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László Andor Commissioner for Employment, Social Affairs and Inclusion "How to improve European pensions systems - and the role of the European Commission" Conference on Green Paper on Pensions Brussels, 29 October 2010

European Commission - SPEECH/10/611   29/10/2010

Other available languages: none

SPEECH/10/611

László Andor

Commissioner for Employment, Social Affairs and Inclusion

"How to improve European pensions systems - and the role of the European Commission"

Conference on Green Paper on Pensions

Brussels, 29 October 2010

Excellencies,

Honourable Members of the European Parliament,

Distinguished guests,

Ladies and gentlemen,

It gives me great pleasure to welcome you to this Conference.

This is a key event in the consultation on the Green Paper on pensions which Commissioners Olli Rehn and Michel Barnier and I launched.

A Commission consultation is supposed to last for at least two months. For the consultation on the Green Paper, the consultation period lasts four months, not only because it started before the summer break, but also and mainly because we considered it very important to involve as many stakeholders as possible. To give them time to think it over. To gather evidence. To contribute to the debate.

And many have responded. We have received over 200 responses to the Green Paper to this date and more than 300 participants are attending this conference today. I am sure that many more will follow by the time the consultation closes on 15 November.

This interest highlights the Green Paper’s timeliness and importance.

Few would dare to say they knew how to design an ideal pension scheme – and the Commission would not be among them.

But we all know that population ageing, combined with the impact of the financial crisis, poses a challenge for our pension systems, and one to which we must respond. We must respond to ensure our pension systems remain adequate, sustainable and safe.

Each of you has a different experience to relate, a special contribution to the discussion. I encourage you all to use the opportunity we have today to make your views known and make sure we have a good debate.

A constructive debate on the main questions in the Green Paper. To put it simply:

  • What should our pension systems look like? and

  • How can the European Union best support the Member States in ensuring adequate, sustainable and safe pensions?

Pension reform can trigger strong public reactions and even cause civil unrest as. This risk can be greatly reduced – even if not eliminated – with preparation, transparency and broad consultation with all the stakeholders.

Over the last decade, almost every Member State has adjusted the pensionable age one way or another, or has introduced new regulations or schemes.

But we have to go now further and draw the full conclusions from the challenges facing all the Member States: the retirement of the baby-boom generation and the

The Commission believes it is easier to meet these common challenges if we look for solutions together, if we allow time for reflection, and involve all stakeholders.

Under pressure to act during the crisis, various decisions were taken and sometimes in a rush. But now that the pressure of the crisis has let up a little, there has to be room for proper social dialogue.

I firmly believe that the contribution of the social partners is vital for sustainable reform. That is why I welcome the high-level representatives here today.

National experience

While the design of pension systems is largely a national responsibility, the Commission and the European Union have a role to play: it can document the need for reform, encourage the proliferation of good practices, and coordinate the different approaches.

But let me be clear: at the end of the day it is in many ways for the Member States to design implement and follow up reforms — and many of you here know how difficult that is.

That is why the Belgian Presidency is best placed to give the keynote speech at this conference. It will be our pleasure to listen to Pensions Minister Michel Daerden, who has launched a Green Paper on the pension challenge in Belgium.

National experience is the mainstay of this pension debate. We can learn from good examples and from those that are less successful too — what may be a good solution, what is to be avoided, and maybe the most difficult part — how to communicate and implement reform.

Economic theory

We can learn from national experience and we can also learn from economic and social theory.

There is a need to distinguish between economic science and intellectual fashion. There was a time when funded pensions seemed the magic solution to the ageing problem. The financial crisis has shown that this was overoptimistic and funded pensions as any other pension scheme need to be adjusted to ageing and changing economic prospects.

However, even if the weaknesses of a particular model have been exposed by the crisis, it may not be the best idea to disrupt a system – that otherwise can work better under an improved regulatory framework.

I am very happy that Professor Nicholas Barr will be explaining how he sees the role of a pension system and how we can deal with the challenges facing our pension systems.

Nick is one of the best-known economists dealing with public and welfare economics, the author of the standard textbook Economics of the welfare state. We can be sure he will help us start from a theoretically and empirically well-founded position.

There are many issues to tackle. The Green Paper lists 14 questions, each of which deserves a day-long discussion. So I can do no more than sketch out a few of the pension-related dilemmas.

Adequacy and sustainability

An important topic that will be tackled in panels 1 and 2 are adequacy and sustainability and the link to the labour market.

Our job today is to bring clarity to these concepts. For some, there may appear to be a trade-off between adequacy and sustainability.

But as I stressed at the Belgian Presidency’s pension conference in Liège in September, pension systems have both to be sustainable and provide adequate pensions.

Financial and social considerations need to be weighed up together. Within the Commission, for me this means working with my colleague Olli Rehn.

But while we have a practical definition of sustainability linked to public budget balance, defining adequacy has proved more difficult.

