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56
European Policy Analysis - Volume 1, Number 1 - Spring 2015
I - Introduction
For many years, the aging of societies
has been seen as a challenge to public
pensions, particularly PAYG systems,
in which the working population nances
the pensions of the retired. In order to se-
cure nancial sustainability, international
organizations, and national policy experts
recommended the shi toward a multi-pil-
lar pension architecture with more funded
elements. is would entail fostering (pre)
funded supplementary pensions, while
seeking to control public pension expen-
diture through cutbacks of benets. e
nancial market crash in 2007/2008, how-
ever, has challenged the merits of private
funded pensions as their assets experienced
a substantial decline within a short time
(OECD 2010). As a result, trust in the ex-
In response to the demographic challenges and scal constraints, many Euro-
pean welfare states have moved toward the privatization and marketization of
pensions in order to improve their nancial sustainability. e privatization
of retirement income responsibility has led to a shi from dominantly public
pensions to a multi-pillar architecture with growing private pillars composed
of personal, rm-based, or collectively negotiated pension arrangements. At
the same time, marketization has led to the introduction and expansion of pre-
funded pension savings based on nancial investments as well as stronger reli-
ance of market-logic principles in the remaining public pay-as-you-go (PAYG)
pensions. However, there are also important cross-national variations in the
speed, scope, and structural outcome of the privatization and marketization of
European pension systems. Liberal market economies, but also some coordinat-
ed market economies (the Netherlands and Switzerland) as well as the Nordic
countries have embraced multi-pillar strategies earlier and more widely, while
the Bismarckian pensions systems and the post-socialist transition countries of
Eastern Europe have been belated converts. e recent nancial market and
economic crisis, however, indicates that the double transformation may entail
short-term problems and long-term uncertainties about the social and polit-
ical sustainability of these privatized and marketized multi-pillar strategies.
Keywords: Privatization, marketization, pension system, transformation, cri-
sis, multi-pillar system
Bernhard EbbinghausA
e Privatization and Marketization of Pensions in Eu-
rope: A Double Transformation Facing the Crisis
A University of Mannheim
57
European Policy Analysis
pected long-term returns of funded pen-
sions has been shattered at a time when
saving for retirement has become more im-
portant. e privatization of responsibility
for old-age income and the shi towards
more funded pensions thus raises import-
ant issues that warrant to be revisited (see
also Gilbert 2002 and in this issue).
My main argument is that we have
witnessed a dual paradigm shi of privat-
ization and marketization in pension pol-
icy that needs to be reconsidered aer the
nancial market crash. Although they have
been advanced in tandem as responses to
the public nance problem, demographic
aging, and the diusion of neo-liberal eco-
nomic doctrine, the two processes should
be analytically separated. Privatization is
the process of shiing responsibility for
old age income support to private actors,
whereas marketization is the process of in-
creasing (quasi)-market mechanisms in the
allocation of resources. A paradigm shi
can thus be seen in two oen linked trans-
formations in pension policy. On the one
hand, responsibility for old age income has
been shied from state to private actors,
thus increasing the reliance on collective,
rm-based, and/or individual private pen-
sions. On the other hand, old age pension
benets are more and more commodied,
that is, they become dependent on market
logic, be it through tighter coupling of ben-
ets with contributions or nancial returns
on investments. is dual transformation
has shied the responsibility and nanc-
ing logic of old age income support fun-
damentally with both processes fostering
each other in intricate ways. ere treat of
the state from status maintenance to a mere
anti-poverty orientation leaves a gap for
income maintenance in old age that needs
to be lled by private actors, if not employ-
ers or social partners then by individuals
themselves. Hence, privatization can be a
consequence of marketization. Moreover,
marketization takes hold not only in the
private sphere but also in the public system,
for instance, by introducing quasi-market
principles such as benet reductions for
early exit (based on actuarial principles) or
through mandatory public pension contri-
butions to prefunded schemes.
Drawing on the experience of Eu-
ropean countries with already mature and
still expanding multi-pillar systems, this
comparative analysis will explore universal
trends toward more private funded pen-
sions, but will also show the cross-national
variety in the public-private mix and pen-
sion fund capitalism (see also Ebbinghaus
2011). Aer rst discussing the known
challenges of aging, the analysis will brief-
ly point at the multi-pillar paradigm as the
consensual solution for the nancial sus-
tainability issue in aging societies. We will
then revisit the two transformations in pen-
sion reform. e cross-national compari-
son will then show the variety of pension
arrangements that resulted in recent years.
Subsequently, the analysis will discuss the
short-term and the long-term impacts of
the post-2007 crash development on both
public and private pensions. Aer pointing
at problems of social sustainability, that is,
the long-term increase in old age poverty
and social inequality, the conclusion will
discuss the political sustainability of the
thus far dominant multi-pillar paradigm.
As part of the “new politics” of reform, the
state has more and more retreated from
its responsibility to maintain income in
old age (Myles and Pierson 2001) and le
funded pensions to the “dri” of private ac-
tors (Hacker 2005). However, following the
crisis, there seems to be an increasing need
and mounting political pressure for state
regulation if not intervention in securing
not only nancial sustainable but also ade-
quate pensions in the future.
58
II - e Multi-Pillar Paradigm Shi
The demographic and economic chal-
lenges to the nancial sustainability
of pensions have been well known for
decades. Pension expenditure represents an
economically large burden in Europe (cur-
rently about 12% of GDP); indeed it is the
largest social protection program (about
45% of social expenditure, which amounts
to 27% of GDP in EU-27 aer the crash).
