  different  reasons  behind  this  risk  (see  European  Commission:  Public
Finances in EMU – 2002).

4.4.

Objective 7: adjust benefits and contributions in a balanced way

Ensure  that  pension  provisions  and  reforms  maintain  a  fair  balance  between  the
active and the retired by not overburdening the former and by maintaining adequate
pensions for the latter.

Under Objective  3, Member States outlined  their  policies  for  ensuring  that  pension
systems  meet  their  traditional  solidarity  objectives,  i.e.  to  deliver  a  decent  share  of
societal  wealth  to  retired  people  and  to  bring  about  a  re-distribution  of  income  in
favour  of  the  poorest  older  people.  Under  objective  7,  the  concept  of  solidarity  is
considered  in  the  context  of  the  efforts  required  to  maintain  the  financial
sustainability of pension systems in an ageing society.

It  is  clear  that  Member  States  seek  to  avoid  painful  adjustments  to  benefit  and
contribution levels by raising employment and bringing their public finances in order
before the financial impact of ageing will be felt. However, in many Member States
this will not be sufficient in view of rising old-age dependency ratios. In these cases,
it  is  necessary  to  ensure  that  the  financial  impact  of  ageing  is  equitably  shared
between generations. Objective 7 therefore calls on Member States to avoid the two
rising
the  active  generation,  notably 
extremes  of  overburdening 
contributions, and reducing pension levels below an adequate level.

through 

4.4.1.

Reducing the burden on future generations

Most  national strategy  reports  make it  clear that increased  expenditure  on  pensions
required  by  ageing  populations  cannot  be  financed  by  rising  contributions.  This
would place too heavy a burden on the active population. Several Member States are
committed to keeping contributions below a specified level or  rule  out  contribution
rises  altogether.  In  Germany,  legislation  requires  the  government  to  propose
appropriate  measures  if  there  is  a  risk  that  the  contribution  rate  would  have  to  rise
above 20% (until 2020) or 22% (until 2030). The contribution rate in the Netherlands
is not to be raised above 18.25%, while Sweden intends to maintain contributions at
18.5%. The Greek national strategy report rules out increases in contributions.

These commitments illustrate the determination of Member States to limit the extent
to which the financial consequences of  ageing will be shifted to future generations.
One  way  to  achieve  this  consists  in  reforming  pension  systems  in  such  a  way  that
increases in future public pension expenditure are curbed. Many Member States try
to achieve this through changes in indexing methods applied to pensions in payment
or  to  past  earnings  used  for  calculating  pension  entitlements.  Changes  to  benefit
formulae such as those signalled by Austria and Finland (similar measures have been
taken in France) can have the same effect and are not only presented as having the
objective  of  saving  costs  to  the  pension  system;  insofar  as  they  strengthen  the
incentive to contribute over a longer time to the system, they are  expected to boost
the incentive to increased and longer employment.

Some Member States describe in detail the adjustments they are making to particular
aspects of their pensions systems to avoid the accumulation of excessive costs in the

71

future while maintaining the essential fabric of their systems. Finland lists a series of
reform  steps  undertaken  during  the  1990s  including  survivors’  and  public  service
pensions; raising the lower eligibility limit for early retirement pensions; changes in
the calculation of pensionable earnings and in the indexation method. The combined
effect  of  these  reforms  is  that  pension  expenditure  in  the  long  term  will  be
considerably lower than it would otherwise have been. Austria sets out a similar list
which also targets early retirement and survivors’ pensions as well as changes to the
formula by which benefits are calculated on the basis of earnings.

Societal  change  may  create  opportunities  for  reducing  certain  benefits  for  older
people. Thanks  to  the fact  that women  will  be  increasingly  likely  to  have  adequate
pension entitlements of their own, Finland and Austria expect that they will be able
to  reduce  expenditure  on  survivors’  pensions.  This  view  is  also  shared  by  the
Netherlands.  In  signalling  a  shift  towards  the  individualisation  of  pension
entitlements,  Member  States  are  both  promoting,  and  seeking  to  capitalise  on,
increased  employment  participation  as  a  means  to  establish  a  new  sustainable
balance  between  work  and  retirement.  Similarly,  the  targeting  of  early  retirement
benefits involves addressing a twofold policy objective – it reduces both the burden
on the pension (or pre-pension) system and increases the incentive to work for older
workers.

Two Member States, Sweden and Italy, have pursued the objective of strengthening
the  link  between  contributions  and  benefits  further  and  have  opted  for  a  (notional)
defined-contribution system of public pension provision. In both  cases, the primary
objective  of  their  reforms  was  to  strengthen  the  actuarial  relationship  between
contributions and benefits. Sweden argues that this means "that the contract between
the  generations  will  now  be  more  equitable  than  was  the  case…".  Defined-
contribution benefits are also the norm within the Danish second pillar and are likely
to  play  an  increasing  role  within  the  pension  systems  of  the  UK,  Ireland  and  the
Netherlands. Moves towards such defined-contribution systems should help promote
longer working lives. Sweden and Italy both state that this is an important objective.

Defined-contribution  schemes  represent  a  qualitative  shift  in  the  balance  between
generations.  However,  certain  risks  previously  borne  mainly  by  contributors  or  the
system  are  automatically  transferred  to  beneficiaries18:  the  risk  that  pension  fund
assets will not provide a good return and the risk of increased cost as successive age
cohorts live longer and draw their pensions for a longer period. In the Swedish case,
the new system is supported by well-developed information policies (discussed under
Objective 11), the aim of which is to inform individuals during their working life as
to what they should do in order to ensure that they get a good pension. In particular,
the  idea  of  working  longer  is  clearly  held  out  as  a  good  way  to  cushion  the  other
risks.

the  strong  commitment  (discussed  under  Objective  3) 

Notwithstanding 
to
maintaining its defined benefit approach, the Netherlands states that it would wish to
see  the  social  partners  adjust  2nd  pillar  pensions  in  the  future  to  take  account  of
present and projected longer lives.

18

In defined-benefit schemes, discretionary changes in parameters do occur, so that beneficiaries are also
exposed to financial risks.

72

                                                
The reforms of public pension schemes are reflected in one of the factors that drive
the increase in future public spending on pension: the benefit ratio, i.e. the average
pension  relative  to  output  per  worker.  According  to  the  Economic  Policy
Committee's projections of public pension expenditure, old-age dependency (defined
in this case as the ratio of persons aged 55 and over to the population aged 15 to 54)
alone would drive up public pension expenditure (EU15) by 6.4 percentage points of
GDP  between  2000  and  2050,  compared  to  a  projected  total  increase  of  about  3
percentage points. The falling benefit ratio as defined above is the main reason why
public pension expenditure does not mirror exactly future demographic trends.

4.4.2. Maintaining pensions adequacy

Thus,  reforms  are  starting  to  reduce  the  ageing-related  burden  that  will  have  to  be
borne by future active generations. However, the strategies of Member States do not
only  rely  on  curbing  the  future  growth  of  benefits.  An  important  element  of  the
strategy consists in increasing financial resources that will be available in the future.
This can be achieved in particular by running down public debt or by accumulating
pension reserves.

Public  pension  reserve  funds,  as  envisaged  or  already  in  existence  in  a  number  of
Member  States,  are  a  particularly  visible  effort  to  avoid  over-burdening  the  next
working-age  generation  at  the  time  when  the  baby-boom  generation  will  be  in
retirement.  The  creation  of  such  funds  aims  at  ensuring  that  current  pension  levels
can  be  maintained  or  to  limit  the  decline  in  pension  levels.  However,  in  many
countries, these funds  are  at  a very early stage  of  development  and  the  amounts  of
assets  accumulated  are  still  rather  limited.  Although  these  funds  are  growing  in
importance  over  time,  estimates  of  their  sizes  in  the  future  are,  for  the  most  part,
missing  in  the  national  strategy  reports.  Moreover,  commitments  to  making
contributions  to  these  funds  in  some  countries  have  been  confined  to  bringing  the
social security sector into surplus which may be possible over the next 10 or 15 years
only.

While  public  pension  reserve  funds  allow  public  pensions  to  be  maintained  at  a
higher  level  than  otherwise,  the  development  of  private  funded  pension  schemes
provides  an additional  pension  that,  in  several  Member  States,  will  compensate  for
lower  public  pension  levels.  The  financial  effort  for  building  up  public  or  private
pension reserves is, in any case, borne by future pensioners, so that contributions to
be paid by future active generations can be kept lower. However, it has to be kept in
mind that, in real terms, only resources produced by future active generations can be
shared  between  the  active  and  the  retired,  although,  through  a  current  account
surplus,  pension  reserve  assets  could  be  invested  abroad  –  preferably  in  countries
without an ageing problem – before Europe's baby boom cohorts will  start retiring.
This would open, at a later stage, the option of running a current account deficit and
hence increase the real resources that are available for sharing between the active and
the retired.

Funding  can  at  best  address  the  transitory  demographic  ageing  problem  caused  by
the large cohort of the baby boom. The consequences of a permanent increase in life
expectancy call for a more durable solution which balances the relationship between
the time spent in employment and in retirement. This requires lengthening working
lives which can be promoted by a close link between contributions and benefits and
by adjusting benefits to changing life expectancy, as is the case in the new Swedish

73

and Italian pension systems which nevertheless allow scheme  members  to  maintain
adequate pension levels by postponing their retirement. In the absence of a pension
system  design  involving  appropriate  incentives  to  work  and  mechanisms  for  the
adjustment  of  benefits  to  life  expectancy,  ad  hoc  adjustments  in  benefits  and
contributions will be needed.

4.4.3. Conclusion: Risk sharing between the active and the retired

The  national  strategy  reports  suggest  that  most  Member  States  are  committed  to
preventing  excessive  burdens  on  future  generations.  They  have  taken  measures
designed to curb the future growth of pension expenditure or, notably by setting up
pension  reserve  funds  and  reducing  public  debt,  increase  the  resources  that  can  be
used  to  finance  future  pension  expenditure.  Where  public  pension  benefits  are
expected to fall in relation to earnings, Member States promote the development of
private  supplementary  provision.  Italy  and  Sweden  have  transformed  their  public
pension schemes into notional defined-contribution schemes which ensure adequate
pensions  not  through  increased  contributions,  but  through  the  opportunity  to  earn
sufficient pension rights by working longer.

4.5.

Objective  8:  ensure  that  private  pension  provision  is  adequate  and  financially
sound

through  appropriate 

Ensure, 
sound
management, that private and public funded pension schemes can provide pensions
with the required efficiency, affordability, portability and security.

frameworks  and 

regulatory 

through 

4.5.1. Current and envisaged role for occupational and private pension provision

In most Member States private pension provision has an increasingly important role
to play in ensuring adequate income protection in old age. This must be reflected in a
sound  regulatory  framework  that  ensures  a  high  degree  of  efficiency,  affordability
and  security  of  such  private  pension  schemes  (portability  will  be  dealt  with  under
objective 9). Moreover, several Member States accumulate pension reserves for their
first pillar schemes which raises the issue of how to manage these assets.

The importance of private old-age provision can be gauged in different ways. Table 3
(access  to  private  pension  schemes,  see  objective  2)  gives  some  indications  on  the
numbers of people who are covered by supplementary (mostly occupational) pension
schemes or receive benefits from them. Another measure  of  their importance is the
total amount of benefits paid by such schemes. Some Member States have provided
information on benefit payments by second pillar schemes.  In  the United  Kingdom
and the Netherlands these represent about 40% of pensioners’ income, representing
roughly a pension expenditure  equal to 5-6 percentage  points  of GDP.  In Denmark
and Ireland second pillar pensions amount to about 25-35% of  pensioners’  income;
while in Belgium, Luxembourg and Sweden this share is in the range of 10-25%. In
the  remaining  countries  of  the  EU,  the  share  of  second  pillar  pensions  is  currently
below 10% and almost negligible in a few countries (GR, F, A). The importance of
second  pillar  pension  schemes  is  expected  to  increase  in  most  countries  as  the
development of such schemes is encouraged and a greater share of  current workers
pay contributions to such schemes. In many countries (UK, NL, DK, IRL, B and S),
the coverage of second pillar schemes is already relatively high and on an increasing
trend, thus leading to a significantly more important role of second pillar pensions in

74

the retirement income of future pensioners. Moreover, several countries (D, E, GR,
P)  have taken measures  to  strengthen  the framework conditions,  such as legislative
and supervisory provisions for private pension providers, and have introduced fiscal
incentives or grants with the aim of promoting participation in second pillar schemes
and savings in individual pension insurance policies.

The  role  of  individual  pension  insurance  policies  and  other  forms  of  retirement
savings  is  particularly  pronounced  in  Belgium  where  45%  of  the  population
participate  in  third  pillar  schemes  thanks  to  fiscal  incentives  for  life  insurance  and
pension  savings.  In  Denmark,  the  Netherlands and  the United Kingdom  third  pillar
schemes also provide an important contribution to retirement income provision. The
German  2001  reform  introduced  subsidies  and  tax  incentives  for  saving  in  private
pension schemes. These subsidies are expected to amount to about 0.5% of GDP in
2008 when the new scheme will be fully phased in. The United Kingdom introduced
a new  type of  private  pension,  the  so-called  Stakeholder  Pension,  in  2001  with  the
aim  of  promoting  private  saving  and  making  it  easier,  simpler,  cheaper  and  more
flexible for individuals to provide for their retirement.

A  more  forward-looking  way  of  measuring  the  importance  of  private  pension
provision is to examine the amount of assets held by such schemes. Table 13 below
compiles information on pension assets mainly held by 2nd-pillar schemes based on
the report of the European Federation for Retirement Provision, and complemented,
for some countries, with the information from the national strategy reports. However,
these  figures  should  not  be  considered  as  comparable.  Definitions,  particularly  of
what  forms  of  insurance  and  savings  are  to  be  included  in  the  3rd  pillar,  differ
considerable from one Member State to another. Moreover, the value of these assets
may have changed since the year when they were observed.

Table 13:

Assets held by pension schemes in 2000 (% of GDP)

Total assets

B1)
DK1)
D
GR
E
F
IRL 1,2)
I
L
NL 1)
A
P 1)
FIN 1)
S
UK
Source: European Federation for Retirement Provision
1)
2)

Source: national strategy report
Ireland: % of GNP

15
80
13
-
5
5
43
22
0.2
166
12
12
6.5
112
91

75

While the importance of private pension provision appears to be increasing in almost
all Member States it is also likely that public pension schemes will remain the most
important  source  of  income  for  older  people  in  most  Member  States  –  with  the
possible exception of , DK, NL and IRL, the three countries with predominantly flat-
rate public pension schemes, and the UK which allows the opting-out from its state
earnings  related  scheme.  However,  even  if  private  provision  overtakes  public
pension  schemes  in  terms  of  total  benefit  payments,  it  is  to  be  expected  that  for  a
very large proportion, if not a majority of pensioners, public benefits will remain the
largest source of income in old age.

In  countries  with  high  pension  levels  from  first  pillar  schemes  (France,  Finland,
Austria, Luxembourg) there is currently limited demand for occupational provision.
Also, the social partners may have little interest in setting up occupational schemes,
particular if they already play an important role in managing first pillar schemes (as
is the case in France and in Finland). Austria, however, is transforming its severance
pay  scheme  into  occupational  pension  provision.  In  Luxembourg  occupational
pensions  have  mainly  developed  in  large  international  companies  of  foreign  origin
and in the banking sector. A new legal framework was introduced in 1999 and a new
saving and pensions instrument is currently being defined. Moreover, a new type of
personal pension plan was introduced in 2002.

In  Spain,  Italy  and  Portugal,  legal  frameworks  were  designed  fairly  recently,  and
occupational  schemes  have  not  yet  developed  into  a  significant  component  of
national  pension  systems,  although  various  initiatives  are  being  taken  to  promote
their development. This will also require the development of a market for annuities.
New legislation was introduced in Spain in January 2002 to boost the development of
occupational  pension  plans  particularly  in  SMEs  through  collective  bargaining.
Greece, with the reform of 2002, wants to transform the ‘auxiliary funds’, which are
currently part of the first pillar, gradually into funded occupational schemes.

In Italy the development of private pension provision, occupational or individual, is a
strategic priority for the Government.  Supplementary pension schemes  will  have to
play a major role in supplementing adequate income levels for pensioners in the new
notional defined contribution pension scheme. It is expected that the so-called closed
occupational  pension  funds  which  are  usually  based  on  sector-wide  collective
agreements will gain importance as membership in ‘open funds’ is only possible in
the  absence  of  a  closed  fund.  In  Portugal  closed  pension  funds  have  recently
experienced  a  slight  decline  in  the  numbers  of  contributors  and  the  government  is
planning to set out a new regulatory framework to significantly develop second and
third pillar pension arrangements.

Several  countries  are  now  following  the  lead  of  the  Netherlands,  Denmark  and
Sweden  as  far  as  the  important  role  of  sector-wide  collective  bargaining  for  the
development  of  occupational  pension  schemes  is  concerned.  Belgium  is  making  a
determined  move  in  this  direction  with  the  law  on  supplementary  pensions  that  is
now in discussion in the parliament and which also seeks to promote wide coverage,
and  some  elements  of  solidarity  in  supplementary  schemes.  Spain,  Germany  and
Italy  also  expect  that  coverage  will  be  promoted  through  collective  agreements.
Ireland  and  the  United  Kingdom,  favour  a  voluntary  approach  to  supplementary
pensions  and  have  recently  focused  their  attention  on  designing  more  accessible
pension  products  (‘stakeholder  pensions’  in  the  UK  and  ‘Personal  Retirement
Savings Accounts’ in Ireland) and in the UK on simplifying the regulations around

76

occupational  schemes  to  make  it  easier  for  employers  to  make  good  occupational
provision.

4.5.2.

Regulatory frameworks for private pension provision

Private  pension  provision  needs  an  appropriate  framework  for  its  development;  the
fact that public pensions are inadequate is not sufficient to trigger the development of
private schemes. Such a framework includes prudential  regulations, rules  regarding
contributions, investment income  and benefits and clarity in the roles  of  employers
and workers and, the scope for collective bargaining.

The  European  Union  has  an  important  role  to  play  in  developing  this  regulatory
framework  for  private  retirement  provision.  Life  insurance  is  covered  by  the
prudential  rules  of  the  life  insurance  directives.  A  similar  framework  for  pension
funds  –  or  institutions  for  occupational  retirement  provision  –  is  currently  being
discussed  by  the  Council  and  the  European  Parliament.  This  directive  aims  at
protecting  the  rights  of  future  pensioners,  at  increasing  the  affordability  of
occupational  pensions  and  at  allowing  the  free  provision  of  occupational  pension
services and cross-border membership.

In  the  area  of  social  and  labour  law,  the  European  Union  imposes  the  principle  of
equal  treatment  between  men  and  women  in  occupational  pension  schemes  (such
benefits  are  regarded  as  pay  within  the  meaning  of  article  141  of  the  Treaty).
Directive  80/987/EEC  on  the  approximation  of  the  laws  of  the  Member  States
relating  to  the  protection  of  employees  in  the  event  of  the  insolvency  of  their
employer obliges Member States to ensure that occupational pension rights are safe
when an employer becomes insolvent. This can be achieved through external funding
by  setting  up  a  pension  fund  that  is  separated  from  the  sponsoring  undertaking  or
through insurance.

The  introduction  of  a  modern  regulatory  framework  for  occupational  pensions  is
quite recent in many Member States. Many important laws were only adopted in the
past  decade  or  two,  and  further  improvements  can  be  expected  as  a  result  of  the
forthcoming directive on institutions for occupational retirement provision.

There  are  different  approaches  to  regulating  supplementary  pension  provision.  One
option  that  is  used  for  instance  in  Sweden,  Denmark  and  France  is  to  request
providers to comply with insurance legislation which is long-established, including at
EU level. However, occupational pension provision has given rise to the emergence
of specific institutions and arrangements which will be covered by the new directive
on institutions for occupational retirement provision.

In  the  UK  and  Ireland  pension  funds  are  governed  by  trust  law.  This  places  the
responsibility for running the schemes with a third party that is legally separate from
the employer and members. The trustee has  a  duty  to  act  in the best interest of  the
members  and/or  beneficiaries  of  an  occupational  pension  scheme.  The  primary
responsibility for the sound administration of the scheme lies with the trustees who
assume  personal  liability.  In  the  Netherlands  the  social  partners  have  the  primary
responsibility for the management of supplementary pensions – within the regulatory
framework  defined  by  the  Pensions  and  Savings  Funds  Guarantee  Act  (PSW).  In
Italy "closed funds" can be established by associations or foundations operating on a

77

not-for-profit basis and with an autonomous legal status whereas "open funds" may
be established by financial intermediaries specialised in asset management.

One  particular  type  of  occupational  pension  provision  will  not  be  covered  by  the
directive  on  institutions  for  occupational  retirement  provision  because  it  does  not
involve the creation of a separate institution to manage the scheme. Certain schemes
consist  in  a  simple  promise  by  the  employer  to  pay  a  pension.  The  corresponding
liabilities  are  recorded  in  the  balance  sheet  (‘book  reserves’)  and  represent  a
convenient  source  of  finance  for  the  company.  Such  schemes  exist  for  instance  in
Germany,  Finland,  Sweden,  Luxembourg  and  Spain  (where  they  are  being  phased
out  except  for  companies  in  the  financial  services  sector).  Italy’s  severance  pay
scheme is also based on book reserves, but it is envisaged to switch to separate funds
when this scheme is to be transformed into occupational pension provision. In order
to provide safe pensions these schemes have to be backed up by insurance which can
guarantee  the  pension  in  the  event  of  insolvency  of  the  employer.  Compulsory
insolvency insurance for book reserves exists in Germany and Luxembourg.

The safety of pension funds depends on prudent asset management. Investment in the
sponsoring  employer's business  must  be  strictly  limited  or  guaranteed  by  insurance
as in the case of book reserves. Otherwise an insolvency would put employees at risk
of  losing  both  their  current  income  and  their  future  pension.  In  the  Netherlands
company pension funds are allowed to invest a maximum 10% of their assets in the
sponsoring  company.  Apart  from  this  general  principle  approaches  to  investment
strategies  differ  between  the  Member  States.  The  UK,  Netherlands  and  Ireland
favour  qualitative  investment  principles  (the  so  called  "prudent  person"  principle),
whereas  others  such  as  France  and  Luxembourg  prefer  setting  some  quantitative
limits for certain categories of assets to enhance the safety of the fund, albeit possibly
at  the  price  of  lower  returns.  There  is  also  risk  that  political  interference  with  the
financial  management  of  pension  funds  could  lead  to  money  being  channelled  into
investments with low returns. This appears to have been a problem in Greece where
the  involvement  of  the  State  in  pension  fund  asset  management  was  the  target  of
frequent criticism leading to a series of laws from 1990 onwards to ensure that asset
management would be to the benefit of the insured members.

Financial risks, which any form of pension provision has to incur in some form, can
be shared in different ways between pension scheme contributors and beneficiaries.
Defined-benefit schemes, often still based on final earnings, guarantee a certain level
of pension income depending on earnings and career lengths. It is the responsibility
of  the  pension  scheme  –  or  of  the  sponsoring  employer  –  to  ensure  that  the  fund
holds  sufficient  assets  to  meet  pension  liabilities.  As  asset  values  fluctuate  pension
funds  must  either  be  allowed  to  hold  surpluses  as  a  safety  margin  (this  may  be
limited for tax reasons  as higher contributions  diminish tax revenue)  or  required  to
take other action to address the risk of underfunding. Member States have different
levels of tolerance regarding managing of underfunding. In Denmark, for instance, a
life insurance company or pensions fund that fails to meet investment standards will
be  asked  by  the  Financial  Supervisory  Authority  to  submit  a  recovery  plan.  If  this
does  not  work  the  institution  will  come  under  administration  and  attempts  will  be
made  to  transfer  the  pension  schemes  to  other  companies  or  pension  funds  with
adequate capital.

The  definition  of  what constitutes  adequate funding of future  liabilities  depends  on
various  economic  and  actuarial  assumptions  chosen  for  the  calculation  of  the

78

technical  provisions  (or  future  liabilities)  when  the  occupational  pension  schemes
provide  cover  against  bio-metric  risks  and/or  guarantee  either  an  investment
performance or a given level of benefits. The rate of interest (or discount rate) is an
important  assumption  needed  to  calculate  the  actuarial  value  of  accrued  pension
rights. The proposed directive does not aim at harmonising this rate of interest, but it
is accepted that this issue needs to be carefully monitored. By contrast, the directive
will  require  full  funding  at  all  times  for  pension  funds  that  provide  their  services
across borders.

In  the  case  of  defined-contribution  pension  schemes,  the  commitment  of  the
employer  is  limited  to  paying  a  certain  amount  of  contributions  into  a  savings
scheme. The risk of low returns is entirely borne by the beneficiary. At the moment
of retirement, in order to obtain a pension, the accumulated capital under a defined-
contribution  scheme  needs  to  be  converted  into  a  regular  income  the  amount  of
which will depend on  interest rates at the moment  of purchase of  an  annuity.  This,
too, places a significant income risk on the beneficiary.

Finally, under private schemes the risk of inflation is often borne at least partially by
beneficiaries which may result in declining real values of pension income during the
period  of  retirement.  The  Dutch  and  the  Irish  national  strategy  reports  explain  that
many occupational  pension  schemes are trying to protect their beneficiaries  against
inflation, but this is not a legal obligation. The ability of pension schemes to insure
against  the  risks  of  financial  instability  or  inflation  depends  on  the  availability  of
suitable  assets  such  as  index-linked  bonds.  It  is  common  for  pension  funds  and
individuals to adapt their asset portfolio in accordance with age profiles. The closer
future  beneficiaries  come  to  retirement,  the  safer  the  investment  should  be  (i.e.
typically a shift from company shares to government bonds). The reduction in public
debt may have implications for the ability of pension funds to hedge against financial
risks through investment in  government  bonds,  but  these  were  not  discussed  in  the
national strategy reports.

The national strategy reports present a variety of supervisory bodies, some of which
have  only  recently  been  created  or  restructured.  The  directive  on  institutions  for
occupational  retirement  provision  will  require  all  Member  States  to  have  effective
supervisory authorities.

Sound  management  of  pension  assets  is  not  only  an  issue  for  managers  of  private
schemes.  Several  Member  States  are  accumulating  pension  reserve  funds  in  their
social security schemes to meet the future needs of the ageing baby-boom cohorts. In
Finland, these assets are held by the institutions that manage the statutory earnings-
related pension scheme. In the other Member States with a reserve fund, this is held
at  a  central  level  but  usually  managed  separately  from  the  central  government
budget.  In  Ireland  the  fund  is  controlled  and  managed  by  a  Commission  which  is
independent  of  Government  and  has  discretionary  authority  to  determine  and
implement  an  investment  strategy  in  order  to  obtain  the  optimal  financial  return,
subject  to  prudent  risk  management.  In  some  Member  States  (e.g.  Spain  and
Luxembourg) the management of the reserve fund is still under discussion.

4.5.3.

Reducing administrative costs

Only  a  few  Member  States  reported  figures  on  administrative  costs  of  pension
schemes. Due to economies of scale and the absence of a need for sophisticated asset

79

management,  administration  costs  tend  to  be  significantly  lower  in  public  pay-as-
you-go pension schemes than in private funded schemes. The OECD estimated that
administrative  costs  of  private  pension  schemes  were  in  a  range  between  10%  and
35%  of  contributions.  In  Belgium,  management  fees  for  old-age  and  survivors
pensions represented 1% of total  expenses  in  2001,  while  management  fees  for  2nd
and  3rd  pillar  provision  amounted  to  4%  of  total  expenses.  In  Finland,  the  total
operating expenses of the pension insurance system were 2.7% of premium income
in  2000,  including  the  operating  expenses  of  the  statutory  earnings-related  pension
insurance,  the  national  pension  and  optional  supplementary  pension  insurance.  The
operating  expenses  of  the  life  assurance  component  were  about  4.9%  of  their
premium income. In Ireland the cost of administering all social welfare contributory
old-age pensions represent approximately 1.5% to 2% of total payments, whereas the
administrative costs of occupational schemes was of the order of 5% of contributions
in 1994, with significant variations depending on the type, structure and size of the
scheme  and  the  level  of  contributions  paid  into  the  scheme.  In  France  the
management  costs  of  voluntary  supplementary  schemes  are  generally  4%  of  total
expenses. In the UK, the administration charges for Stakeholder Pensions are capped
by law at 1% of the fund's value per year.

However,  there  is  still  scope  for  improvements  in  public  schemes  through
rationalisation  measures  (e.g.  merger  of  pension  insurance  institutions).  In  Austria,
where  administrative  expenditure currently  stands at 1.8%  of pensions expenditure,
further  reductions  are  planned  thanks  to  the  creation  of  a  joint  data  processing
company  for  all  social  insurance  institutions.  In  Germany  the  proportion  of
management costs has steadily fallen over the past three decades and administration
costs  accounted  in  2000  for  1.6%  of  the  total  receipts  of  the  statutory  pension
insurance.  In  Luxembourg,  the  administration  of  the  general  pension  scheme
amounted to 1.4% of current spending in 2001.

In Italy overall management costs of closed pension funds were estimated at 0.57%
of  the  value  of  assets  –  which  represents  a  significant  reduction  in  real  returns.
However,  thanks  to  efforts  by  the  social  partners  there  is  a  declining  trend.
Moreover,  the  law  allows social security institutions to  support  such  pension  funds
by  collecting  contributions  and  paying  pension  benefits.  Open  funds  incur
considerably  higher  costs,  but  not  as  high  as  private  pension  schemes  operating
through life insurance policies.

The need for reducing administrative costs is widely recognised and being addressed
in various ways. ‘Stakeholder pensions’ in the UK and ‘Personal Retirement Savings
Accounts’  in  Ireland  try  to  make  private  pension  provision  less  onerous  and  hence
more  accessible  for  people  on  low  incomes.  The  UK  government  is  determined  to
further simplify the occupational and personal pension system so as to make it easier
to understand and to reduce costs. In particular, the report commissioned from Alan
Pickering  of  July  2002  proposes  a  radical  simplification  of  pensions  legislation  to
reduce the administrative burdens on schemes and employers.

