Decent pensions for all

1. European pension systems are faced with the challenges of demographic developments which are threatening the stability of the inter-generational contracts in place since the early 20th century: the trend towards ageing of the population, life expectancy well beyond retirement age and the imbalance between the number of pensioners and the number of contributors of working age are just some examples. In the current context of economic and financial crisis, the national austerity programmes adopted by many member States also have repercussions on pension systems and are leading to new social inequalities between pensioners.

2. The Parliamentary Assembly, conscious of the efforts made by the governments of numerous member States to enhance the viability of their pension systems, is concerned about the safeguarding of adequate pension levels offering pensioners a decent standard of living.

3. It therefore considers that pensioners require special protection in accordance with Article 23 of the revised European Social Charter (ETS No. 163), which provides that Parties must, among other things, undertake to make available to elderly persons “adequate resources enabling them to lead a decent life and play an active part in public, social and cultural life”.

4. To take up the dual challenge of current demographic trends in Europe and the financial and economic crises, European pension systems should not be geared exclusively to a funded approach. While the use of such methods of financing pensions may represent a solution to the problem of demographic trends, they prove less effective in absorbing financial and economic shocks. The predominance of funded components would heighten the vulnerability of pension systems, which would become less resilient to the risks of the financial markets. To ensure the viability and sustainability of pension systems, a balance must therefore be struck between funded and pay-as-you-go components.

5. Given the ongoing financial and economic crises, the complexity of pension systems and the multitude of possible choices, it will, moreover, be vital to resolve the problem of State budget deficits in general, and in particular the deficits of public pension funds, in order to be able to maintain the principle of inter-generational solidarity. In this connection, a real revitalisation of the economy, which should also benefit individual households, will be the decisive factor in promoting a positive trend in pensions in Europe.

6. The Assembly calls on the member States of the Council of Europe to apply the following principles in their national policies:

1. In an economic, demographic and social context putting a huge strain on European pension systems and requiring far-reaching reforms to ensure their sustainability, the Parliamentary Assembly is concerned about the issue of pension adequacy, namely the safeguarding of adequate pensions for all pensioners. The trends towards smaller pensions and increased use of funded schemes are creating new intra- and inter-generational inequalities and therefore pose a threat to social cohesion in many member States.

2. Referring to Resolution … (2012) on decent pensions for all, and Resolution 1752 (2010) on decent pensions for women, the Assembly calls on the Committee of Ministers to urge member States to:

3. The Assembly invites the Committee of Ministers to study the questions of pensions and the standard of living of the elderly in the context of the intergovernmental activities conducted by the Drafting Group on the Rights of the Elderly (CDDH-AGE), with a view to exchanging good practices in this area and preparing practical instruments, such as guidelines, which can provide member States with guidance in their ongoing or forthcoming reforms. Active debate on this subject in the Council of Europe could also represent a significant contribution in the context of the European Year of Active Ageing and Solidarity between Generations 2012, launched by the European Commission.

1. Introduction: Aims and basis of the report, and approach adopted

1. Pension systems are a key issue in the political debates in most Council of Europe member States. The reforms initiated in the past few years throughout the continent must in particular respond to two big shared challenges: a demographic trend towards the ageing of the population and the impact of the current economic and financial crises on the incomes of the elderly. At the same time, member States have both to guarantee adequate retirement pensions, and therefore a reasonable standard of living for current pensioners, and provide sustainable systems for future generations.

2. In this complex situation, the rapporteur draws the Parliamentary Assembly’s attention to what he considers to be worrying trends in pension levels and the standards of living of retired persons in Europe. Pensioners in a number of member States are facing significant difficulties in supporting themselves, particularly because of reductions in pensions. The impact of measures taken to preserve pension systems sometimes seems to be further accentuated by emergency responses to the current economic situation and State budget deficits, as a look at various national situations will show.

3. In the spirit of the European Social Charter (ETS No. 35), the Assembly considers, and regularly reiterates, that social protection is essential for achieving social cohesion. In order for it to be complete, social protection should guarantee the entire European population access to decent retirement pensions above the national poverty line and, as specified in Article 23 of the revised European Social Charter (ETS No. 163), provide elderly persons with “adequate resources enabling them to lead a decent life and play an active part in public, social and cultural life”. Accordingly, the pension reforms currently under way must both affirm the responsibility of the public authorities by creating greater solidarity within and between the generations, and encourage the working population to take their own measures to provide for themselves.

4. This report is based on two motions tabled in 2009 (“Impact of the financial crisis upon pensioners”) and 2010 (“Decent pensions for all”). It follows on from Resolution 1752 (2010) and Recommendation 1932 (2010) on decent pensions for women, adopted by the Assembly on 25 June 2010, and its aim is to provide some further reflection on the subject of these texts. The rapporteur has in particular drawn on research conducted by the Organisation for Economic Co-operation and Development (OECD) and work carried out at European Union level that resulted in the publication of the Green Paper on pension systems, in 2010, and the White Paper on “An agenda for adequate, safe and sustainable pensions” in 2012. As far as France is concerned, the rapporteur draws on documents of the national pension fund scheme Caisse nationale d'assurance vieillesse (CNAV) and the Conseil d’Orientation des Retraites (Pensions Advisory Council – COR). Furthermore, on the rapporteur’s initiative, a special survey was launched at the beginning of 2012 via the European Centre for Parliamentary Research and Documentation (ECPRD), a parliamentary co-operation and information exchange mechanism of which the Parliamentary Assembly is a member.