Until recently, Europeans tended to retire
ever earlier despite the fact that they will
live longer than ever before (Ebbinghaus
2006), thus increasing the pressure on so-
cial expenditure over the last decades. More
generally, the aging of societies caused by
increasing life expectancy and lower birth
rates has been seen as a “time bomb” (Bo-
sworth and Burtless 1998) to the nancial
sustainability of public pensions, since more
and more retirees have to be supported by a
shrinking working age population. In par-
ticular, public PAYG systems that nance
current pensions out of incoming contribu-
tions by working people suer in particular
from aging. Increasing old age dependency
ratios (people aged 65 and older in percent
of the working population aged 15-64) have
been forecasted over the next 50 years: the
European Union (EU-27) ratios expected to
double from 26% in 2010 to 54% in 2060
(Eurostat 2010). is will have long-term
consequences on the political inuence of
the elderly. However, there is also a consid-
erable cross-country variation between the
“pensioners’ states” of Germany and Italy
on the one hand and the relatively young
Irish and Cypriot societies on the other.
Moreover, it is less the population ratio that
matters than the employment rate; there-
fore, Continental Europe due to low female
participation and early retirement is again
in a more strained situation (Ebbinghaus
2006).
e need for cost cutting may not be
immediately evident. Additional retirement
costs could be nanced by increased social
contributions, higher taxes or more bor-
rowing. Indeed, many European countries
have initially increased the revenue side
as well as augmented public debt (Bonoli
and Palier 2007). For instance, the pension
costs of German reunication were largely
paid for by increasing contributions in the
early 1990s. However, such revenue and
debt strategies could only solve immedi-
ate problems and had severe knock-on ef-
fects. Given global competition, increasing
social contributions can price labor out of
work, thus further increasing the number
of the unemployed and early retired, the
vicious circle of “welfare without work”
(Esping-Andersen 1996). Moreover, glob-
al nancial markets and EU policies, in
particular the European Monetary Union
(EMU) since the late 1990s, limited the s-
cal capability of public policy to promising
non-funded pension rights. In fact, several
major pension reforms occurred during the
1990s in the run up to the European Mon-
etary Union (EMU), most prominently the
1995 pension reform in Italy. us demo-
graphic pressures, economic rationale, and
scal limits have all increased pressures to
restore nancial sustainability.
In order to make pensions more
nancially sustainable, policy experts rec-
ommended to shi the balance from the
dominant public PAYG pensions to more
private (pre)funded pension pillars. e
recommendations by international organi-
zations shaped the policy discourse on pen-
sion reforms for several decades. Since the
late 1980s, the Organization of Economic
Co-operation and Development (OECD)
has been active in providing reports on the
demographic aging (OECD 1988), calling
for “Reforms for an Ageing Society” (OECD
2000) that advocated a shi to more private
European Policy Analysis
59
funded pensions. In recent years, however,
it has also taken notice of the problem of
poverty and inequality in old age (OECD
2001) and more recently of the consequenc-
es of the nancial market crisis on pension
savings (OECD 2009). e OECD, howev-
er provides only statistical information and
policy expertise; it has limited impact on
steering national policy development oth-
er than providing policymakers with back-
ground information, inuential as this may
be (Ervik 2009).
e World Bank propagated its
multi-pillar pension model in developing
countries (World Bank 1994), advocating
the introduction of private funded pensions
by following the Swiss three-pillar model
(Leimgruber 2012). e World Bank’s in-
uence was particularly strong among the
transition countries in Central and Eastern
Europe (CEE), which moved from state-so-
cialist to more market-compatible social
protection (Holzmann and Hinz 2005).
Indeed, several CEE countries introduced
funded pensions as a result of low levels
of trust in the state, the need to boost do-
mestic nancial markets and the nancial
dependency from the International Mon-
etary Fund (IMF). While the European
Union (EU) attached no pension model to
its membership accession conditions, CEE
policy reformers “out-liberalized” others in
adopting the World Bank model (Orenstein
2008).
Since the late 1990s, the EU has be-
come increasingly involved in discussing
social protection issues. e Lisbon process
has shaped policy debates about moderniz-
ing social protection, maintaining the eco-
nomic growth, and increasing employment.
For instance, it set the goal to raise employ-
ment of older workers (aged 55-64) to more
than 50% by 2010. e renewed 2020 Strat-
egy has now streamlined these policy goals
(Marlier et al. 2010), including the targets
to increase the employment rate to 75% and
to reduce poverty by 20 million people by
2020. ese broad goals have had only par-
tial impact on national policymaking, as the
targets have been met only by some and not
all EU member states thus far. In addition,
the open method of coordination (OMC)
in pensions was launched, though with less
clear goals and targets than in employment
policy (Anderson 2002). e open method
of coordination (OMC) in pensions was lat-
er integrated with a parallel OMC in social
inclusion and poverty. e main purpose
of OMC is learning from others through
peer-review and common indicators, thus
“so” governance, while nancial con-
straints set by the EMU are more stringent.
In addition, the EU has some say in harmo-
nizing public pensions and regulating occu-
pational pensions in Europe’s single market.
e most recent EU White Paper 2012 (EU
Com. 2012; Natali 2012) has led to a contro-
versy over the future course aer the crisis.