The  latest  pension  reform  in  Germany  introduced  an  obligation  on  providers  of
government-supported  supplementary  pensions  to  provide  their  customers  with
written  information  on  the  expected  management  charges  before  the  contract  is
concluded.  A  similar  obligation  exists  in  Denmark  where  life  insurance  companies
and pension funds are obliged to give adequate information on rights and obligations
before  and  during  membership  in  the  scheme.  Starting  in  April  2003  defined-

80

contribution  schemes  (occupational,  personal  and  stakeholder  schemes)  in  the  UK
will be required to give members an annual estimate of their pension in retirement is
likely to be. (including future contributions, annuity rates, etc). Further obligations in
terms  of  information  to  scheme  members  can  be  expected  to  be  introduced  in  the
wake of the directive on institutions for occupational retirement institutions.

4.5.4. Conclusion: contribution of funded schemes to future pension provision

Significant progress is being made towards a sound regulatory framework for funded
pension provision across the EU. This will be helped by the forthcoming directive on
institutions for occupational retirement provision. However, financial risks will still
be  addressed  in  different  ways  in  the  Member  States  and  further  co-operation  is
required  to achieve  greater  convergence.  The  difficulty  of  managing  financial  risks
such  as  instability  on  capital  markets  and  inflation  may  lead  to  such  risks  being
shifted more and more to beneficiaries which may have adverse consequences for the
future  adequacy  of  pensions.  Developments  in  this  area  need  to  be  monitored  and
there seems to be scope for more in-depth information exchange on how to achieve
the best balance between risk management and pensions adequacy.

Progress  is  also  being  made  in  reducing  management  costs.  This  can  have
considerable  benefits  in  terms  of  affordability  of,  and  hence  access  to,  private
pension provision.

The  contribution  of  private  provision  to  the  sustainability  of  public  finances  is
indirect, but may be significant in many Member States. In the UK, for instance, the
costs  of  the  ‘Pension  Credit’  scheme  will  depend  on  the  extent  to  which  private
provision lifts incomes above the levels guaranteed by the Pension Credit. Germany
has  been  able  to  lower  slightly  the  replacement  levels  in  the  public  scheme  by
supporting  the  development  of  private  provision  which  offers  the  opportunity  to
compensate  for  the  effects  of  this  reform.  In  other  Member  States  the  success  of
private  provision  may  help  to  reduce  pressures  for  increased  public  pensions
expenditure and give governments greater freedom to curb future expenditure growth
in public schemes.

81

5.

MODERNISATION: RESPONDING TO CHANGING NEEDS

Pension systems need to evolve to reflect changes in society and the labour market.
Pension scheme rules were often designed in a different social context, responding to
different needs and aspirations. However, if they are based on out-dated assumptions
about family and employment patterns they will fail to provide the required pension
benefits to more and more people and risk creating undesirable incentives.

Traditional  pension  schemes  are  well  adapted  to  life-long  careers  in  full-time
employment  –  with  the  same  employer.  This  does  not  reflect  the  requirements  of
modern labour markets, nor the aspirations of individuals. Pension systems must not
penalise flexible forms of employment and job mobility.

Good  pensions  coverage  of  flexible  forms  of  employment  will  also  help  achieve
greater  equality  between  men  and  women,  as  women  tend  to  be  over-represented
among  part-time  workers  and  among  those  who  have  to  interrupt  their  careers  for
family reasons. In some countries equal treatment of men and women has  yet to be
achieved  in  pensions  legislation,  mainly  with  regard  to  pensionable  ages  and
survivors’ benefits.

Finally,  modernisation  of  pension  systems  also  implies  more  transparency.  Policy
makers  need  clear  information  on  future  challenges  and  policy  options  that  are
available to them. They should seek a broad consensus on reform measures so as to
avoid  frequent  and  unexpected  policy  changes.  This  will  also  make  it  possible  to
provide  better  information  to  individuals  about  what  they  can  expect  from  their
pension system – and what additional effort may be required to achieve the desired
living standard after retirement.

5.1.

Objective 9: adapt to more flexible employment and career patterns

Ensure that pension systems are compatible with the requirements of flexibility and
security on  the labour  market;  that,  without  prejudice  to  the  coherence  of  Member
States' tax systems, labour market mobility within Member States and across borders
and  non-standard  employment  forms  do  not  penalise  people's  pension  entitlements
and that self-employment is not discouraged by pension systems.

Many pension schemes are well adapted to standard employment patterns – full-time
work and life-long careers –, but tend to serve people in atypical jobs or people with
interrupted and non-linear careers less well. Both statutory and occupational pension
schemes  need  to  be  adapted  to  more  flexible  forms  of  employment  and  greater
mobility by improving access to pension rights and enhancing their portability.

5.1.1.

Access to pension rights

First pillar pension provision is practically universal in  all Member States although
separate  schemes  may  exist  for  certain  categories  of  workers.  In  particular,  public
sector  employees,  the  self-employed  and  farmers  have  special  schemes  in  several
Member States. A certain number of adaptations  to  first pillar  schemes  to  meet  the
needs of  atypical  workers were reported in the  national  strategy  reports.  Several  of
them focus on ‘new self-employed’, people who are not employees, but provide their
services for a single company. This group of workers was given equal rights to other

82

non-farm  self-employed  in  Austria.  Germany  included  self-employed  persons  with
no employees of their own into the statutory pension scheme and introduced checks
to identify fictitious self-employment intended to avoid social insurance obligations.
In Italy a compulsory scheme for atypical workers (the so-called ‘parasubordinati’,
flexible employment relations which bear similarities with self-employment, but are
characterised  by  a  close  and  continuous  relation  with  a  single  company)  was
established  within  the  statutory  social  insurance  scheme  INPS  in  1996;  it  covers
around 2 million workers and has net receipts of almost Euro 11 billion.

An  interesting  feature  of the Spanish system  is the fact  that  self-employed  workers
can choose freely the contribution basis between a minimum and a maximum amount
that  is  fixed  every  year  by  the  government  budget.  This  measure  responds  to  the
difficulty  of  assessing the  true  income  of  self-employed  workers.  However,  for  the
self-employed  workers  over  the  age  of  50  years  the  choice  is  restricted  to  prevent
people  from  paying  high  contributions  only  during  the  years  that  count  for  the
calculation of the pension entitlement.

In Austria and Germany the coverage of  marginal  part-time  workers  was  extended.
These  were  previously  exempted  from  the  social  insurance  obligation  and  did  not
earn  any  pension  rights.  In  Austria,  these  workers  were  offered  optional  low-cost
self-insurance  under  the  health  and  pension  insurance  scheme.  In  other  Member
States  marginal  employees  are  obliged  to  contribute,  but  they  may  not  necessarily
earn an entitlement to benefits. To address this problem  qualifying  conditions  were
eased  in  several  countries  notably  for  part-timers  and  marginal  workers.  In  France,
200 hours of work paid at the minimum wage (the equivalent of five weeks of full-
time  work)  is  sufficient  to  earn  three  months  of  insurance  career.  If  income  from
short-term  or  other  non-standard  employment  contracts  exceeds  €690.97  a  year  (in
2002) workers in Finland are covered by pension insurance and can build up pension
entitlements.

An  exception to  this general  trend  of  improving  the  statutory  pensions  coverage  of
atypical  workers  is  Portugal  where  tighter  qualifying  conditions  were  recently
introduced (120 days of employment per year compared to one day/year). This helps
prevent  abuse,  but  it  can  also  adversely  affect  the  pension  rights  of  part-time,
temporary  and  seasonal  workers.  Italy  reports  that  changing  from  full-time  to  part-
time work is still penalising for pension purposes.

First pillar pension coverage of people in non-standard employment is by and large
satisfactory  and  even  involves  a  large  degree  of  solidarity  towards  these  groups,
notably through the mechanisms discussed under objectives 1 and 3. By contrast, the
situation is less favourable with regard to occupational pensions.

Several  Member  States  are  nevertheless  making  efforts  to  improve  access  to
occupational pension schemes. In the Netherlands, legislation that came into force in
1994  made  it  illegal  to  exclude  part-time  workers  from  supplementary  pension
schemes;  legislation  stipulates  that  employees  working  on  temporary  employment
contracts should not be treated less favourably than comparable employees on fixed
employment  contracts.  Sector-wide  collective  agreements  on  occupational  pensions
appear to  be a  good  tool  for  ensuring  that  coverage  is  comprehensive,  including  in
sectors  in  which  SMEs  are  predominant  which  would  normally  not  offer  access  to
occupational  pension  provision.  Such  collective  agreements  also  allow 
the
introduction of solidarity mechanisms into the  second pillar, as  is envisaged by  the

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recently  presented  reform  in  Belgium  which  aims  at  fostering  the  development  of
occupational  pension  provision.  The  intention  is  to  offer  coverage  of  career  breaks
due to unemployment or sickness within these schemes.

5.1.2.

Portability of pension rights

Portability of pension rights under the first pillar is not an issue in countries with a
single pension scheme. A change of jobs does not require membership in a different
pension scheme. Countries with different statutory schemes for specific categories of
workers usually have co-ordination arrangements between the different schemes that
protect the pension rights of mobile workers. These arrangements are referred to for
instance in the French and Luxembourg national strategy reports. However, problems
do  seem  to  exist  in  Greece  for  mobility  between  the  various  auxiliary  funds,
particularly when a worker moves from a generous fund (usually of the public sector)
to  a  less  generous  Fund  before  having  acquired  a  full  entitlement.  Many  national
strategy  reports  also  refer  to  EU  regulation  1408/71  which  guarantees  the  social
security  rights  of  migrant  workers.  Non-EU  migrant  workers  are  often  covered  by
bilateral social security agreements.

Major problems of portability of pension rights often arise in the second pillar.  All
Member  States  where  second  pillar  pension  provision  is  well  developed  (e.g.
Denmark,  Ireland,  the  Netherlands,  Sweden,  and  the  United  Kingdom)  seek  to
ensure, by legislation or through agreements by the social partners, that obstacles to
mobility are minimised. This includes reducing maximum vesting periods (the time
after  which  a  guaranteed  pension  entitlement  is  acquired)  which  are  typically  nine
months  in  Denmark,  one  year  in  Belgium  and  two  years  in  Ireland  and  the  United
Kingdom.

Vested rights can either remain in the previous pension scheme or be transferred into
the new employer’s scheme. In case of preservation, it is important that these rights
are  protected  against  inflation.  The  UK  requires  that  they  be  up-rated  in  line  with
inflation up to a maximum of 5%. As earnings tend to grow faster than prices, this
mechanism  would  still  leave  a  person  who  changes  jobs  less  well  off  than  another
worker with the same earnings, but an uninterrupted career with the same employer.
In the Netherlands and in the UK employees have a right to transfer the capital value
of  their  pension  entitlement  to  a  new  scheme  (subject  to  the  new  scheme  meeting
certain quality requirements). If no transfer takes place the pension rights remain in
the  previous  employer’s  pension  scheme  until  the  employee  retires.  The  preserved
pension entitlements must be up-rated in the same way as pensions in payment by the
scheme.

Some countries where supplementary pension funds are not very  common have  yet
to  take  measures  to  address  the  issue  of  portability  and  thereby  increase  the
attractiveness of supplementary pension schemes. In Portugal 54% of pension funds
do not guarantee any pension rights if a worker leaves the scheme before retirement.
In Italy five years of participation in a fund is necessary to acquire vested rights and
to be able to transfer them to another fund (however, transferability to another fund is
possible after three years of membership if the fund has already existed for more than
five years).

Measures to improve the portability of occupational pension rights are accepted as a
necessary  corollary  of  reforms  that  seek  to  promote  second-pillar  provision.  Spain,

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Italy  and  Portugal  have  announced  that  they  are  planning  to  tackle  the  issue  of
portability.  As  part  of  the  latest  pension  reform,  Germany  halved  the  maximum
vesting  periods  permitted  by  law  from  ten  to  five  years  and  guaranteed  immediate
vesting  of  occupational  pension 
rights  based  on  employee  contributions.
Furthermore,  the age threshold at  which vested pension rights  can  be  acquired  was
lowered  to  30  years.  In  Belgium  the  recently  proposed  reform  of  the  second  pillar
will  significantly  improve  the  portability  of  supplementary  pension  rights,  giving
beneficiary the option to keep acquired rights in the previous  scheme or to transfer
them to the new employer's scheme.

Problems  of  portability  normally  do  not  arise  in  defined-contribution  schemes  or
personal  pension  plans.  In  the  case  of  defined-contribution  schemes  each  scheme
member  has  an  individual  account  with  an  amount  that  can  be  easily  preserved  or
transferred  to  another  scheme  of  the  same  type.  The  drawback  of  defined-
contribution schemes is, however, that beneficiaries have to bear the full investment
risk and thus face far greater uncertainty about their future pension income. Personal
pension plans would be independent of the employment relation, but they are only an
option  if  employers  accept  to  pay  their  contributions  into  the  personal  plan,  rather
than  the  company  scheme.  Moreover,  individual  retirement  provision  tends  to  be
more  expensive  than  collective  second-pillar  provision  and  it  remains  to  be  seen
whether  the  new  products  defined  in  the  UK  (‘Stakeholder  Pensions’)  and  Ireland
(‘Personal  Retirement  Savings  Accounts’)  can  overcome  these  drawbacks.  In  any
case  it  remains  likely  that  workers  who  frequently  change  jobs  and,  as  a  result,
belong to  several  supplementary  pension  schemes  during  their  careers,  will  tend  to
have reduced pension entitlements when they retire.

The issue of portability will therefore remain on the political agenda, including at the
European  level.  The  Commission  has  recently  consulted  the  social  partners  on  the
issue  of  portability  of  supplementary  pension  rights  (Improving  the  portability  of
supplementary pension rights, first stage consultation of the European social partners
SEC/2002/597 of 27/05/2002). A second stage consultation will take place during the
first half of 2003 before deciding whether action at EU level should be taken.

5.1.3. Conclusion: Improvements needed in second pillar provision

Statutory schemes, by and large, respond well to the challenge of providing pensions
to  atypical  and  mobile  workers.  By  contrast,  second  pillar  schemes  still  pose
problems  on  both  fronts.  Nevertheless,  those  Member  States  which  are  promoting
these  schemes  are  working  to  address  these  difficulties.  Action  to  facilitate  cross-
border portability of occupational pensions at the EU level is continuing.

5.2.

Objective 10: meet the aspirations for greater equality of women and men

Review pension provisions with a view to ensuring the principle of equal treatment
between women and men, taking into account obligations under EU law.

Women represent the majority of older people – nearly 60% of people over 65 and
close  to  two  thirds  among  those  over  75.  However,  pension  systems  are  not
particularly  geared  towards  women's  evolving  needs..  Most  pension  schemes  were
traditionally designed for men working full time and without career breaks as family
breadwinners. Women's needs were met through their husbands income or, after his
death, widows’ pensions and complemented with child allowances. This approach is

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still  reflected  in  the  basic  principles  of  many  pension  schemes  although  many
Member  States  are  progressively  adapting  their  systems  in  accordance  with  the
existing  Community  law  and  in  the  light  of  higher  labour  market  participation  of
women, and aspirations to greater gender equality.

5.2.1. Gaps in the pension situation of men and women

As pension systems are not only designed to provide a universal flat-rate income, but
to  replace  earned  income  and  to  maintain  living  standards  reached  during  one’s
working life, differences in employment between men and women will inevitably be
reflected  in  pension  entitlements.  Women’s  current  employment  rates  remain
significantly below those of men with a long term trend towards reduced gaps. The
difference is larger for older workers and smaller in younger age groups. As a result,
women  who  are  retired  today  or  who  are  reaching  retirement  age  had  shorter
employment  records  than  men  and  lower  earnings.  Moreover,  they  are  more  likely
than  men  to  have  worked  part-time  and  in  companies  which  did  not  offer  them
supplementary pensions.

Such differences between men’s and women’s employment histories are reflected in
today’s pensions. The gap between women’s and men’s own pensions can be larger
than the pay gap.19 Thus Finland reports that in 2000 women’s average total pension
is €841 compared to an average for men of €1151, a pension gap of 27 % 20 compared
to a  pay  gap of  only  20%.  In  Spain  the  average  contributive  pension  was  €405  for
women  and  €650  for  men  in  2001,  a  gap  of  37  %  (pay  gap  based  on  1998  ECHP
figures:  14%).  In  Austria,  the  average  statutory  pension  was  €734  for  women  and
€1334 for men in 2000, a gap of 45% (pay gap: 21%). In France the average monthly
pension for men in 1997 was €1342 compared to €767 for women, a gap of 43% (pay
gap: 11%). In the UK in 2001 the gap is 16% (men receiving £183 per week, women
£153)  –  compared  to  a  pay  gap  of  24%  –  and  the  difference  stems  mainly  from
occupational pension benefits that tend to be significantly lower for women.

Such low individual pension entitlements tend to increase  women's  risk of poverty,
particularly  when  they  live  alone  and  have  no  other  sources  of  income  such  as  a
derived  benefit  (survivors’  pension).  Poverty  risks  in  the  late  1990s  were  indeed
higher for elderly women than for elderly men in most Member States (see chart 14
under objective 1). Only in Spain and the Netherlands were women exposed to lower
risks of poverty than men, and in Belgium the difference is very small. However, the
gaps are generally larger for older people living on their own.

Many  of  the  measures  designed  to  strengthen  the  adequacy  of  pension  systems
should  particularly  benefit  women  who  more  often  than  men  rely  on  minimum
income  guarantees.  Women  are  also  the  main  beneficiaries  of  pension  credits  for
bringing up children or caring for relatives.

Increasing  second  and  third  pillar  provision  presents  a  new  challenge.  Maintaining
and  improving  pension  levels  for  women  will  require  higher  participation  on  the
labour  market.  Access  to  second  and  third  pillars  schemes  is  improving,  but

19

20

It should be noted that the comparison between women's and men's pension level concerns individual
entitlement. The actual income situation also depends on derived benefits.
The  pension  gap  is  calculated  as  the  difference  between  average  pensions  for  men  and  women  as  a
percentage of average pensions for men.

86

                                                
solidarity  features  (e.g.  pension  credits  for  parental  leave)  remain  scarce  in  such
schemes  and  women  may  be  penalised  by  their  longer  life  expectancy  (by  around
four years) that will translate into reduced annuities.

Life expectancy at age 65 (1999)

Women

Men

Chart 20

22

21

20

19

18

17

16

15

14

13

12

B

DK

D

GR

E

F

IRL

I
(1996)

L

NL

A

P

FIN

S

UK

EU15
(1997)

Source: Demographic statistics, EUROSTAT

5.2.2. Gender differences in pension legislation

Community  legislation  requires  equal  treatment  of  men  and  women  in  statutory
social  security  matters,  but  allows  for  certain  exceptions  regarding  the  pensionable
age, survivors’ benefits and pension rights for bringing up children (directive 79/7).
These derogations have been interpreted very restrictively by the European Court of
Justice. The directive clearly considers these exceptions as transitional and  requires
Member States to examine periodically, in the light of social developments, whether
such derogations from the principle of equal treatment are still justified. In the area
of  occupational  pensions,  directive  96/97/EC  has  modified  directive  86/378/EC  to
bring it in line with Article 141 as interpreted by the ECJ. It also restricts the possible
derogations  compared  to  directive  79/7  as  Article  141  of  the  Treaty  requires  that
women and men must receive equal pay for equal work. This includes not only direct
pay, but also other forms of remuneration such as occupational pensions.

Member  States  are  generally  committed  to  achieving  full  equal  treatment  in  their
pensions legislation, although some Member States have yet to fully ensure it in their
various provisions. The Swedish report underlines the importance of this by arguing
that  compensation  in  social  insurance  systems  for  gender  differences  on  the  labour
market will merely serve to reinforce traditional gender roles. Giving more generous
survivors’ benefits or higher allowances and pension credits for bringing up children
to women than to men might act as a financial incentive for maintaining traditional
gender roles and discourage men from taking career breaks.

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The  equalisation  of  pensionable  ages  for  men  and  women  in  occupational  or
equivalent  schemes  is  achieved  by  raising  the  retirement  age  of  women  to  that  of
men.  This  represents  a  major  contribution  to  raising  employment  rates  of  older
workers  and  reducing  future  pensions  expenditure.  Regarding  the  pensionable  age
Belgium  aims  for  equality  in  2009,  the  UK  in  2020  and  Austria  by  2033.  Some
Member  States  including  Sweden,  Italy  and  Spain  offer  flexible  retirement
possibilities allowing people with shorter careers – and hence many women – to earn
a full pension.

As the new pension scheme is phased in in Italy, the same flexible pensionable age
will apply for both men and women. However, mothers will have the option to retire
up  to  one  year  early  (for  three  or  more  children)  or  obtain  a  higher  pension
corresponding  to  up  to  two  additional  years  of  employment  (for  three  or  more
children). Various other benefits or advantages that are linked to the retirement age
or  pensioner  status  will  also  have  to  be  equalised  (notably  invalidity  benefits  and
advantages offered to pensioners such as reduced transport fares).

Another discrimination between men and women that  is accepted  by  directive  79/7
concerns  compensation  for  raising  children.  Austria,  Germany,  Greece,  Germany,
France,  Ireland,  Italy,  Luxembourg,  UK  and  very  recently  Sweden  are  using  this
option.  As  recently  stated  by  the  European  Court  of  Justice,  this  option  should  be
allowed  on  an  equal  basis  for  men  and  women  in  public  sector  schemes.  Equal
treatment  of  mothers  and  fathers  has  to  be  applied  to  schemes  where  pensions  are
considered  as  a  remuneration,  and  some  public  sector  schemes  will  have  to  be
adapted accordingly.

France  awards  contribution  periods  to  mothers  regardless  of  whether  they  have
interrupted  their  career  or  not  to  compensate  them  for  having  to  shoulder
professional  and  family  obligations.  Luxembourg  has  introduced  baby  years
(minimum  two  years)  for  one  of  the  two  parents.  In  Germany  pension  credits  for
child care can be awarded to either the father or the mother and it is up to the parents
to declare who is to be credited with these pension rights. However, in the absence of
concurrent declarations by both parents the childcare periods must be credited to the
mother.  In  Sweden,  it  will  be  offered  to  the  parent  with  the  lowest  income,  if  the
parents do not specify which one of them should be given the pension credit.

5.2.3. Measures to promote greater gender equality in pension systems

The  main  reason  for  women's  limited  employment  records  is  the  fact  they  have  to
assume most of the caring and household responsibilities. Bringing up children often
means career sacrifices for the parent who bears most of the caring responsibilities –
typically  the  mother  who,  as  result,  will  have  reduced  pension  entitlements.  Many
statutory  pension  systems  recognise  career  breaks  for  raising  children  by  crediting
pension rights or by counting such years towards the number of years that is required
for obtaining the right to a pension. These credits are often calculated at the level of
the  minimum  pensions.  Some  occupational  schemes  with  stronger  solidarity
elements  also  award  pension  credits  for  such  periods,  but  have  to  do  so  on  strictly
equal terms for men and women to comply with 141 of the Treaty (equal pay for men
and women).

Leave arrangements, such as parental leaves, are important tools for allowing women
and  men  to  reconcile  work  and  family  responsibilities.  Provisions  concerning

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allowances  and  pension  credits  are  very  contrasted  among  Member  States.  11
Member  States  take  into  account  in  one  way  or  another  the  leave  periods  in  the
pension calculation at its minimum level. On the one hand generous support through
direct cash allowances or pension credits may encourage fathers to take up the leaves
but, on the other hand, when associated to longer career interruptions they may have
a  negative  impact  on  aggregate  employment  and  may  jeopardise  the  mother's
chances to resume a career.

In  terms  of  equal  opportunities  on  the  labour  market  it  might  be  more  efficient  to
reallocate some resources from generous full time leave allowance to the combining
care  and work and developing child care services, as some Member States suggest.
Part-time  arrangements  are  offered  by  some  Member  States.  Luxembourg  for
instance offers a parental leave allowance of €1650 per month, or €825 for a parent
who  works  part-time,  and  credits  pension  insurance  contribution  for  this  period.
France  is  currently  discussing  a  "free  of  choice"  benefit  which  would  replace  the
various existing benefits and that parents could use alternatively to stay at home or to
pay for care services.

In  view  of  the  weaker  labour  market  participation  and  lower  earnings  of  women
survivors’ benefits remain an important tool for ensuring adequate living standards of
older  women.  Several  countries  (Austria,  Germany,  Netherlands,  Sweden,  UK)  are
reducing in  various  ways these  benefits as  women  become  less  dependent  on  them
either because of better employment and hence contribution records or as a result of
other  policy  measures  that  will  increase  women’s  individual  pension  rights.  Thus
Germany  lowered  survivors’  pensions  from  60%  to  55%  of  the  spouses  pension
while at the same time increasing pension credits for bringing up children.

The Greek report  points out that the  conditions  attached  to survivors’ benefits  may
create perverse incentives by  guaranteeing  married  women  higher  incomes  through
derived benefits from their spouse pension than they would be able earn through their
own employment. It is likely  that  other survivors’  benefit  schemes  also interfere in
undesirable  ways  with  individual  choice  regarding  employment  or  remarriage,  but
these are not discussed in other national strategy reports.

In  Sweden  where  female  labour  force  participation  has  been  high  for  a  long  time,
there is a strong emphasis on individual rather than derived rights; the acquisition of
individual  pension  rights  is  helped  by  pension  credits  for  child  care  periods.
Survivors’ pensions are available on equal terms for men and women since 1990 in
the form  of  an  ‘adjustment  pension’  which  provides  ‘reasonable  economic  support
for a certain period following  the death  of a  partner’.  For surviving spouses under
the  age  of  65  the  period  is  limited  to  10  months  (12  in  2005).  However,  the
adjustment pension is always granted until the youngest child reaches the age of 12.
A widow’s pension which is only  payable to women still exists but will  be  phased
out  over  an  extended  period;  widows  who  married  before  1990  will  generally  be
eligible. Occupational pension schemes usually offer survivors' benefits.

The  Swedish  national  strategy  report  does  not  discuss  the  social  impact  of  cutting
survivors’  benefits,  but  the  partner’s  death  might  imply  a  significant  drop  in  the
surviving spouse’s living standard. It is interesting to note that in Sweden there was a
large  gap  between  men  and  women  in  the  relative  income  of  people  over  65
compared  to  people  aged  0-64  (see  chart  17  under  objective  2).  Sweden  allows
individual  premium  pension  rights  (the  funded  part  of  the  new  Swedish  pension

89

system financed from 2.5 percentage points of the contribution) to be transferred to
one’s  spouse.  This  can  be  decided  every  year  for  the  totality  of  premium  pension
rights  earned  during  the  year.  However,  very  few  people  use  this  option  and  the
charge for this transfer amounts to 14%.

A major issue is the sharing of pension rights in the event of family breakdown. The
UK  report  explains  that  ‘for  many  married  women,  the  adoption  of  caring  and
domestic responsibilities has enabled their husbands to work and build up a decent
pension. So the husband’s pension reflects the  contribution that  both have made to
the  marriage’.  Since  December  2001  the  value  of  pension  rights  can  be  shared  in
divorce  proceedings,  although  this  is  not  compulsory.  Pension  sharing  is  also
possible  in  Denmark,  Ireland,  Germany  and  it  is  statutory  in  the  Netherlands.
Germany  has  also  introduced  the  possibility  of  splitting  pension  rights  for  spouses
who  continue  to  live  together  as  a  way  of  individualising  pension  rights.  Similar
options are currently also discussed in Austria.

5.2.4. Conclusion: impact of pension systems on gender equality

Member  States  are  gradually  adapting  their  pension  systems  to  the  new  social  and
economic roles of men and women. They are moving from  direct discrimination in
pensions  legislation  in  favour  of  dependant  housewives  to  new  rules  that  aim  at
facilitating  the  reconciliation  between  family  responsibilities  and  work  for  both
parents.  However,  in  spite  of  such  measures  and  increased  labour  market
participation of women, significant differences between women’s and men’s pension
entitlements  will  subsist  for  a  long  time  to  come.  Further  gender  assessment  is
needed  to  understand  the  impact  of  recent  reforms  on  the  relative  situation  of  men
and women.

The  strengthening  of  minimum  income  guarantees  can  be  expected  to  diminish
poverty  risks  while  pension  credits  for  periods  of  child  care  or  care  for  elderly
relatives should raise individual entitlements. Survivors’ benefits, by contrast, tend to
be reduced, reflecting the tendency towards individual rights which is made possible
by towards a greater labour force participation of women. The increasing importance
of  supplementary  pension  provision  might  have  an  adverse  impact  on  equality
between men and women, although access to occupational pension schemes is being
improved in many Member States. While it is clear that women have a  right  to the
same pension benefits as men under defined-benefit occupational schemes, in private
defined-contribution schemes women may receive lower pension benefits due to the
use  of  gender-specific  actuarial  factors  (reflecting  the  longer  life  expectancy  of
women).  However,  in  public  defined-contribution  schemes  (Sweden,  Italy),  unisex
actuarial factors will be used so that women and men obtain the same annual pension
for  identical  amounts  of  contributions.  The  Netherlands  introduced  a  statutory
requirement for equal benefits for men and women even under defined-contribution
schemes; this will come into force in 2005.

The Lisbon target of raising female employment rates to 60% remains well below the
employment  rate  for  men.  However,  achieving  this  target  will  certainly  enhance
future pension entitlements of women. Further progress will require combined efforts
from  three  major  policy  fields,  social  protection,  employment  and  family  affairs
which should aim at a better sharing of rights and responsibilities within families, a
better sharing of paid and unpaid work between men and women, better rewards for

90

caring responsibilities for both women and men and better professional care services
as an alternative to career breaks.

5.3.

