.....................................................................................................................................

Pensions after the financial and

economic crisis:
a comparative analysis of recent
reforms in Europe

David Natali

.....................................................................................................................................

Working Paper 2011.07

.....................................................................................................................................

Pensions after the financial and

economic crisis:
a comparative analysis of recent
reforms in Europe

David Natali

.....................................................................................................................................

Working Paper 2011.07

european trade union institute

Brussels, 2011
Publisher: ETUI aisbl, Brussels
All rights reserved
Print: ETUI Printshop, Brussels
D/2011/10.574/27
ISSN 1994-4446 (print version)
ISSN 1994-4454 (pdf version)
The ETUI is financially supported by the European Union. The European Union is not responsible
for any use made of the information contained in this publication.

Pensions after the financial and economic crisis: a comparative analysis of recent reforms in Europe

Contents

Introduction...................................................................................................................................................5
1. European pension models..............................................................................................................7
2. Financial and economic crisis and its impact on pensions.................................................9
3.

Comparing pensions policy and politics in four European countries........................... 14

3.1 French pensions and the crisis.......................................................................................... 14
3.2 Swedish pensions and the crisis....................................................................................... 17
3.3 Polish pensions and the crisis............................................................................................ 20
3.4 UK pensions and the crisis ................................................................................................ 23

Conclusions................................................................................................................................................. 27
Bibliography................................................................................................................................................ 28
ETUI Working Papers............................................................................................................................... 31

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Pensions after the financial and economic crisis: a comparative analysis of recent reforms in Europe

Introduction

The global financial and economic crisis has affected pension schemes in
Europe in three major ways. Firstly, these schemes have served as one form of
automatic stabiliser in other words, as a means of mitigating the potential
social consequences of the negative state of the economy and their use to
this end is expected to increase social expenditure in many EU countries.
Secondly, the worsening economic situation has entailed new challenges to
the financial sustainability of social protection: growing unemployment and
negative GDP growth represent a loss in revenues for welfare programmes
and may thus lead to the deterioration of public budgets. Thirdly, the financial
shock has dealt a severe blow to both private fully-funded schemes and public
reserve funds.
This paper has two main aims. First, it assesses the initial impact of the
financial and economic crisis. In relation to first-pillar pension schemes,
short-term effects have been limited. PAYG (Pay-as-you-go) schemes are
largely immune from short-term financial crisis, although reserve funds have
suffered losses.1 Yet the long-term effects on first-pillar schemes may be also
important and require further adjustments if their financial viability is to be
secured. As for second- and third-pillar schemes, fully-funded schemes have
experienced more direct effects since investment losses and negative rates of
return have been massive, while interest rates have been low. Pension funds
suffered from these trends (but subsequently started to recover). Secondly, the
paper compares the reforms introduced in four different European countries:
France and Sweden, representing social insurance pension systems (firstand second-generation), and the UK and Poland which are representative of
multi-pillar pension systems (first- and second-generation). All the countries
under scrutiny have been affected by the financial and economic crisis (albeit
with some differences in the magnitude of economic recession and budgetary
strain) and have, in its wake, introduced new legislative measures.
Section 1 briefly summarises the key features of pension models in Europe.
Section 2 sheds light on some indicators of the impact of the financial crisis
and economic recession on pensions policy across Europe (and in the broader
international context). Section 3 focuses on the specific problems experienced
by the four countries and describes the most recent reforms, most specifically
1. In pay-as-you-go (PAYG) schemes, current contributions paid by both employers and employees
(or revenues from current taxation) are not accumulated but are immediately used for financing
current benefits.

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with reference to their outcome and the political debate (the position of
the different actors). Section 4 draws some preliminary conclusions, while
showing how social and economic/financial problems have moved to the core
of the pension reform debate and what consequences for present and future
pensions have been generated by the crisis.

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Pensions after the financial and economic crisis: a comparative analysis of recent reforms in Europe

1. European pension models

The contemporary literature on pensions has generally tended to propose two

main clusters (Bismarckian vs. Beveridgean Myles and Quadagno 1997;
social insurance vs. late-comers Hinrichs 2001; social insurance vs. multipillar systems Bonoli 2003), consistent with two different paradigms. In
the following, we refer in particular to the work of Bonoli (2003), according to
whom there are two forms of old-age system in Europe. Under social insurance
systems the state provides the greater part of pension benefits through national
and universal or occupational schemes based principally on social insurance
(e.g. France, Germany, and Sweden). The financing method is usually of a
pay-as-you-go (PAYG) type. Current contributions paid by both employers
and employees (or revenues coming from current taxation) are not saved but
put to immediate use for financing current benefits. As such, the main goal
of such pension programmes is income-maintenance. The generous level of
coverage and the encompassing character of pension benefits reduce the room
for supplementary occupational and/or individual schemes.
Under multi-pillar systems, by contrast, the state has the responsibility for
basic entitlements for the sole purpose of poverty prevention, while additional
benefits are provided by supplementary occupational and/or individual
schemes (e.g. Denmark, the Netherlands, and the UK). The financing methods
are thus mixed: on the one hand, public pension programmes (first pillar)
provide flat-rate or means-tested benefits; on the other hand, supplementary
occupational schemes (second pillar) and pension funds (third pillar) are
mainly funded. In other words, current revenues are saved and then used to
finance future benefits.
The last two decades have seen widespread reform of pension systems in Europe.
Recent reforms have been multi-dimensional in that they have served a range of
goals which can be defined in terms of increasing financial sustainability, on the
one hand, and safeguarding adequacy through the modernisation of pension
systems on the other. Reforms have been shaped by the following structural
measures: tightening eligibility conditions (particularly for early retirement and
disability pension schemes); scaling down the level of public pension benefits and
their growth (in relation to wages); and moving towards a raising of retirement
ages. At the same time, the emergence of new social risks has been dealt with
through measures aimed at allowing more people to gain access to public and
private pension schemes (e.g. through lowering the minimum contributions
required for entitlement to a pension benefit, introducing contribution credits
for periods of inactivity, etc.) (see Natali, 2008; Zaidi, 2010).

