Transcript A Comparison of Pension Reform in the EU – 27: What

Pension Reform in the Nordic Countries:
What Can Other EU Member States Learn?
The Cicero Foundation
Paris, 15-16 May 2008
Mika Vidlund
Structure of the presentation

The changing demographics in the Nordic countries

Common features for Nordic pension schemes

Recent pension reforms

Concluding remarks
The change in old-age dependency ratio (65+/15-64) in the EU
countries
55
50
45
%
40
35
EU15
30
EU25
25
EU10
20
15
2005
FIN
2010
Source: Eurostat 2005
2015
2020
2025
2030
2035
2040
2045
2050
The change in old-age dependency ratio (65+/15-64) and the
situation in 2050
70
65
Elderly dependency ratio 2050, %
ES
IT
BG
60
EL
PT
DE
55
SI
CZ
AT
RO
50
BE
FR
UK
45
LV
EE
SE
40
DK
PL
SK
HU
FI
LT
IE
CY
MT
NL
LU
35
30
30
50
70
90
110
130
150
170
Percentual change of elderly dependency ratio 2004-2050, %
EU-25 average
Source: Eurostat
190
210
Old-age dependency ratios in Norway and Finland, 1950-2060
60
Finland
PERCENT
50
Norway
40
30
20
10
Source: Statistics Norway; Statistics Finland
60
20
50
20
40
20
30
20
20
20
10
20
00
20
90
19
80
19
70
19
60
19
19
50
0
Public pension expenditure as a share of GDP between 2004 and 2050
16
14
% of GDP
12
10
8
FIN
6
EU15
4
EU10
2
0
2004
2010 2015
2020
Source: EPC/AWG-calculations (2006)
2025 2030
2035
2040 2045
2050
Public pension expenditure in the EU-25 countries in 2004 and in
2050, % of GDP
24
EL
22
PT
pension expenditure 2050, % of gdp
20
CY
SI
HU LU
18
16
14
DE
AT
12
ES
BE
FR
IT
FI
DK
CZ
NL
SE
10
IE
SK
LT
PL
8
UK
MT
6
LV
EE
4
2
-6
-4
-2
0
2
4
change by 2050, %-points
EU-25 average
Source: EPC/AWG-calculations 2006
6
8
10
12
14
DK
SE
FI

FI = 13th
SE = 11th
DK = 9th
NO = 8th
Allianz 2007:
Reform Pressure
Gauge
Common features for Nordic Pension Systems

”Universal” basic security
- guarantee pension in FI, SE and NO (in 2010)
- basic pension model in DK

Comprehensive earnings-related pension scheme
- with the exception of DK
- in DK and IS earnings-related pensions through occupational schemes
- in FI no pension or wage ceiling

Low income inequality and poverty in old-age

Prefunding of pensions
- Since the establishment of employment pensions: FI, SE, DK, IS
- Norway: The origin of the Government Pension Fund can be traced back
to 1990 when the Government Petroleum Fund was formally established
Value of pension assets in the EU countries in 2004,
per cent of GDP
% 140
120
II pillar
I pillar
100
80
60
40
20
0
NL DK SE UK FI IE CY LU SK BE PT ES FR PL DE AT HU CZ IT EE SI LV LT
Source: AWG (2006); EFRP 2005; OECD 2005
The Government Pension Fund and accrued old age pension liabilities,
per cent of mainland GDP 2005 - 2060
400
% GDP
350
300
Accrued pension
liabilities
250
Government Pension
Fund
200
150
100
50
0
2005
2015
2025
2035
2045
2055
Net interest rate 2 per cent; with real annual growth rate in earnings 2 per cent and real rate of return 4 per cent
Source: Norwegian Ministry of Finance
Different Designs – Recent Pension Reforms


Countries are similar in many respects, but they differ
when it comes to their pension design and the political
making of the pensions
“The Swedish reform in the late 1990s was ‘big bang’
where everything was changed, the Finns build on
piecemeal reforms that gradually changed the whole
system, while on the surface, the Danish story is about
stability and status quo.” (Three routes to a pension
reform (to be published by Kangas, O.; Lundberg, U.&
Ploug, N.)
Different Designs – Swedish Pension Reform

The reform emanated from Parliament, and interest
organizations were excluded from the planning.