Objective 11: demonstrate the ability of pension systems to meet the challenges

Make  pension systems more  transparent and adaptable  to  changing  circumstances,
so that citizens can continue to have confidence in them. Develop reliable and easy-
to-understand information on the long-term perspectives of pension systems, notably
with regard to the likely evolution of benefit levels and contribution rates. Promote
the broadest possible consensus regarding pension policies and reforms. Improve the
methodological basis for efficient monitoring of pension reforms and policies.

Achieving  the  10  common  objectives  discussed  so  far  will  secure  the  future  of
European  pension  systems.  However,  this  is  not  simply  a  task  for  technocrats.
Without  determined  political  leadership  and  strong  public  support  for  necessary
reform measures it will not be possible to build solid pension systems. Building safe
and sustainable pensions poses particular challenges for governance - the issues  are
complex; the impact of changes are slow and out of step with the normal rhythm of
political  change,  but  their  effects  on  the  lives  of  citizens  are  profound.  The
preparation and publication of the national strategy  reports should contribute to the
necessary  open  debate  on  reforms  of  pension  systems.  However,  a  rational  debate
must be based on sound information about the current and future situation of pension
systems.  This  should  be  the  basis  for  developing  a  broad  consensus  which  is
necessary  to  avoid  frequent  about-turns  after  each  election.  Policy  makers  should
seek to give citizens a clear idea of what they can expect from their pension systems
– and what they have to do themselves to prepare for their retirement.

5.3.1. Monitoring of pension systems

Mechanisms for monitoring the aggregate financial situation of pension systems, and
increasingly  also  their  impact  on  the  social  situation,  have  been  significantly
improved in many Member States.

Some  countries  have  introduced  statutory  obligations  to  report  on  public  pension
schemes. The  German government must  submit an annual pension insurance report
to  the  legislator.  This  must  include  projections  regarding  the  required  contribution
level  for  the  next  15  years.  Once  in  each  legislature  the  report  must  also  present  a
survey  of  the  income  situation  of  pensioners.  In  Ireland,  actuarial  reviews  of  the
Social  Insurance  Fund  are  statutorily  required  every  five  years  and  the  first  report
covers the period 2001 to 2056. In addition, the quarterly national household survey
has  been  adapted  to  track  improvements  in  occupational  pension  coverage  (the
government  has  a  target  of  70%  cover  for  those  over  age  30  and  must  review  the
situation by 2005).

The regular monitoring of the main parameters of a pension system is a precondition
for  more  or  less  automatic  adaptation  mechanisms.  Sweden  and  Italy  have  gone
furthest  in  this  direction  by  fixing  the  contribution  rate  and  building  automatic
stabilisers into the system which will adjust benefits as life expectancy goes up or the
number  of  contributors  falls;  the  system  is  monitored  through  reports  that  the
National Social Insurance Board is required by law to present annually. In the case of
Germany,  should  the  projections  referred  to  above  indicate  that  targets  in  terms  of

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contribution rates or benefit levels will not be met, this will trigger an obligation for
the government to propose adjustments.

Greece  and  France  make  the  point  that  the  complexity  of  their  systems  makes  it
difficult  to  provide  good  information  regarding  future  prospects  of  their  systems.
Nevertheless,  France  has  developed  various  statistical  tools  that  will  also  allow
medium- and long-term simulations of the pension system and information from the
many  different  schemes  is  being  centralised.  Finland,  too,  envisages  improving  the
collection  of  harmonised  data  from  pension  institutions  and  first  results  should  be
published in 2003. The UK is currently developing a new dynamic microsimulation
model for the long-term analysis of pensions policy. This will allow to estimate the
income  situation  of  pensioners  under  various  assumptions  about  public  and  private
pension schemes and economic parameters, thus linking financial and social aspects.

Regarding  information  on  private  pension  schemes,  the  Dutch  national  strategy
report  explains  that  since  1994  the  supervisory  authority  PVK  has  been  obliged  to
collect  annual  data  on  supplementary  pensions,  including  coverage  and  benefits
offered.  In  Denmark,  where  defined-contribution  schemes  are  predominant,  the
emphasis  is  on  financial  performance  data.  The  Danish  financial  supervisory
authority  publishes  comparable  financial  ratios  covering  administration  costs  of
schemes and returns on assets.

In  some  countries,  ad  hoc  reports  were  commissioned  as  a  basis  for  reform
discussions.  A  major  economic  analysis  on  the  impact  of  ageing  on  government
finances, health care  and  pensions  in  the Netherlands was published by the Central
Planning  Bureau  and  became  a  basis  for  policy  making.  It  was  recommended  that
this analysis should be up-dated every four years.

Finland was the only country to mention opinion surveys on public confidence in the
pension system. These are conducted from time to time and allow the monitoring of
public perceptions of  the  pension  system.  The  last  one  took  place  in  late  2001  and
showed rising confidence.

While there is certainly room for improvement in most Member States, only Greece
presents a very critical assessment of its own situation with regard to the monitoring
of the pension system. Building confidence in the system is the central theme of the
Greek  report;  the report  stresses  a need for bringing about structural change  before
the  kind  of  information  policies  envisaged  under  this  objective  would  be  feasible.
Transparency  is  hampered  by  fragmentation  of  the  system  and  the  complexity  of
legislation.  Moreover,  it  reports  that  many  funds  do  not  comply  with  the  statutory
obligation  to  carry  out  actuarial  studies  every  five  years.  The  situation  can  be
expected  to  improve  through  the  consolidation  of  funds  into  larger  units  and  the
creation of a national actuarial authority.

5.3.2. Mechanisms for building political consensus

The  measures  described  above  will  contribute  to  a  more  informed  policy  debate  in
the  Member  States  and  hopefully  strengthen  the  consensus  on  the  required  policy
responses.  The  need  for  consensus  building  is  widely  recognised  and  several
Member States report on the structures in which all interested parties are associated
in policy development.

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Several national strategy reports insist on the leading role of the social partners. This
is  obvious  in  the  case  of  occupational  pension  schemes  based  on  collective
agreements (as in Denmark and the Netherlands). However, even in some statutory
schemes  they  are  important  players.  In  Finland  the  future  of  the  earnings-related
pension scheme  is  shaped through  the negotiations of the social partners  which  are
then translated into legislation by Parliament. The social partners are also represented
in many of the consultative bodies that exist across the EU.

Two countries particularly insist on cross-party agreements. Sweden explains that the
new  pension  system  is  the  result  of  work  done  by  representatives  of  all  parties
between  1991  and  1994.  Five  out  of  the  seven  parties  represented  in  the  Riksdag
supported the reform proposal and pursued their  co-operation in  an implementation
group which prepared the adoption of the reform in 1998 and continues  to monitor
the  implementation  of  the  reform.  The  Spanish  ‘Toledo  Pact’  is  a  set  of
recommendations  issued  by  Parliament  in  1995  after  expert  hearings  in  a
parliamentary  commission  composed  of  representatives  from  parties  across  the
political  spectrum.  However,  unlike  Sweden  the  recommendations  issued  by
Parliament  were  not  directly  translated  into  government  policy,  but  were  first
submitted to the main trade unions who reached an agreement with the government
in  October  1996.  A  new  agreement  on  reforms  between  the  government  and  the
social partners came into effect in April 2001 for the period up to 2004 and covered
in particular minimum pensions, the pension reserve fund and flexible retirement.

Partnership and consensus building are regarded as an essential component of policy
formulation  and implementation  in  Ireland  where  the  pensions  strategy  is  based  on
extensive consultation and agreement with social partners, representative groups and
industry; objectives and targets are incorporated in National Partnership Agreements.
The UK has a less institutionalised approach than most other Member States: reforms
are  prepared  by  consultative  documents  which  are  used  as  a  basis  for  discussions
with  a  wide  range  of  interested  parties,  including  with  representatives  of
management and labour, but also pensioner organisations and pension providers.

5.3.3.

Information to beneficiaries

Providing  beneficiaries  with  information  regarding  acquired  rights  and  prospective
pension  levels  represents  a  strong  commitment.  Such  information  may  not  be,  in
formal  terms,  contractually  binding,  but  it  creates  expectations  put  those  who  are
responsible for  a pension scheme under pressure  to  deliver  these  expected benefits.
Thus  better  information  to  beneficiaries  can  be  seen  as  an  indication  that
governments and pension  scheme managers  are  confident about their  ability  to  pay
well into the future.

Member  States  report  considerable  improvements  in  the  information  provided  to
beneficiaries  on  their  statutory  pension  rights.  Whereas  the  traditional  approach
seems to be to give information only on request and mainly to people who are close
to retirement age,  the new trend clearly  is  to provide regular  statements  of  pension
rights  accrual  to  all  scheme  members.  Sweden  pioneered  this  approach  with  the
‘orange pensions envelope’ that is sent, since 1999, every year to all those covered
by  the  public  pension  scheme.  The  envelope  contains  information  about  pension
rights  acquired  during  the  previous  year,  the  total  accumulated  notional  pensions
capital  and  a  forecast  of  the  future  pension  under  different  assumptions  about
economic growth, rates of return and the retirement age.

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Germany  will  follow  a  similar  route  from  2004  onwards  when  statutory  pension
insurance  institutions  will  have  to  send  annual  ‘pension  information  reports’  to  all
insured persons above age 27. The report covers pension entitlements earned to-date
and the pension amount that would be paid in the event of incapacity. Moreover, an
estimate of the  future old-age pension is  included,  based  on  the  assumption  of  that
the  current  employment  continues  until  retirement  age.  For  insured  persons  above
age 54 a triennial pension statement will be provided with information on the pension
amount under current legislation.

In Finland, pension  records  are sent  within 12 months following  the termination of
an employment contract in the private sector. Municipal employees above the age of
35  receive  a  record  once  every  five  years.  New  legislation  introduced  in  2000  in
Portugal establishes an obligation to provide regular information to insured persons
about their pension rights.

Several  national  strategy  reports  present  initiatives  to  allow  access  to  pension
information  via  the  internet.  This  may  be  general  information  about  current
legislation (Austria) or information about one’s individual pension situation (Finland,
Denmark, Portugal). People covered by the general pension scheme in France have a
statutory  entitlement  to  personalised  information  on  their  pension  rights  as  soon  as
they  reach  the  age  of  58;  simulations  of  pension  rights  based  on  typical  cases  are
available on the internet.

Improved access to information not only applies to statutory schemes. In some cases,
legislation  on  information  disclosure  may  be  more  advanced  for  private  pension
schemes  than  for  public  schemes.  Belgium  requires  employers  to  provide  annual
information on rights acquired to-date and on  when they will  be  due.  Denmark has
already  information  duties  for  life  insurance  companies  and  sector-wide  pension
funds and plans to extend these to company pension funds. The PensionsInfo website
is a joint initiative of the public authorities and private pension providers and aims at
giving individual beneficiaries an overall picture of their pension situation. Holders
of  the  new  Personal  Retirement  Savings  Accounts  in  Ireland  will  be  entitled  to
regular  updates  on  the  current  and  projected  value  of  the  benefits  they  can  expect.
Members  of  occupational  pension  schemes  in  Luxembourg  have  a  right  to  regular
information  on  prospective  pension  benefits  at  the  end  of  their  career  and  on
guaranteed rights in the event of a job change or insolvency of the employer. The UK
government  is  working  with  employers  and  pension  providers  to  provide,  on  a
voluntary  basis,  ‘combined  pension  forecasts’  covering  state  and  private  pension
entitlements.  Moreover,  defined-contribution  schemes  will  be  required,  from  April
2003,  to  give  members  an  annual  illustration  of  their  prospective  pension  under
various assumptions.

Better individual information will raise awareness about pension matters, but it does
not  necessarily  enable  individuals  to  take  appropriate  action  if  they  feel  that  they
should  do  more  to  provide  for  their  retirement.  The  UK  has  launched  a  ‘Pensions
Education  Publicity  Campaign’  to  raise  awareness  about  the  need  to  save  for
retirement and the options that are available.

5.3.4. Conclusion: information as a driver of change

Objective  11  may  seem  secondary  compared  to  the  previous  10  objectives,  but  it
could  have  a  profound  impact  on  the  future  of  pension  systems.  Creating  a  high

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degree  of  consensus  has  been  a  sine  qua  non  for  the  successful  introduction  of
reforms. Most of the reform efforts recounted here have also involved the creation of
ongoing mechanisms aimed both at ensuring continuity and a basis on which further
reform discussions can, where necessary, be undertaken. High quality information on
pension systems, both for policy makers and citizens, should make it easier to build
the required consensus for reforms – and might, for example, increase the support for
automatic stabilising mechanisms, if the risks can be shown to be acceptable.

Regular  information  to  individuals  about  their  pension  rights  creates  a  sense  of
ownership  and  allows  individuals  to  take  responsibility  for  their  own  retirement
provision. It could change the very nature of certain pension systems and accelerate
the move towards schemes  where the  acquisition  of  rights  is  more  linear  and  more
closely linked to contributions or other efforts that can be rewarded through pension
entitlements (e.g. caring responsibilities).

It is clear that the degree to which it is possible to provide good information depends
very much on the nature of the system. Thus approaches developed within the highly
integrated  Swedish  system,  or  planned  for  the  German  system,  may  not  easily
translate  to  other  systems.  Nevertheless,  it  is  clear  that  the  Member  States  attach
considerable importance to the issue and that considerable scope exists for organising
exchanges regarding good practices in this area.

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6.

GENERAL CONCLUSIONS AND NEXT STEPS

6.1.

Meeting the common objectives

to 

the  common  objectives.  They  demonstrate 

The  national  strategy  reports  present  a  wide  range  of  positive  developments  with
regard 
the  Member  States'
determination  to  address  the  financial  challenges  without  undermining  the  social
objectives  of  their  pension  systems.  This  balance  between  social  and  financial
concerns is key for the political success of pension reforms.

Adequacy of pensions

Preventing  social  exclusion  -  All  Member  States  ensure  through  compulsory
membership in pension schemes that people usually earn pension rights contributing,
where  possible,  to  their  financial  autonomy  in  old  age.  In  addition,  they  have
provisions which provide a minimum level of income to older people who have not,
for one reason or another, earned sufficient pension entitlements in their own right.
Thanks to pension systems, old age is no longer synonymous with poverty for a large
proportion of the population. Income data from the European Community Household
Panel (ECHP) show that, in 1998, the risk of poverty (i.e. living on an income below
60 % of the median income) for people over the age of 65 was only slightly higher
than for  people  younger than 65.  However,  in some  countries,  higher  poverty  risks
persist for older people and in particular older women. The national strategy reports
present  a  range  of  measures  to  lower  poverty  risks,  including  minimum  income
guarantees and various benefits in cash and in kind. Moreover, future pensioners, and
in  particular  women,  are  likely  to  acquire  more  pension  entitlements  during  their
working lives.

Enabling people to maintain living  standards  - Pension systems comprising  flat-
rate  or  earnings-related  first  pillar  scheme,  private  occupational  schemes  (second
pillar) and individual retirement provision (third pillar) offer good opportunities for
most Europeans to maintain their living standards after retirement. This is reflected
in average income  levels of people over  65  that were  close  to  90 %  of  the  average
income of people under 65. Most of these pension incomes are provided through first
pillar schemes which can be expected to remain the most important source of income
for  older  people  in  most  Member  States.  However,  the  national  strategy  reports
present  a  wide  range  of  pension  reforms  implemented  to  date  with  the  aim  of
containing future public pension expenditure growth, leaving more scope for private
provision.  In  this  context,  an  important  way  of  maintaining  future  adequacy  of
pensions  is  to  allow  people  to  earn  additional  pension  rights  by  postponing  their
retirement. Occupational and personal pension provision is also developing in many
Member  States  so  that  lower  incomes  from  first  pillar  schemes  can  be  replaced  by
higher  benefits  from  private  schemes.  However,  voluntary  private  provision  would
not  be  expected  to  automatically  fill  the  gap  left  by  reduced  public  provision.  An
increasing number of countries therefore allow the social partners to establish sector-
wide  pension  schemes  based  on  mandatory  collective  agreements  which  make  it
possible to achieve high rates of coverage.

Promoting solidarity – Member States build strong redistributive elements into their
first pillar pension schemes, notably in the form of minimum pension guarantees or
credits for certain periods without pensionable income (e.g. unemployment, studying,

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parental  leave  etc.).  This  is  not  incompatible  with  stronger  links  between
contributions  and  benefits,  particularly  if  solidarity  elements  are  financed  from
general  budgets.  Strong  solidarity  elements  can  also  be  present  in  occupational
pension schemes based on collective agreements. The latest available income survey
data  suggest,  for  the  EU  as  a  whole,  somewhat  smaller  income  disparities  among
older people than among the population as a whole.

Financial sustainability of pension systems

Raising  employment  levels  –  All  Member  States  see  their  efforts  to  raise
employment  rates  as  an  important  element  in  their  long-term  strategy  for  making
pensions sustainable. Higher employment rates imply that more people can shoulder
the financing of benefits and, thus, that benefit levels can be maintained. Projections
of public pension expenditure21 indicate that, if the Lisbon employment targets were
to  be  achieved,  with  continued  employment  growth  beyond  2010,  the  increase  of
public pension expenditure as a percentage of GDP could be reduced by  about  one
third in 2050, compared to the baseline scenario of unchanged policies. This means
that  higher  employment  rates  alone  will  not  solve  the  problem  of  the  financial
sustainability of pension systems.

Extending  working  lives  –  Currently,  most  Europeans  retire  before  reaching  the
statutory retirement age. If a one-year increase in the effective retirement age could
be  achieved  without  increasing  pension  entitlements, 
the  expected  pension
expenditure  rise  would  be  cut  by  0.6-1  percentage  points  of  GDP  in  2050.  This
means  that  a  one-year  increase  in  the  effective  retirement  age  would  absorb  about
20% of the average expected increase in pension expenditure in 2050. Member States
have declared their commitment to delay the take-up of early pensions and are in the
process  of  reforming  early  pension  systems  and  labour  market  policies  and
promoting active ageing22. However, in many cases, the pace of reforms falls short of
what is required to achieve the Stockholm and Barcelona targets for the employment
rate of older workers (50% by  2010  compared to 38.5% today)  and to  increase  the
effective retirement age by about five years by 2010.

Making  pension  systems  sustainable  in  a  context  of  sound  public  finances  -
Some Member States have put, or are putting, in place comprehensive strategies for
ensuring  the  sustainability  of  pension  systems  and  public  finances  as  a  whole  in
accordance  with  the  three-pronged  strategy  (raising  employment  rates,  reducing
public debt levels,  and reforming pensions  systems themselves)  incorporated  in  the
framework  of  the  Broad  Economic  Policy  Guidelines  (BEPGs).  However,  large
expenditure increases on public pensions are projected for most Member States and,
in  addition,  some  countries  are  still  hampered  by  high  debt  ratios  and  the  need  for
budgetary consolidation. Further reforms  in  all three  areas  are needed, in particular
further pension reforms in those Member States which have not yet safeguarded the
long-term  sustainability  of  pension  systems.  This  was  highlighted  in  the  2002
BEPGs, where the need to reform pension systems to put them “on a sound financial
footing” was underlined and specific recommendations to this end were addressed to
a large number of Member States.

21

22

Carried out by the Member States in 2001 under the auspices of the Economic Policy Committee.
Joint report to the Barcelona European Council on increasing labour force participation and promoting
active ageing.

97

                                                
Adjusting benefits and contributions in a balanced way – While Member States
are  committed  to  maintaining  adequate  pension  provision  in  spite  of  demographic
ageing, they also realise that this cannot be achieved by overburdening future active
generations.  To  prevent  adverse  effects  on  employment,  care  should  be  taken  to
avoid  increasing  the  total  tax  burden,  in  particular  on  labour,  and  to  achieve  a
sustainable    balance  between  taxes  on  labour,  on  the  one  hand,  and  other  forms  of
taxation,  including  on  capital,  on  the  other.  No  Member  State  envisages  increased
pension  expenditure  to  be  financed  solely  by  raising  contribution  rates.  Several
Member  States  set  an  upper  limit  for  contribution  rates.  In  the  case  of  the  new
notional defined-contribution pension schemes, benefits are automatically adjusted to
maintain  the  financial  balance  of  the  schemes,  notably  in  the  face  of  rising  life
expectancy. In view of the financial impact of the baby-boom cohorts’ retirement on
pension  systems  during  the  next  few  decades,  several  Member  States  have
established  reserve  funds  in  public  pension  schemes  which  should  allow  them  to
avoid  major  increases  in  contributions.  Some  expect  to  be  able  to  afford  larger
transfers  from  the  general  budget  to  their  public  pension  schemes  thanks  to  debt
reduction  over  the  coming  years  and  hence  reduced  future  interest  payments  –  or
thanks  to  increased  tax  revenue  from  future  pension  benefits  that  are  subject  to
deferred  taxation.  Several  Member  States  have  taken  measures  to  reduce  gradually
replacement  rates  under  public  pension  schemes,  while  at  the  same  time  creating
better opportunities for supplementary private provision.

Ensuring  that  funded  pension  provision  is  adequate  and  financially  sound  –
Financial  sustainability  is  not  only  an  issue  for  public,  pay-as-you-go  financed
pension schemes. Funded pension provision depends on the performance of financial
markets.  The  risks  of  funded  pension  provision  can  be  greatly  reduced  through
effective supervision and prudent management of the  assets. Significant progress is
being  made  towards  sound  regulatory  frameworks  for  funded  pension  provision
across the EU; in this regard, the directive on institutions for occupational retirement
provision,  currently  under  discussion  in  the  Council  and  the  European  Parliament,
will play a major role. Progress is also being made in reducing management costs of
private schemes which are usually significantly higher than those of public schemes.
This  can  have  considerable  benefits  in  terms  of  affordability  of  private  pension
provision and, hence, improved access.

Modernisation of pension systems

Adapting to more flexible employment and career patterns - Statutory schemes,
by and large, respond well to the challenge of providing pensions for atypical (part-
time,  temporary,  self-employed  workers)  and  mobile  workers.  By  contrast,  second
pillar  schemes  still  pose  problems  on  both  fronts.  Member  States  with  highly
developed occupational pension schemes are aware of the problems and have started
addressing  them  through  legislation  or  collective  bargaining.  However,  in  spite  of
improvements achieved in many Member States, the situation cannot yet be regarded
as  satisfactory:  atypical  workers  continue  to  be  less  well  covered  by  occupational
schemes  and,  in  many  Member  States,  workers  who  change  jobs  tend  to  end  their
careers with reduced  occupational  pension  rights  compared  to  workers  who  remain
with the same employer.

Meeting the aspirations for greater equality between women and men - Member
States  are  gradually  adapting  their  pension  systems  to  the  evolving  social  and
economic roles of men and women.  They are moving from  direct discrimination in

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pensions  legislation  in  favour  of  dependant  housewives  to  new  rules  that  aim  at
facilitating  the  reconciliation  between  family  responsibilities  and  work  for  both
parents.  However,  in  spite  of  such  measures  and  increased  labour  market
participation of women, significant differences between women’s and men’s pension
entitlements  will  persist  for  a  long  time  to  come.  Further  gender  assessment  is
needed to  understand the impact of  recent  reforms  and  notably  the  development  of
supplementary pension schemes on the relative situations of men and women.

Demonstrating  the  ability  of  pension  systems  to  meet  the  challenges  –  Most
Member States have undertaken efforts to improve the transparency of their pension
systems, through systematic information to  individuals about  their  entitlements  and
through  regular  monitoring  of  the  aggregate  performance  and  sustainability  of  the
pension  system  as  a  whole.  This  is  important  both  in  order  to  allow  individuals  to
plan  for  their  retirement  and  make  provision  that  will  allow  them  to  achieve  the
desired living standard, and in order to guarantee the long-term viability and stability
of the system and, hence, public confidence in the  future of pension  systems. High
quality  information  on  pension  systems  for  policy  makers  and  citizens  should  also
make  it  easier  to  build  the  required  consensus  for  reforms.  Regular  information  to
individuals  about  their  pension  rights  creates  a  sense  of  ownership  and  allows
individuals to take responsibility for their own retirement provision. It could change
the very nature of certain pension systems and accelerate the move towards schemes
where  the  acquisition  of  rights  is  more  linear  and  more  closely  linked  to
contributions or other efforts that can be rewarded through pension entitlements (e.g.
caring responsibilities).

***

The  momentum  behind  the  reform  process  to  secure  the  sustainability  of  adequate
pensions  must  be  maintained.  These  reforms  should  be  seen  in  the  context  of  the
coordinated efforts by the Member States to implement the growth strategy required
by  the  Lisbon  summit,  including  structural  and  fiscal  reforms  and  better  and  more
productive  public  investment.  Ageing  will  start  to  produce  its  effects  on  pension
systems within the next ten years in most Member States. It is therefore urgent to put
in  place  credible  and  effective  strategies  and  to  give  clear  signals  to  citizens  about
what they can expect from their pension systems and what they have to do to achieve
an adequate living standard in retirement.

6.2.

Further co-operation at EU level

Pension  reform is  almost a continuous process in most countries  and  the  impact  of
past reforms needs to evaluated to check whether the desired results in financial and
social  terms  have  materialised.  This  first  comprehensive  exchange  of  information
should therefore be followed up in a number of different ways.

One priority must be to work on common indicators which would allow to measure
the  extent  to  which  the  common  objectives  are  being  achieved.  Work  on  this  is  in
progress  in  the  Indicators  Sub-Group  of  the  Social  Protection  Committee  and,
regarding  financial  sustainability,  in  the  Ageing  Working  Group  set  up  by  the
Economic Policy Committee. Indicators should not just focus on the present or recent
past (ECHP data reflect the situation four to five years ago). As far as possible they
should  also  include  projections  of  the  future  situation,  as  is  the  case  with  the
indicators  of  long-term  sustainability  used  in  the  context  of  the  assessment  of  the
Stability  and  Convergence  Programmes.  Other  examples  of  this  are  expenditure

99

projections carried out within the Ageing Working Group or the attempt to calculate
prospective  replacement  rates  in  the  Indicators  Sub-Group  of  the  Social  Protection
Committee. In addition to indicators relating to individual objectives it might also be
useful to assess at regular intervals overall confidence in pension systems as is done
in Finland.

The latest ECHP data capture the income situation in 1998, that is before many of the
significant  reforms  presented  in  the  national  strategy  reports,  and  show  that  about
20%  of  older  Europeans  were  at  risk  of  poverty.  Improving  the  quality  of  income
data and their timeliness should be a priority if adequacy is to be monitored properly.
Moreover,  work is required on indicators describing future adequacy as determined
notably  by  reforms  of  pension  systems  and  the  development  of  second  pillar
schemes.

The national strategy reports and the first peer review on pensions that took place on
the basis of these reports on 23-24 October 2002 confirmed that there is much scope
for  mutual  learning.  Such  exchanges  of  information  and  experiences  could  be
continued in greater depth by focusing on specific topics.

This co-operation on pensions will have to be extended to new Member States. The
Göteborg  European  Council  invited  the  applicant  countries  to  translate  the  Union's
economic, social and  environmental objectives into their national policies. Building
adequate,  sustainable  and  modern  pension  systems  is  part  of  these  objectives  to  be
translated  into  national  policies,  and  the  Council  and  the  Commission  encourage
candidate  countries  to  make  use  to  this  end  of  the  Member  States'  experience
presented in this report.

In  particular,  applicant  countries  could  be  invited  to  prepare  their  own  national
strategy reports based on the 11  common objectives. Preparatory meetings with the
Commission could be held in late Spring or early Summer so that applicant countries
can develop their strategies and present their report immediately upon accession.

Finally, it should be recalled that the joint report of the Social Protection Committee
and the Economic Policy Committee on objectives and working methods in the area
of  pensions  presented  to  the  Laeken  European  Council  in  December  2001  requests
the Commission and the Council to assess, before the end of 2004, the objectives and
working  methods  and  to  decide  on  the  objectives,  methods  and  timetable  for  the
continuation  of  this  co-ordination  on  pensions.  This  will  be  done  taking  into  the
reports  from  the  new  Member  States  as  well  as  any  updates  to  the  strategy  reports
submitted by the current 15 Member States.

100

ANNEX - COUNTRY SUMMARIES

This section briefly presents, for each Member State, the main characteristics of the
pension  system,  the  major  challenges  that  it  is  confronted  with  and  the  reform
measures  that  have  been  taken  to  date  to  meet  these  challenges.  In  addition,  some
background statistics are presented on the income situation of pensioners, the current
level and projected trend of public spending on pensions as a percentage of GDP and
the  scope  for  policy  action  to  enhance  the  financial  sustainability  of  pension
provision.

Inevitably, these statistics do not tell the full story but they do provide a useful tool
for  promoting  understanding  of  the  situation  of  pensioners  and  pension  systems  in
the  Member  States.  Work  on  a  comprehensive  set  of  common  indicators  is  still  in
progress within the Sub-Group of Indicators of the Social Protection Committee and
the Ageing Working Group of the Economic Policy Committee, and  it  represents a
major  task.  The  data  in  these  tables  should  not,  therefore,  be  used  as  indicators  to
establish a ranking of country performances.

The projections of public  expenditure  on  pensions  up to the  year 2050  are  the  first
attempt of this kind at EU level. These are, first of all, estimates of the impact of the
population ageing on public expenditures on pensions. As with any exercise covering
a very long time period, the projection results need to be interpreted with care.

The  aim of these  projections  was to examine, on  a  comparable  basis  across  all  EU
countries, the long-term sustainability of public finances. The ECOFIN Council has
decided  that such  an  exercise  will be repeated,  possibly  in  2005,  when  new  census
data are available,  providing  a  firm  basis  for new  population  forecasts.  In addition,
further  refinements  in  the  methodology  of  the  expenditure  projections  are  also
envisaged.  These  include,  for  instance,  the  inclusion  of  future  revenues  and  other
types  of  social  spending  that  may  be  affected  by  demographic  changes  (notably
health  and  long-term  care).  These  issues  are  being  considered  by  the  Ageing
Working Group of the Economic Policy Committee.

Moreover,  the  focus  of  these  projections  is  on  public  pension  spending,  including
means-tested old age benefits, but not covering privately provided pensions. It should
be noted that  some  Member States have  a  much higher  degree  of private  provision
than others. Regarding future living standards of older people, work on indicators to
describe  the  future  evolution  of  replacement  ratios  for  pensioners  in  a  range  of
hypothetical  cases,  possibly  also  using  microsimulation  techniques,  is  still  in
progress.

