The 2015 Pension Adequacy Report has been endorsed on October 5th by the EU Employment and Social Affairs Council.
The report shows in its conclusions that EU’s pension systems can be expected to deliver adequate pensions to future generations of retirees provided strong policies to enable workers to stay in jobs until they reach the statutory pension age are pursued. Thus, employment policies should provide more possibilities for older workers to stay longer in the labour market. However, pension systems must also provide protection for those who are unable to remain in the labour market long enough to build up sufficient pension entitlements.
According to the report, for the EU as a whole, pensions currently provide most people with sufficient protection against poverty and adequate income security in old-age. Overall, older people in the EU enjoy living standards close to those of the younger population. The relative median income of people aged 65 or more comes to 93 percent of the income of those under that age. But it ranges from below 80 percent in eight Member States to above 100 percent in six Member States in 2013. In 2012, 14% of those aged 65 and over were at risk of poverty (i.e. disposing of less than 60% of the median income in a given country), compared to 16% for the rest of the adult population . But differences in poverty rates across countries are large, ranging from below five to 28% of the older population.
Pensioners have largely maintained their relative standard of living over the crisis, but old-age poverty continues to be a problem in some countries, particularly for women. While the risk of poverty increased for those below 65 since the onset of the crisis, from around 16% in 2008 to 17% in 2012, during the same period the rate went down for those over 65, from 17.8% in 2008 to 13.8% in 2012 – a development that has benefited both men and women and older as well as younger retirees.
Across Member States pension outcomes are marked by persistent gender differences, with women being more exposed to poverty and having lower pensions than men, due to lower salaries and shorter working lives linked to caring duties. On average, women also live longer than men, an as a consequence are more likely to become widowed and end up in more precarious single person households. On average in the EU, women's pensions are 40% lower than men's. Gender gaps in pensions can be reduced, but often it will require long-term policy efforts that combine equal opportunity policies across several fields before people reach the pensionable age with changes in the pension system.
According to the report, in the future, it will be increasingly important to complete a full working career with 40 to 45 years of pension contributions in order to receive a decent pension. In some Member States, future income maintenance after retirement will increasingly depend on private provision through occupational or personal pension schemes. Close cooperation among Member States is necessary on supplementary pensions, including on issues related to their availability, take up and coverage. Depending on national practices, social partners can have an important role in this respect.
Recent pension reforms have postponed retirement and restricted early exits from the labour market. The success of such reforms will depend to a great extent on the ability of older workers to stay in employment as pension ages go up. In 2012 only about half of retirements from the labour market occurred because people had reached the pensionable age. Many people retired earlier for reasons such as health, unemployment, and caring duties. It will therefore be crucial to provide people with the necessary skills, as well as health and social support to maintain their employability as they age.
The report analyses also the economic well-being of older people and the way it is determined. According to the report, while the majority of older people rely on pensions as a main source for income during retirement, their living standards are also determined by income from work after the pensionable age, from income from assets such as housing or financial assets, and from their access to any publicly provided or subsidised services. Housing in particular is an important component of both current consumption and private investment. In 2012, over a quarter (27%) of the total EU-28 population lived in an owner-occupied home for which there was an outstanding loan or mortgage, while more than two fifths (45.1%) of the population lived in an owner-occupied home without a loan or mortgage. As for the financial wealth of older people, the report states that unfortunately the amount of data on financial wealth and its contribution to the adequacy of old age incomes, is generally limited.
What effect has the financial crisis had on pension systems in EU countries? Aaron G. Grech notes that prior to the crisis there was a significant divergence in pensions across the EU, with some states having relatively generous systems in comparison to others. He writes that following the crisis, southern European states have had to substantially cut back on pensions, while other states in northern Europe have remained relatively unscathed. He argues that although it should still be possible for these systems to keep pensioners out of poverty, European policymakers will need to ensure a properly functioning labour market that provides opportunities for young Europeans.
