EU Pension Trends Matti Leppälä, Secretary General / CEO PensionsEurope 16 October 2014 Rovinj, Croatia 1 Lähde: World Bank 2 Pension debt big (implicit debt, % of GDP, 2006) Source:Müller, Raffelhüschen and Weddige (2009) Source: Eurostat (online data code: tsdde410) Iceland Norway Greece Italy Belgium Portugal Ireland Germany France Hungary EU-27 2000 United Kingdom Austria Malta Netherlands Cyprus Spain Poland Finland Latvia Denmark Slovakia Sweden Slovenia Lithuania Czech Republic Romania Luxembourg Bulgaria Estonia EU-27 Public debt big and growing (explicit debt) General government debt, by country % of GDP (at current prices) EU-27 2010 The impacts on public pensions Public spending in pension as a percentage of GDP in 2010 and projection to 2060 Member States Austria Spending 2010 12.8 Spending 2060 13.6 Belgium 10 14.7 Denmark 9.1 9.2 Germany 10.4 12.8 Greece 11.7 24.1 Spain 8.4 15.1 France 13 14 Ireland 4 8.6 Italy 14 13.6 Luxembourg 8.7 23.9 The Netherlands 6.6 10.5 Portugal 11.4 13.4 Finland 10 13.4 Sweden 9.5 9.4 The UK 6.6 9.3 EU 15 10.2 12.6 Source: European Commission 5 Pay as you go not sustainable • Important to start promoting complementary funded pension system; “pay as you go” system alone is not enough. • “Complementary retirement savings can also help secure adequate replacement rates in the future. Some Member States have introduced pension funds to complement their public pay-as-you-go pension schemes with private funded schemes, but there is much scope for further development of complementary pension savings opportunities in many Member States.” – White paper on adequate, safe and sustainable pensions, European Commission, 2012. 6 Consequences Reduction first pillar pensions till 2060 (compared to 2010) • UK Cyprus Hungary Ireland Denmark Czech Republic Lithuania Bulgaria France Portugal Malta Germany Italy Finland Estonia EU-27 Austria Spain Luxemburg Sweden Slovakia Greece Poland • • -60 -50 -40 -30 -20 -10 0 10 20 30 Old age dependency will roughly double In 2010 there were 4 people of working age for each person 65 years or older, in 2060 there will only be 2 Replacement rates will decrease when not reforming the pension system 40 % Source: European Commission (2012) 7 European Pensions Landscape • Large public pensions, less funding • France, Spain and Greece • Reforms of 1st pillar into NDC (mandatory) • Hungary, Poland and Sweden • Some shift from public to private pensions (voluntary) • Germany, Italy and Belgium • Already developed 2nd pillar, a lot of pension savings • Netherlands, Denmark, Ireland, Switzerland and UK Pension funds in relation to the economy As % of the GDP Source: OECD Pension Markets in Focus 2013 140 Assets Pension Funds (% GDP) Greece Net Replacement Rate Public Pension (Median Earner) Luxembourg 160 Spain Austria Italy Slovenia Finland Portugal Czech Republic France 120 Norway Hungary Belgium Germany Sweden Switzerland United Kingdom Netherlands Ireland Denmark Poland Slovak Republic Estonia Iceland Link between 1st pillar pensions and pension savings 2nd pillar 100 80 60 40 20 0 10 Pension trends across Europe • Increase in number of DC schemes • More focus on risk management, governance and disclosure • Central issues (both DB and DC): how to deal with volatile financial markets • Reverse developments in some CEEC Countries (Poland, Czech Republic, Hungary) Developing pension fund governance to secure future retirement income in Europe DB Plans in Europe: characteristics & trends  Characteristics: • Collectivity & Risk sharing • Wide diversity of risk mitigating instruments and character of pension benefit across Member states  DB under pressure: • Increasing longevity • Financial crisis – low interest rate environment • Regulatory framework  Trends: • Reinventing DB • From hard and fast guarantees to more conditional benefits 1 2 Growing importance of DC – Growing importance at both international and European level: • DC pension funds assets in OECD countries increased from 30.3% to 35% between 2001 and 2011(OECD) – DC schemes are dominating in Cnentral and Eastern European Countries: – DB still dominate in countries with large occupational pension sector (UK, NL). However, there is a shift away from DB: • In UK for instance, only 16% of DB schemes are completely open compared to 31% in 2008. Relative share of DB and DC pension funds assets (2011) 14 Shift DB to DC Pure DB Risk employer DB contribution based Various hybrids DC with guarantees Pure DC Risk employee 15 Developing pension fund governance to secure future retirement income in Europe 1 6 DC Plans in Europe: characteristics & trends  Wide diversity of DC plans: • • • • •   Coverage Level of contribution Pension provider (pension funds, insurers, investment funds) Investment choice (one or more options) Risk-reduction mechanisms (life-cycling, guaranteed returns, intergenerational risk-sharing) Increasing shift DB/DC (UK,IE, Multinationals) Role of auto-enrolment and good defaults Different reasons for shiting to DC – Globalisation • Difficult for companies to raise contributions, hence labour costs to recover funding short-falls in DB plans. – Ageing population • Contribution bases have started to diminish as the number of working people is decreasing relative to the number of pensioners. – Regulatory framework • DC relieves companies from having to account for volatile changes in pension. 17 Prerequisites for a good pension system • Prerequisites for all pension systems: “Effective central government, fiscal stability, economic growth, wellestablished financial markets, and adequate public and government understanding of and trust in them” (Barr 2002) • “There can be no sound development of funded pensions without real economic growth “(Holzman 2012). 18 CONTACTS Matti Leppälä, Secretary General/CEO PensionsEurope Koningsstraat 97 Rue Royale 1000 Brussels Tel.: +32 2 289 14 14 Fax: +32 2 289 14 15 www.pensionseurope.eu