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So as to take these innovations into account, our description also incorporates

a historical perspective in that, in considering the two clusters, we make a
further distinction between first- and second-generation types. In line with
Hinrichs (2001) and Natali (2008), we look at both the first and the second
generations of multi-pillar and social insurance systems (Table 1).
Table 1 European pension models

Public schemes
Goal
Private schemes
coverage
Earnings-related
schemes

Multi-pillar
1st Generation
2nd Generation
Basic protection
Savings on earnings
(poverty prevention)
Mandatory or quasiMandatory
mandatory

Social insurance
1st Generation
2nd Generation
Savings on earnings
Savings on earnings
(some adequacy)
(some adequacy)
Mandatory or
Voluntary
quasi-mandatory

(mainly) Private

(mainly) Public

Public/private

(mainly) Public

For the first group, represented by the UK, we use the label first generation
of multi-pillar systems. Central-Eastern European countries represent the
second generation of multi-pillar systems. While under the first generation
of multi-pillar systems, public programmes provide basic and homogenous
protection (with flat-rate and/or means-tested benefits), in post-Communist
systems the public programme provides contributions-based and earningsrelated benefits. This is consistent with the actuarial (insurance) principle. In
the second generation of multi-pillar systems, the interaction between public
earnings-related schemes and minimum (means-tested) pensions is decisive
in defining the future role of public programmes (Table 1).
Social insurance (1st and 2nd generation) represents the third and fourth
groups of pension systems. Old Bismarckian systems (in Continental and
Southern Europe) and countries from Northern Europe have in most cases
reformed their pensions in order to limit public spending while opening
up room for non-public pension funds. The institutional features of the
systems are similar (the first pillar is still the cornerstone of the system but
it is integrated with supplementary schemes). France is a typical example
of the first generation of social insurance systems. The Swedish system,
which belongs to the second generation of social insurance systems, is under
scrutiny too. Originally based on universalism and part of a social-democratic
welfare regime, Swedish pensions were then re-oriented along the lines of
the Bismarckian model (Table 1).2
In the following, we focus on the way economic and financial crisis has hit
some of the national pension systems operating in Europe. Both the particular
pension model implemented in any given country and the size of the
constituent pillars have affected the impact of the crisis on old-age schemes
and its consequent financial and social effects.
2. Some authors use the label second generation of social insurance systems for Sweden, Norway
and Finland in that they introduced a mandatory and public earnings-related scheme after
WW II, well after the introduction of the first earnings-related programmes in Continental
Europe (Hinrichs, 2001).

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Pensions after the financial and economic crisis: a comparative analysis of recent reforms in Europe

2. Financial and economic crisis and its

impact on pensions

The emergence and evolution of the recent economic crisis has been
characterised by three different steps: the financial crisis (worsened following
the collapse of Lehman Brothers in 2008); the broad economic recession
that hit Europe in 2009; and the Greek crisis and the consequent budgetary
tensions in the European Union (EU) in 2010 (Liddle et al., 2010; Natali,
2010).
In the literature on pensions policy there is a broad consensus as to the fact
that pension programmes (be they public or private) are not immune from the
consequences of economic recession and financial crisis (OECD 2009; 2010a;
CEC, 2010a). Yet the impact differs a great deal depending on whether one is
looking at first-, second- or third-pillar schemes. In the following analysis, we
thus consider (with a specific focus on the four countries under scrutiny), first,
the challenges facing supplementary pension funds (private pensions) and,
subsequently, those affecting public schemes.

The crisis and its impact on private pensions

Supplementary pension schemes with a fully-funded logic of financing are the
most severely affected by negative economic and financial trends. Recent data
from OECD (2010a) clearly shows huge negative effects in 2008 and some
recovery in 2009 and 2010. In 2008, supplementary pension funds both
defined-benefit (DB) and defined-contribution (DC) plans were hit hard by
the crisis (see also CEC, 2009a). 3
As shown by Table 2 below, the impact of the crisis on investment returns
has been greatest among pension funds in countries where equities represent
over a third of the total assets invested, with Ireland the worst hit at -35.7%
in real terms in 2008, followed by Belgium, Hungary and the Netherlands
(ibidem, 3-5).

3. The terms defined-benefit (DB) and defined-contribution (DC) are used to describe the type
of benefits and the logic underlying their calculation: in the former, the resources/benefits
balance is adjusted by modifying contribution rates while keeping benefits defined. In the
latter, the balance operates in the opposite direction, by fixing contribution rates and letting
benefits fluctuate according to individually accumulated resources or rights to resources.

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Table 2

Pension funds real investment rate of return in selected OECD countries

in 2008-10

Country

2008

2009

2010

Turkey

19.00

11.5

1.10

Korea

4.09

-2.2

2.20

Germany

1.60

4.5

6.40

Czech Republic

0.32

-0.7

-0.40

Greece

-0.89

1.7

-7.40

Mexico

-2.03

5.8

6.80

Slovak Republic

-2.08

-0.1

0.40

Italy

-6.30

5.60

1.60

Spain

-8.00

2.80

-1.30

-8.70

9.60

5.90

Simple average

Norway

-10.83

5.40

4.30

Switzerland

-11.30

10.7

0.00

Austria

-12.94

7.80

4.60

Poland

-14.28

8.90

7.70

Luxembourg

-14.39

8.00

Chile

-14.58

18.50

10.00

Portugal

-14.66

12.50

-2.40

Finland

-15.00

13.40

8.90

Netherlands

-15.70

11.10

18.60

Hungary

-17.64

14.30

4.00

Belgium

-19.89

13.80

5.40

Australia

-20.60

-10.50

6.20

Weighted average

-20.93

4.40

3.50

United States

-24.00

4.50

1.00

Ireland

-35.00

Source: OECD (2011)

In 2008, funding levels in DB plans were down by more than 10% on average.
As the rate of company insolvency increases, benefits may be cut. Members of
the DC schemes have been those most at risk of losses, in that these pension
schemes leave the investment risk entirely with the scheme member so the
impact will be felt directly. Especially older workers close to retirement are
affected by investment losses and the resulting drop in their overall pension
income will signify the prospect of less well paid or later retirements (CEC,
2009a: 2). Younger workers, on the other hand, could benefit in the long term
as future pension contributions will be invested at much lower prices, hence
raising the potential rate of return on investments and future benefits.
As shown by Table 2, during 2009 and 2010, pension funds regained much
of the investment losses made in 2008. The recovery in pension fund
performance continued through the whole year on the back of strong equity
returns, but it will be some time before the 2008 losses are fully recouped. As
shown in Table 2, the simple average of real rates of return in OECD countries
for the period 2008-10 was still negative.

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Pensions after the financial and economic crisis: a comparative analysis of recent reforms in Europe

A further issue connected with the crisis relates to the expected low interest
rates (OECD, 2010b). Protracted low interest rates could impact pension
funds and insurance companies on both the asset and the liability side of
their balance sheets. Such a trend could, to a certain degree, increase the
liabilities of pension funds and insurance companies and reduce the returns
on future portfolio investment. As a result, the solvency status of insurers and
pension funds might well deteriorate. Low interest rates affect, in particular,
the level of benefits that annuity providers and DB pension funds are able to
offer and beneficiaries to receive. In a context of increasingly long periods of
retirement due to longer life expectancy, this can have serious consequences
on retirement income.