III - e Reform Politics of the Dual
Transformation
Although the economic rationale and
interna
tional recomm
endations pro-
pagate a shi from public PAYG to
private funded pensions, the reform process
seemed rather stony. Comparative politics
scholars have attributed these problems to
the “veto points” provided by political insti-
tutions (Bonoli 2001), the electoral compe-
tition between political parties (Immergut
and Anderson 2007), and the feedback of
past policies (Pierson 1993). Most prom-
inently, the “new politics” thesis advanced
by Pierson (2001) used pension policy as
the prime case of path-dependent inertia. It
is dicult to rewrite the intergenerational
contract in PAYG pensions due to the “dou-
ble-payer” problem: those who currently
have to contribute to the pensions based
European Policy Analysis
60
on past promises would also have to save
for their own future retirement (Myles and
Pierson 2001). Adopting “blame avoidance”
strategies (Weaver 1986), politicians would
be unwilling to opt for too radical reforms
for fear of electoral backlash from the grow-
ing older population.
Yet demographic and econom-
ic pressures cannot be ignored forever. A
transformation toward multi-pillar sys-
tems has been undertaken across Europe
over the last decades, leading to more pri-
vatized, partially funded, more delayed,
and less sucient income support in old
age. In line with the “new politics” thesis,
politicians used strategies of “obfuscating”
retrenchment eorts, phasing in reforms
gradually or diusing blame through polit-
ical consensus building (Myles and Pierson
2001). Societal consensus building through
social pacts with unions and employers
has been used by governments to facilitate
parliamentary passage and to overcome
non-parliamentary resistance (Natali and
Rhodes 2008; Schludi 2005). ese chang-
es have not always been the result of high
politics; some happened largely unnoticed,
as the consequence of (un)intended (non)
action or “dri” by non-state actors (Hacker
2005), such as employers, nancial institu-
tions, trade unions, and individuals.
Nearly everywhere in Europe the
pension systems transformed their pub-
lic-private mix through privatization (Clark
and Whiteside 2003; Ebbinghaus 2011),
increasing the scope for occupational and
personal funded pensions in addition to
public PAYG-pensions.1 Some of these
changes have been relatively path depen-
dent in retrenching the public pillar, in par-
ticular the more generous pensions, and by
introducing measures in reaction to the in-
creased need to regulate occupational and
personal pensions. ere were also a few
path departing developments, most nota-
bly the pension reforms in Sweden (1994)
and Italy (1995) that introduced national
dened contributions (NDC), that is, mak-
ing individual public benets dependent
on contributions during working life and
the economic–demographic development,
thus introducing marketization in the pub-
lic pillar. Also in other public systems, de-
mographic adjustment factors, such as in
Germany, were introduced to make PAYG
pensions more sustainable in aging soci-
eties. Also notable were the introduction
of funded personal pensions as part of the
public mandate (e.g. Sweden’s premium
pension as part of the state pension con-
tributions) and the fostering of voluntary
personal pensions (Germany, Finland, and
France). e largest impact of the multi-pil-
lar paradigm can be found in the parallel es-
tablishment of mandatory funded pensions
in many CEE transition economies during
the late 1990s, with few exceptions such as
the Czech Republic (Orenstein 2008).
Institutional change toward multi-
pillar systems occurred in Europe oen as
“twin processes” in the public and private
pension realms (Ebbinghaus 2011): reduc-
tion of the former increased through the
pension income gap the push for expansion
of the latter. Marketization of public pen-
sions has become thus an engine of further
privatization. Most remarkable for privat-
ization are those reforms that newly intro-
duce private pillars: new non-state funded
pensions add a new layer to the multi-pillar,
multitier retirement income system. ey
bring about transformative change with-
out completely altering the public pillar, at
least initially. Given the phase-in retrench-
European Policy Analysis
1 e boundaries between public and private responsibility in nancial and regulatory matters, however,
remain rather uent and subject to change (Ebbinghaus and Whiteside 2012).
61
ment of public pensions and the long-term
building up of private funded pensions,
there will be a slow conversion from status
maintenance to a basic income function in
many Bismarckian systems over several de-
cades. ese reform steps indicate a gradual
path departure moderated by institutional
processes such as layering, conversion, or
displacement (see Streeck and elen 2005)
depending on institutional capacities and
preconditions. In the long run these insti-
tutional changes may prove to be the rst
important steps towards a more substantial
shi. We should thus distinguish for analyt-
ical purposes the two trends in pension re-
forms: marketization and privatization (see
Table 1).
With marketization we describe an
increase of the market logic in response
to the demographic challenge of aging so-
cieties and the scal constraints of welfare
states. e most pronounced marketization
is the shi from a pay-as-you-go to a pre-
funded nancing logic: pensions will no
longer be paid from current contributions
of those expecting to receive benets in the
future but from the investment (accumulat-
ed capital) that has been saved thus far. Pre-
funding is not necessarily always private;
some countries have introduced reserve
funds for their public pensions or require
individuals to invest part of their mandato-
ry state contributions in (private) prefund-
ed schemes. Funded schemes depend on
the portfolio of investment as to what de-
gree they are dependent on nancial risks.
