25 February 2013

Commissioner Andor: Ensuring the sustainability of EU pension systems

The services of Commissioner Barnier, with input from the European supervisory authority EIOPA, are preparing a proposal on revising the IORP Directive. My services are looking at how we can better ensure protection of workers’ occupational pension rights in the event of insolvency of their employer.

But the Commission is taking further action to improve protection and information.

• A task force under the Pension Forum will soon start working on a code of good practise for occupational schemes.
• In March a feasibility study on the development of a pension tracking service will start. And my services will further examine with the Member States on how to better disseminate information to citizens concerning their pension entitlements.
• The services of Commissioner Borg will soon launch a consultation on improving consumer information and protection standards for third pillar retirement products.
• More generally, we have commissioned a study from the OECD on many aspects of private pensions including taxation..
• As a follow-up to the White Paper on Pensions, Commissioner Šemeta's services are working on ways to reduce the risk of cross-border pensions, as well as other forms of income, either being subject to double taxation or escaping taxation altogether. They are also working on questions pertaining to indirect taxation.

Taxation and longer working lives

In view of future demographics and in light of the economic crisis, many Member States have begun reforming their pension systems. This should reduce future costs and establish a better balance between contributions and entitlements, as well as between years in work and years in retirement. Common features in public pension reform include increases in pensionable ages of men and women, restricted access to early retirement schemes, and changes to the valorisation and indexation of pension entitlements.

The book value of privately-funded schemes declined dramatically at the beginning of the crisis. While some losses have since been recovered, authorities in Member States with extensive private schemes have focused on restoring solvency and making sure future schemes have the ability to resist and absorb economic shocks.

These reforms have improved the medium- and long-term sustainability of public pension expenditure. However, the effects of reforms on the adequacy of pensions are uncertain, and depend on a longer working life with fewer interruptions, as well as supplementary pension savings.

Changes to the pension systems need to be underpinned with employment and social policies that promote active ageing and longer participation in the labour market. The Social Protection Committee’s first Pensions Adequacy Report published last year stresses that longer working life will be the key to pension adequacy in the future.

This requires active ageing strategies, investments in life-long learning of all age groups, the adaption of work places to the needs of older workers, and new forms of labour force participation. The tax system can provide incentives for longer working lives, as taxes on labour impact on labour supply and employment rates, in particular the employment rate of older workers. A modern tax and benefit system should create incentives for active participation in the labour market until, or even beyond, the statutory retirement age is reached.

In order to offset the reductions in labour taxation, it may be necessary to increase taxation in other areas, such as value added taxes, green taxes and property taxes. However, their increase, if not properly designed, could have unfavourable distributional effects and hamper the goal of reducing poverty.

In addition, shifting taxation from labour to other sources may impact on the financing of social protection. This is a risk particularly in countries where social protection is primarily based on social insurance contributions. However the financing of social protection could be preserved by earmarking a portion of revenues for this purpose, as done for instance by Germany for VAT.

Efficiency and cost-effectiveness of tax and other incentives

In a tough review of all expenditures, Member States will also have to look at the cost of promoting funded 2nd and 3rd pillar pensions through tax exemptions and other subsidies. They will have to examine whether fiscal incentives offered to pension savers and to pension funds yield enough value in terms of pension provision. They will also have to consider whether similar or better results can be achieved through other or complementary means.

The key argument for subsidies through tax exemptions is that 2nd and 3rd pillar schemes are voluntary. Economic incentives are necessary to motivate employers and individuals to move consumption into the future and build extra entitlements through complementary savings. Yet, even with high subsidies it has been impossible in some Member States to raise coverage above 50 per cent. Instead, authorities are now trying a regulatory approach of auto-enrolment. If this works could subsidies then be lowered?

In a number of Member States the pervasiveness of tariff agreements with work place pensions means that such schemes in reality are what OECD calls quasi-mandatory. If this is so could incentives to save be phased out or perhaps continued at a lower level?

Finally, public authorities may also be inspired by the idea of mandatory private pensions.

We live in a Union where all countries subscribe to the idea of mandatory third party insurance for drivers of motor vehicles. Should we not also consider making it mandatory for citizens to take out pension insurance in the work place or in third pillar schemes to boost the adequacy of their pension entitlements? Making it mandatory need not mean that we should abolish or even reduce fiscal incentives. But it would mean that we have more room to consider how much we subsidise and with which distributional profile.

Full speech

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