The crisis and its impact on public pensions

But the crisis has affected public schemes too. First of all, through the most
recent round of reforms, funding has taken on an increasingly important role
within publicly managed pension systems. Many countries have established
public pension reserve funds (PPRFs) to provide financing support for systems
that otherwise operate on a pay-as-you-go basis. This is the case of Sweden,
where buffer funds were set up in the second part of the 20th century, and
more recently of Ireland, Poland and France. Albeit to a much lesser extent
than private pension schemes, public buffer funds have been affected by
negative investment returns. The impact of the crisis on investment returns
varies greatly between countries. It has been greatest among public pension
reserve funds where equities represent a large part of the total assets invested.
The Irish National Pension Reserve Fund was the most exposed to equities
(59.8% of total assets), followed by France (49.3%). At the other extreme,
public pension reserve funds in Spain experienced positive returns as they
were fully invested in bonds in 2008 (Table 3).
As argued above, the crisis has led to a further effect. Social protection
schemes have been largely used to deal with the initial social consequences
of recession. EU countries have thus increased public social spending to limit
the consequences of the financial crisis on individuals and families. According
to the European Commissions Autumn economic forecast (SPC, 2009), as
a result of automatic stabilisers and discretionary measures to reinforce
social benefits, social expenditure in the EU was expected to increase by 3.3
percentage points of GDP between 2007 and 2010.
The projected increase varies between less than 1% in Bulgaria, Hungary and
Slovakia and 6% or more in Estonia, Ireland, Latvia and Lithuania. Spending
on unemployment benefits was the first component to increase. The impact on
the number of social assistance claimants is now clear. Numbers of claimants
have continued to increase in the countries that were first or most severely hit
by the crisis, and pressure on last-resort schemes has also started to increase
in most other countries. Comparative analysis has shown some evidence of an
upward trend. For example, in some countries, including Poland and Greece,
the number of older workers claiming early retirement has grown, while, in

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David Natali

other member states, the indexation of pension benefits has been revised in
a more favourable manner (e.g. Portugal) or minimum pension benefits have
been improved (e.g. Finland) (SPC, 2009).
Table 3 Public pension reserve funds nominal returns in selected OECD countries

in 2008-10

New Zealand
Norway
Sweden - AP2
Sweden - AP4
Sweden - AP1

2008
-4.9
-25.1
-24.0
-20.8
-21.9

2009
-23.8
30.7
21.2
22.2
20.8

2010
12.9
12.6
9.9
9.6
9.0

Sweden - AP6
Sweden - AP3
Canada
France ARRCO
Korea
France AGIRC
Simple average
Australia
Ireland
Weighted average
Poland
United States
France FRR
Mexico
Spain
Belgium
Chile
Portugal

-16.6
-19.8
-14.4
-9.4
-0.2
-7.8
-10.8
-8.5
-30.4
1.8
-5.9
5.1
-24.9
7.3
4.7
4.4

-3.9

11.9
16.9
14.6
11.5
7.4
10.5
10.6
9.1
16.7
7.3
4.9
5.2
14.9
1.3
4.9
4.5

7.1

8.1
7.8
7.2

7.1

6.3
6.5
5.5
3.9
4.0
3.0
2.6
2.3
2.1
2.0
0.4
-1.3

Source: OECD 2010a, 2011.

In a broader perspective, economic recession (followed by more timid growth)

provides long-term challenges to public pension schemes. The first challenge
is a result of the fiscal stimulus implemented by many countries in order to
reduce the impact of the crisis and which has led to a rapid deterioration of
public finances. The IMF (2009) projects an increase in the average debt-toGDP ratio in the euro area of 30%, to reach 90% of GDP by 2014. This average
conceals substantial increases for some member states and, while part of the
budgetary deterioration is cyclical, another part is permanent.
An EPC (2009) study proposed the fiscal sustainability gap indicator (S2Total) that measures the gap (as a percentage of GDP) that must be closed
to ensure that the government is able to finance all public obligations in the
future. The ratio consists of the sum of initial budgetary position (IBP) largely
influenced by the crisis and the consequent stimulus and the long-term
changes (LTC) of the future related to demographic ageing (and the related
expenditures on pensions, healthcare and long-term care). In line with the
EPC study (quoted in Zaidi, 2010), the four countries under scrutiny belong
to three different groups. Sweden is characterized by low budgetary risks as a
consequence of the very balanced initial budgetary position and very limited
future strains (due to more radical cutbacks introduced in the last decade).
Poland is characterized by medium sustainability risks: despite the limited

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Pensions after the financial and economic crisis: a comparative analysis of recent reforms in Europe

long-term challenges, initial budgetary conditions were much more risky.

France belongs to the same group with medium sustainability risks (with a
more alarming impact of long-term challenges). The United Kingdom belongs
to the group with high risks due to a much worse initial budgetary condition
(consistent with a more important fiscal stimulus to deal with the crisis).
The indicator of long-term changes (LTC) does not, however, consider the
full impact of the crisis. Further strains are thus expected (on the side of
public pension and social security schemes) as a consequence of increased
unemployment and reduced resources from taxation and social contributions.
Employment contracted by around 2 per cent in 2009, with a further decline
of about 1% expected in 2010, and was expected to increase only in 2011 as the
recovery began to take hold. The unemployment rate is projected to stabilise
at close to 10% in the EU (CEC, 2010b). Unemployment was likely to reach
10.3% in 2010 with social expenditure possibly having risen from 27.5% to
30.8% of GDP between 2007 and 2010 (SPC, 2010). Meanwhile, projections
about future economic growth are still worrying: the crisis may well have an
adverse impact on future potential output through its three main components:
labour input, measured in hours worked in the economy, capital stock which is
affected by investment, and productivity which is usually taken as a proxy for
technological progress (Koopman and Szekly, 2009). According to estimates
of the short-term impact produced by DG ECFIN, the severe economic crisis
will lead to a sharp downward revision in potential growth rates.4
To sum up, public pension benefits (first pillar) seem largely immune to the
short-term impact of the crisis. They have indeed, in some cases, actually
been increased to act as automatic stabilisers. Yet the long-term prospects for
PAYG systems are more difficult to predict. Persistent economic stagnation
(if not recession), rising unemployment rates, and the consequent reduction
in revenues, may lead to future financial tensions. Lower investment returns
for public reserve funds contribute to these more negative prospects. Private
pensions (second- and third-pillar) have been much more hit by the crisis.
The short-term effects on funded schemes have been tremendous. Despite the
partial recovery of 2009, the decline in rates of return on investment and the
persistently low interest rates have placed pension funds at risk of huge losses.

4. Against the backdrop of considerable technical and economic uncertainties, the potential growth
rates of the euro area and of Denmark, Sweden and the UK are expected to be halved in 20092010 as compared with 2008, to fall, in other words, from a growth rate range of 1.3%-1.6% to
one of 0.7%-0.8%. The pattern for the new Member States is broadly similar, although their
potential growth rates remain much higher, reflecting a catching-up effect.

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3. Comparing pensions policy and

politics in four European countries

In this section we summarize the main challenges faced by the reformed

pension systems in the wake of the crisis and the measures introduced to limit
the consequences of the economic downturn. The focus is on four countries
representing the four pension models mentioned in Section 1. France and
Sweden represent social insurance pension systems, while the UK and Poland
have multi-pillar pension systems. For each country the brief summary of the
key characteristics of pensions policy is followed by the review of the main
measures introduced after the crisis.
The analysis demonstrates the existence, in some cases, of common trends,
while lines of intervention tend, in other cases, to diverge. Common trends
have consisted of the measures to improve old-age protection for those at risk
of poverty, with all governments having subsequently introduced measures to
reduce public spending (mainly through a raising of the retirement age). On the
other hand, the four countries have diverged in the approach to private pension
funds: while some France, Sweden and the UK have confirmed the increased
role of supplementary schemes (and have revised the regulation of pension
markets), others have adopted a more critical approach to private pensions. This
is the case of Poland, and also of other Central Eastern European countries.