In dened contribution (DC) schemes these
risks are borne by the individual if there is
no regulation on the nancial product that
provides some safeguards. In dened bene-
t (DB) systems, such as company schemes
and pension funds, nancial responsibility
might be shared in case of underfunding,
when promised benets cannot be nanced
from the current and future investment. Pri-
vate pensions are more likely to be funded
pensions since a PAYG arrangement such
as book reserves requires considerable trust
in their future ability to pay such a com-
mitment. ere is a second mechanism of
marketization that introduces quasi-market
principles in public pensions, that is when
Table1:MarketizationandPrivatizationofPensions
Process
Marketization
Privatization
Principle
Increasingthemarketlogic
andmarketdependency
(commodification)
Shiftingresponsibilityto
nonstateactors
(riskprivatization)
Aims
Financialsustainability,
reducingpublicexpenditure
Retreatofthestate,
selfregulation,consumerchoice
Instruments
Employmentrelatedpensions
Longerworkinglife
Actuarialtreatmentofbenefits
Prefundedpensions
Mandateforprivateactors
Collectivebargaining
Employerscommitment
Voluntary/individualchoice
Source:owncompilation.
European Policy Analysis
62
benet calculations are more strictly tied
to contributions (lifetime point systems),
when benet indexation is dependent on
wage or price development, or when actu-
arial principles are applied to non-funded
PAYG benets as if they were contributory
saving schemes.
In contrast, privatization is the sec-
ond transformation, entailing a shi to-
ward a multi-pillar pension system; this
involves the introduction or expansion of
the importance of private pillars. is pri-
vatization is foremost a process changing
responsibility for retirement income from
state to non-state actors, these may include
employers, social partners, and individuals.
e move toward a multi-pillar architecture
is a response to the overburdening of the
public welfare state, but is also in line with
neo-liberal ideas of strengthening private
self-reliance, individual responsibility, and
consumer choice. e distinction between a
second (occupational) and third (personal)
pension pillar indicates the dierences in
governance structure, principal-agent con-
ict of interests and employer-employee re-
lations (Ebbinghaus and Wiß 2011). In the
case of collectively negotiated occupational
pensions, responsibility is shared between
employers (or employer associations) and
employee interests (or trade unions), that is
the social partner. ese schemes can intro-
duce more solidaristic elements that come
closer to public schemes. In company-spon-
sored schemes, labor relations matter too,
but employees are less powerful vis-à-vis
the employer who can determine the condi-
tions of such schemes or abstain from them.
Finally, in personal pensions individuals are
responsible for making the main decisions,
but this depends on their nancial literacy,
individual foresight, and income situation.
Besides these dierences in governance,
the state as regulator can also regulate con-
ditions, provide tax incentives, and setup
controlling agencies. us privatization as a
retreat of the state from primary nancial
responsibility does not preclude state inter-
vention through other means.
IV - Varieties of Pension Mixes
Europe’s pension landscape varies in
the importance of private funded
pensions, depending on the gap le
by more or less generous public pensions
(Ebbinghaus 2011). Pension fund capital-
ism as revealed by the size of pension fund
investment has a major impact on nancial
markets and corporate governance. Based
on the Varieties of Capitalism approach
(Hall and Soskice 2001) we would expect
that there is a strong relationship between
the importance of nancial markets in Lib-
eral Market Economies (LME) and their re-
liance on funded private pensions, whereas
in Coordinated Market Economies (CME)
in Continental and Nordic Europe but also
on Mixed Market Economies (MMEs) in
Southern and Eastern Europe there is a larg-
er reliance on patient capital and non-fund-
ed pensions (book reserves) by private sec-
tor rms. Current pension systems dier in
their public–private mix (see Table 2): e
Anglophone Liberal Market Economies
(LMEs) have a large share of private pen-
sions, although Irish voluntary pensions lag
behind the UK’s occupational and personal
pensions that could opt-out of the state sec-
ond pension. Already a considerable share
of overall pension benets were paid out
before the 2008-crash by Icelandic (61%),
Dutch (52%), Swiss (48%), Belgian (30%),
Danish (28%), Swedish (23%), Norwegian
(12%), and also Finnish (no gure available)
private schemes. In the other countries cur-
rent pensioners receive still more than 90%
of their retirement income from public pen-
sions; although this will change given recent
reforms phasing in prefunded pensions.
European Policy Analysis
63
e maturity of private funded pen-
sions can be seen from the assets already
accumulated (see Table 2). e correlation
between nancial markets and funded pen-
sions is very strong for liberal Britain, while
pension fund assets in Germany’s coordi-
nated market-economy are still relatively
small though growing. Similarly, France and
Southern European countries are laggards
in pension fund asset growth (only Bel-
gium had some liberal insurance tradition).
But there are two continental Coordinated
Market Economies (CMEs) that have de-
veloped considerable funded occupational
pensions on top of public rst tier pensions:
the Netherlands and Switzerland. ese
two “liberal” CMEs outperform the United
Kingdom in pension assets, as substantial
investments are made by the Dutch collec-
tively negotiated and the Swiss mandatory
pension funds. Moreover, the Nordic CMEs
now also have substantial funded pillars as
part of public or private pensions. But there
remains a wide variation, including funded
elements as part of mandatory public pen-
sions (Sweden), mandated, partly funded
occupational pensions (Finland), negotiat-
ed occupational pensions (Denmark), and
Norway’s oil-nanced global government
pension fund (Statens pensjonsfond utland).
e other continental and CEE countries
have thus far collected far less than 20% of
their GDP; they are lagging far behind the
LME’s, the Netherlands, Switzerland, or the
Nordic countries in respect to pension fund
capitalism.
e future impact of private pen-
sions can also be seen from the current
contribution rates (for 2012, see Table 2).