5. The objective of this report will be neither to be exhaustive with regard to the issue of pensions in Europe, nor to make any specific recommendations on the political, financial or fiscal choices to be made individually by member States. Rather, the aim is to shed light on, and present in a structured way, the main problems faced by Council of Europe member States both generally and in times of crisis, provide member States with guidelines for guaranteeing decent pensions for all and identify the main areas where sharing good practices could prove useful in the future.

6. In referring to “financial and economic crises”, the report proceeds on the assumption that all the recent critical phases in the global economy are interconnected and must be viewed from an overall perspective; they include the financial and economic crises which began in 2008/2009 and, after receding to a greater or lesser extent in 2010, subsequently turned into a Europe-wide sovereign debt crisis in 2011, which has continued in 2012. The effects of the latest crisis are not yet well known, but it has been obvious since the end of 2011 that the impact on social services will be considerable given that many member States have been forced to cut back on certain social services under austerity programmes imposed on national budgets. What we need to know, therefore, is how today’s pension systems can be made strong enough to withstand the current crises and any other crisis that may emerge in future.

2. Pension systems in the light of demographic developments and the impact of the crises: trends and challenges

7. International experts generally agree that the first big challenge that governments have to address with regard to retirement pensions is the demographic trend towards an ageing population. In a wider context of recurrent economic and financial crises – the second challenge – the main political priorities as far as pension systems are concerned are still ensuring the financial sustainability of the systems and the adequacy of pensions, as well as striking a balance between the two. These same challenges were also identified by the European Commission in its Green Paper published in July 2010, as well as in the White Paper published in February 2012. This work, which constitutes an excellent overview of the retirement pension situation and clearly sets out the priorities for modernising pension policy for European Union member countries, should also serve as a primary reference for any discussion conducted at Council of Europe level, with due account taken of the additional characteristics specific to member States who are not members of the European Union.

2.1. Some of the main challenges: The trend towards ageing of the population, the need for increased labour market inclusion of women, and changing lifestyles

8. The fact that in Europe there is a trend towards the ageing of the population has been known for a very long time. However, a critical phase of this development will soon be reached since the “baby-boom” generation is approaching retirement age and the European population of working age is likely to decline from 2012 onwards. This statement made with respect to the European Union also applies to Greater Europe, as a glance at Russia by way of example illustrates: like many other industrialised countries, Russia has seen its population grow older because of decades of very low birth rates leading to a decline in the population. Projections to 2030 suggest that Russia heads a list of 11 countries likely to lose at least 1 million people in 30 years with an estimated decline of 12 million (out of some 143 million in 2011).

9. In the light of these demographic trends, the extent of which varies from one country to another, the OECD says there will be a smaller number of economically active people paying pension contributions and thus paying for today’s retirement pensions and that the “economic dependency ratio” of elderly people will double in the European Union: assuming four persons of working age for each person over 65 in 2010, the ratio will only be 2:1 by 2060. The OECD’s figures for its member States are based on an average of 7.5 contributors for one pensioner in 2011, a ratio likely to fall to three contributors for one pensioner in 2050.

10. At the same time, retirement periods are growing longer owing to increasing life expectancy. In itself, this is a positive development but it means national pension systems need to make provision for higher expenditure. In 1970, pensioners in France drew their pensions for an average of 10.8 years, but that average had risen to 24 years by 2010. Unless people, as they live longer, also stay longer in employment, either pension adequacy is likely to suffer or an unsustainable rise in pension expenditure may occur.

11. The European Commission’s 2009 report on ageing in the eurozone states that age-related public expenditure will probably grow by 5% relative to GDP by 2060 and that the only source of growth will be the productivity of a reduced labour force. Hence the importance of including any policy to support pension systems in a wider framework of economic and social policies. In this context, the promotion of greater female participation in the labour force is both a direct and an indirect source of growth, among other things because it generates new jobs in the fields of childcare and home help services.

12. Finally, there are other developments that may be sources of additional difficulties in preserving the level of pensions: lifestyle changes (single-person households, childless couples, geographical separation of the different generations of a family, etc.) are resulting in the establishment of more formally structured care services and creating additional costs – even if they do create job opportunities and represent sources of medium-term growth.

13. The challenges to be addressed undoubtedly include that of defining what is meant by an “adequate” pension: for some people, it is a pension at least equivalent to the minimum subsistence income, while others take the view that pensioners should be entitled to a certain percentage of their previous earnings. A third definition is that a pension should be calculated according to individual consumption needs. To define what it means by an adequate pension, the Council of Europe bases its approach mainly on the revised European Social Charter, Article 23 of which, on the right of elderly persons to social protection, states that they should be provided with “adequate resources enabling them to lead a decent life and play an active part in public, social and cultural life”. Once the meaning of the word “adequate” has been clarified, it will be important to consider appropriate ways of moving closer to the goal of decent pensions for all. The causes of uncertainty in this regard include the willingness and ability of individuals to save throughout their lives and the risks related to the financial markets.