Background statistics for the Joint Report on pensions: Methodological note

At-risk-of-poverty  rates  are  defined  as  the  share  of  persons  with  an  equivalised
disposable  income  below  an  at-risk-of-poverty  threshold.  Equivalised  disposable
income  is  defined  as  the  household's  total  disposable  income  divided  by  its
"equivalent size" to take account of its size and composition.23 The at-risk-of-poverty

23

The  data  use  the  modified  OECD  scale  which  gives  a  weight  of  1.0  to  the  first  adult,  0.5  to  other
household members aged 14 or over and 0.3 to each child aged less than 14.

101

                                                
threshold  is  set  at  50%  and  60%  of  the  national  median  equivalised  disposable
income.  It  must  be  noted  that  income  generated  from  owner-occupied  housing  or
housing at below-market rents - i.e., imputed rent – is not included in the definition
of income. Inclusion of this element of income could make significant difference in
the measurement of risk-of-poverty rates. Source: European Community  Household
Panel, 1999 wave (version of the Users' database of December 2002. Data for the UK
are  provisional;  the  weights for the Spanish  data  will  be  revised).  Data  refer  to  the
socio-demographic  circumstances  of  individuals  in  1999  and  to  their  income
situation  in  the  previous  year,  1998,  since  in  the  ECHP,  annual  income,  which  is
constructed  on  the basis  of all income  components  at  the  individual  and  household
level, refers to the year prior to the interview.

Inequality of income distribution (or income quintile ratio) is defined as the ratio
of  total  income  received  by  the  20%  with  the  highest  income  within  a  given
population (top quintile) to that received by the 20% of the same population with the
lowest  income  (lowest  quintile).  Income  must  be  understood  as  equivalised
disposable income and is defined as the household's total disposable income divided
by  its  "equivalent  size".  The  definition  of  income  does  not  include  imputed  rent.
Source: European Community Household Panel, 1999 wave. Data refer to the socio-
demographic  circumstances  of  individuals  in  1999  and  to  their  income  situation  in
the previous year, 1998, since in the ECHP, annual income, which is constructed on
the basis  of all income components  at  the  individual  and  household  level,  refers  to
the year prior to the interview.

For  the  indicator  on  income  of  people  aged  65  and  over  as  a  ratio  of  income  of
people  aged  0-64,  income  is  also  understood  as  equivalised  disposable  income  as
defined above.

Factors  determining  the  evolution  of  public  pensions  expenditure  (2000-2050):
the  projected  total  increase  in  public  pension  expenditure  between  2000  and  2050,
expressed  in  percentage  points  of  GDP,  is  decomposed  into  its  main  determining
factors. The algebraic sum of these contributions, plus a residual, corresponds to the
total.

These  projections  provide  estimates  of  the  impact  of  population  ageing  on  public
pension expenditure. The baseline scenario, the results of which are presented in the
tables,  assumes  unchanged  policies  in  the  pension  system.  The  underlying
assumptions  of  population  and  macroeconomic  developments  were  commonly
agreed within the Ageing Working Group of the EPC, while it was recognised that a
considerable  degree  of  uncertainty  is  inherently  involved  in  such  calculations
covering a very long time span. A number of sensitivity analyses were made to test
the  impact  of  different  assumptions  on  the  results.  Overall,  these  tests  led  to  the
conclusion  that  the  results  of  the  baseline  scenario  are  robust  and  provide  an
adequate  representation  of  magnitude  of  the  demographic  challenge  ahead.
Moreover, even if the figures for "public pensions" in these calculations refer to all
public revenues for older persons and not only to old age pensions, the coverage of
the  projections  may  slightly  differ  across  countries.  Furthermore,  the  very  recent
reforms in some Member  States are not  reflected in  the  projections,  but  the  text  of
the country summaries presents  their  features and, where  available, their impact on
expected pension expenditure.

102

The  "pension  expenditure"  aggregate  according  to  the  ESSPROS  definition  goes
beyond  that  of  public  expenditure  to  also  include  expenditure  by  private  social
protection schemes. "Pension expenditure" is the sum of seven different categories of
benefits,  as  defined  in  the  ESSPROS  Manual  1996:  disability  pension,  early-
retirement benefit due to reduced capacity to work, old-age pension, anticipated old-
age  pension,  partial  pension,  survivors'  pension  and  early  retirement  benefit  for
labour market reasons. Some of these benefits (for example, disability pensions) may
be paid to people who have not reached the standard retirement age.

103

Main characteristics of the pension system

BELGIUM

The  first  pillar  pay-as-you-go  earnings-related  pension  system  is  composed  of  a  general
compulsory  scheme  covering  all  salaried  workers  in  the  private  sector  (some  70%  of
pensioners receive a benefit from this scheme), a scheme for self-employed workers (liberal
professions, farmers, traders, artisans) and a scheme for civil servants. Financing and methods
of  calculation  of  benefits  differ  from  one  scheme  to  another.  Since  1995  a  global  financial
management of social security was introduced. Financing of the different branches of social
security relies on social security contributions and state transfers. As from 1995, an annually
defined percentage of value-added tax has been earmarked for social security (25% in 2002).
Total  social  security  contributions  currently  stand  at  37.9%  of  wages  (24.9%  paid  by  the
employer and 13% by the employee).

Pensions in the private sector are calculated on the basis of the full contributory career, up to
45 years of contributions, with the same calculation coefficients for both men and women, i.e.
60% (for a single person) or 75% (for a head of family) of the revenues earned in the whole
contributory career. Under the scheme for civil servants, pensions are calculated on the basis
of the average income of the last five years. Early retirement is possible from the age of 60,
on  the  condition  that  the  beneficiary  has  cumulated  35  years  of  contributions  (this  will  be
implemented  starting  from  2005,  while  the  minimum  contributory  career  was  20  years  in
1997).

Second pillar pension arrangements take the form of voluntary company pension funds set up
in full autonomy at the initiative of the employer. Occupational pension rights are vested after
one  year  of  membership  in  the  pension  fund  and  are  transferable  to  the  fund  of  the  new
employer. The penetration rate of second pillar pension schemes was 35% in 1999, but only
8.3% for the self-employed alone.

Third pillar pension provision can take the form of pension savings or life insurance. 44.4%
of  the  overall  population  participate  in  third  pillar  pension  accounts  thanks  to  fiscal
advantages. Thus the degree of penetration of the third pillar exceeds that of the second pillar.

Approximately 90% of pensioners are entitled to the minimum pension or more. Older people
(above  62  or  65  from  2009  onwards)  with  insufficient  income  are  protected  by  a  social
assistance scheme for the elderly, GRAPA (Garantie de Ressources aux Personnes  Agées –
GRAPA – guaranteed income for the elderly).

Challenges

Poverty risks among older people are close to the EU average, but somewhat higher than for
the  Belgian  population  below  age  65.  First  pillar  provision  for  the  private  sector  only
guarantees low replacement  rates as pensions  are  calculated  on the  basis  of  earnings  during
the  entire  career,  subject  to  a  ceiling.  Past  earnings  are  indexed  by  a  price  index  for  the
calculation of the pensionable wage. The fact that pensions in payment in the private sector
are also linked to prices rather than wages can involve a progressive erosion of a beneficiary’s
pension during the years after retirement; this can be prevented through periodical additional
adjustments. In spite of the equalising effect of first-pillar pensions, income inequality among
pensioners is high compared to other Member States and, most striking when compared to the
Belgian population below age 65.

104

The expected increase in the old-age dependency ratio is somewhat lower in Belgium than for
the EU as a whole. However, due to the low employment rate, actual dependency on transfer
incomes  is  very  high:  in  2000,  for  every  100  gainfully  employed  persons  there  were
approximately 86 who were entitled to a replacement income and 43% of these were under the
age of 65. This reflects, in particular, one of the lowest employment rates for older workers
(26.3 % in 2001) in the EU.

According  to  the  Economic  Policy  Committee  projections,  public  pension  expenditure
(including old-age, disability and early pensions) is projected to rise from 10.4% of GDP in
2000  to  13.4%  in  2050.  The  social  security  system,  including  public  pensions,  is  partially
financed  by  transfers  from  the  federal  government.  According  to  national  projections  (see
table  below),  the  increase  in  those  transfers  is  expected  to  be  financed  by  the  decrease  in
interest payments and by accumulated budgetary surpluses.

Budgetary cost of ageing and public finances:
level in 2000 and projections (2000-2050) in % of GDP

Budgetary cost of ageing

2000

2050

Pensions
Health care
Other social security expenditures
Education (salary)
Total

8.7
6.2
7.3
4.3
26.4

11.8
9.3
5.0
3.7
29.8

Change
2000-50
3.1
3.1
-2.2
-0.5
3.4

Public finance

Primary surplus (no change in policy)
 - Budgetary cost of ageing
 - Other factors (tax reform,…)
Interest charges of public debt
Budget balance
Public debt

2000

2050

7

1.6

7
0
112.9

1.2
-1.2
21.7

Change
2000-50
-5.5
-3.4
-2.1
-5.8
-1.2
-91.2

Further adaptations to the pension system are needed to respond in particular to the needs of
atypical workers and the self-employed. The national strategy report also stresses the need for
further improvements in the transparency of the system and information to beneficiaries.

Meeting the challenges

The government is addressing the issue of poverty risks by improving the minimum pension
introduced in 1980 for salaried workers. This minimum is subject to having worked full-time
for 30 years, i.e. 2/3 of the career required for a full pension. The reform in 1997 introduced a
"minimum entitlement per year of the career" subject to having worked for at least 15 years.
The minimum entitlement is guaranteed for each career year corresponding to at least 1/3 of
full-time employment. The amount thus guaranteed is linked to the minimum wage.

The minimum pension applicable to the self-employed was reformed in 1994, so as to bring it
more in line with the minimum guaranteed income for older  people, although  the minimum
amount  applicable  to  the  self-employed  still  remains  lower  than  those  for  salaried  workers.
This situation is currently under review. The means-tested social assistance scheme for those
among the elderly who have insufficient means to live on (GRAPA) has been modernised in
2001, especially with regard to the individualisation of rights.

In  order  reduce  the  gap  between  final  earnings  and  pension  benefits,  the  government  is
committed to widely develop second pillar pension schemes for both salaried workers and the
self-employed. To this end, it has presented a draft law to the Parliament. These schemes will
be  based  on  collective  agreements  and  should  comprise  elements  of  solidarity.  Fiscal
incentives will be used to boost the development of the second pillar.

The government’s strategy  to  cope with  the financial  challenge to the  pension  system  relies
heavily  on  a  reduction  of  public  debt  and,  hence,  on  reduction  in  interest  payments;  this  is

105

projected to  be larger  than  the  increase in  expenditure due  to  ageing  populations.  However,
the budgetary surplus was only 0.4% of GDP in 2001 and it moved into an estimated deficit
of  0.4%  of  GDP  in  2002;  the  public  debt  ratio  still  exceeds  100%  of  GDP.  For  the
government’s  strategy  to  succeed,  budget  surpluses  will  have  to  be  achieved  for  several
decades  to  come.  The  government  has  indicated  its  commitment  to  cope  with  the  financial
challenge  of  the  ageing  population  through  the  establishment  of  a  reserve  fund  in  2001.
Savings resulting from the reduction of public debt will be transferred to this fund and thereby
earmarked  for  future  expenditure  on  ageing-related  needs.  However,  the  fund  is  still  in  its
infancy and amounted to only 0.5% of GDP in 2001.

Future expenditure growth was already curbed by the pension reform of 1997 which adapted
the way of calculating pension benefits in such a way that replacement rates will continue to
decline over time. Thus replacement rates for employees in the private sector are expected to
decline from 29.9% of final earnings in 2000  to  25.5% in 2050. Moreover, it  was decided to
raise the pensionable age for women – and the required number of years for a full pension – to
the level of men by 2009.

A number of measures with the aim of increasing the employment rate of older workers have
been and  are being taken, such  as  tighter  conditions  for  obtaining  early  retirement  pensions
(reform  of  1997),  some  improvements  in  pension  levels  for  workers  who  prolong  their
careers,  subsidies  to  employers  who  employ  older  workers,  improvements  in  working
conditions and access to training, and the possibility of gradually reducing one’s working time
before retirement. The possibilities to cumulate work and pension income were improved by
raising  the  salary  ceilings.  However,  such  employment  for  pensioners  does  not  create  any
additional  pension  rights.  Although  there  has  been  some  progress  in  increasing  the
employment rate of older workers, the pace is slow and further reforms seem to be necessary
in order to come closer to the EU-wide target of a 50% employment rate of older workers by
2010.

Conclusion

Although  public  pension  expenditure  is  expected  to  rise  significantly  due  to  ageing
populations, it may be manageable provided that large primary surpluses can be sustained for
several decades. However, public finances are moving into deficit in 2002. This gives rise to
some  concern  over  the  likelihood  of  success  of  this  policy.  Further  reforms  appear  to  be
necessary  with  regard  to  early  retirement  so  as  to  encourage  a  higher  labour  force
participation  of  people  in  their  50s  and  60s.  This  would  make  a  contribution  to  financial
sustainability. The promotion of occupational pension schemes could raise replacement rates
in  the  long  run  and  hence  the  relative  living  standards  of  pensioners.  It  remains  to  be  seen
whether  this  and  other  measures  to  improve  adequacy  will  also  reduce  inequality  among
pensioners.

106

Background statistics

B

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
6

65+
12

0-64
5

65+
11

0-64
7

65+
12

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

11

22

10

20

13

22

17

20

17

17

18

22

4,1

4,3

5,1

4,5

0,76

0,77

0,76

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

25,5
10,0

Level
2020
32,7
11,4

2050

45,0
13,3

% increase
2000-50

76,0
33,0

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

5,2
-0,9
0,9
-2,0
3,3

11,6

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

59,9
24,1
58,1

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

73,0
48,6
NA

69,1
34,4
58,5

50,5
14,3
57,3

63,9
38,5
NA

54,9
28,8
NA

107,6
0,4

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

107

Main characteristics of the pension system

DENMARK

The first pillar of the Danish pension system consists of the universal, residence-based and
non-contributory,  statutory  old  age  pension  scheme  that  is  financed  from  general  taxation
and consists  of a flat-rate  benefit  and  an  income  tested  element.  It  is  designed  to  secure  a
decent minimum standard of living for all citizens from the age of 65. A full public old-age
pension is conditional on 40 years’ residence in Denmark. The benefit is indexed to private
sector  wages  and  is  taxable.  It  consists  of  two  parts,  a  basic  amount  that  goes  out  to
everybody  and  a  supplement,  which  is  income  tested.  The  post-tax,  net  value  of  the  two
benefit elements corresponds to 47% of the average take-home pay of a worker. At present
the basic pension is paid to 99% of residents above retirement age. Of these 99% receive the
full  basic  amount  and  64%  the  full  supplement.  For  single  pensioners  the  basic  pension
constitutes 61% of their income.

A second tier of the first pillar consists of the statutory, working time-related, fully funded
ATP scheme (which is available for all economically active persons, but only offer benefits
at  a  moderate  level  equivalent  to  20%  of  the  1st  pillar  pension)  and  the  statutory  labour
market  supplementary  pension  scheme  for  recipients  of  anticipatory  pensions  (SAP).  The
ATP  scheme  provides  for  a  substantial  amount  of  redistribution  notably  in  favour  of  the
unemployed and disabled. In addition, civil servants’ pension schemes, which are statutory
and paid for by taxes, are included in the first pillar.

The second pillar consists mainly of occupational schemes based on collective agreements at
the sectoral level which are fully funded defined-contribution schemes. These schemes have
been expanded significantly since the 1980s and now cover more than 80% of the employed
workforce.  While  based  on  individual  accounts,  these  trade-union  initiated  schemes  have
important  solidarity  elements,  in  particular  invalidity  insurance  and  the  absence  of  health
criteria  for  qualification  purposes.  In  addition,  they  do  not  present  barriers  to  labour
mobility,  thanks  to  immediate  vesting  and  transferability  between  schemes.  The  normally
regressive  distribution  effects  and  public  budget  costs  of  tax  incentives  for  supplementary
pension provision are moderated by the fact that tax exemption only applies to income tax at
a  standard  rate  and  that  returns  on  investments  are  taxed.  In  2002,  the  statutory  Special
Pension  Savings  scheme  was  redefined  as  a  savings  scheme  without  any  redistribution
objective and based on individual accounts.

The  third  pillar  consists  of  individual  pension  savings  schemes,  many  of  which  result  in
lump sum benefits instead of annuity payments.

Access to a number of needs- and income tested cash supplements (e.g. housing, heating and
medicine  allowances),  to  free  health  and  long-term  care  and  to  recreational  activities
contribute to guaranteeing a decent minimum standard for all.

Challenges

While the Danish system currently appears to provide a solid and decent income level to all
long-term residents, there appear to be  weaknesses as  far  as the relative living standard of
the elderly is concerned, although national data present a different picture from ECHP data.
In view of the fact that a significant proportion of wage earners were only covered recently

108

by occupational schemes, it can be expected that many people retiring over the next 15-20
years will have had insufficient access to schemes that allow income levels to be maintained
after  retirement.  Over  the  long  run  the  situation  can  be  expected  to  improve  thanks  to  the
gradual  accrual  of  occupational  pension  entitlements  based  on  collective  agreements.
However, access to  income maintenance  through  occupational  schemes  for  people  in  non-
standard  jobs  could  be  improved.  The  increasing  importance  of  occupational  pension
schemes which reflect earnings could result in a somewhat greater gap between the pension
incomes of men and women.

Expenditure on public old-age pensions stands at 4.4% of GDP and is estimated to increase
by 3.4% of GDP by around 2035. However, including all public pension schemes (such as
disability  pensions,  civil  servants  pensions  and  statutory  supplementary  pension  schemes),
the total expenditure amounted to 10% of GDP in 2000 and is estimated to rise to 14.5 % by
2030  and  to  decrease  to  13.3%  by  2050  (Economic  Policy  Committee  projections).  The
strategy  for  financial  sustainability  hinges  upon  maintaining  a  surplus  on  public  finances
averaging  1½-2½%  of  GDP  up  to  2010  and  an  increase  in  the  labour  force  of  133,000
persons by 2010 also. Both of these goals are ambitious and are at the same time crucial for
the strategy to  succeed,  given the  relatively  short  period  of  time  for  reacting if  underlying
assumptions on economic developments should not hold.

Since Denmark already has one of the highest employment rates in the EU, labour reserves
are  small.  The  pension  reforms  undertaken  during  the  1990s  are  expected  to  increase  the
labour force participation of older workers during this decade, but only by about the amount
that is needed to offset the impact of the ageing workforce. In addition, employment is to be
raised  through  substantially  improved  employment  rates  among  immigrants  and  an
improved  integration  into  employment  of  the  disabled  as  well  as  by  increasing  the
effectiveness of labour market policies.

Meeting the challenges

The  Danish  national  strategy  report  expresses  satisfaction  with  the  reforms  implemented
over  recent  years  and  stresses  that  no  major  adjustments  to  the  system  are  planned  at
present.  The  system  is  based  on  a  broad  consensus  between  the  major  parties  about  the
overall structure and the relative role of its various elements. In addition, a large majority in
parliament  agreed  in  2000  on  the  principle  that  the  public  old-age  pension  should  form  a
sound income basis for present and future pensioners.

The  expansion  of  occupational  pension  schemes  is  expected  to  raise  replacement  rates
significantly  and  hence  to  reduce  the  current  income  maintenance  gap.  Yet  the  first  pillar
will continue to play a  lead role in provisions.  By 2045, income from  the  basic pillar will
still account for  about 50% of the average  income  of  pensioners.  A  potential  drawback  of
defined-contribution occupational schemes in terms of  gender  equality,  i.e. lower  pensions
for women reflecting their longer life expectancy, is avoided by calculating pension benefits
on a unisex basis.

A major focus of the reforms during the  1990s was  employment promotion through better
work incentives and working conditions for older workers. The pre-early retirement scheme,
which  was  a  transitional  allowance  for  people  aged  50-59  years  who  had  become
unemployed and had contributed to the unemployment benefit scheme for at least 30 years,
was  closed  for  new  entrants  in  1996  and  will  be  fully  phased  out  by  2006.  The  voluntary
early  retirement  scheme  was  made  less  attractive  for  individuals  in  2001  through  the

109

obligation to contribute to the scheme if a person opts to retire early. In addition, a special
tax  exemption  for  contributions  was  introduced  for  people  who  postpone  the  take-up  of  a
voluntary early pension. Yet, the implicit tax on working beyond the ages 60, 62 and 65 is in
many  instances  still  substantial.  Regarding  the  disability  pension  scheme,  rehabilitation
measures  have  been  reinforced  and  the  focus  has  been  switched  to  encouraging  people  to
continue  at  work  by  mobilising  the  remaining  capacity  to  work  from  those  wishing  to
benefit from the scheme. Measures  taken have already  resulted  in  a  lower  number  of  new
disability pension claimants.

An increased labour force and a further reduction in unemployment are also seen as crucial
for  enabling  the  government  to  face  increasing  expenditure  while  implementing  its  debt
repayment strategy. The government aims to maintain on average a general budget surplus
of 1½ to 2½% of GDP up to 2010.

The  complex  structure  of  the  Danish  system  (means-tested  elements,  ATP,  defined-
contribution  schemes)  can  make  it  difficult  to  have  a  clear  idea  of  a  person’s  income
situation  after  retirement.  This  issue  is  addressed  by  an  obligation  on  pension  schemes  to
disclose their administrative costs and performance records. In addition, the ATP scheme, in
co-operation with almost all other pension providers, runs an internet site where individuals
can have their prospective net income from various pension schemes calculated.

Conclusion

The strategy for ensuring adequacy and financial sustainability of pension provision seems
appropriate. The reforms needed to achieve the adequacy and solidarity objectives have been
put in place over the last decade with support from a broad majority in Parliament. A budget
policy  leading  to  quick  debt  reduction  has  already  been  sustained  for  some  years  and  all
major parties support the continuation of this  policy  until  2010,  when  the  public  debt  will
have  been  largely  eliminated.  A  further  rise  in  employment  will  be  difficult  to  achieve  in
view of the limited labour force reserves, but it is not implausible given Denmark's proven
track  record  in  employment.  In  particular,  the  incentives  for  older  workers  to  defer  their
retirement could be further strengthened.

In sum the pension system seems to be financially sustainable in the long term under present
policies  with  a  fairly  equitable  sharing  of  the  burden  between  generations.  Building  up
occupational  pensions  will  increase  replacement  rates  in  the  future  and  thereby  alleviate
potential  pressure  for  increases  in  public  pension  rates.  Yet,  the  sustainability  calculations
hinge critically on maintaining large surpluses in public finances during this decade. Further
labour market reforms would seem to be needed to ensure the assumed increase in the labour
supply,  which  in  turn  is  needed  for  ensuring  the  debt  reduction  strategy  necessary  for
financial sustainability.

110

Background statistics

DK

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
5

65+
12

0-64
4

65+
10

0-64
6

65+
14

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

7

31

7

26

8

35

17

20

17

17

18

22

2,9

3,5

5,1

4,5

0,68

0,70

0,66

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

22,2
10,5

Level
2020
30,5
13,8

2050

36,0
13,3

% increase
2000-50

65,0
26,7

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

4,1
-0,2
0,5
-1,7
2,7

10,7

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

76,2
58,0
63,6

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

72,0
49,8
63,0

80,2
65,5
63,7

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

44,7
3,1

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

111

Main characteristics of the pension system

GERMANY

The  general  pay-as-you-go,  earnings-related  pension  scheme  covers  around  82%  of  the
employed population in Germany (33 million people). The contribution rate currently stands
at 19.1%, paid in equal shares by employers and employees. This contribution pays 63% of
the expenditure on this pension scheme, while 37% is paid out of the federal public budget.
Civil servants’ pensions are paid directly from public budgets. Special schemes exist notably
for farmers and the liberal professions (funded schemes e.g. for doctors, lawyers, architects).
First pillar schemes account for 78% of all incomes of people aged 65+. The general scheme
alone provides 60% of all incomes in old age in West Germany and more than 90% in East
Germany. While, the self-employed are normally not compulsorily insured under the general
scheme, they have the option of contributing to the scheme. In 1999, 96% of the population
over  the  age  of  65  were  receiving  benefits  from  old-age  pension  schemes  which  were
publicly  funded  in  whole  or  in  part.  Survivors’  benefits  are  available  under  the  statutory
scheme.  In  addition,  the  2001  pension  reform  introduced  the  option  of  splitting  pension
rights between spouses (previously pension rights were split only in the event of a divorce).

Second  pillar  provision  tends  to  be  organised  at  company  level  in  the  private  sector.
Different  financing  models  are  possible,  ranging  from  book  reserves  (internal  funding
guaranteed by compulsory insolvency insurance) to external funds and group insurance. The
2001  reform  favours  the  development  of  contributory  schemes,  also  at  sectoral  level.
Occupational  schemes  also  exist  for  public  sector  employees  who  are  not  civil  servants.
These schemes contribute 7% to the total income of senior citizens.

Individual third-pillar provision (life insurance) accounts for around 10% of total income in
old age.

Older people without sufficient incomes are entitled to means-tested benefits. Since the 2001
pension reform, the resources of descendants are no longer taken into account. This should
improve the take-up of such benefits.

Challenges

Maintaining  financial  sustainability  in  the  face  of  an  expected  doubling  of  the  old-age
dependency ratio over the coming decades is seen as the main challenge. According to the
Economic Policy Committee projections, public pension expenditure was expected to rise by
5  percentage  points  from  11.9%  of  GDP  in  2000  to  16.9%  of  GDP  by  2050  before  the
impact  of  the  2001  reform.  The  latest  revised  estimates,  which  also  take  into  account  the
impact of the reform, project an increase of public pensions expenditure from 10.8% of GDP
in 2000 to 14.9% in 2050, a rise of 4.1 percentage points. A major source of the reduction in
the  estimated  expenditure  increase  will  be  tightened  eligibility  criteria  for  pensions  which
will  reduce  the  number  of  people  taking  up  an  early  pension.  Financial  sustainability  will
also be strengthened by the fact that the adjustment of pensions has been modified in such a
way that the rise in pensions will be slowed. In particular, public pensions will be reduced in
line with the rising share of the new private funded pension schemes; this will be achieved
through  a  reduction  in  pension  adjustments  until  2010.  The  contribution  rate  is  currently
19.1%  of  gross  income.  In  addition,  large  subsidies  from  the  Federal  budget  for  the
financing  of  current  pension  expenditure  are  needed,  rising  to  37%  of  current  pension

112

payments.  In  the  pension  reform  of  2001,  the  government  made  a  firm  commitment  to
maintain  the  contribution  rate  to  the  general  public  scheme  at  a  reasonable  level  (20%  by
2020  and  22%  by  2030).  To  this  end,  the  pension  reform  foresees  a  modest  reduction  in
replacement  levels  of  public  pensions  and  accompanies  this  with  generous  support  for
savings in mostly voluntary private retirement schemes. This should ensure that the level of
pensions will remain adequate, but in  view  of  the  small  reduction in public  pension  levels
and in the absence of automatic adjustment mechanisms, major financial challenges persist.

Apart from the latest  pension  reform,  the  government’s strategy  to  cope with the financial
challenge relies on increasing  employment  and  productivity,  in  other  words,  strengthening
the contribution base. There is scope for lowering the unemployment rate and raising labour
market participation, in particular of women and older workers. The introduction of actuarial
reductions for early pensions is likely to produce results in the coming years. In addition, the
government aims at achieving a balanced budget by 2006. Achieving sound public finances
will be important to meet future spending commitments due to population ageing, including
those for health and long-term care and for civil servants’ pensions, as well as for increased
transfers to the general pension scheme.

As  private  pension  provision  develops,  it  becomes  increasingly  important  to  ensure  that
individuals  have  sufficient  information  to  be  able  to  make  the  right  choices,  that
occupational  pension  provision  is  made  widely  accessible  (notably  through  collective
agreements) and that  it  does  not  exclude  certain  groups  of  workers  (notably  part-time  and
temporary workers) and discourage labour mobility.

Due  to  labour  force  participation  rates  and  earnings  of  women  that  are  likely  to  remain
below  those  of  men  (although  the  situation  is  improving),  individual  pension  rights  for
women will continue to be comparatively low. Adequate pension provision for women will
therefore continue to depend on survivors’ benefits, splitting of pension rights in the event of
divorce  and on the  granting of  pension  entitlements  for  career  breaks.  The  role  of  derived
benefits can be adapted as the labour market involvement of women and men becomes more
similar.

Meeting the challenges

The German pension system has been gradually adapted since the 1990s to the challenges of
demographic ageing. A major focus of the measures of 1992, 1997 and 2000 was to reduce
the  need  for  future  increases  in  contribution  rates,  notably  by  raising  the  labour  force
participation  rate  of  older  workers  and  hence  the  effective  retirement  age.  The  statutory
retirement age is currently being raised to 65 years for all types of pensions except invalidity
pensions. Early retirement  is  only  possible  at  reduced  pension  levels.  Thus,  conditions  for
early retirement were tightened and financial incentives for working longer were introduced.

The latest major reform was adopted in 2001 with the aim of reducing the so-called standard
pension  level  in  the  public  scheme  from  70%  to  67-68%  by  2030  and  promoting  the
development  of  private  pension  savings.  It  set  a  maximum  contribution  rate  of  20%  until
2020  and  22  percent  until  2030.  The  government  is  statutorily  obliged  to  propose
appropriate measures to Parliament should a risk of contribution rate increases emerge from
the 15-years projections.

The latest reform also improved the protection of older people against  the risk  of poverty.
Although there is no guaranteed minimum pension, the granting of social assistance to older

113

people is no longer subject to a means-test against their children’s income (even if they were
to  have  sufficient  resources  to  support  their  parents),  nor  is  the  income  of  household
members other than the partner taken into account. Statutory pension insurance institutions
are  obliged  to  inform  older  people  of  their  rights.  This  should  increase  the  rate  of  benefit
take-up and hence the income situation of the poorest pensioners.