Path-breaking reform changing the logics of the system

Time schedule:
-
1984-1990
1991-1994
1994
1998
1999
2003
-
-
Pension Commission
Working Group on Pensions
New System approved in Parliament
Final Legislation approved
New system comes into force
New system fully implemented
Transitional rules for those born in 1938-1953
Different Designs – Finnish pension reform

Tripartite: Politicians virtually watch the process from the sideline

Gradual and piecemeal reforms - working group negotiating to reform pensions. All
major trade unions and employer federations were represented in the group, while there
was no political representation; thus the Finnish procedure has been opposite to that
pursued in Sweden.
Towards pension reform 2005:

Kickoff: Deep economic crisis in the early 1990s
- Unemployment rate reached almost 17 per cent in 1994 and GDP fell from 1990 to
1993 almost 11 per cent

Smaller reforms throughout the 1990s
- E.g. employees’ pension contribution introduced in 1993.

Earnings-related pension reform in 1996
- The calculation base for pensionable wage was gradually changed to the ten last years
of each employment contract (previously 2 out of last 4 years)
- Pensions paid to persons aged over 65 were revalued by a new index, in which
consumer prices have a weighting of 80 per cent and wages a weighting of 20 per cent
(previously 50/50)
- The national pension was made proportional to the earnings-related pension
Different Designs – Finnish pension reform
Pension reform 2005

Negotiations started at the end of 1990s
- Pension agreements among the labour market parties on 12 November
2001 and 5 September 2002
- In November 2002, the Government submitted the bill to Parliament.
- Parliament approved a pension reform package on 18 February 2003

Main changes
- Flexible retirement age between the ages 63-68
- Linking benefits to life-expectancy from 2010 onwards
- Basing benefits on life-time earnings
- Restricting access to early retirement
- Increasing the accrual rate within the window of retirement
- Changing indexation rules
- Redefining and extending accrual for non-working periods
Employment rate of people aged 55 to 64 (% of
population) in the Nordic countries
Män
Men
Kvinnor
Women
100
90
80
70
60
50
40
30
20
10
0
1999
2003
2006
EU-15
Source: OECD
FI
DK
NO
SE
IS
100
90
80
70
60
50
40
30
20
10
0
EU-15
FI
DK
NO
SE
IS
Pension

Sweden
-
DC-old age pension system:
16 % (NDC) + 2,5 % (DC)
Flexible retirement age 61 
Automatic pension adjustment:
Balance ratio 1.0149 (2006).
Invalidity pension from sickness
insurance
Compulsory occupational
pensions (> 90%)
Occupational pension
Guarantee pension
Premium pension
-
Income related
pension
-
ca. 1 100 e/month
-
ca. 3 500 e/month
-
Wage
National pension

Finland
-
No pension or wage ceiling
 Occupational pensions are rare
Pension accrual rates: 1.5%
(aged 18-52), 1.9% (aged 53-62)
and 4.5% (aged 63-68)
Flexible retirement age 63-68
(early retirement at the age of 62)
Administration dezentralised (see
e.g. www.etk.fi)
-
Earnings-related pension
Ca. 1 150 e/kk
n. 2 200 e/kk
-
Ca. 2 200 e/month
Wage
Administration: www.fk.se,
www.ppm.nu, www.ap1.se (ap 1st –
4th, ap6th and ap7th)
Pension
ca. 2 000 e/month
Different Designs – Norwegian pension reform 2010
Norway
Pension
(NOK)
280000

240000
-
200000
-
160000
-
120000
80000
-
40000
0
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14
-
Current old-age pension scheme:
Retirement age 67
No statutory early retirement
Special early retirement pension (AFP)
from the age of 62
Occupational pensions compulsory
since 2006
Administration: www.nav.no
Earnings as B.a (1B.a = 66 812 NOK, 2007 )
Basic pension
Income-based pension
Pension supplement