2.2. The effects of the financial and economic crisis on pension systems

14. According to the OECD’s findings in 2009, no country and no pension system has been sheltered from the effects of the crisis. First of all, the financial crisis that began in 2008 has had an impact on private pension funds, which today are an important component of pension systems in many countries. The economic crisis that followed in 2009 led to a drop in production and a considerable increase in unemployment. These factors were in turn the cause of a big drop in salaries and a reduction in working time. Finally, the fall in receipts from pension contributions and an increase in applications for unemployment benefits, combined with economic recovery plans, have put greater pressure on public finances. However, the effects of the financial crisis on private pension funds have varied according to the composition of their portfolios. For example, the countries whose pension funds had the highest proportions of their assets invested in shares (often guaranteeing higher yields than bonds) have often sustained the greatest losses, such as Ireland for example.

15. It seems obvious that the current financial and economic crises will necessarily have an impact on the level of public pensions. Even where pensions are not decreasing in nominal terms, they tend to increase more slowly than salaries and prices generally. For example, in France, the rapporteur’s country of origin, it is obvious that today’s pensioners have a considerably better standard of living than those of the 1970s, when the level stood at only 60% of that of the working population. Even in France, however, many retired people are faced with pensions which are no longer increasing sufficiently in relation to the cost of living (housing, energy, medicines, etc.), according to the charities working in the field.

2.3. The trend towards privatisation: A vulnerability factor for pension systems

16. With the aim of ensuring the long-term financial sustainability of public pension systems, a large number of pension scheme reforms provide for a transition from systems mainly based on redistribution of public funds and inter-generational contracts (pay-as-you-go) to systems increasingly based on (compulsory or voluntary) funded components linked to the individual’s job before retirement and managed by private agencies. Within capitalisation systems, schemes guaranteeing a defined retirement income are increasingly replaced by savings plans under which “investors” will not know the amount of their capital until they retire, since it is determined by the size of the contributions and the rate of return.

17. Under recent reforms, most countries have put in place a multi-pillar pension system or have modified an existing pillar-based system. The classification of pension systems by pillars therefore warrants further explanation. This way of organising pension systems by pillars is based, inter alia, on the normative approach suggested in the report published in 1994 by the World Bank’s research department. The World Bank considers that the multi-pillar model is the best approach to pension reform and proposes a three-pillar structure:

• a compulsory public pay-as-you-go pillar, to ensure a minimum income;
• a compulsory privately managed and funded pillar, based on capitalisation, to replace income from employment;
• a voluntary privately managed and funded pillar based on capitalisation.  

18. The World Bank therefore rules out a model based exclusively either on a pay-as-you-go system or a funded system. The same position is adopted by other international institutions and organisations, which nevertheless propose a slightly different classification. The OECD has developed a classification based on four pillars: the first is a public pillar designed to guarantee a minimum income; the second is a contributory pay-as-you-go social pillar meant to substitute an income from employment; the third comprises collective funded schemes; and the fourth is based on voluntary individual savings. For its part, the European Commission generally adopts a classification based on three pillars, with the first pillar covering basic compulsory pay-as-you-go schemes, the second comprising, in principle funded, occupational schemes established and managed by the social partners, and the third consisting of schemes based on individual savings. The classification of pension systems by pillars is therefore the subject of a debate within international organisations which is echoed at national level. While the great majority of European countries have put in place pension systems based on pillars (usually three), each of them has adopted different arrangements and combinations of pillars.

19. According to the OECD report “Pensions at a Glance 2011”, most European countries that are members of OECD have adopted measures to improve the financial sustainability of their pension systems in the last few years. However, the trend towards the privatisation of pensions, the aim of which is to make pension systems economically viable, is exposing them more to the crisis at the same time. Accordingly, the impact of the recent crises is said to have been more severe in countries with a significant proportion of private pensions and retirement savings, where investments have been made in risk products or when the financial balance of the public systems was already critical.

20. Generally speaking, the role of private pension savings schemes varies enormously from one OECD country to another. For example, in the Netherlands or the United Kingdom, private financial sources account for more than 40% of retirement income, whereas in Austria, the Czech Republic, Hungary, Poland and the Slovak Republic the percentage is about 5% (2009 figures). However, even some of the afore-mentioned countries now have compulsory private pension schemes. The youngest wage-earners should therefore be entitled to a pension from the private sector amounting to a third of their income in Hungary, half in Poland and 60% in the Slovak Republic.

21. In the context of the future reforms to be undertaken by countries that have to involve the private sector still more in their pension system, or introduce funded elements, it will therefore be important to ensure that the systems in question are made able to withstand future crises. According to the OECD, the best method for governments and individuals, given the economic, demographic, financial and social uncertainties, would be a mix of sources of retirement income and the development of balanced multi-pillar pension systems, as is already the case in many countries today.

2.4. Elderly people are among the groups most affected by the crises

22. According to the latest forecasts, Europe will in the near future be confronted with a growing number of people who have been unable to contribute fully for their retirement and who will be at risk of poverty once they reach retirement age. In most of the countries studied by the OECD, elderly people are actually among the groups at risk of poverty, especially in times of crisis. Not only do they depend on the stability of pension systems during a crisis and on the income from them, but the crises themselves also aggravate the general economic situation, which has a direct influence on their standard of living because of its impact on personal savings and the prices of consumer goods and, especially, energy. However, the extent of the impact of the crisis on retired people depends on the age of those concerned.