3.1 French pensions and the crisis

Since the early 1990s, pensions policy has moved into the forefront of the
political scene in France. A series of shortcomings (i.e. mounting deficits and
perverse labour market effects) have highlighted the need for reform. All these
challenges have become more evident since the recent crisis.
First, French social protection (and the pension system in particular) has been
characterised by rising financial deficits produced by an increasing demand for
welfare and declining rates of economic growth. Thus, the need to improve the
financial viability of pension regimes had been at the top of the political agenda
since the 1980s. French pensions have been criticised for the following defects:
the burden placed on job creation (due to the high level of social contributions);
the emergence of new forms of social exclusion (with the increased need to
improve the social adequacy of pension programmes); and their excessive
fragmentation (characterised by a net of schemes operating in accordance with
different mechanisms for private and public sector workers) (Natali, 2008).

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Pensions after the financial and economic crisis: a comparative analysis of recent reforms in Europe

As explained by the recent report from the French Pensions Advisory Council
(COR), the challenges have become even more evident since the crisis. The
number of pensioners in France is set to increase rapidly from 15 million in
2008 to 22.9 million in 2050 and the current demographic ratio of 1.7 (i.e.
1.7 economically active people for every retiree) will fall over time to 1.2. This
ratio would be further reduced in the event of higher unemployment. The
estimated deficit of the French state pension system will be, in 2010, 1.7% of
gross domestic product (GDP) (32 billion) due to the fall in employment,
which will result in reduced revenue for the public pension system. In the
medium term (20152020), the impact of the current crisis on the countrys
finances compounds the effects of an ageing population. In 2015, the financing
required for the public pension system will amount to 1.8% of GDP (40
billion) and by 2020 it will be between 1.7% and 2.1% of GDP (COR, 2010).
The financial requirement of the public pension system in 2050 will depend
also on the countrys economic growth and on long-term unemployment,
although the outlook should improve in both cases as a result of the expected
recovery. By 2020, the amount of government income (generated through
taxation as a percentage of GDP) required to cover the annual pension funding
requirements, will be between 3.8% and 4.7% (Jean, 2010).
In the last two decades, two main reforms sought to deal with these challenges:
the Balladur reform in 1993 and the Raffarin reform in 2003. The Balladur
reform had three main components: the creation of a solidarity fund (Fonds de
Solidarit Vieillesse) to charge non-contributory benefits (previously covered
by the pension regimes, with resources obtained through contributions) to
general tax revenue; secondly, cost-containment measures (the number of
years of contribution needed to gain a full pension was increased (from 37.5
years to 40), as was the reference period for calculating the average annual
(reference) wage; thirdly, the unions position as managers of the system was
guaranteed, allowing them to retain their key organisational resources. All
these proposals were implemented for private sector employees alone (Natali
and Rhodes, 2004).
Ten years later, the Raffarin reform was able to be pushed through only
after a political exchange had successfully divided the moderate sections of
the labour movement from the governments more militant opponents. The
reform finally adopted consisted of a mix of cost-containment measures
(extending the contributory period for all workers from 37.5 to 40 years in
2008, and subsequently to 41.9 years in 2020), benefit improvements (e.g.
more generous indexation), concessions to particular categories of workers,
equity-improving provisions, and a consolidation of the trade unions comanagement role. Earlier retirement for workers who entered work in their
mid-teens was protected from the reform, as were the generous entitlements of
certain rgimes spciaux, notably those covering metro and railway workers.
A new compulsory supplementary scheme for public-sector employees was set
up and managed jointly by the social partners as a public fund. Finally, better
coverage of flexible workers was introduced through contribution credits for
both study periods and part-time careers (more adequacy).

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David Natali

The gradual reduction in benefits from public schemes opened up new room
for supplementary pension funds. The first parliamentary proposals for the
development of funded savings schemes date back to the beginning of the
1990s. Profit-sharing schemes became mandatory for firms with 50 or more
employees in 1990 and this step was followed by proposals to legislate new
measures for the development of funded schemes for retirement savings.
In 1997, the Loi Thomas introduced voluntary retirement salary savings
schemes for more than 14million private sector employees. The first steps in
the development of pension savings were thus already evident. By June 2007,
45,000 firms had provided the possibility for their employees to contribute to
retirement savings schemes (Natali, 2008).

The crisis and its effects on French pensions

The French Government reacted to the crisis through two main strategies: on
the one hand, minimum benefits were increased to reduce the social effects of
the crisis while, on the other, a more in-depth reform was launched to bring
public spending under control. In pursuit of the first of these two aims, the
Government introduced ad hoc measures to increase benefits: disability and
old-age minimum benefits will be gradually increased by 25% (this target will
be fully reached by 2012) (SPC, 2009). As for the second aim, a vast project was
launched based on the argument of the need to reinforce budgetary stability in
a context characterized by population ageing and the most recent effects of the
global economic downturn. Much of the debate has focused on the sustainability
of public schemes, rather than on the role of private pension funds.
On July 2010, the right-wing Fillon Government introduced a bill to raise
the statutory retirement age from 60 to 62 years and to increase the pension
contributions of civil servants. The bill, proposed by Minister of Labour
Woerth, was first debated in Parliament during the September plenary session.
Constructed on the above-mentioned financial projections of the Pensions
Advisory Council (COR), the reform is designed to raise the statutory retirement
age from 60 to 62 years at a rate of four months per year, from 1 July 2011, to
reach 62 by 2018. By 2023 the age of entitlement to a full pension irrespective
of total duration of contributions will increase from 65 to 67. The duration of
individual contributions by citizens for entitlement to receive a full pension on
retirement was set at 40 years in 2008 and will rise to 41 in 2012 (for those born
in 1952) and to 41.25 (for those born in 1953 or 1954). For those born after 1955
the duration will be fixed each year in accordance with changing life expectancy.
In line with current projections, the total duration would be 41.5 years by 2020
and 43.5 by 2050. However, the existing policy covering those who began
working at an early age (14, 15 or 16 years of age) will remain in force. Individuals
whose health has deteriorated (and who are assessed as having a minimum of
20% disability) as a result of their work will be permitted to retire at the age of
60 on a full pension. In addition, changes will be introduced in the amount of
income tax payable on certain levels and types of income; for example, increases
in the highest band of income tax, in the taxes levied on stock options, on
supplementary pension schemes, on capital income and on inheritance income.