Anglophone LMEs show a high percentage
of above 3% of GDP (no gure for Ireland
available), but this is again outperformed
by Swiss (8%), Icelandic (6%), Danish (7%
in 2010), Dutch (5%), and Swedish (no g-
ure available) private pension schemes. In
continental Europe, due to its Bismarckian
tradition of rather generous public pen-
sions, the trend toward funded pensions
has been much longer delayed (Ebbinghaus
2011), they still save only little in econom-
ic resources in private funded pensions.
Finally, following the transition to market
economies, major reforms in CEE coun-
tries have led to the building up of private
funded pensions, particularly in Hungary,
Poland, and the Baltic countries (Orenstein
2008). is can also be seen in the gures
on contributions; private pensions in CEE
countries collect somewhat more than in
Bismarckian countries (between 0.3% and
1.4% outside the Baltics, but less than prior
to the crash).
V - Pensions Facing the Post-Crash
Crisis
The nancial market crash in
2007/2008 and the subsequent crisis
have immediate short-term and pos-
sible long-term repercussions for the nan-
cial sustainability of pensions, both public
and private. For public pensions, the scal
burden of rescuing the nancial system
limits even further the capacity of welfare
states to nance public pensions and other
social benets. Although social protection
provided a buer to the economic crisis, the
nancial pressures to reform public social
expenditure have further amplied with the
sovereign debt crisis in Southern Europe
and Ireland. Highly indebted countries,
Greece in particular (Tinios 2012), have
come under pressure to cut back on social
benets immediately and reform public
pension systems for the long-term. Lower
levels of economic growth and high unem-
ployment will also have long-term conse-
quences for the nancing of European wel-
fare states. But the crisis will also aect the
other pillars, the private funded pensions.
European Policy Analysis
64
Table2:PensionAssets,Coverage,Contributions,andExpenditureinEurope
andUnitedStates
Pensionexpenditure
(%GDP)2012
Private
coverage
2011
Assets
(%GDP)2010
Privatepensions
(%GDP)2012
TotalPrivate(%)[%]
All
funds
Public
funds
Contri
butions
Benefits
LMEs
Ireland
a
4.5
a
0.9
a
(20.1)
[41.3]
64.9
15.9
UK
9.4
3.2
(34.2)
[43.3]
88.7
—
d
2.9
d
3.2
US
11.4
4.6
(40.3)
[47.1]
137.9
17.9
d
4.0
d
4.6
LibCMEs
Netherlands
9.4
4.3
(46.0)
[88.0]
128.5
—
5.5
4.3
Switzerland
b
11.3
b
5.0
b
(44.3)
[70.5]
113.7
—
8.2
5.0
CMEs(North)
Denmark
11.2
5.1
(45.4)
[61.9]
177.8
—
c
6.9
c
5.1
Finland
10.5
0.6
(5.9)
*[74.2]
*91.0
—
10.2
*11.2
Iceland
7.4
5.7
(77.0)
[84.4]
131.9
—
6.4
5.0
Norway
b
7.0
b
1.6
b
(23.1)
[68.1]
***136.2
5.6
0.5
0.2
Sweden
9.5
1.3
(14.0)
[>90.0]
84.1
27.2
CMEs(Centre)
Austria
13.7
0.2
(1.7)
[>38.6]
5.5
—
c
0.4
c
0.2
Belgium
13.7
3.7
(27.0)
[45.2]
8.8
5.0
0.4
0.3
France
14.1
0.4
(2.5)
v[20.9]
13.1
4.6
c
0.6
c
0.4
Germany
11.4
0.2
(1.8)
[71.3]
5.4
—
0.3
0.2
MMEs(South)
Greece
13.1
0.0
(0.0)
[>0.2]
0.0
—
0.0
0.0
Italy
15.8
0.3
(1.8)
[14.0]
5.3
—
0.6
0.3
Portugal
12.8
0.5
(3.5)
[>8.4]
17.9
5.6
0.5
0.3
Spain
10.0
0.7
(6.9)
[18.6]
18.7
6.1
0.4
0.4
MMEs(East)
CzechRep.
8.9
0.6
(7.2)
[62.1]
6.3
—
0.9
0.6
Estonia
7.9
0.0
(0.3)
[68.9]
7.4
—
1.4
0.0
Hungary
10.1
0.2
(1.9)
[20.0]
14.6
—
0.3
0.2
Poland
11.8
0.0
(0.1)
[56.5]
16.6
0.7
0.5
0.0
SlovakRep.
7.1
0.1
(1.6)
[44.4]
7.4
—
1.2
0.1
Slovenia
11.8
0.9
(7.7)
[38.2]
4.9
—
0.5
0.2
Sources:owncalculations;expenditure(2012):PensionMarketinFocus2013;coverage:OECD
PensionOutlook2012,Tab.4.1,p.105;Publicpensionfunds:OECD(2011):Table4;Private
pensionfunds:OECDGlobalPensionStatisticsdatabase.
Notes:(%)%ofTotal;[*]occupationalandpersonalpensioncoveragein%ofworkingage
population;>underestimated;includesmandatoryoccupationalpensions(partlyfundedprivate
schemes);
(a)2007;(b)2008;(c)2010;(d)2011;(f)totalincludesNorwegianstatepensionfund(122.8%
GDP,financedbyoilreceipts).