23. Accordingly, people close to retirement are most affected by the impact of economic and financial crises. They are among the first to lose their jobs in a period of economic slowdown and among those most exposed to the risk of long-term unemployment. This can lead to a permanent reduction in their retirement income and prevent them from making up for lost earnings. As happens more generally in the case of retirement pensions, the extent of the impact of a financial crisis on retirement incomes, especially savings, also depends on the composition of the investment portfolio. Only a proportion of pensioners have transferred their investments to less risky assets when retirement age approaches. These effects on individual pensions are all the more dramatic as retirement pensions must also be considered “crisis absorbers” if they provide a decent level of income. Any impact of an economic crisis on pensions could therefore make the initial crisis worse.

24. Compared to this first category of people, younger employees, prime-age employees and pensioners are much less affected by the recent crises. The youngest group (25-34 years) will have 30 years or more to compensate for the temporary devaluation of their investments or the effects of an incomplete career. The second group (35-44 and 45-54), even though the financial crisis has taken its toll on their private retirement savings, still have enough years in front of them to reconstitute their savings and their jobs are generally less threatened than those of younger or older employees.

25. Finally, today’s pensioners will generally suffer relatively little from the crisis (apart from a few exceptions) and are generally sheltered from the effects of the economic crisis on the job market or of the financial crisis on private pensions. By contrast, these individuals are, like everyone, suffering from the general effects of the economic crisis on prices and will probably be affected by measures applied in response to the current debt crisis, which is also impacting on public pension schemes.

2.5. Preserving intra- and inter-generational solidarity

26. On a political level, any attempt to reduce the level of pensions necessarily comes up against major obstacles. A further difficulty lies in the increased use of funded pension schemes. Most countries which have reduced the benefits of pay-as-you-go pension schemes have, at the same time, adopted measures to extend the coverage of funded schemes. However, as the number of people covered by these new instruments is still small, a return to significant inequalities in the pension field can be expected in most European countries. In the light of this situation, the rapporteur calls for the preservation of the greatest possible intra-generational solidarity as a basis for social cohesion in our societies.

27. The OECD believes that the consequences of the economic and financial crises have indeed been painful for many people. However, as far as pension policies are concerned, the effects of the crises are negligible in relation to the problem of an ageing population, which remains the main challenge to be addressed in any current or future reform of pension systems. In its Green Paper, the European Commission also confirms that the recent economic and financial crises has only worsened the impact of the strong trend towards the ageing of the population. It points out that inter-generational and national solidarity are key principles and that “sound and adequate pension systems, enabling individuals to maintain, to a reasonable degree, their living standard after retirement, are crucial for citizens and for social cohesion”. It continues as follows: “Ensuring adequate retirement income is the purpose of pension systems and is a matter of fundamental inter- and intra-generational solidarity. Most reforms of pension systems so far have been aimed at improving sustainability. Further modernisation of pension systems will be needed to address adequacy gaps”. The rapporteur suggests adopting the same lines for the draft resolution and recommendation to be proposed to the Assembly.

28. Furthermore, the rapporteur fully supports the European Commission’s findings in its White Paper with regard to older workers: raising the effective retirement age will not be about pitching the interests of the young against those of the old. Indeed, the member States with the highest employment rates for older workers also have some of the lowest youth unemployment rates. In the long term, the number of jobs is not fixed, but depends notably on the supply of qualified workers, which is a key driver of economic growth. The increased availability of experienced older workers will enhance Europe’s growth potential and thus create more opportunities and better living conditions for the young and the old.

3. Reforms of pension systems in Europe: Instruments for improving system viability and adequacy

29. At European Union level, the European Commission has established that most member States have been forced to initiate significant reforms of their pension systems in the last few decades, while the recent economic and financial crisis has only highlighted the need to review the existing systems. In their reforms, States have first of all addressed aspects of the viability of systems and the question of pension adequacy, as well as more specific issues such as job market development and the distribution of gender roles. Once again, these findings certainly apply to a large number of States which form part of Greater Europe.

30. More specifically, the European Commission recommends that its member States:

• link the retirement age with increases in life expectancy;
• restrict access to early retirement schemes and other early exit pathways;
• support longer working lives by providing better access to life-long learning, adapting workplaces to a more diverse workforce, developing employment opportunities for older workers and supporting active and healthy ageing;
• equalise the pensionable age between men and women;
• support the development of complementary retirement savings to enhance retirement incomes.

31. With the aim of improving pension adequacy, the first measure initiated by governments is often to extend working life by encouraging people to work longer and raising the retirement age, now fixed at 65 for both women and men in most OECD countries, less than 65 in some (including France), and 67 in others, including Iceland and Norway (see document AS/Soc/Inf (2012) 08 ). Although different developments are planned, depending on the specific context of each country (and also on life expectancy and the effective retirement age), a general trend towards increasing the statutory retirement age is nevertheless emerging.