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Over time, the French pension system for public-sector employees will mirror
that of the private sector through the proposed increases in the retirement
age and the period over which contributions are made, as well as by bringing
contribution rates in the public sector into line with those in the private sector.
To promote the employment of older workers, measures will be introduced
to offer incentives to employers to hire job applicants aged over 55 and to
develop tutoring in companies. Another aspect of the reform relates to the
fact that, in France, in the past, if a young person was unemployed for a
short period, this time would still count towards their pension, despite their
inability to make financial contributions. By contrast, when a woman took
maternity leave her pension could be affected because she was absent from
work and contributing less to the public pension. Under the reform, women
will no longer be disadvantaged in this way. Their maternity allowance will be
taken into account in the final pension calculation.
The trade unions did not support the bill and four of the five large unions
expressed their outright opposition: CGT-Force Ouvrire called for its
withdrawal; CFDT demanded its revision, due to the costs of the changes
being met largely by employees (estimated at 85%), and commented that
the government had failed to take into account the reduced life expectancy
of workers in certain occupations; CGT complained that the bill represented
an unprecedented regression in social terms; the French Christian Workers
Confederation (CFTC) deplored the universal increase in the retirement age
and the fact that capital income will contribute only 10% of the financing;
CFE-CGC, which chairs the national pension assurance fund, commented
on the inadequate degree of funding envisaged for the pension system, while
welcoming the measure designed to take maternity leave into account when
calculating the public pension (Jean, 2010). After months of street-level
demonstrations and trade union action, the bill was nonetheless finally passed
at the end of October 2010.

3.2 Swedish pensions and the crisis

Sweden introduced, in 1998, one of the most radical reforms to have been
adopted in the context of social insurance pension systems. In the 1980s, the
system had been characterised by political and financial strains. Regarded
from a political perspective, the inclusive universal system introduced in the
late 1950s was highly redistributive (e.g. through the introduction of pension
supplements for low-income-earners). This meant that public programmes
were not attractive for high-income-earners. From a financial point of view,
moreover, the system was increasingly under stress. All these pressures
reduced the popularity of the pension model with the Swedish population as
well as among policy-makers (Natali, 2008).
Under the new system adopted by the Swedish parliament in 1998, the first
pillar is composed of three tiers. The old Peoples Pension now consists of an
income-tested benefit, for citizens unable to save enough contributions for the
second tier. The first tier thus offers residual (rather than universal) protection,

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incorporating the ATP scheme (Palme, 2003) which provides PAYG and
employment-based pensions. Benefits are financed by social contributions
(equally shared between employees and employers) and organised through
a notional defined contribution method. While the system is still of a PAYG
type, it works like a funded system. Contributions are virtually saved to provide
future pensions. For a given contribution amount paid by or on behalf of an
individual, the same individual will receive the same amount of pensions.
A distinctive feature of the first public pillar is in fact its partial pre-funding.
The public scheme is financed by contributions amounting to 18.5% of
earnings. While contributions equal to 16% of earnings are used to finance the
PAYG system (2nd tier), the remaining 2.5% part of the contribution finances
funded schemes managed by private fund managers (premium pension or 3rd
tier). Financial resources for the third tier are still collected by the state, and
complementary pensions are still paid by public institutions. The practical
administration of these resources, by contrast, is handled by private managers
investing contributions in the financial market. If the insured person does
not choose a private fund, his/her contributions are managed by the public
authorities through the default fund. Benefits are calculated in line with the
fully-funded logic.
The role of occupational schemes is limited to the second pillar then
supplemented by individual savings (the third pillar). In 2003, occupational
funded schemes provided an average gross replacement rate of 13.9% and
covered around 90% of the labour force (well above the average coverage in
social insurance countries). At that time, the general public scheme gave an
average gross replacement rate of 57% of previous earnings, but this is expected
to decrease to 40% by 2050 (Natali, 2008). The non-public occupational
scheme for private-sector workers is funded and of a defined-benefit type, but
since the 1980s part of the contributions is used for a defined-contribution
supplement. This element substantially influenced policy-makers in devising
the reform of public pensions in the 1990s.
Recent reforms have consisted of the partial pre-funding of the first pillar
and the introduction of the NDC benefit structure in its PAYG part. This is
expected to lead to a drop in total public spending and a reduction in the
generosity of the first-pillar benefits (gross replacement rates are expected to
decline by about 30%). Consistent with its own historical evolution, the system
is still fundamentally public and based on the role of the state as regulator and
provider. It is, however, becoming increasingly complex.

The crisis and its impact on Swedish pensions

In the case of Sweden, the crisis has provided a test for the reform implemented
in the 1990s. The reformed system was designed to be fiscally sustainable by
including automatic adjustment mechanisms to maintain balance in response
to short-term economic and financial fluctuations and long-term demographic
changes (Palme, 2003). Much of the political debate has thus focused on the

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automatic mechanisms introduced under the first public pillar to grant longterm financial viability.
Just as in France, the right-wing government did first introduce some
measures to deal with the short-term effects of the crisis (substantial income
tax cuts and reduced taxes for pensions to soften the impact of the economic
recession on household income). In 2009, targeted measures were adopted
for people with reduced work capacity, the long-term unemployed, newly
arrived immigrants, and youth, as well as measures to promote working
longer. To support the income for pensioners, the government proposes an
increase in the basic tax deduction for pensioners and a change in the method
for indexation of pension income in order to smooth out the effect of volatile
asset prices in the pension funds (CEC, 2009d; SPC, 2009).
Subsequently, the effect of the crisis on the adequacy of public benefits has
become central to the debate. As for public schemes, negative trends in the
stock market have led to a decline in Swedens pension reserve funds and
triggered the automatic reduction in the pension indexation scheduled to
occur in 2010 (see Figure 2 above). Due to the automatic mechanisms in
action, a deficit in the system causes the indexation of pensions and earned
pension entitlements to be lowered, in order to restore the long-term viability
of the pension system.
The economic crisis has affected both components of the Swedish system, the
NDC and the Premium Pension, but the main impact will be felt by current
retirees, through changes in the indexation of their NDC benefits. Average
wage growth has been very slow due to the recession, so that, even before
balancing is applied, benefits were scheduled to decrease by 1.3 percent.
Balancing reduces this level further so that the net effect on benefits would
have been a decline of 4.6 percent (Sundn, 2010).
Due to the recession following the financial crisis, employment in Sweden did
decrease during 2009 and 2010, placing the pension system further under
pressure. Originally, the projected 2009 balance ratio of 0.9655 would have
resulted in a further decrease of 3.5 percent in the indexation of benefits in
2011; because the outlook for wage growth has improved somewhat, the net
effect on benefits would have been a reduction of 1.7 percent. With current
projections, indexation would turn positive again in 2012. Beneficiaries
without income-related benefits or with low NDC benefits can qualify for the
minimum guarantee benefit (about 43 percent of Swedens retirees have some
guarantee benefit). When the NDC benefit is reduced, guarantee benefits
will increase for beneficiaries with both benefits. Thus, the net effect on total
benefits will be less for this group.
Given the major effect of the economic crisis on the NDC plan, policymakers have
begun to respond. The balance ratio was published in March 2009 and, almost
immediately, the five political parties that stand behind the pension reform
known as the Pension Group started to discuss whether to propose smoothing
the adjustment of pension benefits (+4.5 in 2009 and -4.6 in 2010) (ibidem). In