Adequacy is measured for the middle earners as income replacement and for the low earners as poverty avoidance. But what level of income replacement are we striving for? And where should be the emphasis in public provision between poverty avoidance and adequate replacement of previous income?

Now on the one hand, promising pensions and benefits at adequate levels without securing their financial sustainability is of little help to pensioners.

And on the other hand, inadequate pensions and benefits will not be socially or politically sustainable.

Present pension systems are successful in the sense that old age and poverty are not any more synonymous and we would like to keep it like this hence we need to modernise. But we should not overlook that women's pensions are in average half of those of men. We need to ask what changes in our labour markets, employment and social policies and our approach to care and household work are required.

Adequacy and sustainability are two sides of the same coin. The challenge for policy makers is to strike a good balance between these fundamental concerns in pension delivery.

Yet while action needs to be taken to improve both the adequacy and the sustainability of pension systems, some reforms may be more effective for one than the other.

In addition, greater reliance on market-based pension income may result in volatility of adequacy, loss of safety — in line with the performance of the financial markets. The last two years have made us even more aware than before of the inherent risks in financial markets.

The Commission is not pushing Member States towards any particular pension system design. Pay-as-you-go, funded and mixed schemes can all perform well. What matters is organising the pension system well.

So when is a pension system well organised?

This is a very difficult question, and I would welcome contributions from all panels.

I think a pension system is well organised if it provides a transparent, adequate and sustainable framework for income provision after retirement. That is one that prevents people from falling into poverty in old age, while at the same time builds entitlements that allow them to maintain their living standard in old age to a reasonable degree.

Secondly, pension systems need to strike the right balance between working life and the time spent in retirement.

Life expectancy is set to rise further: over the last 50 years, it has risen by about five years in the EU, and by 2060 we can expect a further rise of up to seven years. It is natural then to adjust the retirement age as well.

But does that mean that the adjustment in pension age has to be the same for all professions? It may be easier to work in an office than perform arduous work in a mine — an issue that may be addressed in panel 1.

Thirdly, a system is also well organised if it maintains a strong link between the contributions paid and the value of the pension but also cater for people with breaks in their contribution history — for example, where people care for their family members.

Many Member States already credit periods of unemployment, maternity and sickness when they calculate public pension entitlements.

I am sure you will have ideas to contribute to this list — or criticise it. You will be able to discuss these issues today.

Commission responsibilities

While the design of pension systems lies greatly with the Member States, the Commission has certain responsibilities.

First, it coordinates social security pensions. Someone moving from the United Kingdom to Spain or from France to Romania on retirement has the right to receive his or her State pension in sunny Spain or in the beautiful Carpathian mountains.

Secondly, leaving statutory pensions aside, the Commission also works to strengthen the internal market for funded occupational schemes and the necessary minimum standards on prudential rules.

There are minimum guarantees concerning occupational pensions and accrued rights in the event of the insolvency of pension sponsoring companies.

Freedom of movement is a huge achievement of the European integration project, but barriers still exist, and for pensions too.

I am sure panel 3 will provide an excellent forum to discuss the issue of portability of supplementary pensions.

Fresh impetus is needed. One idea mentioned in the Green Paper is the introduction of a a system of national tracking services for pension rights.

How the Directive on the activities of Institutions for Occupational Retirement Provision — which is usually called the IORP Directive — needs to be reviewed is also an important question.

Another area of concern is the fact that funded pension schemes are not all equally covered by EU regulation including the hotly debated issue of Solvency II and of an equivalent Solvency Regime for pension funds.

Now, no pension system exists in isolation. Even the best-organised pension system fails if economic and social policies are not supportive.

This is also why active and healthy ageing was the topic chosen for panel 1, and the interaction with other policies is an issue in all panels.

Employment policy must help everyone who is looking to find and keep a job and thus have a longer pension contribution history, whether they have just left school or are close to retirement.

Social, health and education policy should also help — and provide incentives for — older workers to remain active, to keep working and to remain up to date through life-long learning. We must also ensure that people stay healthy longer.

And companies need incentives to provide training for — and to use the expertise of — their older employees. There should be good safeguards against age discrimination.

One question we may have to revisit from a modern, angle of gender equality is the link between family policy and pensions. Should we give pension rights for raising children or caring for older or disabled family members? What conditions needs to be in place to allow people to have the number of children they want to have?

The European Union is active in many areas connected with pensions, the elderly and longer working life. For example the EU supports the employment and training of older workers through the European Social Fund. 2012 will be European Year of Active Ageing, an opportunity to raise awareness of the importance of active and healthy ageing.

The first innovation partnership under the Europe 2020 Innovation Union flagship centres on active and healthy ageing.

Ladies and gentlemen,

This conference is taking place in the Charlemagne building. A building named after the King of the Franks, and a man regarded by many as the father of Europe.

Charlemagne once said: Right action is better than knowledge; but in order to do what is right, we must know what is right.

Hopefully the agenda at this conference will allow us to debate the best way forward for European pensions.

I look forward to hearing your views in the panel sessions.

Thank you.


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