32. Other instruments available to governments include the level of pensions, the level or period of contributions and the elements used as a basis for calculating the level of pensions, for example most recent salary years, best salary years or average salary over the whole career. Generally speaking, recent and ongoing reforms observed in Europe are marked by a twofold trend: on the one hand, reductions of varying degrees in public pay-as-you-go schemes, and on the other, an attempt to develop funded instruments either on a collective (sector or company) or individual level.

3.1. The example of France: “Restoring young people’s confidence”

33. In order to have a better understanding of the challenges facing member States and the choices they will have to make in connection with their pension reforms, France, the rapporteur’s country of origin, has served as a first example. The pension system in France has developed in different phases. From 1945 to 1970, the primary aim was to maintain a decent standard of pension provision. Since 1970, the problem has been compounded by the now very familiar demographic challenges, especially greater life expectancy, which is extending the period spent in retirement. In France, it is the job of the national retirement insurance fund Caisse Nationale d’Assurance Vieillesse (CNAV), in close co-operation with the retirement orientation board, Conseil d’Orientation des Retraites (COR), to advise the government on its strategic choices and inform insured persons by explaining to them all the possible choices available.

34. The first French reform took place in 1993 and not only established the principle of taking into account the 25 best salary years instead of 10 to determine the size of the pension but also introduced a new price-based indexation. The 2003 reform was designed to increase the number of contribution years required to reach the maximum pension. This number will gradually rise to 41.5 years in 2018 (namely for people born in 1956). The 2010 reform provides for a rise in the retirement age to 62 in 2018, a target date considered by the French authorities to be perfectly sustainable for the introduction of new measures.

35. The most recent reform took place in the context of the economic crisis in which pensions were themselves not directly affected but where a high level of debt had been reached in order to guarantee pensions. The main guiding principle of this last reform was the desire not to increase wage and salary deductions any further, nor to reduce pensions. However, in the different reform phases France has taken all possible measures with regard to pensions: 1) level of contributions; 2) duration of contributions/age of retirement; 3) the level of pensions.

36. According to the CNAV, a number of approaches are possible to determine the level of pensions: the contributions made throughout a person’s working life (social insurance) or an income corresponding to the final salary received. The CNAV system is based more on the latter. The fundamental question was therefore that of the index link applied to determine a decent level of pension for retired people. Other issues that the French reforms had to deal with were the protection of those who are most vulnerable, the responsibilities of each individual and restoring young people's confidence in the future, this being considered one of the main challenges.

37. In France, the pension system is still firmly based on the principle of solidarity and contains elements of support for those who are most disadvantaged. There is therefore a possibility of relatively early retirement, for example, for anyone who has a long career, has a disability or suffers from an illness. According to the CNAV, French people remain strongly attached to this solidarity-based system and the "saving for retirement" approach has had limited success as a result. However, the political agenda includes another phase of reform in 2013, this time entailing new contribution methods.

38. Issues still needing to be tackled are the financial balance of the different systems and final salary pension schemes, the latter being intended to ensure a direct link between standard of living while working and after retirement, without falling below a certain threshold. Also still to be reviewed is the proportion of each person’s individual contributions to the retirement pension: the basic fund for pensions will continue to be built up jointly, while every person should in future be allowed to add to their own pension according to their own situation. In the case of France, this is taking place in a particularly complex context characterised by a pension system that distinguishes not only between public-sector and private-sector schemes, but also, for historical reasons, involves around 35 special schemes for various occupational categories. The complexity is intensified by the increasingly “fragmented” nature of professional careers, with regular changes having become the norm, making it ever more difficult to advise individuals concerning the path to follow.

3.2. The example of Germany: Need to strengthen the promotion of the second and third pillars

39. Statutory old-age insurance was introduced in Germany over a century ago – the world’s first public pension system – and has undergone many far-reaching reforms since the 1950s. Like most European countries, Germany is faced with an ageing population and the imminent retirement of the baby-boom generation, after which there will be fewer and fewer contributors paying pensions for more and more pensioners.

40. The German pension system is based mainly on three pillars: (1) statutory old-age insurance (pay-as-you-go); (2) an occupational pension system (betriebliche Altersversorgung) and (3) various private schemes, including fully private contracts and the “Riester Rente”, which, since 2001, has offered the possibility of access to State-subsidised savings schemes. The German system, like the Swiss (see below), is considered exemplary. The German social partners will, however, be faced with a certain number of challenges in the years ahead. Among the latest measures taken, the German government (under a 2006 decision) has gradually raised the statutory retirement age to 67, and the world of work will therefore have to adapt to this new reality.

41. It was announced just recently that the level of State pensions will decrease by 10% in relation to salaries by the year 2025: whereas the level of pensions stood at 50.8% in relation to salaries (before tax) in 2011, that figure is expected to fall to 45.2% by 2025. According to the German Institute for Old-Age Provision (Deutsches Institut für Altersvorsorge), the average pensioner will get only 38% of his or her last gross salary, a figure which, according to estimates, will decrease still further, to 35.6%, after 2040.