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particular, the group discussed whether it was reasonable that the stock market
crash should affect NDC benefits so much. The Pension Group suggested that,
instead of using the market value of the buffer funds, a three-year average should
be used to value the funds. As a result, the deficit would be spread out over time
with a smaller decrease in 2010 but a larger decrease in 2011 and 2012.
During the official review of the proposed change, several agencies remarked
that using a three-year average to value the buffer funds means that the
balance ratio will be a less accurate measure of the systems financial stability.
Moreover, the effect on reducing the variation in benefits is limited and a
temporary downturn in the stock market will continue to affect benefits even
after it has ended. However, the government, with the support of the Pension
Group, decided to go ahead with the change. Parliament passed the legislation
in October 2009. The policy changes moderate the effect on system stability
following the sharp stock market decline by using a three-year average to
value the buffer funds, a change that spreads out the required adjustment
over a somewhat longer period. To further reduce the effects of the crisis on
pensioners income, policymakers decided to reduce taxes on pension benefits
(Settergren, 2011).
As for supplementary pension funds, some measures have been proposed and
implemented to help lower the costs of the financial crisis. Guaranteed levels
of return on investment for (hybrid) DC schemes have been lowered. Pension
insurance companies have also changed their solvency standards, to allow
longer periods for measurement (for example from three to six months, or
even from six to twelve months) of the solvency level. This is intended to help
mitigate the impact of the crisis on pension insurance contracts. Surveillance
of pension insurance groups has also been stepped up (OECD, 2010a).

3.3 Polish pensions and the crisis

In Poland, the new system replaced the old single-pillar architecture by a
multi-pillar institutional design, applicable to all workers aged under 30 in
January 1999, with the exception of farmers (who fall under the revised old
system). Though the new arrangement is usually perceived as the paradigmatic
example of the World Bank three-pillar model, it actually deviates from
that model, especially as far as the first pillar is concerned. The first (public
and mandatory) pillar consists of three tiers. Beyond the minimum pension
(first tier), the second tier provides earnings-related benefits, consistent with
the PAYG mechanism but with a defined-contribution logic. The pension
amount is related to contributions paid by employees and employers, and also
to the average life expectancy at retirement age. Contributions paid by both
employers and employees are collected by public social insurance institutions
(the Social Insurance Institution ZUS). The benefit level is determined by
contributions, as well as by economic and demographic factors. In line with
the Bismarckian tradition, the coverage of the second tier is not homogeneous
but fragmented. The general regime is for all employees in the private sector.
Special regimes exist for other categories, and first of all for farmers for whom

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the system is the old (albeit modified) one PAYG and defined-benefit
in which contributions are collected by a separate public body, the Social
Insurance Institution for Farmers (KRUS).5
The third (mixed public/private and mandatory) tier is represented by
funded schemes, in the form of open pension funds. Employees have the
right to choose the (private) fund in which they invest their contributions
under the supervision of the state.6 Pension contributions under this tier give
entitlement to an annuity after retirement. Each pension fund is managed by
a separate legal entity, the private pension fund company. Contributions are
still collected by the public Social Insurance Institution (ZUS), similarly to the
arrangement in Sweden. At the time of retirement, savings in open pension
funds are used by insured persons to purchase an annuity provided by special
private companies. This is the so-called payout phase and its regulation
has been delayed for years (see below the most recent evolution). The total
contribution to the first two tiers is 19.52% of the contribution base: 12.22%
finances the first tier, while 7.3% finances the second one (Natali, 2008).
Benefits from the public second tier are expected to decrease in the future.
Projections by Guardiancich (2010) show a significant decline in the average
replacement rate after reform: from 50% to 30% in the case of retirement at
60, and from 65% to 40% in the case of retirement at 65. Muller (2007) has
shown a decline of the first pillar (both second and third tiers) to around 50%
of previous salaries.
Benefits from the first pillar are then supplemented by the second and third
supplementary pillars that are private and voluntary. Given the relatively high
level of the replacement rate granted by the first mandatory pillar, voluntary
programmes are not well developed and are, in fact, residual. In March 2004 the
Parliament adopted two acts to encourage the development of voluntary schemes.

The crisis and its impact on Polish pensions

In Poland financial crisis coincided with a political crisis that led to the collapse
of the right-wing coalition formed after the 2005 elections. In the wake of
corruption scandals, an early election was called for October 2007. This was
won by the Civic Platform (PO), which had been the main opposition party in
the outgoing parliament. PO formed a government coalition with the agrarian
Polish Peoples Party (PSL). The two coalition partners have had divergent
agendas on pension reform: PO, which attracts mainly the urban middle class,
has aimed to modernize the Polish economy while defending the pension
reforms of the last decade; PSL, by contrast, emphasizes its commitment to
improve the adequacy of public pensions (Naczyck, 2010).
5. Other special regimes exist for occupational categories such as judges, policemen and soldiers
(who started their careers before 1999), and lawyers.
6. In the following we refer to mandatory pension funds, supplementary private pensions, first
pillar third tier schemes and open pension funds as synonyms.

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The reform agenda has been developed through the crisis with a parallel focus
on the PAYG and funded schemes. In a first phase, the politics of pensions
continued to revolve around the payout issue which had dominated the political
agenda over the previous years (Guardiancich, 2010). In a second stage,
policymakers focused on the revision of the governance and cost structure
of supplementary pension funds (first pillar third tier). However, the most
severe criticism against the s has emerged in the most recent third phase, some
ministers having proposed a decrease in contribution rates to the third-tier
schemes that would significantly reduce the role played by private pensions.
In June 2008 and August 2008, the Polish government approved two draft
bills regulating the payout phase. The first bill sets out the rules concerning
the types of annuity product to be offered at retirement on life annuity funds.
The second bill established a regulatory framework for the creation of special
pension annuity companies that would be established only in 2014 when the
first life annuities are due to be paid out. The ruling coalition thus resolutely
opted for a liberal approach, in line with the preferences of the largest
employers association and the Polish Chamber of Pension Funds (ibidem).
In the meanwhile, some measures focused on active ageing and the increase in
benefits for those at risk of poverty. In October 2008 the Council of Ministers
adopted the programme entitled Solidarity across generations measures
for those aged 50+. The programme provides for measures that increase
incentives for enterprises to employ people aged 50+, as well as for measures
that encourage improvement of the qualifications, skills and efficiency of
people in this age group (CEC, 2009d; SPC, 2009).
As the financial crisis deepened, the controversy concerning the Polish
mandatory supplementary schemes (first-pillar third-tier) also became more
acute. The Solidarnosc parliamentary group submitted a draft bill with a plan
to reduce the charge to 3.5% in January 2009. As a consequence, the Civic
Platform decided to hold a consultation over possible changes in the regulation
of pension funds. The government suggested a decrease in the distribution
fee to be implemented in parallel with the creation of funds with investment
strategies adapted to the life cycle of contributors (so-called multifunds).
After a protracted consultation and pressure from the opposition, the
government decided to push through a decrease in the distribution fee to 3.5%
from January 2010. The measure was passed by Parliament in June 2009.
In this third phase, the pension system was affected not only by the negative
results posted by open pension funds, but also by declining revenue in the
PAYG system, because of the economic recession. In November 2009,
Jolanta Fedak the Minister of Social Affairs (PSL) and Jacek Rostowski
the Minister of Finance (close to PO) proposed decreasing the share of
contributions going to the mandatory pension funds from 7.3% to 3%. Both
ministers argued that the measure would break the vicious circle in which
pension funds largely invest their assets in government bonds, that are used to
finance the deficit caused by the loss of revenue for the PAYG system resulting
from the introduction of a mandatory pension funds (Naczyk, 2010). NSZZ