European Policy Analysis
65
In fact, the crisis has shed some new light
on the pension privatization strategy, which
has thus far been seen as the best way out of
the pension sustainability problem in aging
societies.
Funded pension schemes faced ma-
jor problems during the nancial market
downturns (Casey 2012; Ebbinghaus and-
Wiß 2011). Contributions are invested in
capital markets for high long-term returns
albeit with some risks which have already
been exposed during the early 2000s. e
2007/2008 nancial market crash impacted
on pension funds immediately, though with
some cross-national variations. Within a
year, assets dropped dramatically by more
than 25% in the United States and 35% in
Ireland and Iceland, while most other Euro-
pean pension funds had a nominal decline
of more than 10%, but less than 20% with
few exceptions (OECD 2009). Certainly,
most funds have somewhat recovered af-
ter 2008 (in particular Danish and Dutch
funds), but it will take several years until
all have made up for their forgone growth.
Moreover, the nancial crash had various
economic and nancial repercussions that
led to ad hoc interventions, particularly
in countries with sovereign debt problems
(Casey 2012).
e dierential short-term impact is
largely determined by the investment port-
folio: particularly risky stock market invest-
ments (equities, currencies, hedge funds,
commodity trading) vis-à-vis more con-
servative investments (public bonds, non-
risky loans, and domestic real estate). e
countries with the largest losses have the
highest aggregate share of equities (OECD
2009, 34; Pino and Yermo 2010). ere is
indeed a strong negative relationship be-
tween post-crash losses of pension funds
and their overall share in equities (and pri-
vate investments) shortly before the crash
(Ebbinghaus and Wiß 2011; Wiß 2014).
More risky investments, most notably in the
United States and Ireland, but also in the
United Kingdom and the Netherlands, lead
to higher negative investment returns than
in countries like Switzerland and Germa-
ny with more prudent investment in bonds
(OECD 2010). Among the OECD countries,
Liberal Market Economies (LMEs) tend to
rely much more on a growth-oriented but
more risky equity-based strategy, while
Conservative Market Economies (CMEs)
(including Swiss funds) are more conser-
vative in their investment, but are thus also
much less severely struck during the crisis,
even though they may have smaller long-
term returns.2
VI - Privatizing Financial Risks?
The crisis highlights the problems of
shiing responsibility and thereby
risks to private actors. e sudden
losses and lower than expected returns af-
fect employers or social partners as spon-
sors of dened benet (DB) schemes as
well as current and future pensioners rely-
ing on dened contribution (DC) personal
pensions. Even if pension funds have been
partly recovering aer 2008, the eects of
the crisis will undermine long-term growth
expectations and trust in funded pensions.
e impact of lower than expected returns
plays out dierently in pension plans (Ebb-
inghaus and Wiß 2011), depending on
whether these are DB schemes that specify
a predened salary replacement, and DC
schemes that do not make such promise. In
2 Although investment returns improved aer the 2001 ‘new economy’ crash and the 2007/2008 nancial
market crises, the long-term (ination-adjusted) net rate of pension fund returns remained only in few
countries (Germany, Denmark, and Norway) above 3% from 2001-2011 (OECD 2012: Figure 1.1, p. 21).
European Policy Analysis
66
DB schemes, the employer or social partners
have the responsibility to cover pension li-
abilities in case of underfunding or adjust
dened benets, while they may prot from
contribution holidays in good times as hap-
pened in Switzerland during the 1980s. In
funded DC schemes, however, the nancial
market risks are completely individualized,
thus lower than expected returns may lead
to postponement of work exit or lower re-
tirement income. DB schemes tend to pro-
tect employees’ interests better than DC
schemes (though some Danish and Swiss
schemes are hybrid collective DC schemes);
the DC (and collective DB) schemes allow
pooling social risks across employees in a
rm, across employers in a sector or even
nation-wide. While in DC schemes individ-
uals bear the nancial risks and need the
foresight to stick to a lifecycle portfolio in-
vestment strategy, DB schemes can balance
risks by pooling and thus guarantee some
predened benets.
While the majority of current pen-
sioners is still covered by DB schemes, new
schemes, or plans for new entrants are in
most countries increasingly DC schemes.
e Netherlands and Finland are still stand-
ing out by providing DB schemes through
occupational schemes with nearly full cov-
erage. In collective schemes, such as the
Dutch DB schemes, the social partners can
function as mediators to balance the inter-
ests of current and future pensioners as well
as between employers and employees. Via
collective bargaining and involvement in
the management of pension funds, burdens
can be shared between employers (higher
contributions) and (ex-) employees (lower
or frozen indexations, higher contributions,
and lower benets). Nevertheless, the social
partners have thus to make as dicult deci-
sions in underfunded DB schemes as gov-
ernments for public PAYG pensions facing
demographic and scal pressures. As a con-
sequence of the crash and its repercussions,
the group of those that trusted in pension
funds dropped in the Netherlands by half
from more than every second Dutch person
in 2006 to only every fourth in 2009 (Casey
2012, p. 257).
e consequences of nancial risks
for individuals thus depend on pension plan
designs. Workers might possibly have to
postpone retirement (exit work later), pay
higher contributions or accept lower than
expected benets if long-term returns are
low. Under DC schemes, current retirees,
or those close to retirement are more likely
to be hit by a nancial market crash if sav-
ings are still in risky investments. erefore,
“nudging” rules in DC plans should insure
life-cycle investment strategies (aler and
Sunstein 2009), that is, a shi toward more
conservative investments as retirement ap-
proaches and a transfer to annuities instead
of lump-sum pay-out when reaching retire-
ment. Pensioners covered by DB schemes
are less directly aected by the nancial
crisis, but their benets could decrease in
real value when pension indexation is sus-
pended as in the Netherlands DB schemes
place particular strains on the sponsors,
the employer, or social partners. Reinsur-
ance against bankruptcy of the sponsoring
rm is needed; indeed premiums have in-
creased, for instance, in Germany, the Unit-
ed Kingdom, and Switzerland (Ebbinghaus
and Wiß 2011).