42. These trends are considered extremely worrying by the social federations, which are demanding that pensions be aligned with the positive overall trend in salaries. According to the OECD, Germany will be faced with a growing number of elderly people living in poverty unless access to the second and third pillars is facilitated, especially for the lower-paid. There would also be no automatic provision for those who have not contributed continuously. The Swiss model could serve as an example even for Germany because it provides for compulsory coverage by the three pillars. The slow growth of two of the pillars is undoubtedly due, inter alia, to the complexity of the pension system, because the second pillar alone offers employees five different options: employer savings, pension schemes, pension insurance, support funds and pension funds.

3.3. The example of Switzerland: A three-pillar system in place for many years

43. Switzerland established a “three-pillar system” many years ago. The first pillar, State provision (old-age and survivors’ insurance/disability insurance), is designed to guarantee the resident population the appropriate cover for the necessities of life in old age and in cases of disability or widowhood. The second pillar, occupational provision, enables people to maintain their previous living standard, and is compulsory for workers earning an annual income in excess of 20 880 SFR in 2011 and optional for the self-employed. The third pillar, personal provision, is designed to supplement other pensions according to each individual’s needs. The first and second pillars are not financed in the same way. The old-age and survivors’ insurance scheme, which is based on an inter-generational contract, is financed on a pay-as-you-go basis (today’s economically active population finance the benefits of today’s pensioners), whereas the occupational scheme is funded (constitution of an old-age savings account that enables occupational pension benefits to be financed).

44. The latest reforms implemented in Switzerland retain the three-pillar system, but seek to enhance its sustainability. There have been two failed attempts to reform the 1st pillar, one by referendum, the other in parliament. A “minor”, somewhat technical reform accepted by parliament came into force in 2012. A reform of the 1st pillar to guarantee its financing and sustainability is at the planning stage. The latest reforms of the 2nd pillar were adopted by parliament in 2010 and 2011 and came into force in 2011 and 2012. They include closer supervision, stricter requirements for 2nd pillar stakeholders and increased transparency in management of pension funds, thus helping to prevent abuses. The provisions relating to the financing of public pension funds are intended to guarantee the financial security of those institutions. Some measures apply specifically to older workers and are intended to encourage their continued labour market participation. In view of its relatively sound and balanced retirement system, Switzerland can certainly serve as an example for other European countries.

3.4. The example of the United Kingdom: Abolition of a statutory retirement age

45. In 2008, the United Kingdom had a two-tier pension system consisting of a flat-rate pension and an earnings-related additional pension, complemented by a large voluntary private pension sector. In the last few years, these private schemes have admitted a large number of contributors who have left the second public tier (35% of employees). An income-related benefit (pension credit) has also been introduced for the least well-off pensioners . The reforms recently initiated by the United Kingdom follow the same trend as that observed in other countries, namely a raising of the retirement age, which is currently 65: under the Pensions Act 2007, which the British government is in the process of implementing, the statutory retirement age will be raised to 66 years in 2020 and continue rising gradually to reach 68 years by 2050.

46. However, the latest measures include permission for employees to work beyond the age of 65 if they so wish, and the abolition, as from October 2011, of the statutory retirement age while retaining a minimum contribution period for entitlement to a full pension. An increase of 10% in the basic retirement pension for each year worked beyond the age of 65 for men and the age of 60 for women has been introduced to encourage those over 65 to remain in the workforce longer.

47. The potential impact of the financial and economic crises became apparent in June 2010 when the government announced in connection with the budget debate that it intended to change the index for inflation-proofing in the pension schemes from the Retail Prices Index (RPI) to the generally slower-growing Consumer Prices Index (CPI). Given that this might prompt some private-sector companies to make the same switch, a large number of pensions could be affected in future.

3.5. The situation in other Council of Europe member States

48. Norway has recently reformed its pension system. With a life expectancy above 81 years in 2010, the number of pensioners has constantly risen in the past few decades, whereas the number of economically active persons has fallen. In order to safeguard the pay-as-you-go pension, a reform was therefore essential, so the Norwegian parliament decided to make the retirement age flexible. Since 2011, everyone has had the choice of combining pay and pension and working for as long as they wish (from age 62 to 75). If the pension is taken at 62 (the first year possible for taking early retirement) and not at the age provided for by the public pension scheme (67 years since 2007), the pension will be reduced, but it increases with every additional year worked. Elements of prefunding have been introduced into the pay-as-you-go system. Furthermore, the basic pension will be adjusted to life expectancy for each cohort.

49. In Eastern Europe, many countries have begun to embark on reforms of their pension systems owing both to the challenges common to other European countries (demographic developments, financial and economic crises) and to the demands of international donor agencies (such as the European Union or the International Monetary Fund (IMF)), which consider some pension systems to be significant burdens on State budgets and demand reforms as a precondition for granting loans. For example, in Romania a reform raising the retirement age was passed by the parliament in 2010. This law provides for the retirement age to be gradually raised to 65 for men and 63 for women by 2015. In response to the financial and economic crisis, which has affected both pension fund holdings and national economies in general, different approaches have been adopted. To enhance the viability of their systems, Estonia, Hungary, Latvia, Lithuania, Poland and Romania, for example, have apparently rethought their funding models by redirecting contributions made to the second pillar towards the public pay-as-you-go pillar.