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Solidarno and the Polish Confederation of Private Employers Lewiatan

(PKPP Lewiatan) gave a negative assessment of the proposals. By contrast,
the All-Poland Alliance of Trade Unions (OPZZ) and the Trade Unions Forum
(FZZ) proved well-disposed towards the ministerial proposal (Kumicz, 2010).
The months following the announcement of the plan have been marked by
growing tensions among the coalition partners. On the one hand, members
of PO argued that, rather than dismantle mandatory open pension funds, the
government should try to negotiate with the EU on a new classification of the
debt which would take into account future pension liabilities and would be
more favourable for Poland. On the other hand, the Civic Platform backed
by interest groups such as PKPP Lewiatan and the Polish Chamber of Pension
Funds placed the reform of the farmers social insurance scheme at the top
of its agenda. Yet, in March 2011, the reform was adopted by the lower house
of the Polish parliament. Total contributions able to be paid into open pension
funds were decreased from 7.3% to 2.3% of salary. The 5% difference will be
paid into Polands national social security scheme, or ZUS. The reform was
passed by 237-154 votes with 40 abstentions. The government has stated that
this move is crucial to enable the state to keep paying out pensions from the
indebted ZUS schemes coffers, thus reducing pressure on the state budget.
The reform is projected to save the state about 50 billion euros equivalent to
15% of GDP in 2011-2020 (Euractiv, 2011).
The Polish case is not an exception. Other Central Eastern European countries
have introduced more far-reaching nationalization of private pension funds.
This is the case in Hungary where the Parliament has recently voted to reverse
the reform of 1997 that partially privatized old-age protection. This seems to
prove the existence of a broad trend towards a more critical understanding of
the political economy of pension security in these countries.7

3.4 UK pensions and the crisis

In the 1980s, the Conservative government implemented radical changes that
were consistent with the implementation of a more liberally oriented model
(Arza, 2007). Innovations defined a pension system in which the responsibility
to protect against the old-age risk was increasingly shared between public and
private institutions. As far as its institutional design is concerned, the pension
system currently in place is thus based on different pillars. The first pillar provides
mandatory public basic pensions. Benefits are flat-rate, low-level, financed by
social contributions, and managed by the state. Below a certain minimum level
of revenues, the insured individuals do not have to pay contributions; above this
limit the insured people pay directly for the basic benefit. In that respect, the first
programme (Basic State Pension) is flat-rate and means-tested. Basic benefits,
moreover, are not related to retirement: they can be received even if the insured

7. Some countries, including Estonia, Latvia, Lithuania, and Romania, reduced contribution rates
under the second pillar, while increasing them under the first pillar.

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individual is still active. The main goal of the first pillar is thus to prevent poverty
among the elderly through low benefits (Schulze and Moran, 2007).
The second pillar is also mandatory and based on the so-called contractingout method (introduced as long ago as the 1950s). Employees are able to
choose the pension scheme into which they pay social contributions. It
can be public or private, the former being administered by the state along
PAYG lines. The latter may consist either of occupational funds organised
at the company level or of individual funds managed by private insurance
companies. Private (occupational or individual) pension schemes are fullyfunded and increasingly of a DC type. The benefit level is the consequence of
contributions paid, with no major re-distributive effects. Thanks to important
fiscal incentives and public subsidies, private schemes are very common
(especially the occupational ones).
Reforms adopted by governments in the last two decades actually favoured
the development of private coverage by reducing the generosity of the public
supplementary scheme. What is more, measures introduced in the period
1986-1995 had the effect of reducing public spending on supplementary
benefits (from SERPS) by around 25%. Public spending on pensions is one of
the lowest in the EU: in 2000 it (first plus second public pillars) was 5.5% of
GDP against 9% in Sweden and 11.8 % in Germany (Natali, 2008). All these
elements are consistent with a multi-pillar system in which the responsibility
to protect the elderly is shared between public and private institutions, the
latter playing a decisive role.
The New Labour Government introduced, in 1999, the Welfare Reform and
Pension Act. Its ambition was twofold. On the one hand, it was to confirm the
key role of private-sector schemes and to provide more protection for lowincome pensioners. On the other, the government reformed the public pension
programmes. The basic pension was increased and a new programme was
introduced: the Minimum Income Guarantee, giving a typical means-tested
benefit directed at elderly people in need. The old State Earnings-related
Pension Scheme (SERPS) was then replaced in 2002 by the State Second
Pension Scheme (S2P). The latter remained earnings-related until 2007, but
then became a more generous scheme with equal flat-rate benefits for each
worker, particularly favourable for low-paid individuals.

The crisis and its impact on UK pensions

At the beginning of the 21st century, the traditional shortcomings in old-age
security remained: public pensions remained low and the coverage of private
pension schemes continued to decline (Bridgen and Meyer, 2007). The most
recent reform with two main pieces of legislation, the Pensions Act 2007
and the Pensions Act 2008 was inspired by specific challenges to pension
programmes in the UK. The timing of the reform has, what is more, largely
shaped the debate on pension policy after the crisis.

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The Pensions Act of 2007 introduced legal provisions to implement the major
measures proposed in the two White Papers on public pensions, and was then
followed by a second Pensions Bill announced in December 2007 and then
introduced as the Pensions Act of 2008. The two pieces of legislation represent
major innovations affecting the UK pension system. A number of measures are
related to the first public pillar, both its first tier (Basic State Pension, BSP)
and second tier (State Second Pension, S2P). The key goal has been to increase
the state systems generosity and its fairness to women and carers through the
introduction of new qualifying conditions, while accentuating its liberal logic
(to reduce poverty in old age). The Pensions Act has reduced the number of
years required for a full Basic State Pension: from 39 (women) and 44 (men)
to 30 for all. The system of Home Responsibility Protection was then replaced
by a more inclusive system of credits for BSP and S2P. This should increase
the number of women receiving the full BSP (Cleal, 2007). The new legislation
has also changed the indexation mechanism of BSP: from prices to earnings.
Finally, the transitional period through which the State Second Pension (S2P)
will be flat-rate is to be speeded up and this is expected to reduce inequality
between men and women. The practice of contracting out is confirmed but
limited to non-public defined-benefit schemes (Natali, 2008).
The overall package means that the public pillar performance for men and
women will converge. While these measures will increase spending, the
proposed increase of the state pension age (from 65 to 66 by 2026, to 67 by
2036 and 68 by 2046) will reduce costs in parallel, thereby maintaining a
stable level of total pension expenditure over the next decades.
The most innovative part of the broad reform was subsequently finalized
in 2008. The Pensions Act 2008 refers to the revision of voluntary pension
schemes and, in particular, the introduction of the so-called National
Employment Savings Trust (NEST). The aim is to set up multi-employer
occupational schemes extended to those workers currently without access to
company funds. These would be based on the workers automatic enrolment
in the scheme through their employer, yet with the opportunity to opt out.
NEST is intended to deal with some of the deficiencies of the pensions market
stressed above and to contribute to maximising coverage of supplementary
schemes, especially for lower earners, workers with interrupted careers and
the self-employed, while at the same time reducing charges.
Turning now to consider the governments initial reaction after the crisis,
it took the step of introducing certain one-off payments. In 2009, Browns
Government ordered a special one-off payment of 60 to 15 million vulnerable
people to help them through the winter and ease their worries about bills. The
Christmas bonus was also increased (for one year) from 10 to 70, resulting in
additional support of approximately 900 million. This payment was received
by 12.5 million pensioners, 2 million disabled people, 350,000 carers and
150,000 people on bereavement benefits. In addition to this one-off measure,
cold weather payments (support for the elderly to help cover fuel payments
during extreme weather conditions) were increased for the winter (SPC, 2009).
The financial turbulence initially increased deficits in defined-benefit (DB)