While EU countries entered the financial crisis with very different pension systems, the crisis has enhanced convergence, at least in two aspects. Eastern European countries which had sought to lessen the role of the state and set up mandatory private pensions ended up unwinding most of these reforms. Meanwhile, Southern European countries which traditionally had relatively generous state pension schemes cut them back.
The European Commission’s 2015 Ageing Report suggests that despite a doubling of the dependency ratio, pension spending in the EU will decline by 0.2 per cent of GDP by 2060. A comparison with the projections made in 2009 shows that those countries least affected by the crisis, such as Poland and Germany, have had an upward revision in their spending projections. Conversely, those economies that were severely affected have made substantial cuts. For instance, instead of rising by 12 per cent of GDP by 2060, as had been projected in 2009, in Greece pension spending is now forecast to decline by 2 per cent.
The reduction in projected spending implies lower generosity and adequacy of state pensions. The OECD’s Pensions at a Glance report includes estimates of pension wealth (i.e. total pension flows during retirement as a multiple of the average wage). These estimates can be compared with estimates made before the crisis in 19 EU countries (comprising 92 per cent of the EU’s population). Since state pensions are of key importance to those with low-to-average incomes, it is best to focus on estimates for those in that part of the wage distribution.
On the face of it, the crisis appears not to have weakened entitlements substantially. Even in stressed countries, pension wealth appears to be higher. Pension entitlements fell in just seven countries, with the largest falls in Greece. Meanwhile, the five biggest nations boosted generosity.
he picture that emerges is that while Mediterranean countries tend to have generous systems on paper, due to limited labour participation, actual outcomes are not that rosy. Consequently, while today the Greek, Italian and Portuguese systems are more generous than the French and German ones, over the coming decades the situation could be reversed.
The financial crisis has led to increased convergence amongst countries, with the gap between the most and least generous pension systems more than halving. However, the crisis has led to increasingly different labour outcomes. Before the crisis the gap in unemployment rates between the country with the least unemployment and that with the highest stood at 8 percentage points. Now the gap is three times larger. The gap is even more worrying when looking at youth unemployment rates: 58 per cent in Greece against 8 per cent in Germany.
This development, combined with the tightening of the link between pension entitlements and contributory records introduced by recent reforms, poses serious risks for young generations’ future retirement incomes. This enhances the importance of policies, such as the youth guarantee, intended to increase employability and ease access to the labour market for the young. Now, more than ever before, European policymakers need to ensure a properly functioning labour market that provides opportunities to young Europeans.
EPPARG has responded to the European Commission’s Green Paper on Capital Markets Union, highlighting that there is no recognition of the significant role that the growth of equity release markets could have in relation to unlocking capital in the economy. EPPARG considers that promoting the growth of equity release markets should be a key priority for Europe.
EPPARG called for a ‘joined up’ approach within the European Commission, noting that a Call for Proposals was launched last year on ‘Promoting the contribution of private savings to pensions adequacy’, which will look at equity release. EPPARG urged the European Commission to ensure that its approach also takes account of equity release assets at a portfolio level as it develops its work on Capital Markets Union, which has been entirely overlooked by the Green Paper.
In terms of further measures to help increase access to funding, EPPARG called for improved recognition of the potential to improve asset and liability management of long term pension promises by including safe equity release assets of the right quality in the portfolio of banking assets. EPPARG said it would be vital to enable the funding of equity release to reach a scale where an improved level of choice and competition will provide a valuable product for consumers to supplement their pension income, especially for an ageing EU, who in the majority are home owning (asset rich) income poor or state dependent.
EPPARG also called for treatment of life time mortgages to be prioritised in future reviews of Solvency II.
13.May.2015 - Download
Today EPPARG has responded to the Capital Markets Union consultation.
This consultation was launched in mid-February by Lord Hill, Commissioner for Financial Stability, Financial Services and the Capital Markets Union.
The consultation is a first step in the Commission's work to create a capital markets union which would improve access to finance for business.