In order to compensate for the planned reduction in replacement levels under  the statutory
scheme, massive support  for  the  development  of  private  pension  provision  has  been  made
available not only in the form of tax deductibility, but also through direct grants for people
on  lower  incomes  and  families  with  children  who  could  not  take  advantage  of  the  tax
deductions. Depending on the take-up of these government-supported pension arrangements,
the total cost of this measure could rise to more than €12 billion a nnually. Financial support
is available for a wide range of second and third pillar pension arrangements.

that  part  of 

their  earnings  be  converted 

The  development  of  occupational  pensions,  which  were  traditionally  voluntary  benefits
provided  by  the  employer,  will  be  boosted  by  the  granting  of  the  right  to  employees  to
demand 
into  pension  contributions
(Entgeltumwandlung). Such contributions are generally not subject to income tax nor, for a
limited  period,  to  social  insurance  contributions.  Pension  rights  based  on  such  employee
contributions  are  vested  immediately.  The  legal  limits  for  vesting  periods  applying  to
employer-financed  pensions  were  reduced  from  10  to  5  years  and  the  minimum  age  for
acquiring a vested  pension right was cut  from 35 to 30. This will be  beneficial  for  people
who interrupt their careers or change jobs and should improve occupational pension benefits
for  women.  This  improved  framework  for  occupational  pensions  is  likely  to  lead  to  the
creation of more pension schemes based on collective agreements, including at the level of
sectors where some agreements have already been concluded.

The 2001 pension reform also sought to further improve pension rights for women. In view
of the fact that bringing up children often leads to reduced earnings (e.g. through part-time
working or career breaks), pension entitlements are awarded by assuming average earnings
during the first three years after the birth of a child. After that and up to the tenth year, low
pension  entitlements  due  to  part-time  working  can  be  topped  up.  If  there  are  at  least  two
children,  this  further  increase  is  granted  even  in  the  case  of  a  career  break.  Survivors’
pensions  have  been  lowered  from  60%  to  55%  of  the  deceased  spouse’s  pension,  but  the
survivors’  pension  is  raised  for  each  child.  Individual  pension  rights  of  women  could  be
strengthened as a result of the newly introduced option of splitting pension rights acquired
during  married  life.  Previously,  splitting  could  only  take  place  in  the  event  of  a  divorce.
Splitting would have the advantage that these individualised rights are not means-tested (as
survivors’ pensions) and are not lost in case of re-marriage.

The  information  made  available  to  insured  people  about  their  prospective  pension
entitlements is also to be improved. As from 2003, statutory pension insurance institutions
have to provide annual statements about the pension entitlements that an individual (over the
age of 27) has built up. Moreover, these institutions can provide guidance on how to build
up additional, funded pension rights.

Conclusion

The 2001 pension reform made significant progress in terms of adequacy and modernisation
of  the  pension  system,  and  some  progress  on  financial  sustainability.  Further  efforts  are
needed  to  ensure  the  latter.  While  some  progress  in  raising  the  employment  rates,

114

particularly that of older workers, can be expected, this cannot be relied upon to guarantee
the  financial  balance  of  the  pension  system.  Finally,  it  would  be  important  for  the  social
partners  to  develop  occupational  pension  schemes  that  are  accessible  to  all  and  do  not
penalise mobility.

Background statistics

D

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
6

65+
6

0-64
6

65+
5

0-64
6

65+
6

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

11

11

10

9

11

13

17

20

17

17

18

22

3,5

3,6

5,1

4,5

0,97

0,98

0,96

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Up-dated projection 8
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

23,8
11,8

10,8

Level
2020
33,5
12,6

NA

2050

49,0
16,9

15,9

% increase
2000-50

101,0
43,2

34,7

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

6,5
-0,8
1,1
-2,7
4,8

13,0

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

65,8
37,7
61,6

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

72,6
46,1
61,7

58,8
29,5
61,4

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

59,5
-2,8

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.
8.  Source: New projections submitted by Germany to take account of  the  latest  pension  reform.  Germany  indicated  that
the  projections  are  based  on  the  same  assumptions  as  those  used  in  the  EPC  projections;  however,  coverage  of
pension expenditures is somewhat different.

115

Main characteristics of the pension system

GREECE

The first pillar consists of a variety of pay-as-you-go financed schemes which are dispersed
across industrial  sectors and provide varying  levels  of  pension.  The  largest  funds  are  IKA
(private  sector)  and  OGA  (farmers);  a  separate  scheme  also  exists  for  the  self-employed.
Employees’ pensions are defined-benefit in type and are also payable to the self-employed.
These  primary  insurance  Funds  typically  offer  replacement  rates  of  up  to  80%.  However,
pensions are subject to an upper limit. Primary pensions represented 10.6% of GDP (84% of
total pensions) in 2001.

A second tier of the first pillar consists of occupation-based auxiliary funds which provide
supplementary  pensions.  They  cover  all  employees  and  a  small  percentage  of  the  self-
employed  and  typically  offer  additional  replacement  rates  of  up  to  20%.  In  2001  they
accounted  for  1,8%  of  GDP  (14.5%  of  total  pensions  expenditure),  a  proportion  which  is
growing. Finally, in the public sector, lump-sum severance payments are also common.

All Funds are financed through the pay-as-you-go system and benefits levels are implicitly
guaranteed by the state. The implicit rates of return (taking into account contributions, age
limits  and  benefits)  differ  among  funds.  Moreover,  within  a  fund,  various  occupational
categories may be subject to different conditions.

Second pillar occupational pensions are not widespread. Third pillar pensions are subject to
legislation governing life insurance and benefits typically come in the form of a lump sum
and only rarely as an annuity.

Means-tested  benefits  are  paid  to  those  without  an  insurance  record;  a  large  number  of
pensioners  receive  contributory  pensions  at  a  guaranteed  minimum  level.  For  pensioners
with total income from pensions below a minimum (which exceeds minimum pensions) and
whose other income and household situation fulfil additional criteria, a pension supplement
(known as EKAS) is also paid.

Over  the  past  20  years  there  have  been  frequent  rule  changes  resulting  in  significant
differences in treatment depending on the time of first affiliation to the system.

Challenges

The  Greek  national  strategy  report  states  that  the  main  challenge  is  to  restore  the  trust  of
citizens in the system and its prospects. It summarises the problem as follows:

– 

– 

– 

Despite expenditure of over 12% of GDP on pensions, the elderly remain one of the
socially vulnerable groups.

Fragmentation  and  legislative  complexity  result  in  similar  cases  being  treated  in
different ways. These inequities undermine the social acceptance of the system.

Frequent  revisions  of  the  legislative  framework  created  feelings  of  flux  and
insecurity.

116

Notwithstanding  this,  a  huge  financial  challenge  also  exists.  According  to  the  national
strategy  report,  public  pensions  expenditure  is  projected  to  rise  steeply  –  from  12.4%  of
GDP in 2000, to 17.3% in 2030 and to 22.6% by 2050, the largest projected increase among
EU Member States in 2050. In comparison with the EPC projections, the reform undertaken
in 2002 and  the revised  population and  employment  figures  included  in  the  latest  national
projection  would  reduce  the  expected  increase  in  2050  by  only  2  percentage  points.  As  a
consequence of the steep rise in expenditure, tax financing of pensions by the state budget
will have to increase from the current 4.8% of GDP to 8.7% in 2030 and to 15.5% of GDP
in 2050, if current contribution rates are assumed (in fact, the National Strategy Report rules
out such increases).

Without taking into account the impact of the 2001 reform, which took measures to increase
the minimum pension level, the income situation of older people contrasts with that in other
EU countries in a number of ways. Unlike other Member States, old age was still the most
important factor in determining risk of poverty as measured by ECHP data of the late 1990s.
When  interpreting  this  data,  it  should  be  borne  in  mind  that  older  people  were  much  less
likely than elsewhere in the EU to live in old peoples' homes, hospitals or other communal
institutions (less than 3% of the pensioner population). They also had higher rates of home
ownership. Both  of these  factors lead  to  an over-estimation of poverty  risks.  Partly  due  to
the fact that a large proportion of pensioners live with their children, pensions constituted a
smaller  share  of  their  household  income  than  elsewhere:  tax  returns  showed  that  other
significant  sources  of  income  for  people  in  pension  ages  include  farming,  commercial
activity,  rents  and  employment.  Nevertheless,  a  large  number  of  pensioners  rely  on  the
protection  of  minimum  pensions  and  of  the  means-tested  pension  supplement  EKAS.  The
introduction,  in  1992,  of  a  considerably  less  generous  system  for  new  entrants,  notably  in
providing  radically  curtailed  minimum  income  protection,  raises  concerns  of  inter-
generational equity in terms of entitlements.

The adequacy of pension provision is seen as an important structural weakness of the Greek
system. Tackling the issues of adequacy and modernisation is regarded as a precondition for
successfully  addressing the financial sustainability problem  posed  by  demographic  ageing.
Greece,  along  with  other  MS,  faces  the  prospect  of  a  worsening  of  the  demographic
dependency  ratio,  although  the  2001  Census  shows  that  the  impact  will  be  postponed  and
somewhat  mitigated  by  recent  high  levels  of  net  migration  of  people  in  the  economically
active age group.

Overall employment rates are low (55.4% as against the EU average of 63.9% in 2001). In
addition, the national strategy report anticipates that there will be a weakening of traditional
family  solidarity,  so  that  pensions  are  likely  to  have  to  play  a  greater  role  in  securing  the
well-being of older people in Greece in the future.

Meeting the challenges

The Greek strategy is based on two premises:

– 

– 

The  effect  of  increased  participation  in  pension  schemes  during  the  1980s  and
1990s is that there should be an improvement in the level of pensions paid to future
pensioners; and

There  exists  a  "window  of  opportunity"  between  now  and  2015  during  which
pressure on the social security system and on public debt will fall and when there is

117

good  scope  to  accelerate  economic  and  employment  growth  and  to  pursue  the
modernisation of the social insurance system.

The  adopted  Greek  reform  aims  at  addressing  the  structural  weaknesses  of  the  pension
system,  as  described  above,  and  to  create  the  institutional  framework  needed  to  meet  the
further  challenges  stemming  from  demographic  ageing.  The  main  aim  is  to  increase
confidence  in  the  pension  system,  to  promote  structural  change  and,  hence,  face  the
challenge of the ageing population, by:

– 

– 

– 

– 

– 

– 

– 

– 

Promoting pension adequacy and improving the quality of services;

Consolidating the system to ensure uniform treatment and to curtail evasion;

Securing the financial autonomy of the main public fund (IKA) until 2030, through
the creation of a reserve fund which exploits the current "window of opportunity"
in order to secure the payment of benefits after 2015.

Creating a stable legislative framework for first-pillar pensions;

Distinguishing  auxiliary  pensions  more  clearly  from  primary  pensions  and
transforming auxiliary funds gradually into funded occupational schemes managed
by the social partners;

Promoting the institutional and regulatory environment to  allow  the  emergence of
second-pillar  pension  schemes,  so  as  to  diversify  the  system  and  reduce  public
expenditure in the medium term;

Securing reforms via social dialogue.

Creating  a  National  Actuarial  Authority  as  a  regulatory  body  for  all  pension
providers.

The Greek National Strategy Report places a lot of emphasis on increasing economic growth
and  achieving  the  Lisbon  targets  for  employment  rates,  notably  through  measures  that  are
already  being  implemented  to  increase  gradually  the  retirement  age  and  to  combat
contribution  evasion.  However,  the  recent  labour  market  performance  has  not  been
particularly good: the overall employment rate was only marginally higher than in 1995 and
the  employment  rate  of  older  workers  had  decreased  by  3  percentage  points,  which  is
contrary  to  the  development  in  almost  all  other  EU  Member  States.  Major  labour  market
reforms are required in order to raise the employment rates significantly.

While the 2002 reform addresses a large range of issues with the aim of making the system
more  credible  and  socially  sustainable,  the  still-large  projected  increase  in  expenditure,
despite  the  high  starting  level,  suggests  that  significant  further  efforts  are  required.  Many
measures seem to be aimed at tackling the existing problems rather than helping to prepare
for the ageing problem. The reserve fund has been established mainly with the aim of being
able to cover the existing liabilities in the main private pension fund (IKA).

Conclusion

Implementing the reforms set out in the national strategy report will be crucial for rebuilding
confidence in the pension system and making it politically and socially viable. However, the

118

political  and  overall  long-term  viability  of  the  pension  system  cannot  be  ensured  without
addressing  its  financial  sustainability  as  well.  The  estimated  impact  of  the  most  recent
reform on pension expenditure falls short of the scope of the challenge. There is substantial
scope for improving the viability of the pension system by increasing employment rates and
curbing contribution evasion, while the gradual development of second-pillar schemes will
ease pressures on public finances. Nevertheless, significant further measures will be needed
to stabilise expenditure growth in order to ensure the continuity and the long-term financial
sustainability  of  the  pension  system.  In  addition,  considerable  labour  market  reforms  are
needed  in  order  to  raise  employment  rates  as  required  by  the  Lisbon  and  Stockholm
quantitative targets.

Background statistics

GR

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
12

65+
25

0-64
12

65+
24

0-64
12

65+
25

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

18

33

17

34

18

33

17

20

17

17

18

22

5,8

7,0

5,1

4,5

0,74

0,74

0,74

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

25,5
12,6

Level
2020
32,9
15,4

2050

54,0
24,8

% increase
2000-50

110,0
96,8

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

9,9
-3,6
1,4
4,0
11,7

12,7

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

55,4
38,0
60,4

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

70,8
55,0
61,9

40,9
22,5
58,5

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

107,0
-1,2

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

119

Main characteristics of the pension system

SPAIN

The first pillar of the Spanish pension system consists of a general earnings-related scheme
financed through contributions and special schemes for civil servants working for the central
government or the justice system and for people working for the armed forces. The general
scheme is mandatory for all employees and self-employed and provides pension entitlements
after a minimum contribution period of 15 years. The contribution rate is 28.3% of earnings
(4.7 percentage points paid by the employee and 23.6 by the employer).

Benefits  are  calculated  as  a  percentage  of  a  so-called  'base  pension'  which  takes  into
consideration  the  earnings-related  contributions  paid  during  the  15 years  (previously  8
years) before retirement. The percentage of the base pension that is paid out depends on the
number of years a person contributed to the system and on the retirement age: a full pension
is  reached  after  35  contribution  years  and  retirement  at  age  65.  Pensions  are,  in  principle,
adjusted annually in line with the consumer price index, but, in practice, they have increased
in real terms over the last 5 years, particularly the guaranteed minimum pensions which raise
low  contributory  pension  entitlements  to  the  guaranteed  level.  The  number  of  pensioners
needing a top-up to reach the guaranteed level fell from 25% in 1995 to 20% in 2001 in the
general scheme as a result of higher pension entitlements of new retirees.

Supplementary pension schemes of the second or third pillar cover nearly 6 million people,
but  only  10%  of  these  are  members  of  an  occupational  scheme  established  by  a  collective
agreement. Pension plans tend to be more often adhered to on an individual basis or through
membership in a group (association, trade union etc.). The benefits can be drawn in the form
of  regular  or  lump-sum  payments  covering  retirement,  invalidity,  death  and  survivors'
benefits.  The  book  reserve  financing  system  traditionally  used  for  occupational  pension
plans is being abolished (except in the financial services sector) in favour of external funds
to enhance the safety of pensions in the event of bankruptcy.

Non-contributory  pensions  provide  a  means-tested  guaranteed  minimum  income  for  those
without  contributory  pension  benefits  (e.g.  because  of  insufficient  contribution  periods  or
lack of contributions).

Challenges

Spain faces one of the largest increases in the old-age dependency ratio in the EU over the
coming  50  years.  However,  as  a  consequence  of  low  birth  rates  during  the  Spanish  Civil
War,  the  increase  in  the  number  of  pensioners  over  the  coming  years  will  be  reduced,
whereas  the  age  group  20-64  is  expected  to  increase  until  2013  before  starting  to  decline.
Spain  will,  therefore,  experience  the  impact  of  ageing  somewhat  later  than  most  other
Member States.

According  to  the  national  strategy  report,  pension  expenditure  of  the  contributory  social
security  system  was  8.4%  of  GDP  in  2000.  It  will  decline  slightly  until  2010  and  rise
thereafter.  Until  the  year  2015,  contribution  revenue  is  expected  to  exceed  pension
expenditure under the social security scheme by a large margin. The national strategy report
does  not  present  estimates  beyond  2015  and  thus  does  not  cover  the  period  of  the  main
impact of demographic imbalances. Under the EPC projections, public pension expenditure

120

is expected to rise by 7.9 percentage points of GDP between 2000 and 2050 (6.7 percentage
points under the more favourable employment assumptions of the 'Lisbon scenario'). This is
one of the highest increases in the EU. Almost all of this rise is expected to occur between
2020  and  2050.  Similarly,  other  studies  on  this  issue  for  Spain  confirm  that  a  remarkable
worsening  in  the  future  financial  situation  due  to  demographic  developments  from  2020
onwards is to be expected.

The Spanish employment rates for older workers and women are among the lowest and the
unemployment  rate  the  highest  in  the  EU,  thus  providing  considerable  potential  for
employment  growth  and  hence  a  stronger  contribution  base  for  financing  pensions.  In
addition,  the  large  increase  in  the  number  of  foreign  workers  is  expected  to  continue  to
sustain the relatively fast employment growth in Spain.

The  pension  system  appears  to  be  effective  in  reducing  poverty  risks  among  older  people
(which  are  lower  than  for  the  rest  of  the  population).  Relative  living  standards  of  older
people are high and the gap between men and women appears to be small in terms of living
standards  and  poverty  risks,  albeit  not  in  terms  of  individual  pension  entitlements.  The
government  nevertheless  wishes  to  strengthen  occupational  pension  provision  which
currently is only available to a small proportion of employees.

Meeting the challenges

Spain  is  trying  to  tackle  the  issue  of  adequate  and  sustainable  pensions  on  the  basis  of  a
large political consensus. The so-called Toledo Pact concluded in 1995 and put into law in
1997 represented an important step forward in facilitating the management of the financing
of the social security system by separating contributory from non-contributory benefits, the
latter being financed through the general budget. It was also agreed that  the  surplus of the
social security system that is expected until 2015 will be transferred to a newly established
reserve fund to help to cover increased  future pension expenditure. However, the  assets of
the fund amounted to only one per cent of GDP in 2002 and, given the limited period of time
for accumulating reserves, the fund will not grow sufficiently to make a major contribution
to  financing  the  pensions  of  the  large  cohorts  that  will  retire  after  2015.  Thanks  to  the
discipline required by the budgetary stability law, Spain has made major efforts to achieve
balanced budgets both  at  the level of the  central  government  and  in  the  sub-sectors  of  the
general government (Autonomous Communities and local authorities).

Low  participation  rates  and  high  unemployment,  particularly  among  older  people  and
women,  are  being  addressed  by  a  number  of  reform  efforts.  Measures  to  reduce  female
unemployment focus on promoting education and training and on reducing employers' social
contributions  if  women  are  given  open-ended  contracts.  Some  steps  have  been  made  to
facilitate the reconciliation of family and work responsibilities through measures such as the
extension  of  the  right  to  a  reduced  working  day  or  leave  for  people  who  are  caring  for
dependent  people  (not  only  children)  and  through  the  facilitation  of  paternity  leave  (as  an
alternative  to  maternity  leave),  so  as  to  improve  incentives  for  female  labour  force
participation.  The  integration  of  immigrants  into  the  Spanish  labour  market  is  expected  to
continue to play a significant role in increasing total employment and, hence, the number of
contributors to the social security system.

In  recent  years, some steps  were  taken  with  the  aim  of  increasing  the  employment  rate  of
older  people  notably  through  better  possibilities  for  flexible  and  gradual  retirement.
Working  beyond  the  age  of  65  now  allows  an  individual  to  accrue  higher  pension

121

entitlements. It is also possible to draw a (partial) pension while continuing to work after 65.
Furthermore,  Spain  seeks  to  promote  the  employment  of  people  over  45  through
considerable reductions of social security contributions. However, a major drawback is that
no  revisions  in  early  retirement  schemes  have  been  made  with  the  aim  of  increasing
incentives to continue in work.

Legislation  introduced  in  January  2002  tries  to  promote  the  development  of  occupational
pension  schemes,  particularly  in  small  and  medium-sized  companies,  through  collective
bargaining.

Conclusion

The Spanish pension system appears to perform well in terms of adequacy, but faces a major
challenge with regard to financial sustainability. While the reorganisation of the financing of
the  social  security  system,  including  the  establishment  of  a  reserve  fund,  as  well  as  some
adjustments  to  the  parameters  of  the  pension  system  are  steps  in  the  right  direction,  the
reform  efforts  up  to  now  appear  to  fall  short  of  what  is  required  to  meet  the  challenge  of
financial  sustainability.  Significant  reforms  for  ensuring  the  financial  sustainability  of  the
pension system are in preparation and will be necessary. Given the low female employment
rate and the low participation rate of older people, further efforts are also necessary in order
to enable these people to actively participate in the labour market and to offer them the right
incentives to do so.

122

Background statistics

E

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
14

65+
7

0-64
14

65+
7

0-64
15

65+
7

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

19

16

19

16

20

16

17

20

17

17

18

22

6,0

4,2

5,1

4,5

0,91

0,94

0,88

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

24,5
9,4

Level
2020
30,6
9,9

2050

60,0
17,3

% increase
2000-50

146,0
84,0

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

8,2
-2,4
2,0
-0,3
7,5

9,9

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

56,3
38,9
61,4

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

70,9
57,4
61,5

41,9
21,8
61,3

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

57,1
-0,1

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

123

Main characteristics of the pension system

FRANCE

The  French  pension  system  is  based  on  compulsory  pay-as-you-go  schemes,  which  cover
98% of total pension expenditure and are financed by social security contributions and taxes.

The architecture of the schemes varies according to the sector of activity. Pension schemes
for  private  sector  employees  cover  63%  of  total  pension  expenditure.  Alongside  a  basic,
general scheme with strong solidarity elements, mandatory supplementary pension schemes
are established by collective agreements and financed on a pay-as-you-go basis. The benefit
formula of these supplementary schemes is based on a point system and ensures a close link
between  contributions  and  benefits  paid.  Financial  equalisation  mechanisms  exist  between
these different schemes.

Compulsory  schemes  for  farmers  and  the  liberal  professions  have  a  comparable  two-tier
structure.

Civil  servants  and  state  enterprise  employees  are  covered  by  a  variety  of  special  schemes
that  are  organised  in  one  pillar  only  and  cover  28%  of  total  pension  expenditure.  These
special schemes are generally more generous than those for private sector employees.

Finally, a guarantee of a minimum level of resources for old people and the households to
which  they  belong  is  provided  through  a  means-tested  complement  to  pensions  received
from other schemes.

The  extensive  role  of  compulsory  pay-as-you-go  schemes  in  the  French  pension  system
leaves  little  room  for  the  development  of  other  voluntary  occupational  or  individual  plans
which nevertheless benefit from fiscal incentives.

Pension income accounts for more than three-quarters of all income of people aged 65 and
more.  When  all  sources  of  income  are  taken  into  account,  the  living  conditions  of  retired
people are very close to those of the active population. In particular, retired households are
at no higher risk of poverty than other households.

Challenges

France will be among the first Member States to face the ageing problem (already in 2007,
although  the  financial  implications  will  not  materialise  until  2010).  Maintaining  financial
sustainability in the face of an expected rise of the old-age dependency ratio over the coming
decades  is  seen  as  the  main  challenge.24  The  Government  has,  therefore,  announced  its
intention to start discussions with the social partners early next year with a view to defining
a program of reform that will start being implemented in the second half of the year.

24

According to EUROSTAT projections, the old-age dependency ratio will rise by 89% between 2000
and 2050. National projections are based on a greater rise in life expectancy and foresee an increase in
the old-age dependency ratio of 112%.

124

                                                
According  to  the  estimates  reported  in  the  national  strategy  report,  public  pension
expenditure, excluding spending on guaranteed minimum pensions, is expected to increase
rapidly over the coming decades, from a level of 12.6% of GDP in 2000 to 16.3% in 2040.
This estimate is higher than the earlier Economic Policy Committee projection of 12.1% of
GDP in 2000 rising to 15.8% in 2040 (including minimum pensions).

Under current regulations, the balance of the pension system would, therefore, pass from a
surplus of 0.6% of GDP in 2005 to a deficit of 1.8% in 2020 and 3.8% in 2040, unless the
contribution  rate  is  raised  by  10  percentage  points.  Using  more  favourable  variants  to  the
demographic  and  economic  assumptions  underlying  these  estimates  only  partially  corrects
the financing needs of the system. For example, a slightly higher fertility rate, or a shorter
life expectancy or, still, a reduced unemployment rate by 1 percentage point would each lead
to a reduction of the financing need of the pension system of only about 0.2 - 0.4 percentage
points of GDP.

Raising the effective age of withdrawal from the labour market (without increasing pension
rights) is estimated to have a  relatively large impact: adding one extra  year to  the average
age of retirement from now until 2040 would allow the financing need of the pension system
to be cut by 0.6 percentage points of GDP. Currently, the employment rate of older workers
is still very low and the estimated labour market exit age is, at 58 years, one of the lowest
among  EU  countries.  There  is,  therefore,  large  scope  for  increasing  the  labour  supply  of
older people. The Government does not intend to raise the minimum legal age of retirement,
which  is  now  at  60,  but  rather  aims  to  introduce  incentives  to  postpone  the  effective
withdrawal from the labour market. The current retirement system provides weak incentives
to contribute beyond the age at which a full pension entitlement is acquired, i.e. after age 60
and after 40 contribution years (37.5 in the public sector). Once these conditions are fulfilled
there are hardly any incentives for working longer: an extra year of work implies foregoing
one year of pensions as there are restrictions for the accumulation of pension and earnings
and paying pension contributions with no or little increase in acquired pension rights.

The  government's  strategy  to  cope  with  the  financial  challenge  also  relies  on  increasing
employment among other groups, so as to strengthen the contribution base. There is scope
for lowering unemployment and raising the employment rates of young people and women.
However, the strategy to raise the employment rate of young people entails significant costs
as it relies strongly on subsidies notably in the form of reduced social security contributions.

Building the required consensus for reforming the French pension system is made difficult
by its fragmented nature and notably the existence of special and more generous schemes in
the  public  sector.  This  represents  a  major  challenge  and  explains,  to  some  extent,  why
progress in pension reform has been uneven.

The  large  variety  of  pension  schemes  with  somewhat  different  entitlement  conditions  and
pension formulae also makes it important to improve the transparency of the pension system
as  a  whole.  While  it  can  be  said  that  the  French  pension  system  has  been  able  to  ensure
adequacy  in  terms  of  allowing  people  to  maintain  their  living  standards  after  retirement,
there is still some way to go to meet the objective of intra-generational solidarity. The latter
would require  ensuring better equality between workers belonging to different schemes, in
particular  between  workers  in  the  public  and  private  sectors.  In  this  respect,  the  social

125

partners  have  emphasised  the  need  to  give  more  visibility  to  the  likely  evolution  of
replacement ratios for private sector employees.

Meeting the challenges

The present government intends to propose a new reform of the pension system during the
first half of next year. An orientation committee on retirement (COR) has been set up with
representatives from the Parliament, the social partners and experts to promote dialogue and
provide  reports  and  advice  on  pension  matters.  A  driving  principle  of  the  forthcoming
reform is to safeguard of the compulsory schemes financed on a pay-as-you-go basis, which
the national strategy report regards as an essential condition for inter- and intra-generational
solidarity. The Government wants to engage in the reform process through dialogue with the
social  partners  and  within  the  framework  of  the  existing  fragmented  system  of  pension
schemes.

The forthcoming reform will build on previous reforms steps of the French pension system.
The most notable one was the Simone Veil reform of the general scheme for private sector
employees which came into force in 1993. It increased, gradually over a ten-year period, the
number of years of service required to get the full pension rate before 65 years of age from
37.5  years to 40  years.  Next,  the  period of  earnings on which pensions are calculated was
increased from the best 10 to the best 25 years, at the rhythm of one year per year, starting
from  1 January 1994.  The  pension  adjustment  was  changed  to  prices  instead  of  wages,
although leaving scope for some additional adjustments in the case of favourable economic
performance.  Finally,  in  order  to  reinforce  the  insurance  character  of  the  system,  a
"solidarity  fund"  financed  out  of  taxes  was  created  with  the  purpose  of  funding  certain
solidarity  elements  (minimum  old-age  allowance,  benefits  awarded  on  the  basis  of  the
number of children, periods of national service, old-age contributions for the unemployed).
These  measures  responded  to  the  social  partners'  claim  that  such  expenses  should  be  a
responsibility of the state.

As  a  result  of  the  1993  reform,  the  replacement  ratio  provided  by  the  general  scheme  is
estimated  to  fall  until  2020.  In  1996,  changes  have  also  been  introduced  in  the
complementary  schemes  for  private  sector  employees  (AGIRC  and  ARRCO)  in  order  to
reinforce their insurance character. In contrast, public sector employees' schemes have so far
remained unaffected by reforms.

A  Pension  reserve  fund  was  created  in  1999  with  a  view  to  smoothing  contribution  rates
during  the  retirement  of  the  baby  boom  cohorts.  However,  assets  of  the  reserve  fund
currently amount to less than 1% of GDP and will be difficult to boost as ageing will begin
already  from  2007  onwards.  The  government  estimates  that  reserves  should  rise  to  € 150
billion by the year 2020 (around 7 % of GDP), but this will not be sufficient to cover future
pensions imbalances.