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pension schemes and reduced the value of defined-contribution (DC)

funds, particularly where there is a large exposure to equities. However, the
authorities have not shown themselves overly concerned at the long-term
impact of this development. DC fund values have recovered reasonably well
and lifestyling, which moves DC funds away from riskier assets as retirement
approaches, will have protected the majority of people close to retirement. In
the case of DB schemes, the Pensions Regulator helps ensure that DB schemes
are appropriately funded. There is flexibility in the funding regime, so that
employers and scheme trustees can look to extend or back-end load recovery
plans. The Pension Protection Fund should ensure that if a DB sponsor becomes
insolvent, compensation will be payable to scheme members (PPI, 2010).
After the 2010 general election, the new right-of-centre Coalition Government
(between Conservatives and Liberal-Democrats) defined a renewed agenda
for pension policy. The Government has firstly committed that, from 2011,
the BSP will rise yearly by the rate of earnings inflation, price inflation or
2.5%, whichever is the higher, a measure that should enhance public benefits,
especially for low earners (Cleal, 2010). Further issues concern the expected
increase in the statutory retirement age, the containment of pension spending
for public sector employees, and the access to private savings.
It was announced in the Coalition Agreement that a review will be held to set
the date at which the State Pension Age (SPA) starts to rise to 66, although
it will not be sooner than 2016 for men and 2020 for women. In May 2010 it
was revealed in the Queens Speech that the Coalition Government will review
both the current timetable of initial SPA rises from 65 to 66 as well as the two
later increases currently scheduled at ten-year intervals, in order to ensure
the future affordability of the state pension. In parallel, the Government has
pledged to phase out the Default Retirement Age, which means that employers
will no longer be allowed to terminate employment contracts when employees
reach age 65 (ibidem).
Reforms to public sector pensions are currently taking place, including raising
the normal pension age from 60 to 65 for new scheme joiners. In 2010, the
Government set up an independent commission to review the long-term
affordability of public sector pensions. The commissions work led to the
publication in April 2011 of the Green Paper A State Pension for the 21st Century.
Two options for reform have been proposed: on the one hand, the more rapid
transition to the flat-rate S2P; on the other, substitution of the two public schemes
(Basic State Pension and State Second Pension) by a flat-rate single-tier scheme.
According to some experts (PPI, 2011), the former option can be expected to lead
to a broad reduction of pension entitlements, while the second option is expected
to lead to some improvements (especially for women and low-earners) and some
losses (for those with longer careers and eligible for savings credits). As for the
easier access to pension savings, under current legislation people are not allowed
to access private pension savings before age 55, after which they can take 25%
of their pension savings tax-free and must use the remainder to buy an annuity
before the age of 75. Policymakers are now debating giving people access to part
of their pension savings before the age of 55.

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Conclusions

This paper has shed light on the impact of the economic and financial crisis on
pensions policy across Europe, and assessed the first measures proposed and/
or introduced in four EU countries. France and Sweden are typical examples
of social insurance systems, while Poland and the UK are examples of multipillar systems.
The first part summarized the key features of the economic and financial
crisis and the consequences on both the sustainability and adequacy of public
pension schemes and private pension funds. In the case of first-pillar pension
schemes, the short-term effects have been limited. While PAYG schemes, with
the exception of public reserve funds, remain largely immune to short-term
financial crisis, long-term effects may well prove problematic and lead to
further adjustments to secure the financial viability of systems. As for secondand third-pillar schemes, fully-funded schemes have been more directly
affected. Investment losses and negative rates of return have been massive and
pension funds will inevitably suffer from this trend. Meanwhile, the impact of
low interest rates is likely to exacerbate the strains on funded schemes.
The second part of the paper focused on reform initiatives undertaken in the
four countries. While the impact on different pension models naturally varies,
some common trends have nonetheless been identified. On the one hand, all
the countries under scrutiny have introduced short-term measures to grant
additional protection for the elderly at risk of poverty, with more generous
indexation and ad hoc benefits constituting the most evident attempt
to improve old-age protection. On the other hand, measures have been
introduced in an attempt to reduce the mid- and long-term financial tensions
on public pension schemes while improving the regulation of pension markets.
All the countries under scrutiny have proposed and implemented a raising of
the statutory retirement age, together with incentives for active ageing. This
is a major difference compared to how national governments have generally
reacted to economic crisis in the past in that there has been no systematic
recourse to early retirement as a means of reducing unemployment (at least in
the four countries under scrutiny).
The role of private pension funds has been at the core of a renewed and
intense debate, with opposite strategies having been pursued in the four
countries. Some countries, consistent with the pre-crisis reform path, have
pursued the attempt to reinforce the public/private mix. This is the case of
the three western European countries (France, Sweden and the UK). As such,

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David Natali

the measures undertaken did not alter the system design but were primarily
focused on further strengthening the systems sustainability, albeit at the
expense of adequacy.
By contrast, Central Eastern countries (Poland in particular) have debated
the opportuneness of reducing the role of private pension funds through
the reduction of statutory contributions for private pensions with a parallel
increase in those used for public pension schemes. This is not an isolated case
among Central and Eastern European (CEE) states. Hungary, for instance,
has recently re-nationalised private pension schemes. While it is too early
to provide an in-depth explanation of this U-turn in CEE pensions policy,
some initial insights may be proposed. As shown above, the economic crisis
has had two main consequences in these countries: on the one hand, it has
contributed to increased tensions on public budgets while, on the other, the
crisis has served to exacerbate and draw attention to negative trends in the
pensions market. All this has led to a more critical reading of the role of private
pensions and much of the optimism that characterized welfare reforms in the
1990s has given way to a more negative assessment of the functioning of the
public/private mix.

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