I was recently fortunate enough to attend this short course in Paris, held at the Centre for European Studies at St. Germain de Pres. Around 40 delegates from right across Europe, especially the more recent EU members, were in attendance. A mix of academics, researchers, government officials and former pensions ministers created a sound backdrop for debate.
It was clear that all European countries are facing the same issues – increased longevity and increased dependency ratios are making both state and private retirement systems increasingly unaffordable. Higher retirement ages are now accepted as axiomatic and the search is on for strategies to make, particularly state systems, sustainable. Most other EU countries have historically been much more reliant on systems of Social Insurance for pension provision than we have here in the UK.
This country has traditionally taken a multi-pillar approach to retirement funding. The World Bank has suggested that a 3 pillar system might be regarded as ideal; core state pension, a second, probably compulsory, strand of national pension (such as our State Second Pension) with voluntary private saving being the third pillar. Most EU countries have been two pillar at most, but are generally migrating to a 3 pillar model, or even more.
The UK’s multi-pillar approach has evolved rather than being designed from scratch – Basic State Pension, State Second Pension, means tested benefits, entitlements such as free television licences, occupational pension schemes, additional voluntary contribution schemes, personal pensions – the list is endless. One delegate described the UK pension system as “a building site since 1948” and another referred to it as “an impenetrable basket case, delivering increasingly poor outcomes”. Certainly, its complexity is an object of wonder to our European colleagues.
Some of the state-sponsored social insurance schemes have historically produced quite strong retirement incomes for those lucky enough to have benefited from them. Until relatively recently, for example, German workers could look forward to a pension that represented a replacement rate of 70% of final salary! This is now being reversed back to 70% of average salary, with more cuts planned, and a recent rise in the state retirement age from 65 to 67 by 2029. This latter has proved very unpopular in its execution.
The German system also moved in 2001 from Defined Benefit to Defined Contribution and is now, after the Riester reforms, a 3 pillar system in appearance. Re-unification has blown a hole in the economics of their legacy social insurance approach and outcomes are different for former East German employees. This approach is also typically higher in cost than multi-pillar approaches, with 9.97% of GDP being spent on pensions by such countries on average, compared with 6.91% for the multi-pillar countries such as the UK, US, Netherlands and Australia.
52% of German workers are now contributing to occupational pension plans. Interestingly, Germany now has a similar problem to the UK, in that private saving interacts adversely with the state benefit system, acting as a disincentive to save, and holding back take up of Riester schemes.
Other EU Countries
The Accession States are nearly all looking for multi-pillar solutions. The UK has amongst the lowest state pension costs as a proportion of GDP – but some of the poorest pension levels, too, and the highest risk of any EU state of pensioner poverty occurring.
In France, increases in retirement age have already been agreed in principle and 2.8 million workers are now saving into private pensions. However, the state system remains a strong underpin, and additional savings find their way into particular forms of Life Insurance contract which attract tax breaks.
Italy has seen the introduction of a form of auto-enrolment into pension saving in 2007 and the reform of the state “Pay As You Go” system into a Notional Defined Contribution arrangement. Experience of auto-enrolment has been mixed at best, with only 12% of workers in companies with fewer than 50 employees participating against 42% in larger companies. The high cost of living in Italy means wage packets are hard pressed.
Employment rates amongst older workers in the UK were examined and the figures make interesting reading. In 2000, just 47.3% of men aged 60 to 64 were in employment. Now, that figure is 57.9%, an increase of nearly a quarter in just 9 years! The same is true for men aged 55 to 59, with just short of 71% of them in work in 2000, against 76.6% now. It is also clear from studies that Disability Benefit is being used in the UK as a pathway to earlier retirement, where this can at all be justified. Encouragement of older workers, and encouragement of employers to hire them, was seen as a critical challenge for the next few years.
Conclusion – Really a labour market problem?
Inadequate retirement incomes were clearly seen as actually stemming from employment policies and labour market problems. As European countries seek to compete with the emerging economies, costs come under pressure and “low wage” economies start to emerge in the EU itself. Combined with fewer jobs, this typically results in an inability to save at all, never mind the sums required to fund a comfortable retirement. This in turn makes vulnerable consumers ever more reliant on their state retirement benefits – and if these are low, as in the UK, poverty can result. Additionally, there is a strong correlation between “flexible working” and lack of access to workplace savings schemes.
However, the core challenge is simply lack of truly “disposable” income over and above that needed to survive from day to day. All the research I’ve ever done suggests that most people would love to save, but for perhaps 40% of median earners, this is simply not an option.