50. Similarly, the reform initiated in Ukraine is based on the same international requirements but remains very controversial in the country itself, which, in July 2011, experienced demonstrations against the adoption of the draft reform by the parliament. The reform in Ukraine aims to change the statutory retirement age gradually from 55 to 60 for women and from 60 to 62 for men. The primary aim of the latest reforms, which came into force in January 2012, was to establish a three-pillar system and specify the conditions for entitlement to the minimum and maximum pensions. Far-reaching reforms had proved necessary in Ukraine because the traditional system had become socially and economically ineffective, which placed a huge burden on the State budget.

51. Faced with the same demographic challenges as many other countries, the Russian Federation has had a three-pillar pension system since 2002, comprising a public pension (social pensions), a compulsory retirement fund (occupational pensions) and voluntary private pension insurance. Under the State system, the statutory retirement age is 60 for men and 55 for women, and there is a range of supplementary benefits for the neediest cases, persons with disabilities and war veterans. According to official announcements, the situation of pensioners is improving constantly: in 2012, occupational pensions (Russian pension fund) were to increase by 7% (in February) and by 2.4% (in April), and social (State) pensions by 14.1% (in April).

52. It has been well known for a number of years, however, that the Russian government is faced with growing expenditure related to the pension system. This contributes to a chronic budget deficit amounting to 3% to 4% of GDP which, according to a report in 2009 by the Merrill Lynch Investment Bank, is set to last for the next decade. For 2010, the Russian pension fund was estimated at around 40 billion dollars (or 2.4% of GDP) . According to experts, the only long-term solution would be further reforms to the pension system and resolute promotion of private pension funds, which only 5% of Russians had joined in 2009. In the absence of any structural change, the regular increases, designed inter alia to avoid social tensions, therefore seem to put greater pressure on a pension system already subject to strain. It is estimated that, around 20 years from now, there will be only one worker for every pensioner, which would represent a demographic “time bomb”.

53. A look at Turkey, another of the big Council of Europe countries, reveals a highly specific situation. The pension system is a public earnings-related scheme together with private pension schemes introduced in 2001. Contributions to the latter are tax deductible. According to experts, these reforms have greatly improved the system’s long-term viability. However, the large informal sector still represents an obstacle to old-age provision in Turkey because it offers numerous possibilities for bypassing the social security system. The success of Turkey’s pension reforms also depends on the government’s ability to address and resolve this issue.

54. At present in Turkey, reform measures such as raising the retirement age and reducing income replacement rates are virtually restricted to young labour market entrants, who will therefore have to carry the main financial burden. For the majority of employees, replacement rates are still generous compared with other levels observed in the OECD area and therefore dissuade employers in the formal sector from employing unskilled workers. In view of this complex situation, it is anticipated that the rate of voluntary membership of occupational or private pension schemes will remain low and that, owing to the lack of minimum pension benefits for those who need them, poverty will remain a problem among the elderly.

3.6. Special survey of national parliaments

55. On the rapporteur’s initiative, a special survey was conducted via the European Centre for Parliamentary Research and Documentation (ECPRD). Answers were given by 32 Council of Europe member States, confirming some of the trends already identified:

• The majority of member States currently seem to be moving towards three-pillar pension systems. Changes of paradigm (as regards the pillars) and parameters (contribution levels, indexation etc) may be observed in the reforms undertaken;
• The statutory retirement age is rising in most of the respondent countries, although the actual average retirement age is considerably lower in a good many countries. This seems to indicate that measures to keep older workers in employment for longer will be necessary to ensure that as many people as possible qualify for a full pension;
• Many countries have been forced to lower the level of State pensions;
• In most countries there seem to be moves to harmonise the statutory retirement age for men and women;
• One question which was not dealt with explicitly in the survey but which should be kept in mind in view of the initial results obtained, is that of the number of people who have joined (obligatory or voluntary) supplementary pension schemes, together with the question of how this will affect their future income.

56. Examples which stood out as good practices or because of their unusual nature, and in relation to which future exchanges of good practice might prove useful, include:

• Finland, for some of its radical measures: the entire period of contribution will henceforth be taken into account to determine the level of pensions and the statutory retirement age has been abolished, so that the retirement age is now completely flexible;
• Poland, which has set clear limits on early retirement options;
• Sweden, which seems to have a wider range of measures for providing adequate pensions, ranging from a guaranteed minimum pension under the first pillar to the development of an employment market more open to older workers;
• Switzerland, with a relatively highly developed three-pillar system, which is currently aiming to achieve more transparent management of pension funds to help prevent abuses.

4. Conclusions – recommendations: What paths should be followed to strengthen pension systems in a sustainable and balanced way?

57. The trend towards ageing of the population is clearly the greatest challenge facing European retirement systems. As regards the recent financial and economic crises and the public debt crisis, a rapid response is certainly important to protect the systems in place. However, sustainable development of pension systems, which includes a long-term perspective, will be vital to ensure that the systems in place are strong enough to withstand future crises.

58. The adequacy of retirement pensions is not only an outcome very much anticipated by all the reforms initiated but also a factor for stability against future crises. Member States should therefore make it a priority henceforth and for the next reform phases to be embarked upon. In addition, guaranteeing decent pensions both for today’s and tomorrow’s pensioners is a matter of human dignity and involves the recognition of each individual’s efforts and contribution to the sustainable development and well-being of society as a whole. Decent pensions – both today and tomorrow – will therefore be an important factor of social cohesion.