-
7
Pension as B.a
6
-
5
4
3
-
2
1
0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
9,0
Earnings as B.a (1B.a ~ 8 300€ )
Income-based pension
Guarantee pension
Occupational pension
Current system
10,0
11,0
12,0
-
Pension reform 2010
Reform Commission was set up on 30
March 2001
Government’s 1st White Paper on 10
December 2004 – Parliament accepted
main principles for a reform on 26 May
2005
2nd White Paper in October 2006 –
Parliament’s agreement on 23 April
2007
Government bill for consultation on 28
January 2008
The main changes to the Norwegian pension system
Retirement age
Insurance period
Pensionable wage
Life-expectancy adjustment
Upper earnings limit (ceiling)
Pre-reform
67
40 years
Best 20 years
Not applicable
Staggered ceiling from 6 B.a to
upper limit 12 B.a
After reform
From the age of 62 (flexible)
Lifelong earnings
All career earnings
Life expectancy adjustment ratio
All income up to 7.1 B.a. (linear)
Wage-benefit ratio
DB, 42% + 1 B.a/
DC-model: account value 18.1% per year
Unpaid care (minimum
amount)
Unpaid care for children
Military service
Indexing income-based
pension payments
Indexing pension
entitlements
Pension earning equal to 4 B.a.
Pension earning equal to 4.5 B.a.
up to the age of 7years
Not pensionable earning
up to the age of 6 years
2.5 B.a. as the basis for pension earning
Wage growth
Wage growth – 0.75 %
Wage growth
Wage growth
Minimum pension (amount)
1,7933 x B.a
Occupational pensions
Voluntary
Guarantee pension at the current level,
reduced by 80 % of the income-based
pension
Mandatory
Different Designs – Denmark and Iceland

Denmark: a lack of income-related statutory pensions the demand for earnings-relatedness bifurcated into
private occupational and individual pension programs. As
the generous national pension scheme has become
increasingly income-tested, the occupational schemes are
eventually becoming the most important part of the overall
pension design

Iceland: stability - development on pension funds and on
voluntary savings
Pension

-
Pension supplement
ca. 3300 e/month
-
Occupational pension
ATP-pension
National pension
-
ca. 1550 e/month
-
-
Wage
Pension
ca. 5 500 e/month

-
Pension supplement
ca. 2000 e/month
Earnings related /
Occupational pension
-
National pension (basic)
ca. 900 e/month
ca. 3 000 e/month
1.1.2007
Wage
Denmark
No earnings-related statutory
pension
SP-scheme: 1% of wage
(suspension of contributions 20042008)
Retirement age 67 65 67v...
Occupational pension coverage
over 80 %
Administration: municipalities
(national pension); ATP ja SP:
www.atp.dk
Iceland
Earnings-related pension
arranged in separate funds
together with occupational
pensions: benefits may vary
Retirement age 67
Administration: national pension:
www.tr.is; Pension funds: www.ll.is
(Icelandic Pension Funds
Association, IPFA).
Pension Reform in the Nordic Countries:
What Can Other EU Member States Learn?

Nordic way to financially stable pension system: technical solutions to meet the changing demographics
- Automatic adjustments e.g. pensions affected by life-expectancy
- Flexible retirement
- Prefunding
- etc.

Incentives for later retirement
- Tight connection between earnings and benefits
- Pension policy is not enough

Hybrid pension plans between DC and DB

Inclusive pension coverage
- Easier to renew than pension systems representing Continental welfare states - less pieces in puzzle

Broad consensus and political support
Piecemeal reforms in Finland vs. path-breaking reform in Sweden – similar results in the end?

-

Nordic cooperation
Close contacts between the Nordic countries in most areas of society
Nordic cooperation is firmly rooted in cultural and societal ties, shared democratic traditions, values and
way of life.
Comparable to the Open Method of Coordination in EU?
Finally, main lesson and a real challenge...
Thank you for your attention
For more information:


www.etk.fi
[email protected]