Conclusion

The  financing  of  the  pension  system  for  the  decades  ahead  is  currently  not  secured  and
significant further reform efforts are needed. The national strategy report envisages a major
reform in  2003;  specific measures are not  presented, but  it  is made clear  that  this  will  not
change the basic architecture of the current system. However, further significant reforms are

126

needed  in  order  to  put  the  pension  system  on  a  financially  sustainable  footing.  Given  the
complexity  of  the  current  system,  this  will  require  a  strong  political  consensus.  The
fragmentation  of  the  pension  system  into  a  large  quantity  of  schemes  and  the  discussions
between  the  government  and  the  social  partners  within  each  of  these  schemes  should  not
slow  down  the  reform  process.  A  crucial  issue  concerns  the  extent  to  which  it  will  be
possible  to  ensure  an  equitable  treatment  of  members  of  different  schemes,  and,  in
particular,  of  public  and  private  sector  employees.  It  will  also  be  important  for  the
government  to  develop  an  effective  and  sustainable  strategy  to  guarantee  a  greater
participation of older workers in the labour market and to raise employment in general.

Background statistics

Recent income situation (1999 ECHP data) 8

F

EU15

Total

Men

Women

Total

Men

Women

0-64
8

65+
10

0-64
8

65+
8

0-64
8

65+
12

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

14

19

14

16

15

21

17

20

17

17

18

22

4,4

4,1

5,1

4,5

0,90

0,94

0,88

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

24,4
12,1

Level
2020
32,6
15,0

2050

46,0
15,8

% increase
2000-50

89,0
30,6

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

7,7
-0,9
0,7
-3,6
3,9

13,5

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

63,1
31,0
58,7

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

70,3
35,4
58,7

56,1
26,7
58,6

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

57,3
-1,4

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.
8.  The statutory pensionable age in France is 60. Using age the age groups 0-59 and 60+ would result in observing lower

poverty risks and higher relative living standards of older people.

127

Main characteristics of the pension system

IRELAND

The  first  pillar  provides  for  flat  rate  payments  and  is  financed  through  pay-related
contributions from employers, employees and the self-employed. Supplements are  payable
for dependants, for those living alone and to pensioners over 80. Similarly structured social
assistance pensions are payable on a means-tested basis to those without a sufficient social
insurance record.

to
The  old-age  (insurance-based)  pension  currently  pays  an  amount  equivalent 
approximately  31%  of  gross  average  industrial  earnings;  the  means-tested  pension  pays
slightly  less.  Rates  of  payment  have  increased  significantly  in  recent  years  and  the
Government has committed itself to a policy of ongoing real increases to the basic pension
rates until 2007. At the same  time,  the  share  of  the  population  dependent  on  means-tested
pensions is falling and should continue to do so.

The second pillar consists of voluntary occupational pensions usually provided by individual
employers.  The  third  pillar  is  made  up  of  individual  pensions.  The  state  facilitates  and
encourages  second-and 
treatment  of
contributions  and  investment  returns  and  by  a  regulatory  system  designed  to  safeguard
pension entitlements.

third-pillar  pensions 

through  favourable 

tax 

Approximately 68% of members of occupational pension schemes are of the defined-benefit
type  with  the  remainder  being  defined-contribution  schemes.  The  membership  of  second-
and  third-pillar  schemes  has  been  increasing  by  an  average  of  5%  in  each  of  the  last  five
years  as  the  workforce  expanded  rapidly.  Currently  just  over  50%  of  workers  have
supplementary pension coverage.

Non-cash benefits-in-kind are substantial: they include free travel paid to all of pension age;
free healthcare, telephone rental and TV licenses, electricity/gas/fuel allowances are paid to
all at age 70 and subject to a means-test before that.

Challenges

According to ECHP data  from the  late  1990s, poverty  risks  were  high  for  elderly  women,
and the living standard of older people relative to the population below 64 was rather low.
However,  the  national  strategy  report  points  out  that  in  the  period  1994  to  2000  the
percentage of households headed by a person aged over 65 in consistent  poverty  fell  from
12.5%  to  7.2%.25  The  current  government  target  is  to  reduce  this  to  2%  by  2007  and,  if
possible, to eliminate consistent poverty for this group.

The  relative  income  situation  of  older  people  reflects  notably  the  fact  that  Ireland  is
currently the only Member State without some form of compulsory income-related pension
provision  for  a  majority  of  workers.  Moreover,  the  expansion  of  occupational  pensions

25

A person in consistent poverty lives on less than 60% of average income and lacks basic items such as
a hot meal, a warm coat and adequate housing.

128

                                                
coverage –  and  employment  in sectors that are  well  covered  –  will  take  some  time  before
producing its full impact on pensioner incomes.

Regarding financial sustainability, Ireland stands out in that it has the lowest proportion of
older people in the EU – 11.2% are aged 65 or over. This proportion will remain at roughly
the same level for the next 10 years, after which it is projected to increase steeply to 15% in
2021, 19% in 2031 and 28% in 2056. Thus ageing presents the same challenges for Ireland
as other Member States, except that Ireland has a somewhat longer period to prepare for the
full impact of ageing.

Public  spending  on  first  pillar  pensions  (including  public  service  pensions)  is  projected  to
rise from 4.6% of GNP in 2000 to 6.7% in 2020 and 9% in 2050. These projections assume
a very high participation rate of 80% by 2050 (68% in 2001). If the participation rate were to
rise to about 75%, the pension expenditure increase would be 0.7 percentage points higher.
Current  contribution  rates  to  the  Social  Insurance  Fund  are  deemed  to  be  (more  than)
sufficient, but significant rises  in contribution rates  (more than  double) could  be needed if
benefits are indexed to wages or if the lowest pensions are to be increased in real terms.

As a means both to allow people to maintain an appropriate living standard in retirement and
to contribute to spreading the future financial burden, raising the coverage of supplementary
pensions  is  seen  as  crucial.  Currently,  occupational  and  private  pension  plans  cover  about
50%  of  employees  and  there  are  particularly  low  rates  of  coverage  in  certain  sectors  (e.g.
"hotels  and  restaurants"  and  "wholesale  and  retail  trades").  The  government  is  seeking  an
increase in coverage to 70% of employees.

In view of the important role of occupational schemes in the Irish pension system, it will be
important to ensure not only improved access for all workers, but also greater portability of
pension rights, particularly under defined-benefit schemes. The Pensions (Amendment) Act
2002  reduced  maximum  vesting  periods  to  two  years  and  also  improved  transfer,
preservation  and  the  revaluation  of  entitlements  for  members  of  occupational  pension
schemes.

Meeting the challenges

As a result of the progressive extension of compulsory insurance between the mid-1970s and
the  mid-90s,  86%  of  pensions  will  be  social-insurance-based  by  2016.  The  absence  of  a
means test and the fact that these contributory pensions are paid at a higher rate than social
assistance  pensions  should  reduce  the  number  of  pensioners  on  very  low  incomes.
Moreover, the government has declared its intention to raise basic pensions and supplements
for dependent spouses and partners significantly, so that the lowest pension will reach € 200
per week by 2007.

The  government  has  also  set  a  target  for  supplementary  pension  coverage  which  should
reach 70% of the workforce. To this end, the government will introduce Personal Retirement
Savings Accounts (PRSA) from 2003 onwards as the main vehicle for increasing coverage.
PSRAs  will  be  subject  to  statutory  limits  on  administrative  charges,  and  pension
entitlements can be maintained without penalty  when an  account  holder changes or  ceases
employment.  However,  participation  in  a  PRSA  will  be  voluntary  for  an  individual,  but
employers  will  be  obliged  to  facilitate  this  unless  they  already  operate  an  occupational
pension  schemes.  There  will  also  be  a  public  information  campaign.  Recently  enacted

129

legislation  requires  that  progress  be  reviewed  within  three  years.  The  Quarterly  National
Household Survey has been improved to allow the monitoring of pension coverage.

The  national  strategy  report  announces  a  consultation  document  that  should  cover  two
measures  which  would  improve  opportunities  for  earning  adequate  pension  rights:  the
elimination of  the retirement condition at  age  65 (at 66  the  combined  receipt of  a  pension
and earned income is again possible) and the possibility to postpone retirement in return for
improved benefits.

A  key  element  of  the  Irish  strategy  is  to  build  up  a  reserve  fund  to  partially  pre-finance
public  pensions  to  be  paid  out  after  2025.  The  assets  of  the  Reserve  Fund  will  be  drawn
down by future Ministers for Finance commencing in 2025 until at least 2055. The size of
these drawdowns will increase in line with the growth in the percentage of over 65s in the
population. The Government is required by law to contribute 1% of GNP to the fund each
year. The current amount of assets, at 8% of GNP, is estimated to reach a level of 43% by
2025. Additional contributions may also be added (the Fund was launched with the proceeds
from privatisation of the public telecoms company).

Recognising  the  need  to  monitor  the  sustainability  of  the  Irish  pension  system,  the
government decided in 1998 to carry out regular actuarial reviews of the financial situation
of  the  Social  Insurance  Fund  (SIF);  the  capacity  of  the  National  Pension  Reserve  Fund  to
meet  future  pension  liabilities  is  also  to  be  assessed  regularly.  The  first  and,  to  date,  only
review  of  the  SIF  covered  the  period  2001-2056  and  focussed  on  the  adequacy  of  current
contribution  rates  under  alternative  scenarios  for  the  indexation  and  target  levels  of
pensions.

Conclusion

The  Irish  national  strategy  report  presents  a  clear  commitment  to  improving  adequacy  by
raising  the  lowest  pensions  and  rapidly  extending  voluntary  supplementary  pension
coverage  to  70%  of  the  workforce.  This  extended  coverage  is  important  for  ensuring  the
effectiveness  of  the  income  replacement  function  of  pension  systems  and  it  remains  to  be
seen whether this can be achieved via the current purely voluntary approach.

Ireland has made good progress in ensuring the financial sustainability of the pension system
while  at  the  same  time  making  provisions  for  increasing  the  adequacy  of  pensions.  The
public system appears to be, in broad terms, financially sustainable, despite projected major
increase  in  future  pension  expenditure,  thanks  to  the  commitment  of  the  government  to
accumulating  a  considerable  reserve  fund  for  future  liabilities.  In  addition,  there  is  a
commitment  to  monitoring  the  adequacy  of  contribution  rates  through  regular  actuarial
reviews  which  should  help  to  react  to  indications  of  a  need  for  adjustments  in  case  of  a
lower-than-projected increase in participation rates or the introduction of indexation or new
targets for benefit levels and, thus, help to keep the system on a sustainable footing.

130

Background statistics

IRL

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
10

65+
14

0-64
10

65+
7

0-64
11

65+
19

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

17

34

16

26

17

41

17

20

17

17

18

22

4,9

4,5

5,1

4,5

0,69

0,74

0,65

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4, 8 (1999)

2000

16,8
4,6

Level
2020
22,1
6,7

2050

40,0
9,0

% increase
2000-50

139,0
95,7

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

4,5
-0,9
1,4
-0,7
4,3

3,8

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

65,7
46,8
64,3

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

76,4
64,7
64,9

55,0
28,8
62,8

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

36,4
1,6

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note. For Ireland, public pension expenditure is calculated as a percentage of GNP.

4.  Source:  ESSPROS,  EUROSTAT;  see  methodological  note.  For  Ireland,  expenditure  by  occupational  schemes  is  not

available and hence not included in the value shown in this table.

5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.
8.  For  Ireland,  no  data  are  available  on  occupational  pension  schemes  for  private-sector  employees  with  constituted

reserves.

131

Main characteristics of the pension system

ITALY

While the first pillar remains fragmented into over fifty different schemes, the reforms of the
1990s have progressively unified the basic rules and most of the schemes are administered
by the social security institution for the private sector (INPS) which accounts for 2/3 of the
expenditure  and  insures  the  majority  of  private  sector  employees  and  the  self-employed.
Public sector employees' pensions are administered by a separate institution (INPDAP). The
five largest schemes cover about 80% of total public pension expenditure.

This first pillar covers 100% of the registered employed population in Italy and includes old
age,  invalidity  and  survivors'  pensions.  Old-age  pensions  accounted  for  70%  of  public
pension  expenditure  in  2000,  disability  pensions  for  13%  and  survivors'  pensions  for  the
remaining  17%.  The  contribution rate for  employees  is  32.7%  and  between  13.5  and  17%
for the self-employed (due to be raised to 19% over the coming years). The transfer from the
general budget amounted to 0.8% of GDP in 2001. An additional 2.2% of GDP was used to
finance  benefits  included  in  pension  expenditure,  but  classified  as  social  assistance  and
financed through general taxation.

Pensions  and  public  welfare  benefits  represent  the  most  important  source  of  income  for
older people, especially among the less well-off segments of the population.  They  account
for between 86.2% and 54.5% of the income of people aged 65+.

The  1995  reform  of  the  first  pillar  pensions  is  leading  to  a  gradual  shift  from  the  current
defined-benefit scheme to a notional defined-contribution scheme, to be applied fully to all
entrants  to  the  labour  market  after  31  December  1995.  This  implies  that  fully  defined-
contribution  pensions  will  be  paid  out  only  from  2035  onwards.  Meanwhile,  during  the
transition  period,  older  generations  will  maintain,  at  least  partially,  their  entitlements
according to the old scheme rules. Workers with at least 18 years of contributions at the end
of  1995  remain  under  the  defined-benefit  method  of  the  old  system  for  the  calculation  of
their benefits. The new system will result in significantly lower pension benefits if current
career  lengths  and  retirement  ages  are  maintained:  under  the  public  pension  scheme,  the
replacement  rate  for  a  typical  employee  retiring  at  60  with  35  contribution  years  will  fall
from 67.1% in 2010 to 56% in 2020 and, mainly due to rising longevity, to 48.1% in 2050.
The  fall  is  larger  for  the  self-employed,  resulting  in  a  greater  convergence  of  net
replacement rates between employees and self-employed.

Under the  new system, benefits are  calculated  on the  basis  of  the  amount  of  contributions
paid  throughout  the  entire  career  and  capitalised  at  the  growth  rate  of  GDP.  The  value  of
accumulated contributions is translated into a pension on the basis of actuarial equivalence,
taking into account the remaining life expectancy at the retirement age. Retirement will be
possible  between  57  and  65  for  both  men  and  women,  but  workers  may  not  retire  before
they  have  reached  a  pension  level  of  at  least  1.2  times  the  minimum  guaranteed  pension
guaranteed  from  age  65  (old-age  allowance).  In  order  to  counterbalance  the  impact  of
increased  longevity,  the  coefficients  used  for  converting  contributions  into  a  pension  are
reviewed every ten years on an actuarial basis.

The  pension  reforms  of  the  1990s  introduced  a  new  legal  framework  for  supplementary
pension  provision.  Supplementary  pension  provision  can  now  take  one  of  three  different

132

forms:  closed  (negotiated)  funds  based  on  collective  agreements;  open  funds  managed  by
financial intermediaries; and, since 2000, individual pension plans via life insurance policies
(third pillar). Open funds can be joined by workers individually or in groups. Participation in
a pension  fund is always  voluntary  for  employees,  and  benefits  are  calculated,  with  a  few
exceptions, on a defined-contribution basis. In 2001, membership in closed and open funds
was slightly below 10% of the employed population; for the self-employed, the percentage
is only 4% and practically zero for civil servants.

Top-up benefits are available to raise the lowest pensions to a minimum level. Older people
without sufficient income can claim social assistance.

Challenges

Italy  will  have  the  highest  old-age  dependency  ratio  among  the  current  15  EU  Member
States: more than 60% in 2050, up from 26% in 2000. The government started in the 1990s
to  work  out  solutions  that  could  guarantee  both  financial  sustainability  and  adequate
benefits.  It  had  been  calculated  that  under  the  rules  in  force  in  1990,  pension  expenditure
would have risen to 23% of GDP as a result of demographic ageing.

The reforms during the 1990s have curbed and will curb further future pension expenditure
growth. Pension expenditure is projected to increase from the current 13.8% of GDP in 2000
to 16% of GDP in 2033, where it peaks, and, thereafter, decreases gradually. However, the
pension system currently runs a deficit: 0.8% of GDP for the insurance system alone, despite
a  very  high  contribution  rate  of  32.7%  of  wages  (for  the  self-employed  20%).  If  social
assistance pensions are included, the subsidies from the state budget rise to 3.0% of GDP.
This figure is expected to rise to 4.5% of GDP by 2010 and, thereafter, to remain  at about
that level until 2030. This high financing requirement reflects the long transition period of
the first-pillar  reform which is  too long to  address  the  demographic  imbalances  caused  by
the ageing of the baby-boom cohorts.

A  major  challenge  –  and  an  opportunity  for  ensuring  future  adequacy  and  financial
sustainability – is the low employment rate in general (55% in 2001) and of women (41%)
and older workers  (28%)  in  particular.  As  long as current  older workers  can take up  early
pensions  under  old  rules,  disincentives  to  continue  to  work  are  strong  whereas  under  the
reformed public pension scheme with its close link between contributions and benefits and
its actuarial adjustment mechanisms, more and longer employment will  give rise  to  higher
benefit entitlements and hence help address potential adequacy issues. It will be necessary to
stop the widespread  recourse  to  early retirement as an instrument for adjustment in labour
market  and  to  improve  employment  opportunities  for  older  workers.  Moreover,  it  will  be
necessary  to  help  large  numbers  of  undeclared  jobs  –  many  of  them  held  by  pensioners  –
emerge from the shadow economy.

Preventing future adequacy problems will also require improvements in the social protection
of  workers  in  new  flexible  forms  of  employment,  especially  part-time  work  which  has
negative  implications  for  the  pension  rights  of  someone  who  previously  worked  full-time.
There  is  also  a  large  number  of  workers  with  a  special  status  of  self-employment,
characterised  by  a  close  and  continuous  relation  to  a  single  company  (parasubordinati).
Their social protection was improved in 1996 through the creation of a special scheme.

Supplementary pension schemes currently play a minor role in pension provision, but they
are  developing,  notably  thanks  to  fiscal  incentives.  They  could  compensate  for  the  lower

133

replacement  rate  under  the  first  pillar,  but  they  have  yet  to  be  fully  developed  in  many
companies and sectors. About two million workers have so far enrolled in a supplementary
pension  scheme.  Public  sector  employees  are  affected  by  the  same  reform  measures  as
private sector employees, but for this category of workers supplementary pension schemes
have yet to be established.

Meeting the challenges

Three  major  reforms  during  the  1990s  (in  1992,  1995  and  1997)  took  on  the  challenge  of
securing  financially  sustainable  pensions  and  radically  transformed  the  Italian  pension
system. Other cost-cutting mechanisms introduced in the nineties, and already implemented,
include  the  elimination  of  the  index-linking  of  pensions  to  earnings,  the  raising  of  the
retirement age, the tightening of the minimum eligibility requirements for retirement in the
transition  period, the tightening of the  requirements  for disability  pension  benefits  and  the
application  of  rules  to  public  sector  schemes  that  are  equivalent  to  those  of  the  reformed
private sector pension scheme.

The draft law on a new pension reform (currently under discussion in the Parliament) does
contain measures to promote second and third pillar pension provision to compensate for the
reduction  in  replacement  rates  under  the  first  pillar.  The  measures  envisaged  include  a
favourable  treatment  of  such  pensions  with  regard  to  taxation  and  social  insurance
contributions  and  a  possibility  of  diverting  contributions  to  mandatory  severance  pay
schemes  (TFR  -  Trattamento  di  fine  rapporto)  into  occupational  pension  schemes.  TFR
schemes  are  currently  financed  by  a  contribution  rate  of  6.91%  on  gross  earnings  and
managed  as  book  reserves  within  the  company  with  a  low  but  guaranteed  rate  of  interest.
With  the  reform,  pension  funds  would  be  established  and  the  assets  separated  from  the
company, implying that companies will lose a source of cheap finance. Some categories of
workers  are  already  diverting  TFR  into  pension  funds  on  a  voluntary  basis,  and  the
government is taking actions to further extend this possibility to all private and public sector
employees.

Conclusion

Italy  undertook  major  reform  efforts  in  the  1990s  which  have  started  to  stabilise  public
pension  expenditure  and  will  control  the  future  spending  dynamics.  The  move  towards  a
notional  defined-contribution  pension  scheme  represents  a  thorough  modernisation  of  the
first pillar, which is of critical importance also for its financial sustainability. However, the
high  overall  level  of  contributions  to  the  pension  system  (including  social  security
contributions, severance pay and contributions to other supplementary pension schemes) and
the  need  for  large  transfers  from  the  central  government  budget  remain  major  challenges.
Raising  employment  rates,  particularly  of  women  and  older  workers,  will  be  crucial  for
meeting these challenges.

During the transition period to the new system, older workers will continue to retire under
the  old  rules  which  offer  weak  incentives  for  working  longer.  For  the  new  entrants  to  the
labour market since 1995, the new pension system will offer appropriate incentives to work,
thanks to actuarial neutrality, and should, therefore, lead to higher employment rates. At the
same  time,  working  longer  will  provide  opportunities  for  earning  adequate  pension  rights.
Future adequacy will also depend on the development of supplementary pension provision.
The  transformation  of  the  severance  pay  scheme  into  occupational  pension  schemes

134

represents  a  major  opportunity.  Ensuring  adequacy  will  also  require  tackling  the  issue  of
pension rights for atypical workers.

Background statistics

I

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
13

65+
8

0-64
13

65+
7

0-64
13

65+
9

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

19

14

19

12

19

16

17

20

17

17

18

22

5,1

4,2

5,1

4,5

0,96

0,98

0,94

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

26,6
13,8

Level
2020
36,7
14,8

2050

61,0
14,1

% increase
2000-50

131,0
2,2

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

9,5
-3,1
-1,4
-4,9
0,2

15,1

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

54,8
28,0
60,4

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

68,5
40,4
60,4

41,1
16,2
60,3

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

109,9
-2,2

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

135

Main characteristics of the pension system

LUXEMBOURG

The first pillar of the Luxembourg pension system consists of a general scheme for private
sector  employees  and  the  self-employed  and  a  special  scheme  for  civil  servants.  Pension
benefits are related to earnings.

The general pension insurance scheme is financed through a contribution on wages of 24%
which  is  paid  in  equal  shares  by  employers,  employees  and  the  state  budget.  The
contribution  rate  is  determined  for  a  period  of  seven  years  on  the  basis  of  an  actuarial
evaluation of the  scheme.  This  long-term  commitment to  stable  contribution  rates  is  made
possible by a large reserve fund which must not be smaller than 1.5 times the annual amount
of benefits. Currently, the reserve amounts to three times the yearly amount of benefits paid.

The  net  replacement  rates  for  a  full  insurance  career  under  the  general  scheme  are  high,
reaching almost 100% of the pre-retirement income for a worker on about average earnings
after 40 years of insurance. A minimum pension of €1190 is guaranteed after 40 insurance
years.

This leaves only a limited need for supplementary schemes. Occupational pension schemes
have  developed  mainly  in  foreign  or  very  large  industrial  and  commercial  companies,  as
well as in the banking sector. Individual pension provision benefits from fiscal incentives.

The means-tested guaranteed minimum income (RMG) scheme ensures a basic income for
those without adequate pension  entitlements or other resources. The monthly amount  for a
single person is €942.

The living conditions of retired people are very close to those of the active population, and
old people are at no higher risk of poverty than other people.

Challenges

Demographic ageing is projected to be somewhat less pronounced in Luxembourg than on
average in the EU. However, the Luxembourg pension system is very much affected by the
high  level  of  employment  of  non-residents.  Due  to  the  low  level  of  unemployment,  most
new  jobs  –  75%  of  jobs  created  in  2001  –  are  taken  up  by  residents  of  the  neighbouring
countries. Provided current employment growth rates can be maintained, Luxembourg does
not  expect  to  face  difficulties  in  financing  public  pensions  up  to  2050.  However,  this  is
based  on  the  assumption  of  an  annual  rate  of  economic  growth  of  4%  and  hence  a
continuing influx of workers. At half this growth rate, the contribution rate would have to be
raised  from  the  current  24%  to  46%  according  to  the  latest  information  provided  by
Luxembourg.  The  management  of  the  reserve  fund  will  have  to  play  an  important  role  in
preparing for the increase in pensioner numbers.

Within  the  domestic  labour  market,  there  is  scope  for  raising  employment  rates  so  as  to
widen the contribution base. In spite of a very low rate of unemployment, the employment
rate of residents aged between 15 and 64 years was 62.9% in 2001, which is below the EU
average.  Employment  rates  of  women  were  also  comparatively  low  at  50.9%.  Fewer  than

136

one quarter of residents between 55 and 64 are in employment – half the target rate set at the
Stockholm European Council.

Meeting the challenges

A round table discussion on pensions was launched in 2001 with the participation of trade
unions, employers' representatives and political parties. This round table analysed issues of
pension  minima  and  convergence  of  the  level  of  pensions  paid  out  by  the  social  security
schemes for private and public sector employees. Some of the measures decided at the round
table discussion  include  a  rise  in  the  amount  of  minimum  old  age  and  survivors'  pensions
and a proportional increase of 3.9% in the amount of pensions. However, the participants at
the round table agreed that some of the improvements could be reversed if the next actuarial
assessment showed that the reserve fund could shrink to less than the statutory minimum of
1.5 times annual expenses, but this should not affect the lowest pensions.

Two  recent  reforms  try  to  address  the  problem  of  the  low  employment  rates  of  older
workers.  One  is  the  reform  of  the  disability  pension  system  with  the  aim  of  promoting
rehabilitation  instead  of  retirement.  The  new  law  envisages  several  steps  for  helping  a
worker  who  becomes  unable  to  perform  his  or  her  current  job.  First,  examinations  are
conducted to ascertain whether the worker can  return to the previous job. If this is  not the
case, there should be a reassignment of the worker which should be internal in all companies
with  more  than  25  employees.  If  an  internal  reassignment  is  not  possible,  the  worker  is
registered as unemployed and entitled to unemployment benefits while the search for other
suitable  employment  opportunities  continues.  If  the  disabled  person  can  not  be  placed  in
alternative  employment  during  the  legal  duration  of  unemployment  benefit  payments,  the
worker  is  entitled  to  a  waiting  allowance,  which  corresponds  to  the  level  of  a  disability
pension.

The other measure is the introduction of a new mechanism of staggered pension increments,
based  on  age  and  contribution  history,  for  workers  aged  at  least  55  years  and  with  a
contribution  history  of  38  years.  This  measure  should  encourage  people  to  extend  their
working lives.

The  government  is  committed  to  defining  a  legal  framework  for  a  more  dynamic,  albeit
prudent, investment policy for the reserve fund. A study on this issue was launched in 2001
and  a  bill  is  being  prepared.  The  national  strategy  report  notes  that  the  conservative
investment  strategy  followed  in  the  past  has  protected  the  reserve  fund  against  the  recent
downturn on financial markets.

A  law  of  8  June  1999  establishes  a  legislative  framework  for  supplementary  retirement
schemes organised by employers. Whilst leaving companies free to choose whether or not to
introduce  a  supplementary  pension  scheme,  the  law  defines  the  rights  of  employees  and
ensures equal treatment with regard to taxation  of  different  types  of  occupational  schemes
(book reserves, external funds, group insurance). The introduction of a new type of personal
pension plan is  envisaged  by  the  government.  Such  plans  could  pay  out  up  to  50%  of  the
accumulated savings as a lump sum.

The national strategy report presents a number of measures to improve the pension rights of
parents – mostly mothers – who interrupt their career to care for their children. This should
reduce  the  gap  between  average  pensions  for  men  and  women.  A  working  group  was

137

established following the round table on pensions to examine how individual pension rights
of women could be strengthened.

Conclusion

The Luxembourg pension system is based on a strong political consensus and ensures a high
level of adequacy. Its financial sustainability hinges, however, not only on the contribution
of relatively high rates of economic growth in the future, but also on the major contribution
of non-resident workers to the Luxembourg economy and the pension scheme. Fluctuations
in  the  number  of  foreign  workers  could  amplify  the  effects  of  demographic  ageing  of  the
resident population. For Luxembourg, the difference between the demographic dependency
ratio (people aged 65+ in relation to people aged 15-64) and the economic dependency ratio
(people receiving benefits relation to people in employment) could become much larger than
elsewhere. In the event of a decline in the employment of non-resident workers, an ageing
resident population would have to shoulder not only the pensions of resident pensioners, but
also those of a large number of pensioners living outside Luxembourg. This risk should be
taken into account in deciding on the amount of reserves that should be held by the general
pension  scheme.  Financial  sustainability  would  depend  less  on  the  availability  of  non-
resident workers if the employment rates of residents were raised – and in particular those of
women and people over 55.

138

Background statistics

L

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
6

65+
4

0-64
6

65+
3

0-64
7

65+
4

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

14

8

13

6

14

10

17

20

17

17

18

22

4,0

3,2

5,1

4,5

0,99

1,01

0,98

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

21,5
7,4

Level
2020
28,2
8,2

2050

38,0
9,3

% increase
2000-50

76,0
25,7

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

NA
NA
NA
NA
NA

10,9

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

62,9
24,4
57,5

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

74,8
34,8
58,0

50,9
14,0
56,0

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

62,8
-0,8

Women

5,6
6,1

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

139

Main characteristics of the pension system

THE NETHERLANDS

The first pillar of the Dutch pension system consists of a basic state old-age pension scheme
that  provides  flat-rate  benefits  to  all  residents  over  the  age  of  65.  It  is  financed  by
contributions levied on earnings at a rate that is statutorily limited to a maximum of 18.25%,
but  the  entitlement  to  the  basic  pension  accrues  through  residence  in  the  Netherlands
between the ages of 15 and 65. The current value of the basic pension for a single person is
around € 825 per month which almost completely  eliminates the risk of poverty for people
over  65.  The  amount  of  the  basic  pension  is  linked  to  the  minimum  wage  which,  in  turn,
follows  average  earnings.  In  1999,  for  more  than  three  quarters  of  the  over-65s,  the  basic
pension represented more than half of the total gross income.