59. The reforms undertaken by many member States in recent years have certainly contributed to the sustainability of public pension systems. However, situations vary widely from one country to another. Among those which seem to have fared best in terms of ensuring the sustainability of their systems, we find the Scandinavian countries (Denmark, Sweden) and the Netherlands, which all have balanced multi-pillar systems. A diversification of pension systems as initiated by many countries in recent years therefore seems to be a step towards greater stability, even if the increasingly widespread adoption of funded systems represents a risk of creating new inequalities. The challenge for European countries is to strike a balance between pay-as-you-go and funded systems. The State will have a vital role in guaranteeing that future pension systems retain a strong solidarity-based component and include a pay-as-you-go pillar.

60. In the context of financial and economic crises, the establishment of balanced and sound pension systems poses two major challenges: (1) It is necessary to resolve the problem of State budget deficits generally and, in particular, those of public pension funds. Austerity measures may worsen the situation and jeopardise the principle of inter-generational solidarity. Real economic recovery will be the only lasting solution. (2) Positive economic effects must benefit individual households so that they are able to contribute to (collective or individual) supplementary schemes. This type of approach can be promoted or subsidised by the State, but in the first instance, the individuals concerned must be capable of contributing to such schemes from their own income. A climate of confidence and new pension schemes need to be built.

61. It is, moreover, of the utmost importance for the (public) authorities in the member States (governments and parliaments) to be open to dialogue with all stakeholders (including civil society), in a spirit of transparency, before undertaking major reforms. The purpose of such dialogue should be to achieve an acceptable balance between the costs and benefits of future alternative schemes. They will also need to address and respond to the uncertainty observed among the younger generations in a good many countries as to the future of their pensions. There will be a need for nuanced debate which is not based simply on the division between public and private systems as the only possible alternatives but studies the best possible combination between the pay-as-you-go and funded systems. Such debate should lead to a clear allocation of responsibilities between public and private players in a spirit of “shared social responsibility”.

62. In view of the current situation of European pension systems, and especially of the trend towards the ageing of the population and following the recent financial and economic crises, Council of Europe member States should explore and, if appropriate, take the following measures:

63. On a general level:

• Implement pension systems that reflect the complexity of today’s work situations (including more frequent changes of jobs) and lifestyles;
• Combat the persistent inequalities in pension systems, especially between women and men, inter alia beginning with the gender wage gap;
• Initiate or complete pension reforms that both maintain the long-term viability of systems (including when facing future economic crises) and pension adequacy;
• Provide clear information, which everyone can understand, on the implications of existing pension systems for every individual, particularly as regards the size of the pension which every contributor can expect in future under pay-as-you-go systems;
• Pursue positive economic policies designed to revitalise the economy without any loss of purchasing power.

64. With regard to the sustainability of systems:

• Consider pensions as an important aspect in the context of the responses to be made to the current debt crisis (2011/2012);
• In the light of the economic, demographic, financial and social uncertainties, design national pension systems based on a sound “mix” of sources of pension income (funded and pay-as-you-go components), and hence on several pillars;
• Consolidate, nevertheless, inter- and intra-generational solidarity, which also confirms the State’s central role in guaranteeing decent pensions for all;
• Promote international co-operation on pensions, given that pensions are increasingly becoming a transnational matter extending beyond the borders of the European Union or the Eurozone (migrant/mobile professionals, international pension funds).

65. With regard to pension adequacy:

• Ensure a dignified standard of living for pensioners by granting them a certain amount of guaranteed pension from the public pension system based on inter-generational solidarity, while at the same time calling for more individual responsibility to be exercised by people in work who still have the time to build or contribute to savings to an extent to be determined;
• Pursue resolute job creation policies, because only those with a sufficiently well paid job are able to save in order to supplement their future pension or contribute to supplementary pension schemes;
• Take account of the new lifestyles of families, which often demand external care for the elderly, as well as the increase in average life expectancy (which also prolongs the periods in which retired people receive pensions);
• Provide financial assistance for parents with (a) dependent child(ren) so that they can reconcile bringing up their child(ren) and saving for their own retirement. It is not easy for parents to provide for a family’s needs and raise one or more children and at the same time be able to save enough for their own future retirement;
• Find appropriate solutions for people with periods in which they have made no pension contributions (for example, women who have taken a career break, especially to look after children);
• Provide for specific pension measures and schemes for vulnerable groups that have not had sufficient means to prepare for their retirement (migrants, people with disabilities, etc.);
• Make it easier for elderly people to stop working gradually, which would enable them to supplement their retirement pensions by a salary and would certainly have positive effects on their physical and mental health, thus limiting the costs that could otherwise be incurred by health and care systems.

66. Independently of the financial and structural implications of pension schemes and in terms of general policies for retired people, it seems useful to explore – also as part of an exchange of European good practices – innovative ways of improving the well-being of retired people, such as benefits in the form of services to the elderly. Several countries currently have mutual assistance schemes under which elderly people provide assistance to others and are rewarded with “points” which will enable them in future to call on similar services when they need them. This type of assistance certainly must not replace financial benefits from pension schemes, but can supplement them to make life easier for elderly people in need.