To restore sustainability in DB
schemes, employers (or the social partners)
are faced with either higher contributions
or reduced promised benets in the long-
run. e funding ratio of Dutch pension
funds has fallen below 95%, 10 percentage
points below the required minimum fund-
ing, but the government extended the peri-
od for recovery from three to ve years. e
UK average funding ratio has dropped by
around 10%–85% following the 2008 crash
European Policy Analysis
67
(Antolín and Stewart 2009, p. 128). Also
the Swiss funding ratio in the private sector
dropped to 97% in 2008; as a consequence
pension indexation was suspended and
contributions increased. An overall trend is
a post-crash shi to less risky investments
such as bonds and loans which, however,
entail historically low returns, while more
growth-oriented international diversica-
tion increases risks (Antolín and Stewart
2009). Another long-term impact (already
instigated by the 2001 nancial crisis) has
been the further acceleration of the shi
from DB to DC benets, from more bu-
ered to individualized risk exposure. e
trend has been well documented for the
United States (Burtless 2012) and the Unit-
ed Kingdom (Bridgen and Meyer 2005).
e crisis in the early 2000s propelled a shi
from nal-salary to average-career-salary
DB schemes, while the recent post-crash
development led to a paradigm shi from
DB to DC schemes or at least cutbacks in
promised dened benets.
e move toward multi-pillar sys-
tems has been pronounced in CEE since the
late 1990s, when governments faced a dou-
ble problem of rising public debt due to the
economic crisis and continued contribu-
tions to funded pensions with low returns.
By 2010, the new pension funds had started
to accumulate assets (ranging from 5% of
GDP in Slovenia to 16% in Poland), given
the considerable contributions (ranging
from 0.6% of GDP in Slovenia to 6.8% in
Estonia). However, the nancial crisis pro-
voked a moratorium if not reversal of the
shi toward funded pensions in Central and
Eastern Europe by governments respond-
ing to the crisis (Drahokoupil and Domon-
kos 2012). Given the severe economic cri-
sis and the scal constraints, governments
were revisiting the funded pension strategy
and refocused on public PAYG systems.
Most notable is Hungary’s turn-around in
de facto nationalizing prefunded pensions
by the right-wing government in 2010 in
order to avoid further international credit
(Simonovits 2012). e nancial crisis has
further shattered condence in funded pen-
sions; at least for Hungary it will be dicult
to rebuild trust in private funded pensions.
e shi toward marketization and privat-
ization may thus not always be going in the
same forward direction.
VII - e Issue of Social Sustain-
ability
In recent years, not least since the nan-
cial market crash, the social adequacy
of pensions has become an important
topic as a consequence of the response to
nancial sustainability problems. Concerns
about growing risks of poverty and increas-
ing inequality in old age as consequences of
pension marketization and privatization of
funded pensions have mounted in academ-
ic and public debates (OECD 2001). While
economic and nance ministers have been
the spokespeople on nancial issues, the
social and labor ministers have been more
outspoken about the need for “adequate”
pensions. e dierences in position have
been observed since the early days of the
EU’s OMC in pensions, where the nancial
agenda of ECONFIN and the social con-
cerns of the EU social protection committee
(SPC) have become juxtaposed (Anderson
2002).
e issue of old age poverty and in-
equality has become more pressing because
of the already enacted and further planned
retrenchment of public pensions (marketi-
zation) and the shi toward private fund-
ed pensions (privatization), both advocat-
ed by a nancial sustainability rationale.
Except for widows, poverty in old age has
become a less pressing problem than pov-
erty among lone mothers and large families
European Policy Analysis
68
today. An academic and political debate
(Lynch 2006; Bradshaw and Holmes 2013)
emerged whether welfare states have tilted
towards pensioners as a result of their vot-
ing power, and that there was a generational
conict between old and young. is view
may, however, be myopic to future develop-
ments. Old age poverty and inequality will
most likely increase as a result of welfare
state retrenchment, labor market exibili-
zation, and economic uncertainty (Hinrichs
and Jessoula 2012). Hence, the problem of
social sustainability (i.e. policies to safe-
guard nancial sustainability in response to
an aging society) may very well increase the
risk of poverty and inequality in the future.
rough the backdoor this would then lead
to an eventual rise in need for social assis-
tance (or minimum income) for older peo-
ple. Subsequently, increased poverty risks
may also lead to more political pressure to
improve minimum income provisions.
e shi toward multi-pillar sys-
tems poses concerns about the long-term
social sustainability of both public and
private pillars: Will the consequences of
pension retrenchment and privatization in-
crease social inequality and poverty in old
age income in the future? In the public pil-
lar, the once generous pension benets have
been reduced in Bismarckian pension sys-
tems, while Beveridge basic pensions have
also been remodeled (Ebbinghaus 2011).