The second pillar of occupational pension schemes is more developed than anywhere else in
the EU, thanks to collective agreements that ensure mandatory coverage of at least 91% of
all employees in 2001. These schemes are all fully funded, including those for civil servants
and  teachers,  and  the  funding  level  at  the  end  of  2001  stood  at  almost  120%  of  liabilities
(108  %  of  GDP  in  2001),  although  this  figure  is  likely  to  have  come  down  since  then
because of the recent stock market decline. The schemes are usually of the defined-benefit
type;  only  4%  of  employees  with  a  supplementary  pension  belong  to  a  pure  defined-
contribution plan. However, the percentage of pure final salary schemes has fallen from 14%
of  employees  covered  by  an  occupational  scheme  in  1995  to  7%  in  2001.  Most  defined-
benefit  schemes  disregard  salary  increases  in  the  last  few  years  before  retirement.  30%  of
pension scheme members belonged to career average schemes.

Third pillar, individual pension provision is tax-favoured. Contributions are deductible up to
the level that is required to build up total pension rights equivalent to 70% of final earnings.
Assets held by third-pillar schemes amounted to 58 % of GDP in 2001.

Challenges

If the (indirect) link between earnings and the basic state pension is maintained and in view
of the increasing benefit payments by the still maturing occupational schemes, adequacy will
not  be  problem  in  the  Dutch  pension  system.  However,  the  gap  between  older  men  and
women in terms of relative living standards is likely  to remain fairly large, due to the  fact
that  the  importance  of  occupational  pension  schemes  is  still  rising  and  benefits  from  such
schemes  reflect  past  employment  and  earnings  patterns.  Moreover,  until  1994  it  was
possible  to  exclude  part-time  workers  –  mostly  women  –  from  occupational  pension
schemes.

The Dutch national strategy report presents estimates according to which ageing will result
in an increase in public spending of approximately 9% of GDP at the peak in 2040: 4.3% for
basic old-age pensions, 3.6% for health care, 0.7% for invalidity benefits and 0.4% for other
items.  The  projections  carried  out  for  the  Economic  Policy  Committee  point  to  a  rise  of
6.2%  of  GDP  (this  covers  all  public  replacement  incomes  for  people  aged  55  and  over,
including invalidity benefits), one of the highest increases in the EU, although the projected
level in 2050 will be close to the EU average.

140

There  is  some  scope  for  raising  employment  in  the  Netherlands.  The  overall  employment
rate  and  the  rate  for  women  are  above  the  targets  set  at  Lisbon  and  Stockholm,  but  the
proportion of women working part-time is very high (69% in 2000). The employment rate of
older  workers  also  remains  low  at  just  under  40%  in  2001.  This  requires  in  particular  a
review  of  how  the  invalidity  pension  scheme  operates  and  of  the  incentive  structures  in
occupational pension schemes.

The Dutch report also points  to increasing  international influences on the  national  pension
system  as  important  challenges.  The  system  has  to  be  adapted  to  the  growing  mobility  of
labour  and  capital  across  borders.  Moreover,  the  financial  situation  of  pension  funds  and
their  ability  to  provide  adequate  benefits  will  depend  on  inflation  in  the  Euro  zone,  and,
more generally, on developments in financial markets. The national strategy report therefore
insists  on  the  importance  of  maintaining  stability-oriented  macro-economic  policies,
including strict compliance with the  Stability  and Growth pact.  Finally,  at the peer review
held in October 2002, the Netherlands also expressed concern about legal uncertainty caused
by  challenges,  based  on  EU  competition  rules,  to  mandatory  membership  in  occupational
pension schemes. So far, these challenges have never been successful, but it was confirmed
that the dominant position of occupational schemes benefiting from mandatory membership
must be justified by solidarity elements.

Meeting the challenges

The  government  and  the  social  partners  are  committed  to  raising  participation  rates  in
occupational  pension  schemes  even  further.  The  social  partners  at  the  central  level  issued
recommendations  on  this  matter  for  the  decentralised  collective  bargaining  processes  in
Spring 2001. A further step towards a participation rate of 100 % (in 2001 it stood at 91 %)
would  be  compulsory  membership  in  the  occupational  pension  scheme  for  the  temporary
employment agency sector which is currently under discussion. The government will decide,
on the basis of a review in 2006 of the results achieved by the social partners, whether it is
necessary  to  enact  legislation  which  would  make  it  impossible  to  exclude  individuals  or
groups of employees from pension schemes. The social partners also reached an agreement
on recommendations regarding the index-linking of occupational pensions.

In spite of the significant increase in public spending caused by ageing, the Netherlands is
committed to maintaining the basic state pension scheme in its present form. The financing
is  to  be  secured  through  transfers  from  the  general  budget  as  soon  as  the  maximum
contribution  rate  of  18.25%  is  no  longer  sufficient  to  cover  expenditure.  This  can  be
expected  to  be  the  case  around  2010.  The  government  expects  that  sufficient  budgetary
resources  will  be  available.  This  is  to  be  ensured  by  a  further  reduction  of  public  debt.  A
virtual  old-age  pensions  savings  fund  is  being  built  up  in  which  these  savings  will  be
earmarked to be used for financing pensions from 2020 onwards. As this is not a real fund,
the use of these earmarked resources implies a possible increase in public debt after 2020.
The need for government borrowing will be mitigated by the fact that deferred taxation of
supplementary  pensions  will  lead  to  increased  revenues  at  the  time  when  more  public
benefits are paid out. The government expects that this extra tax revenue will represent some
5% of GDP in 2040.

Raising employment rates will also have to make a significant contribution to securing the
future  funding  of  pensions.  Expressed  in  full-time  equivalents,  employment  rates  in  the
Netherlands  are  close  to  the  European  average  which  means  that  there  is  scope  for
improvement  through  more  full-time  employment  opportunities  particularly  for  women.

141

This  would  help  to  create  the  necessary  budgetary  margin  as  increased  earnings  do  not
create  additional  entitlement  to  public  flat-rate  pension  benefits.  It  is  estimated  that  a  5-
percentage-point rise in employment rates creates a budget margin of 1.2% of GDP.

Regarding  the  employment  of  older  workers,  the  government  aims  for  an  increase  in  the
participation rate of older workers of 0.75 percentage points per year. This is to be achieved
through various measures: the favourable tax treatment for early retirement schemes is being
phased out; and the social partners have already reformed early retirement schemes covering
83%  of  older  employees.  Members  who  postpone  their  retirement  under  a  pre-pension
scheme will be entitled to a higher supplementary pension from the age of 65. The number
of older people  claiming unemployment benefit is to  be  reduced by  obliging employers to
contribute to unemployment benefit expenditure for employees aged 57½ and over, and by
reintroducing the obligation to seek work for people aged  57½ and over. The 2002 budget
law  introduced  direct  subsidies  and  contribution  rebates  as  financial  incentives  for  the
employment of older workers.

Further  legislation  that  will  have  positive  effects  on  the  employment  of  older  workers  is
envisaged.  The  government  will  introduce  legislation  to  prohibit  age  discrimination  in
employment  and  training.  Legislation  will  also  ensure  that  older  workers  who  finish  their
careers  at  reduced  pay  will  not  be  penalised  disproportionately  in  terms  of  their  pension
rights under final salary schemes. Finally, a reform of the disability benefit scheme is also
envisaged;  this  should  bring  down  the  number  of  people  who  are  currently  classified  as
totally or partially incapable of working from the current high level of nearly 1 million.

The strategy to cope with the challenge for the public pension system and for public finances
as  a  whole  relies  on  the  abolition  of  the  public  debt  by  2010,  which  requires  an  annual
surplus of between 1.25 and 1.75 % of GDP up to 2010. This will reduce interest payments,
which will allow funds to be earmarked for a notional pension reserve fund. In addition, an
increase in tax revenues paid by future pensioners, in particular from pensions paid out from
second  pillar  funds,  will  help  to  cope  with  the  financial  challenge,  notably  from  2020
onwards. Nevertheless, the drawdowns from the notional reserve fund will imply increased
debt levels.

The financial sustainability of the second pillar schemes depends largely on the stability of
macroeconomics developments and on low inflation, which are important objectives in the
overall economic policies. In addition, requirements concerning the level of funding in these
schemes  are  high  and,  thus,  provide  a  useful  safety  margin  in  the  face  of  stock  market
declines.  Notwithstanding  this,  recent  declines  have  reduced  the  value  of  assets  in  some
funds below the required level. A further decline in asset values could lead to adjustments in
contribution levels or a suspension of the index-linking of benefits for a substantial number
of pension funds.

Conclusion

The  Dutch  strategy  for  the  first  pillar  relies  heavily  on  an  ambitious  goal  of  achieving
budgetary  surpluses  over  a  long  period  of  time,  supported  by  intensified  employment
policies and a reform of disability pension schemes, in order to eliminate public debt. This
should make it possible  to  achieve  the  substantial increase  in public resources  that will  be
required for financing public pensions. However, public finances are moving into deficit in
2002.  This  gives  rise  to  some  concern  over  the  likelihood  of  success  of  this  policy.

142

Regarding  second  pillar  pensions,  the  strategy  relies  on  conducting  sound  macroeconomic
policies and safe funding margins.

The Dutch pension system performs well in terms of adequacy, as it is based on a universal
flat-rate public pension and on earnings-related supplementary pensions which cover a very
large share of the population. However, it remains to be seen whether increased labour force
participation  and  the  inclusion  of  part-time  workers  in  occupational  pension  schemes  will
allow women to catch up with men in terms of incomes in old age.

Background statistics

NL 8

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
6

65+
4

0-64
6

65+
4

0-64
6

65+
5

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

11

7

11

7

12

7

17

20

17

17

18

22

3,7

3,7

5,1

4,5

0,93

0,98

0,89

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

20,0
7,9

Level
2020
29,5
11,1

2050

41,0
13,6

% increase
2000-50

103,0
72,2

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

5,4
-0,6
0,5
0,2
5,5

13,3

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

74,1
39,6
61,7

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

82,8
51,1
61,9

65,2
28,0
61,0

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

52,8
0,1

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.
8. 

In the Netherlands, the second pillar is well developed. This has a direct positive impact on the public pension scheme
by reducing the burden of ageing populations on the first pillar. However, there is also an important indirect implication:
taxes  on  future  pension  benefits  (which  are  drawn  from  the  private  funds)  are  expected  to  be  quite  high  and  may
partially counterbalance the rise in public pension benefits.

143

Main characteristics of the pension system

AUSTRIA

The  first  pillar  consists  of  a  general  scheme  for  private  sector  employees  and  special
schemes for the self-employed, for farmers and for civil servants.  In 2001,  around 95% of
the active population were covered by compulsory pension insurance.

The  schemes  are  predominantly  funded  through  contributions.  The  current  rate  of
contribution  is  22.8%  of  pensionable  earnings  and  has  been  kept  stable  at  that  level  over
recent  years.  Employees  pay  10.25  percentage  points  and  employers  12.55.  Civil  servants
contribute 12.55% of their salary to their pension scheme. It is interesting to note that retired
civil servants also have to contribute 2.3% of their pension income to the scheme. The state
budget contributes 21.5% of total pensions expenditure in Austria. As a share of GDP, this
contribution has fallen from 2.85% in 1991 to 2.4%.

The standard  retirement age is 65 for men  and 60 for  women. Early  retirement is  possible
from age 61.5 for men and 56.5 for women. The pension level depends on the length of the
insurance  career  (including  certain  assimilated  periods  such  as  national  service  or  periods
during which certain social benefits were paid) and on the level of insured earnings (which
are limited by a ceiling of € 3270 per month in 2002). The pension is based on the average
earnings during the 15 best years of the entire insurance career. Pension rights accrue at the
rate of 2% of this average for every insurance year. The maximum pension amount that can
be achieved under the general scheme is € 2309 (paid 14 times per year).

The  second  pillar  is  voluntary.  It  is  estimated  that  300 000  people  have  already  acquired
pension entitlements under occupational schemes, although this figure does not include the
more traditional direct benefit promises by employers (book reserves).

The third pillar has been boosted by the tax reform in 2000 which introduced tax credits for
individual  retirement  savings  plans  and  employee  contributions  to  a  second  pillar  scheme.
Benefits from such favoured schemes are tax free.

A  minimum  pension  of  € 630  for  singles  and 
year) is guaranteed through a means-tested top-up benefit.

€ 900  for  a  couple  (to  be  paid14  times  per

Challenges

For people with sufficient insurance records, the first pillar of the Austrian pension system
provides adequate benefits with net replacement rates in excess of 80%. However, in mid-
2002 more than 11% of pensions needed to be topped-up to raise pensioner incomes to the
minimum  pension  level.  Reliance  on  this  means-tested  support  is  high  among  pensioners
under the farmers’ scheme and also among recipients of survivors’ benefits. Poverty risks in
old age are significantly higher for women than for men.

The  Austrian  pension  system  relies  almost  completely  on  the  first  pillar  public  pension
scheme. This is reflected in public pension expenditure as a share of GDP: 14.5% in 2000,
the highest expenditure level in the EU and well above the EU average of 10.4%. The old-
age dependency ratio will rise faster than the EU average in Austria to about 1.3 times the
current  level  by  2050.  However,  the  projected  increase  in  public  pensions  expenditure

144

appears moderate compared to the extent of demographic ageing, notably thanks to the fact
that  the  employment  rates  of  women  and  older  workers  are  expected  to  increase  in  the
calculations  due  to  raising  the  pensionable  age  of  women  and  the  minimum  age  for  early
retirement. Expenditure in 2050 will amount to 17% of GDP, 2.5 percentage points higher
than today, but at its peak around 2035, expenditure will be up by 4.2 percentage points – a
significantly more serious challenge.

Austria has more or less reached the Lisbon  employment targets for all people of  working
age and for women. Employment rates of older workers, by contrast, are amongst the lowest
in the EU  at 28.6% in  2001.  Moreover,  they  fell slightly  between  1995 and  2001 whereas
most  other  Member  States  managed  to  raise  them.  The  low  employment  rate  of  older
workers is to a large extent due to early exit from the labour market for reasons of invalidity.

Austria is one of the few remaining countries with different pensionable ages for women and
men – except in the special scheme for civil servants. Equalisation is planned by raising the
pensionable age for women by five years to the same age as for men, but this will only be
phased  in  between  2019  and  2029  for  early  retirement  and  between  2024  and  2033  for
standard retirement. An earlier equalisation could help raise the employment rates further.

Individual  pension rights for  women will  continue  to  be  significantly  lower  than  those  for
men, reflecting lower earnings and labour market participation which in turn is a reflection
of  the  assignment  of  roles  within  families.  This  challenge  can  be  addressed  by  awarding
pension  rights  for  child  care  periods.  However,  it  is  also  necessary  to  ensure  that  women
obtain  a  fair  share  of  a  couple’s  combined  pension  entitlements  in  the  event  of  a  family
breakdown.

Meeting the challenges

Austria  is  trying  to  fill  the  adequacy  gap  for  women  by  granting  better  pension  rights  in
respect  of  child  care periods. Parental leave allowance  are  available during  36  months  per
child (if both parents claim their entitlement) of which up to 18 are recognised as insurance
periods.  This  makes  it  easier  for  women  to  achieve  the  15  years  required  for  a  pension
entitlement.

While replacement rates under the first pillar are expected to remain high, the  government
wishes, nevertheless, to strengthen the second pillar. Since 1 July 2002, severance pay can
be invested under favourable conditions in a life insurance contract. This benefit is financed
through  a  contribution  of  1.53%  of  earnings  and  is  to  be  managed  by  separate  employee
welfare  funds  (Mitarbeitervorsorgekassen).  Worker  will  have  the  choice  between  the
payment of severance pay or the investment of their capital in pension provision. The latter
option benefits from a total exemption from taxes.

Austria  is currently working on the  consolidation  of  all  first  pillar  pension  schemes  into  a
single scheme. The special scheme for  civil servants is more favourable in that it provides
80% of final earnings (rather than 80% of earnings during the best  15  years of the  career)
and insured earnings are not subject to a ceiling. However, the earnings base for calculating
pension entitlements is being progressively extended to 15 years and new civil servants will
become members of the general scheme implying that the special scheme for civil servants
will be phased out.

145

The average retirement age for men is about 59 years and for women about 57. Austria has
started to address this problem through a series of measures adopted in 2000. They included
the  raising  of  the  minimum  age  for  early  retirement,  the  abolition  early  retirement  for
reasons of diminished ability to work, higher deductions for retirement before the standard
age  and  higher  increments  for  postponed  retirement.  These  adjustments  for  anticipated  or
delayed retirement are, however, not yet actuarially neutral.

Pensioners were also allowed to earn income while receiving their pension, thus facilitating
a gradual transition into retirement. Gradual retirement is also facilitated by the possibility
from age 50 (women) or 55 (men) to work part-time for a period of 6 ½ years and to receive
a  compensation  for  reduced  earnings.  However,  it  is  likely  that  this  is  leading,  in  fact,  to
reduced  rather  than  increased  labour  market  participation  of  older  worker  (the  alternative
would not be earlier full withdrawal from the labour market, but continued full-time work).
Moreover, it is possible to concentrate the reduced working time during the first part of the
6 ½ year period and, hence, to retire completely before the minimum early retirement age.
This instrument will therefore be reviewed.

Invalidity pensions are currently under review. Under the present system, partial invalidity is
not  recognised  with  the  effect  that  older  workers  withdraw  completely  from  the  labour
market  rather  than  opting  for  a  more  limited  labour  market  involvement  that  would  be
compatible with their health status. An expert committee is examining different options for
partial invalidity benefits.

The  government’s  strategy  to  cope  with  the  financial  challenge  of  the  pension  system  is
based on increasing the employment rate in general and that of older workers in particular,
thereby  strengthening  the  contribution  base.  A  proposal  for  further  reform  of  the  pension
system is  envisaged  in 2003. The national  strategy report  outlines  some  general  principles
for  the  reform,  such  as  strengthening  actuarial  principles  and  promoting  supplementary
private pension provision, while not questioning the importance of the first pillar scheme.

Conclusion

The Austrian national strategy report presents a detailed description of the various measures
already taken to strengthen the financial sustainability of the pension system, but an overall
estimation of  the  impact  of  these  measures  was  not  presented.  The  high  level  of  spending
and a projected significant increase therein pose considerable challenges for public finances.
The declared intention of the Austrian government to reform the pension system is therefore
welcome.

146

Background statistics

A

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
6

65+
10

0-64
5

65+
8

0-64
6

65+
12

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

10

24

9

15

11

29

17

20

17

17

18

22

3,6

4,1

5,1

4,5

0,84

0,90

0,81

0,88

0,92

0,86

At-risk-of-poverty  rate  1  (at
50% of median)
At-risk-of-poverty  rate  1  (at
60% of median)
Inequality 
distribution 1
Income  of  people  aged  65+
as  a  ratio  of 
income  of
people aged 0-64 1

income

of 

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

22,9
14,5

Level
2020
30,0
16,0

2050

54,0
17,0

% increase
2000-50

133,0
17,2

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

10,5
-2,2
-3,0
-2,9
2,4

14,0

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

68,4
28,6
60,9

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

76,7
40,0
60,9

60,1
17,9
60,3

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

63,2
0,2

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

147

Main characteristics of the pension system

PORTUGAL

The  first  pillar  of  the  Portuguese  pension  system  consists  of  a  general  scheme  that  is
mandatory for all employed and self-employed in the private sector. A special scheme exists
for civil servants, police and military force. There is also a voluntary scheme that is open to
residents  in  Portugal  who  are  not  covered  by  the  Portuguese  social  security  system;
Portuguese nationals who reside or work abroad can also enrol in this scheme.

Pension contributions to the general first pillar scheme are not separated from contributions
for  other  benefits  provided  by  the  general  social  security  scheme  which  covers  sickness,
maternity,  occupational  diseases,  unemployment,  invalidity,  old  age,  survivors  and  family
allowances. The contribution  rate  is  34.75%  of  earnings  (11 percentage  points  paid  by  the
worker and 23.75 by the employer) for  employees and varies between 25.4% and 32%  for
the self-employed. The voluntary social insurance scheme is financed by the payment of a
contribution of 16% of an amount to be covered by pension insurance; this amount can be
selected by the insured person.  In the banking and telecommunications sector occupational
schemes exist as a substitute for the general scheme.

Since 2000, the retirement age is 65 for both men and women. To be entitled to an old-age
pension, beneficiaries need to have completed a qualifying period of 15 years of insurance,
with  at  least  120  days  per  year  of  registered  earnings.  Since  1994,  old-age  and  invalidity
pensions are calculated on the basis of the average income of the best ten years over the last
15  (instead  of  the  average  monthly  income  of  the  best  five  years  over  the  past  ten  years,
which applied before)26. The rate  of  accrual  of pension  rights is 2% (previously  2.2%) for
each insurance year.

The  second  pillar  is  practically  non-existent,  and  membership  in  such  schemes  has  even
declined slightly over recent years. It is regulated by the framework law on social security.
Pension funds are administered by private institutions, essentially insurance companies and
pension funds management companies.

Third  pillar  provision  can  take  different  forms  including  the  subscription  of  life  insurance
policies  or  voluntary  membership  in  a  pension  fund.  Individual  pension  provision  is
encouraged through tax incentives.

A tax-financed non-contributory scheme provides means-tested benefits to persons aged 65
and over without adequate benefits from other sources. People with incomes below 30% of
the national minimum wage (50% for a couple) are entitled to an income supplement under
this scheme.

Challenges

The  Portuguese  pension  system  is  confronted  with  two  major  challenges:  to  improve  the
adequacy  of  old-age  pension  provision  (so  as  to  guarantee  decent  living  standards  after

26

Since the latest social security reform in 2000, the earnings over the  whole insurance career  will be
taken into account for the calculation of the pension level (subject to a maximum of 40 years).

148

                                                
retirement to all low-wage earners) and to guarantee at same time the financial sustainability
of the system.

A  significant  proportion  of  the  population  have  short  insurance  careers  or  with  very  low
insured earnings. According to ECHP data from the late 1990s, many older people were at
risk of poverty and in particular the oldest pensioners. However, these data do not reflect the
impact of increased minimum pensions in the latest reform. The relative income of people
over 65 compared to younger people was also among the lowest in the EU, at 72 % of the
income  of  people  below  the  age  of  65  years,  in  spite  of  the  fact  that  the  first  pillar  can
achieve a maximum replacement rate of 80 % at average earnings27. Over time, as cohorts
with  better  insurance  records  reach  retirement  age,  the  adequacy  situation  should  improve
automatically.

The old-age dependency ratio in Portugal is projected to double approximately between now
and 2050 to a rate of 44.5%. A recent national projection, which took account of the pension
reform of this year, forecasts a rise in public pension expenditure from 10% of GDP in 2001
to 12.1% in 2050, while the Economic Policy Committee projected a rise from 9.8% in the
year  2000  to  a  peak  of  13.8%  in  2040  (13.2%  in  2050).  An  important  factor  in  the
expenditure  increase  (accounting  for  one  third  of  the  rise)  is  public  sector  employees’
pensions  which  are  more  generous  than  pensions  in  the  private  sector  for  those  who  were
employed in the public sector before 1993.

If second pillar pension schemes are to develop in Portugal, it will  be  crucial to  guarantee
the vesting of pension rights and to make them portable.

Meeting the challenges

Over the last few years, a major priority has been to improve the level of the minimum old-
age  pension.  Minimum  guaranteed  levels  for  old-age  and  invalidity  pensions  under  the
contributory scheme were introduced for the first time in 199828 and depend on the number
of  contributions  years.  Under  the  new  2002  framework  law,  this  level  will  be  made  to
converge  towards  the  minimum  wage  over  the  period  2003-2007.  The  non-contributory
minimum  pension  will  be  raised  to  50%  of  the  national  minimum  wage  minus  the
employees' social insurance contribution (11%). The possibility to work after retirement and
to  combine  a  pension  with  earned  income  should  contribute  to  improving  the  living
standards  of  the  elderly  in  the  short  run.  In  the  longer  run,  the  maturing  of  the  pension
system (more pensioners with full careers) and, possibly, the development of supplementary
pension schemes should also have a positive impact.

During  the  1990s,  a  number  of  adjustments  were  made  to  reduce  the  future  increase  in
public pension expenditure. In 1993, the rules for calculating pension entitlements under the
special scheme for new civil servants became the same for the new entrants to this scheme
as in the general social security scheme. In 1994, the conditions for entitlement to an old-age
pension and the coefficient for calculating pension benefits were both tightened.

27

28

Under the social security reform of 2000, the maximum replacement rate can rise to 92% at average
earnings for beneficiaries with 21 and more contributions years.
Previously,  a  social  supplement  was  paid  to  people  whose  statutory  pension  did  not  reach  the
minimum amount of 30% of the average income.

149

                                                
Since the latest social security reform in 2000, the earnings over the whole insurance career
are taken into account for the calculation of the pension amount (subject to a maximum of
40 years). The new measures will be phased in and come fully into force in 2016. The social
security law  of 2002 introduces  a  ceiling  on  insured  earnings  which  will  also  cap  pension
benefits for future generations of pensioners, with a consequent reduction of spending in the
long term.

In 1999 retirement was made more flexible. All workers who have completed the qualifying
period of 15 contribution years during 30 calendar years are allowed to retire from the age of
55 at a reduced pension. Workers may also postpone their retirement up to the age of 70 and
receive  an  increased  pension.  Moreover,  old-age  pensions  can  be  freely  combined  with
earned income. Insured persons who claim an early retirement pension and who have ceased
to  work  can  make  voluntary  contributions  in  order  to  increase  their  amount  of  old-age
pension.  The  possibility  to  cumulate  part-time  work  with  partial  pension  has  also  been
introduced.

A  reserve  fund  for  social  security  was  created  in  1989.  According  to  the  social  security
reform law of 2000, the aim is to constitute, in the medium term, a reserve that is equivalent
to 2 years of pension expenditure, approximately 12 % of GDP. In addition to receiving the
surpluses of the social security scheme, which are expected to continue up until about 2015,
the fund will receive two percentage points of the employees' social security contributions.
In  December  2001,  the  fund  held  assets  worth  € 3.8 bn,  thus  amounting  to  5  %  of  GDP.
Social security deficits are expected to emerge between 2015 and 2020; the fund should then
be used  for  a period  of  15-20  years  to  cover  increased  expenditure  and  to  fill  the  revenue
gap. Thereafter, from 2029 onwards, a deficit of between 1 and 2% of GDP will have to be
met from other sources.

In order to promote the development  of supplementary pension schemes, a  comprehensive
legal framework was introduced in 2000 covering management and investment rules, as well
as the tax regime  for such  private  provision.  In  2002, further  tax  benefits  were  introduced
and  a  supervisory  framework  was  defined  for  supplementary  pension  schemes.  The
introduction  of  the  above-mentioned  ceiling  on  earnings  covered  by  the  social  security
pension insurance should create greater scope for private pension provision. With a view to
improving  the  access  to  supplementary  pension  provision,  the  new  framework  social
security law improves the conditions for the acquisition of supplementary pension rights and
establishes the principle of portability.

Conclusion

While  adequacy  remains  a  major  challenge,  recent  measures  to  raise  minimum  pensions
should soon alleviate poverty risks. The more flexible retirement options and the possibility
to raise one's pension entitlement by postponing retirement should increase the adequacy of
retirement income for those with employment opportunities. Also, more complete insurance
careers  in  better-paid  employment  will  result  in  higher  pensions  for  new  generations  of
pensioners.

The latest pension reform has also made progress in meeting the financial challenge of the
pension  system  and  the  national  strategy  report  explains  how  Portugal  will  deal  with  this
challenge  up  to  around  2030,  but  leaves  it  open  how  the  social  security  deficit  is  to  be
financed thereafter. In view of the minor effect of recent reforms on the estimated increase
in public pension expenditure, there is scope for further reform, while taking account of the

150

fact  that  the  balancing  of  the  central  government  budget  remains  difficult.  In  this  context,
there also seems to be scope for the development of private pension provision. It remains to
be  seen  whether  the  modernisation  of  the  legal  framework  for  private  pensions  (including
rules on vesting and portability) will be sufficient to allow occupational pension schemes to
play a significant role.

Background statistics

P

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
12

65+
22

0-64
12

65+
18

0-64
12

65+
25

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

18

33

18

30

19

36

17

20

17

17

18

22

6,4

5,8

5,1

4,5

0,76

0,80

0,73

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

22,6
9,8

Level
2020
27,5
13,1

2050

46,0
13,2

% increase
2000-50

104,0
34,7

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

6,7
-1,1
-2,4
0,1
3,3

10,1

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

68,9
50,3
64,5

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

76,9
61,6
64,0

61,1
40,6
64,2

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

55,5
-4,2

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

151

Main characteristics of the pension system

FINLAND

The mandatory statutory pension provision comprises a basic national pension scheme that
aims at guaranteeing a minimum income for all pensioners and an earnings-related pension
scheme that enables workers to maintain their standard of living to a reasonable degree after
retirement.  The  two  schemes  form  the  first  pillar  which  can  be  complemented  with
voluntary  pension  arrangements.  The  national  pension  scheme  provides  a  residence-based
minimum  pension  that  can  reach  € 488  per  month  (subject  to  40  years'  residence).  The
national  pension  decreases  as  the  person’s  other  pension  income  increases.  In  2001  a  full
national  pension  was  paid  to  only  10%  of  all  pensioners,  while  a  means-tested  portion
supplemented  the  earnings-related  pension  of  55%  of  pensioners.  The  share  of  pensioners
receiving only the national basic pension is on a declining trend.

The  earnings-related  pension  provides  insurance-based  pensions  and  covers  all  wage  and
salary  earners  and  self-employed  persons  without  any  income  ceiling.  An  old-age  pension
currently starts to accrue from the age of 23 at the rate of 1.5% per year up to the age of 60
when it accrues at the rate of 2.5%, for a maximum of 40 years (these rules will change in
2005).  The  target  (maximum)  replacement  rate  is  60%.  The  pension  is  calculated  on  the
basis  of average  earnings over the last 10  years  in  each  different  employment  relationship
(to be based on the entire working career as of 2005). At the end of 2000 the average total
pension  for  old-age  pensioners  (incl.  survivors’  pensions)  was  approximately  € 962  per
month, corresponding to 47 % of the average earnings for wage earners. There is a gender
 to the lower average pay level of women
difference (€ 1 151 for men, € 841 for women) due
(80%), a lower labour market participation in the past and more breaks in women’s careers.
While national pensions are adjusted in line with consumer prices, earnings-related pensions
are linked to a weighted index based on consumer prices and earnings.