Following several reforms since the 1990s,
Germany’s once generous old age insurance
has been transformed into a more meagre
pension that no longer will suce to main-
tain living standards if not supplement-
ed by voluntary funded pensions. Even in
countries that had not retrenched public
pensions during the 1990s, in particular the
Southern European countries, far-reaching
reforms have taken place since the recent
sovereign debt crisis. Also past Beveridge
models like Finland and Sweden were trans-
formed into minimum income systems for
those not receiving enough from the earn-
ings-related pensions, which in turn have
become partly funded. In general, we can
observe a trend that public pensions serve
more and more mainly a minimum income
function (Lagoutte and Reimat 2013), while
the mandatory earnings-related tiers have
become more market-oriented and partially
or fully funded. e increase in retirement
age (or needed contribution records) has
also the eect of de facto lowering pension
benets if older people cannot remain lon-
ger in full employment.
In the case of private pensions, so-
cial inequality might be particularly pro-
nounced in voluntary pensions with un-
even and low coverage (see Table 2), while
collectively negotiated occupational and
mandatory funded pensions provide more
widespread protection (Ebbinghaus 2011).
Moreover, social benets such as credited
contribution years for child rearing and
long-term care are usually not granted in
private pensions but only in public pension
systems. Also atypical employment and un-
employment periods lead to interruptions
in contributions or disadvantages in dened
benet (DB) schemes in case of premature
job termination. e exibilization of la-
bor markets (Hinrichs and Jessoula 2012)
will thus pose a long-term risk for both
public earnings-related and private con-
tribution-based pension systems. Both the
marketization of public pensions and the
privatization of funded pensions will neg-
atively interact with labor market exibili-
zation, thus causing doubts about the long-
term social sustainability of the multi-pillar
strategy.
e individualization of nancial
risks in dened contribution (DC) pen-
sions and the uncertainty about the future
returns of funded pensions also raise con-
cerns about the social sustainability of the
European Policy Analysis
69
multi-pillar paradigm. e nancial crisis
seems to have led to a general decline in
trust into funded pensions, thereby damp-
ening individual eorts to save for old age
income. e choice of pension fund prod-
ucts oen seems too complicated for indi-
viduals, particularly those less educated.
Recent eorts towards “nudging” strategies
have been advocated by behavioral econ-
omists (aler and Sunstein 2009). ese
include automatic enrolment in a fund-
ed standard plan, thereby requiring active
opt-out to other options as for instance in
the recent reforms in the United Kingdom
(Mabbett 2012). Moreover, the European
Commission proposes the introduction of
minimum guarantees in DC schemes or
new mixed DB/DC pension plans as well as
more life-cycle portfolios in order to reduce
short-term volatility (EU-Com. 2012).
VIII - Conclusion: Is it Politically
Sustainable?
The dual shi toward a multi-pillar
paradigm, marketization, and pri-
vatization, has aected nearly all
pension systems in Europe in one way or
another. As funded pensions have grown
in economic importance, individuals’ re-
tirement income will be more and more
dependent on long-term nancial market
performance. e post-crash experience
has shown that nancial risks largely de-
pend on the scope and portfolio of asset
investments, more risky investments can
lead to high volatility, and more conserva-
tive investment may entail rather low long-
term net returns. In addition, public debt
has further increased putting additional
pressure on retrenching public pensions,
thereby leaving an increasing income gap
to ll in for private initiative. Moreover, the
economic consequences of the crash have
been increased in unemployment and the
spread of exible employment, thus mar-
ketization and privatization of pensions
interact negatively with these aggravating
labor market trends. e main lessons from
the two nancial crises during the 2000s are
the need for stricter rules regarding public
supervision, investment restrictions, and
partly new benet protection mechanisms.
is indicates that the role of private pen-
sion governance, including (state) regula-
tion, continues to gain importance despite
claims of privatization that suggest a retreat
of the state. Furthermore, state regulation is
oen complemented by the social partners’
governance and regulation.
While the state partially retreat-
ed from its responsibilities to nance ad-
equate public pensions, the scope for state
regulation and control of private pensions
increased, at least potentially. us Lutz
Leisering (2011) claims an increased need
for state regulation due to the shi towards
funded pensions (see also Mabbett 2012
and Mabbett in this issue). e retreat of
the state from public pension commitments
thus has not only increased the need to ll
the retirement income gap by private fund-
ed pensions but has also led to demands for
better regulation of these pensions by the
state and the social partners. Without such
regulation it may be questionable whether
the funded pension route remains politi-
cally sustainable if it remains a rather risky
business for more and more ordinary people
facing retirement. While the old age pover-
ty threat will particularly call upon govern-
ments to enhance the minimum income
systems, the nancial uncertainty, and the
social inequality issue might provoke more
political pressure from middle-class inter-
ests. Given the political economy of reforms,
the large voting power of people nearing or
beyond retirement age, the political pres-
sure might indeed mount again to recali-
brate public pensions and to regulate private
European Policy Analysis
70
pensions. us pension reform will remain
on the political agenda, even though (or
because) past reforms toward a multi-pillar
paradigm were meant to solve the nancial
sustainability problem by market solutions.
e nancial market crash and its repercus-
sions indicated that the thought solution of
marketization and privatization is far from
being the end of pension reforms.
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