At present, it is possible to retire on an unemployment or early old-age pension at the age of
60 and on a part-time pension at the age of 56. Various disability, unemployment, early and
part-time  retirement  benefits  are  payable  before  the  age  of  65.  Incapacity  for  work  is  the
most  common  reason  for  early  retirement.  In  2000,  Finland  spent  about  1%  of  GDP  on
rehabilitation measures to maintain and develop work ability.

Earnings-related pensions are partially funded. For private sector employees, these funds are
managed by private employee pension institutions which compete on the basis of customer
service and return on investments. They must, however, comply with a detailed regulatory
framework. A guarantee scheme ensures the payment of benefits in the event of insolvency
of a pension institution. Also, for local government and state  pensions, reserve  funds have
been established with the aim of raising funding to the same level as for the private sector
pension  schemes.  Altogether,  the  reserves  of  the  first  pillar  amounted  to  60  %  of  GDP  in
1999 and are projected to rise to almost 80 % of GDP by 2030.

Due  to  the  comprehensive  coverage  of  the  statutory  scheme  the  demand  for  voluntary
supplementary pension provision is very small. The benefits paid out from the second and
third pillar schemes amounted to 4 % of all pension benefits and the contributions to these
schemes to 6 % of all pension contributions in 1999..

152

Challenges

In  general,  the  risk  of  poverty  among  older  people  is  kept  low  by  the  statutory  pension
system. The income level of pensioners is comparable to the rest of the population, and the
at-risk-of-poverty rate for older people in  Finland was, at the end of the  1990s, one of the
lowest in the EU. However, some risks of poverty seem to persist especially among very old
women. Owing to the design of the pension system, pension entitlements of people on low
incomes increase only slightly through their contributions, since the amount of their national
pension diminishes with rising earnings-related pensions.

The main challenges to financial sustainability are stem from population ageing, due to the
baby-boom  generation  reaching  retirement  age,  increased  life  expectancy  and  low  fertility
rates. The number of people above retirement age will rise rapidly after 2020, and in 2030
one in four Finns will be at least 65 years old. Insufficient employment creation would add to
the demographic problem. The current overall employment rate is 67.7%, but only 46% for
those aged between 55 and 64. 86% of Finns retire before the statutory pensionable age and
the  effective retirement  age  is as  low  as  59  years.  In  order  to  reduce  early  retirement  it  is
necessary to  strengthen  incentives  and  to  maintain  the  individuals’  ability  to  work.  Unless
the  ratio  between  working  people  and  pensioners  can  be  improved  by  adequate  efforts  to
promote employment for the unemployed and older age groups, there will always be a risk
that the fiscal burden becomes unsustainable.

Expenditure  on  social  security  pensions  amounted  to  11.3%  of  GDP  in  2000  and  was
projected by the Economic Policy Committee to rise to 16% by 2040, where it will remain
relatively  stable  until  2050.  Expenditure  on  earnings-related  pensions  was  estimated  to
increase  by  6  percentage  points  of  GDP,  implying  an  increase  in  contribution  rates  by  10
percentage points; expenditure on national pensions will decrease by  about one percentage
point  of  GDP,  mainly  due  to  the  maturation  of  the  earnings-related  scheme  which  will
reduce the need for means-tested guarantee pensions. The indexation of the national pension
to prices should also mitigate the rise.

The latest reforms of the private sector pension schemes in 2001 and 2002 are estimated to
reduce  significantly  the  rise  in  pension  expenditure  relative  to  GDP.  This  is,  to  a  large
degree, thanks to the strengthening of the contribution base through tightened access to early
pensions and an improvement of incentives to continue in work. Consequently, the degree to
which the contribution rate (relative to wages) would have to be raised to maintain financial
equilibrium is estimated to be 5 percentage points. Notwithstanding the progress made, there
is  a  need  to  cope  with  the  remaining  financial  challenge  and  to  introduce  corresponding
reforms in the public sector schemes.

A succession of laws and amendments have, on one hand, made the earnings-related pension
legislation very  complex, but have,  on  the other hand,  brought different  schemes  closer  to
each  other,  thus  providing  an  opportunity  for  further  streamlining  and  modernisation.
Legislation would gain from being simplified and consolidated through the harmonisation of
the  internal  operational  principles  of  the  pension  schemes.  A  major  challenge  for
modernisation would be to design the pension system in such a way that the schemes would
adapt automatically to changing circumstances.

153

Meeting the challenges

A  number  of  reform  measures  with  the  aim  of  curbing  future  pension  expenditure  were
already  taken  since  1990:  during  the  1990s,  measures  were  taken,  inter  alia  to  adjust
survivors’  pensions  to  individual  pensions,  to  align  public  sector  pensions  to  those  of  the
private  sector,  to  raise  the  lower  age  limit  for  early  retirement,  to  extend  the  period  of
earnings considered for calculating the pension from 4 to 10 years, and to reduce the weight
of earnings in the index used for pension adjustments. These measures, undertaken in public
pension schemes during  the  1990s,  are  estimated  to  reduce  pension  expenditure  by  almost
one fifth of the expenditure level projected for 2040 under an unchanged policies  scenario
with the rules in force in 1990.

Further measures under the 2001 reform package have just been finalised: the 2001 pension
reform is aimed at discouraging early retirement and at increasing incentives to continue in
work.  Measures  include:  the  introduction  of  flexible  retirement  between  age  62  and  68,
accompanied by higher accrual rates of pension rights for the later years in work; a rise of
the part-time pensionable age from 56 to 58 years, accompanied by a reduced accrual rate; a
reduction of the lower age limit for the accrual of pension rights from 23 to 18; the gradual
abolition of the unemployment pension scheme (from 2009 to 2014); and the abolition of the
individual early (disability) retirement scheme in 2003.

In  September  2002,  the  government  presented  a  bill  based  on  an  agreement  between  the
government and the social partners, on supplementary measures to the 2001 pension reform,
mostly  to  be  introduced  from  1  January  2005.  The  calculation  of  pension  benefits  will  be
based on earnings during the entire career, adjusted using an improved weighted index (80%
wages, 20% prices instead of the earlier equal weights); pension accrual is further raised for
older workers (1.9% per year between 53 and 62 years of age and 4.5% between 63 and 68
instead of the normal accrual rate of 1.5%); early retirement before age 62 will no longer be
possible; the contribution rate for employees over 53 will be raised by 30%; the replacement
rate ceiling of 60% is to be abolished; benefits will be adjusted in line with life expectancy
(as  of  2009);  pensions  will  accrue  during  periods  without  earnings  due  to  child  care,
unemployment,  training,  sickness,  and  rehabilitation;  and,  finally,  the  funding  level  of  the
pension scheme will be increased to smooth out the evolution of contributions.

An objective has been set to raise the employment rate of older workers from 46% in 2001
to  55%  in  2010,  which  would  involve  a  rise  in  the  effective  retirement  age  by  two  years.
However, the new projections of the impact of the latest reforms foresee only an increase in
the effective retirement age by three years by 2050, emerging mainly after 2015. This would
be insufficient in view of the objectives set by the government regarding both the effective
retirement age (to raise it by 2-3 years) and the employment rate of older workers and would
call for a faster implementation of the reforms.

The Government’s overall strategy to cope with significant pressures in pension expenditure
is built upon the elements of ensuring economic growth, reducing public debt and increasing
pension  reserve  funds  (beyond  the  statutory  funding  requirement),  as  well  as  increasing
labour productivity (which has a stronger impact on the growth of pension expenditure as a
percentage of GDP than employment  growth)  and employment rates, notably  among  older
workers, thereby raising the effective retirement age. The strategy will notably require high
and continuous surpluses in general government finances for several decades.

154

Conclusion

Finland  has  made  significant  progress  in  meeting  the  strong  challenge  of  financial
sustainability  of  its  pension  system,  while  ensuring  an  adequate  level  of  pensions,
accompanied  by  a  low  risk  of  poverty  among  older  people,  and  adjusting  the  system  to
changing societal circumstances.

The reforms of 2001 and 2002 represent major steps, but the long implementation period of
the measures  will delay the impact  on  pension  expenditure  somewhat  beyond  the  moment
when the baby-boom cohorts will start retiring, allowing most of the baby-boom cohort to
still benefit from current early retirement options. Expenditure on social security pensions is
expected  to  grow  further.  In  addition,  the  overall  strategy  hinges  critically  on  maintaining
large surpluses in general government finances for a long period of time.

155

Background statistics

FIN

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
5

65+
6

0-64
5

65+
1

0-64
6

65+
8

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

10

17

9

9

10

23

17

20

17

17

18

22

3,4

2,9

5,1

4,5

0,78

0,86

0,74

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

22,1
11,3

Level
2020
35,5
12,9

2050

44,0
15,9

% increase
2000-50

98,0
40,7

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

6,6
-0,1
-1,3
-0,1
5,0

11,2

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

68,1
45,7
62,2

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

65,4
44,8
61,6

70,9
46,7
62,4

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

43,4
4,9

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

156

Main characteristics of the pension system

SWEDEN

The new first pillar scheme introduced in 1999 consists of an earnings-related (contributory)
scheme  and  an  old-age  guarantee  pension  scheme  (non-contributory).  The  income-related
scheme  is  contribution-defined  and  financed  from  a  contribution  rate  18.5%  pensionable
earnings during the entire career. 16 percentage points of the contribution are used for pay-
as-you-go financing and are accumulated at a given interest rate as a notional pension capital
(which accumulates roughly in line with earnings). 2.5 percentage points are invested in one
or  several  funds  chosen  by  the  scheme  member  (the  so-called  premium  pension  scheme).
The earnings-related pension system is separate from the government budget  and expected
to be financed only by contributions which are to be  held  constant  at  18.5%.  The  notional
pay-as-you-go capital  and  the  capital  accumulated  under  the  premium  pension  scheme  are
converted  at  the  time  of  retirement  into  a  pension  the  amount  of  which  depends  on  the
average life expectancy at the age of retirement.

The old-age guarantee pension provides a minimum pension for people over 65 years after
40  years  of  residence  in  Sweden.  It  tops  up  the  pension  entitlements  from  the  statutory
earnings-related pension scheme to the guaranteed amount and is financed by taxes. A new
form  of  means-tested  support  for  elderly  people  not  entitled  to  the  guarantee  pension
(mainly  immigrants)  will  be  introduced  in  2003.  In  addition,  means-tested  housing
allowances contribute significantly to many pensioners' incomes.

The  second  pillar  consist  of  large  occupational  pension  schemes  based  on  collective
agreements and covering around 90% of employees. The contributions are typically between
2  and  5%  of  wages.  Traditionally,  these  pensions  were  defined  benefit,  but  are  becoming
increasingly  defined-contribution  schemes.  In  2000,  pensions  paid  out  of  these  schemes
accounted for 14% of total pension disbursements.

Third  pillar  schemes  contributed  around  5%  to  total  pension  disbursements  in  2000.  Such
voluntary individual pension insurance is tax deductible.

Challenges

The  projected  increase  in  the  old-age  dependency  ratio  is  much  smaller  in  the  case  of
Sweden than for the EU as  a whole. Moreover, the design of the new pension system will
limit  the  future  growth  of  pensions  expenditure.  Spending  on  old-age  pensions  under  the
public  scheme  is  expected  to  increase  from  9%  of  GDP  in  2000  to  11.4%  in  2040,
decreasing  thereafter.  This  rise  is  comparatively  small  and  should  not  represent  a  major
financial challenge.

The employment rate of older workers is the highest the EU. Early retirement is not a major
problem. However, the number of older workers on sick leave has been rapidly increasing
during recent years, thus raising issues regarding the working environment of older workers.

As the guarantee pension is linked only to the price index, real income growth will lead to a
rising  income  gap  between  wage  earners  and  pensioners  with  earnings-related  pensions
above  the  guarantee  level,  on  the  one  hand,  and  pensioners  who  are  only  entitled  to  the
guarantee  pension  on  the  other  hand.  In  the  long  run,  this  could  lead  to  increased  relative

157

poverty  risks,  unless  dependence  on  the  guarantee  pension  can  be  reduced  by  rising
entitlements to earnings-related pensions. Women might be particularly affected by such an
evolution  as  their  earnings  tend  to  remain  lower  than  those  of  men.  As  a  result  of  lower
survivors’  benefits,  older  women  are  also  more  exposed  than  men  to  a  sharp  fall  in  their
living standards upon the loss of their partner.

Meeting the challenges

The  response  to  the  challenge  of  ageing  and  certain  inequitable  aspects  of  the  previous
defined-benefit scheme (higher pensions for people with irregular earnings profiles, but the
same  contribution  effort)  was  a  comprehensive  redesign  of  the  pension  system  in  1999
which  will  fully  come  into  effect  in  2003.  The  earnings-related  scheme  aims  for  full
actuarial neutrality. Redistributive elements include: pension credits for the unemployed or
for  parents  during  the  first  four  years  of  their  child;  and  the  guarantee  pension.  These
mechanisms are financed out of the general budget.

The  challenge  of  financial  sustainability  is  addressed  through  an  automatic  balancing
mechanism  built  into  the  earnings-related  pension  scheme.  It  is  designed  to  maintain  the
contribution  rate  constant  at  18.5%  of  earnings  and  operates  through  an  adjustment  of  the
index applied  to the notional pension capital  of the pay-as-you-go  part.  If  the  contribution
base of the system deteriorates due to an economic slowdown or unfavourable demographic
developments,  then  the  index  is  revised  downwards.  Moreover,  the  conversion  of  the
notional pensions capital takes account of life expectancy at the age of retirement and, thus,
neutralises a major cause of rising pensions expenditure.

Meeting  the  financial  sustainability  challenge  will  also  be  made  easier  thanks  to  the  large
buffer fund which was established as early as 1960 to smooth out fluctuations in the flow of
pension contributions and  disbursements.  This  buffer  fund  is  expected  to  contribute  to  the
long-term financing of the pension system. Its assets amounted to 26% of GDP in 2001.

All  financial  risks  under  the  new  earnings-related  pension  scheme  (longevity,  falling
contribution  base)  are  borne  by  beneficiaries.  However,  the  systems  provides  for  a  high
degree  of  flexibility,  both  in  terms  of  the  choice  of  retirement  age  and  in  terms  of  the
possibility  of  combining  income  from  work  with  a  full  or  partial  pension.  Actuarial
neutrality  will  allow  individuals  to  plan  their  working  life  in  such  a  way  as  to  obtain  an
adequate  pension  and,  thus,  offers  strong  incentives  for  increased  labour  market
participation of older workers (already the highest in the EU). This requires, however, that
employability  and  the  ability  to  work  are  maintained.  Currently,  the  government  tries  to
address  the  problem  of  a  rise  in  sick  leave  through  a  comprehensive  programme  aimed  at
promoting  better  health  in  working  life.  If  a  large  number  of  people  are  unable  to  earn
adequate pension entitlements, financial risks are shifted to the general budget (through the
guarantee pension of invalidity pensions).

The Swedish reform is based on a broad political consensus and is accompanied by a major
effort  to  improve  the  information  of  pension  scheme  members.  They  receive  an  annual
statement of pension capital and forecast of their future pension under different assumptions
(growth rate, rate of return, retirement age).

158

Conclusion

The  reformed  Swedish  pension  system  should  be  able  to  deliver  adequate  pensions  in  a
financially  sustainable  way,  thanks  to  its  design  and  the  built-in  mechanisms  aimed  at
adjusting to economic and demographic developments. It also results in a fair sharing of the
financial  responsibility  between  generations  and  responds 
the  requirements  of
modernisation  by  being  well  adapted  to  flexible  employment  patterns.  Tax-financed
solidarity  elements  are  currently  strong,  including  guarantee  pensions,  disability  and
survivors’ pensions and pension credits to the earnings-related scheme during career breaks
such as unemployment, parental leave etc.). However, it can be expected that the level of the
guarantee  pension  will  fall  relative  to  earnings.  Occupational  pension  schemes  based  on
collective agreements are well developed and can make a significant contribution to income
maintenance after retirement.

to 

159

Background statistics

S

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
5

65+
3

0-64
6

65+
2

0-64
5

65+
3

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

10

8

10

6

9

10

17

20

17

17

18

22

3,2

2,9

5,1

4,5

0,83

0,92

0,78

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

26,9
9,0

Level
2020
34,5
10,7

2050

42,0
10,7

% increase
2000-50

58,0
18,9

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

3,9
-0,5
0,8
-2,6
1,7

12,2

6,4
-1,1
0,6
-2,8
3,1

12,7

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP

Scope for policies to ensure sustainable pensions

Total

Men

Women

Total

Men

Women

71,7
66,5
63,2

73,0
69,1
63,3

70,4
63,8
62,7

56,6
4,8

160

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

62,8
-0,8

Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

161

Main characteristics of the pension system

UNITED KINGDOM

The  first  pillar  of  the  UK  pension  system  consists  of  a  flat-rate  basic  pension  and  an
earnings-related  additional  pension,  the  State  Second  Pension  that  replaces  the  previous
State Earnings-Related Pension Scheme (SERPS, introduced in 1978). These two tiers of the
first  pillar  are  financed  through  earnings-related  National  Insurance  contributions.  The
pensionable age is  65  for  men  and  60  for  women.  Legislation  is  in  place  to  equalise  state
pension age at 65 by 2020. A full flat-rate pension requires 44 years of National Insurance
Contributions for men and 39 for women. Pensions cannot be taken up before these ages, but
may be deferred in return for higher benefits later (7½% per year of deferral).

A unique feature of the UK pension system is the possibility to contract out of the earnings-
related  tier  of  the  pay-as-you-go  financed  first  pillar.  This  requires  coverage  by  an
occupational  or  personal  pension  scheme  providing  equivalent  or  better  benefits  than  the
earnings-related component of the statutory scheme. About 60% of the employed are in such
contracted-out schemes and are entitled to a National Insurance contribution rebate.

Occupational pension schemes tend to be established by a single employer and are generally
of  the  defined-benefit  type,  providing  pensions  based  on  years  of  service  and  final  pay.
However,  there  is  a  trend  towards  defined-contribution  schemes.  Around  44%  of  the
working age population were contributing to an occupational or personal pension scheme in
2000/01  and  60%  of  pensioner  households  had  income  from  an  occupational  pension
scheme and 71% had investment income (including personal pensions).

Personal  pensions  were  introduced  in  1988  to  offer  a  private  second  pension  to  people
without  access  to  an  occupational  scheme  or  who  change  jobs  frequently  (although
Retirement Annuity Contracts, similar to personal provisions, were available prior to 1988).
12%  of  employees  and  44%  of  the  self-employed  are  building  up  personal  pensions.  To
make  private  second  pensions  more  attractive,  Stakeholder  Pensions  were  introduced  in
April 2001. Stakeholder pensions have simple, low charges (maximum 1% of fund value per
annum), flexibility for participants to vary contributions or move between schemes without
any  financial penalty, simplified tax arrangements  with  a  £3,600  pa  contribution  limit  and
are  open  to  non-earners  for  the  first  time.  815,000  stakeholder  pensions  had  been  sold  by
March 2002.

The non-contributory Minimum Income Guarantee (MIG) provides means-tested support to
people over 60, depending on their income and capital. For a single person who meets the
test  the  guarantee  secures  a  weekly  income  of  at  least  £ 98.15,  which  is  about  30%  more
than the full flat-rate basic state pension of £ 75.50.

In 1999/2000, 57%  of  pension  income  came  from  state  sources  and  43%  from  the  private
sector.

Challenges

Between  1979  and  1996  average  net  income  of  pensioner  households  rose  by  64%  while
average earnings grew by 36%; however the income of the poorest fifth of pensioners grew
only  by  30%.  This  discrepancy  is  due  mainly  to  the  growth  in  occupational  and  private

162

pension  income  which  benefited  all  but  the  poorest  pensioners.  The  Minimum  Income
Guarantee was introduced to raise the incomes of this group. This scheme raised the income
of the poorest older people, but the pound-for-pound withdrawal meant that savings efforts
of  many  people  on  low  incomes  would  not  translate  into  higher  living  standards  after
retirement. Around one fifth of pensioners  live in households with incomes below 60% of
median.

SERPS offered a pension of 20% of average revalued lifetime earnings to employees only,
and  lower  earners  only  built  up  very  small  entitlements  to  it.  Around  60%  of  employees
contracted  –out  from  SERPS  into  occupational/private  schemes  tend  to  have  significantly
better income replacement rates. A major challenge will be to ensure that more people have
access  to,  and  make  use  of,  opportunities  to  provide  for  a  higher  living  standard  after
retirement.

Whereas adequacy had developed into a major challenge over the 1980s and 90s, financial
sustainability  appears  to  be  secured  well  into  the  future.  Public  pension  expenditure  was
5.5% of GDP in 2000 and was projected by the Economic Policy Committee to fall to 4.4%
by 2050, reflecting a smaller increase in old-age dependency ratios than in the rest of the EU
and,  most  of  all,  indexation  of  basic  pensions  to  prices  so  that  their  value  in  relation  to
earnings will decline. The projections were carried out without taking into account the new
Pension Credit and the State Second Pension which will result in public pension expenditure
remaining broadly at its current level.

In  view  of  the  importance  of  private  provision,  the  current  diversity  and  complexity  of
private  pension  schemes  pose  particular  challenges.  Individuals  are  faced  with  a  range  of
choices when they start or change employment. The large number of schemes raises issues
of the feasibility of close supervision.  Many  pension schemes have significant holdings of
equities  which  have  produce  high  returns  historically  but  do  introduce  an  element  of
volatility. Many pension schemes  and life insurers appear  to  have  badly  suffered  from  the
recent downturn on world stock markets.  For employers backing a defined-benefit  scheme
this increases the potential future costs of providing such benefits and may have contributed
to  a  switch  to  defined-contribution  schemes  where  the  investment  risk  lies  more  with
beneficiaries.

Although the UK already meets the Lisbon and Stockholm employment targets, there is still
room  for  improvement.  The  average  age  of  effective  retirement  is  62  for  men  and  59  for
women.  55%  of  men  and  one  third  of  women  retire  before  the  state  pension  age;  10%  of
early  retirement  was  linked  to  retirement  conditions  in  an  occupational  pension  scheme,
30%  to  ill-health  and  14%  was  employer-instigated.  While  there  is  no  early  retirement
option under the state pension scheme, the minimum income guarantee can be claimed from
age  60  by  both  men  and  women.  Men  aged  60-64  who  claim  the  minimum  income
guarantee  are  not  required  to  seek  work.  Occupational  pension  funds  often  arrange  early
retirement packages.

Meeting the challenges

During the past few years, a number of measures have been taken to address the adequacy
challenges. From 2003, the new Pension Credit will replace the minimum income guarantee.
This new entitlement should reach not just the poorest 25 % of households but around half
of all households over 60. It will entitle single persons aged 60 or more to an income of at
least £ 100 per week (£ 154 per  week for couples),  and will ensure that those  over 65  can

163

receive  additional  amounts  from  other  pensions/savings  up  to  a  certain  limit  above  the
minimum guarantee level without losing their pension credit entitlements. The income test
for  the  Pension  Credit  is  also  less  severe  than  that  for  traditional  income-related  benefits,
From age 60, people do not have to report any savings they have under £ 6,000 and from age
65 most will not have  to report any changes in  income during fixed  periods  of  five  years.
The  UK  Government  has  made  a  commitment  to  index  the  guarantee  element  of  Pension
Credit to earnings for the rest of its term.

The  introduction  of  the  State  Second  Pension  in  April  2002  will  enable  people  on  lower
earnings  to  build  up  more  pension  entitlements.  In  addition,  individuals  will  be  credited
second  pension  rights  for  periods  when  they  cannot  work  due  to  caring  responsibilities  or
disability. People earning between the lower earnings limit (£ 3900 a year) and £ 10 800 will
accrue pension rights as if they had earned £ 10 800. From 2002, low and moderate earners
who contract out in favour of  an occupational  scheme  will  receive  a  top-up  to  ensure  that
they will also benefit from the improvements resulting from the State Second Pension.

With  regard  to  the  employment  of  older  workers,  the  national  strategy  report  presents
several  initiatives  that  should  have  a  positive  impact.  The  integration  of  benefit  and
employment  agencies  will  make  it  possible  to  reach  people  on  invalidity  or  sickness
benefits. Disabled people can be offered specialist support  to  help  them  stay  in  the  labour
market  (New  Deal  for  Disabled  People).  Job  seekers  over  the  age  of  50  can  receive  an
income top-up (Employment Credit) for up to 52 weeks if they take up a job or become self-
employed;  training  grants  are  also  available  under  the  New  Deal  50  plus.  There  is  also  a
policy  of  encouraging  people  to  work  beyond  the  pensionable  age.  People  may  delay
claiming  their  pension  or  even  “de-retire”  when  they  have  claimed,  and  earn  increments.
Currently  the  maximum  period  for  deferral  is  5  years.  From  April  2010,  there  will  be  no
time  limit  and  the  incremental  rate  will  increase  to  about  10.4%  for  each  full  year  of
deferral.  The  wider  active  ageing  strategy  seeks  to  promote  age-positive  employment
practices among employers in the run up to age legislation in 2006.

The challenges  posed by private  pension  provision  are currently  being  put  on  the  political
agenda. Two Government-commissioned report were recently presented (the Pickering and
Sandler Reviews) with  proposals concerning the simplification  of  pension  products  and  of
pensions  legislation,  better  advice  to  consumers,  improved  access  to  savings  products  for
lower  income  consumers  and  the  reduction  of  administrative  burdens  on  schemes  and
employers.  The  Pickering  report  also  suggested  a  change  to  the  function  of  the  regulator.
These reports will inform a forthcoming Green Paper on Pensions which will address a wide
range of pension issues including promoting employment among older workers and enabling
people  to  save  to  meet  their  expectations  for  retirement.  The  role  of  the  Occupational
Pensions Regulatory Authority (OPRA) is also currently being reviewed and the findings of
this review will also inform the Green Paper.

While the level of public expenditure on pensions is low and will, in the future, be far below
the  level  of  spending  in  all  other  Member  States,  the  financial  sustainability  of  the  public
schemes does not pose  a  problem.  The  strategy  for  ensuring  the  financial  sustainability  of
the whole pension system is based on an increasing proportion of pension expenditure to be
funded through savings that people make during their working lives. The UK seeks to ensure
the  stability  of  pension  investment  in  funded  schemes  by  following  appropriate
macroeconomic policies and is considering improvements in the legislative and supervisory
framework.

164

Conclusion

The UK has made significant progress in addressing the adequacy challenges, but it remains
to be seen to what extent this will lower poverty risks in old age and raise the relative living
standards  of  pensioners.  While  some  measures  will  have  a  strong  impact  in  the  short  run,
others will take decades to develop their full effect.  For those who  are  reaching retirement
age  in  the  near  future,  working  longer  remains  the  most  efficient  way  to  raise  their  living
standard; the recent reforms have considerably improved the incentives to do so.

Financial sustainability appears to be well under control, but depends to a larger extent than
in  other  countries  on  the  performance  of  private  pension  providers.  The  national  strategy
report does not allow to draw conclusions about the financial sustainability of these private
schemes.  If  private  provision  produces  significantly  less  than  the  anticipated  coverage  or
level of pensions, future governments may face increased claims of means-tested benefits.

165

Background statistics

UK

EU15

Recent income situation (1999 ECHP data)

Total

Men

Women

Total

Men

Women

0-64
12

65+
11

0-64
11

65+
7

0-64
12

65+
13

0-64
11

65+
12

0-64
10

65+
9

0-64
12

65+
13

19

21

18

17

20

25

17

20

17

17

18

22

5,4

4,1

5,1

4,5

0,78

0,81

0,75

0,88

0,92

0,86

At-risk-of-poverty rate 1 (at
50% of median)
At-risk-of-poverty rate 1 (at
60% of median)
Inequality of income
distribution 1
Income of people aged 65+
as a ratio of income of
people aged 0-64 1

Long-term projections of public pensions spending (EPC 2001)

Old-age dependency ratio 2
Public pensions expenditure,
% of GDP 3
Factors determining the
evolution of public pensions
expenditure (2000-2050) 3

Demographic dependency
+ Employment
+ Eligibility
+ Level of benefits
= Total (including residual)

ESSPROS Pensions
expenditure 4 (1999)

2000

23,8
5,5

Level
2020
29,2
4,9

2050

42,0
4,4

% increase
2000-50

76,0
-20,0

2000

24,2
10,4

Level
2020
32,2
11,5

2050

49,0
13,3

% increase
2000-50

100,0
27,9

Contribution to change in percentage points
of GDP

Contribution to change in percentage points
of GDP

2,4
0,0
-0,1
-3,4
-1,0

11,5

6,4
-1,1
0,6
-2,8
3,1

12,7

Scope for policies to ensure sustainable pensions

Men

Total

Women

71,7
52,3
63,2

Employment (2001)
Employment rate (15-64) 5
Employment rate (55-64) 5
Effective labour market exit
age 6
Public finances (2001) 7
Public debt, % of GDP
Budget balance, % of GDP
Notes:
1.  Source: ECHP-UDB, Eurostat, version December 2002. Data for the UK is provisional. The weights for the Spanish data

78,3
61,7
64,2

65,1
43,1
62,0

63,9
38,5
NA

73,0
48,6
NA

54,9
28,8
NA

39,1
0,7

62,8
-0,8

Women

Total

Men

will be revised. Data for Sweden only cover persons aged less than 85; see methodological note.

2.  Source: EUROSTAT, demographic projections. Number of people aged 65 years and over as a percentage of people

aged 15-64.

3.  Source: Economic Policy Committee, Report on 'Budgetary challenges posed by ageing populations', 24 October 2001;

see methodological note.

4.  Source: ESSPROS, EUROSTAT; see methodological note.
5.  Source: European Labour Force Survey, 2001.
6.  Source: European Labour Force Survey, 2001. Calculation method still under discussion.
7.  Source: European Commission, DG ECFIN.

166