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Pension reforms in new EU members in the light of new decision of Eurostat interpreting ESA 95. Pawel Pelc Sofia 15 April 2004. Pension systems in old EU members.
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Pension reforms in new EU members in the light of new decision of Eurostat interpreting ESA 95 Pawel Pelc Sofia 15 April 2004
Pension systems in old EU members • In old EU Members Countries the pension systems are usually still not reformed and aging crisis leads to reaction which is still postponed by protests and short perspective of governments (from election to another election) • In old EU Members Countries the basic pension system is usually based on DB PAYG. Occupational and individual arrangements are usually only addition to this based DB PAYG component.
Pension systems in new accession countries • New accession countries are generally poorer than old members and most of them, after collapse of communism had to implemented serious social and economic reforms, including pension reforms, based on Chilean model and than Polish and Hungarian experience.
Reformed pension model in new EU countries • Usually the base for new pension system in those countries was multi pillar model, advised by World Bank, including PAYG component and fully funded DC component – as a copy of Chilean type APF – open pension funds
Creation of Open Pension Funds • Usually new component (open pension funds) was created on a base of transferring part of the social security contribution from PAYG to OPF. • Even though in some countries Open Pension Funds are called in regulations ‘Supplementary’ they are designed to create part of the basic old age payments.
Basic old age benefits after pension reforms • In the new pension system the basic old age benefit is going to be financed from two sources: PAYG and saving in Open Pension Funds. • Without counting payment financed by savings in OPF the basic old age benefit size would be in many countries below the requirements from ILO’s Convention implemented to EU rules.
Lack of EU regulation • There is no EU regulation related to open pension funds. • The latest EU pension directive is addressed only to occupational pension plans and doesn’t cover the Chilean type open pension funds implemented in Central and Eastern Europe Countries
OPF in the pension system • Open Pension Funds (together with PAYG components) play the same role in the CEE countries that PAYG schemes in old EU Members Countries.
Sweden • The only old EU country having in the pension system component resembling somehow (but with many differences) OPF concept was Sweden, but that component is small. • The Swedish funded component was treated by Sweden and Eurostat as a part of public finance
ESA 95 • The base for recognizing for statistical purposes pension systems components is ESA 95. • According to ESA 95 social security schemes are part of public finance, other not. • ESA 95 doesn’t directly recognize Open Pension Funds. • Old type arrangements implemented in old EU Members Countries (usually based on DB rule) are recognized as a social security schemes and therefore part of the public finance.
Polish case • In negotiations with EU, Poland had strong position that OPF are part of the social security according to ESA 95 and thereafter are part of the public finance.
Polish arguments • The main arguments of Polish negotiators were: • Contribution to OPF is part of old social security contribution, • There is the state guarantee as the last resort related to investment activity, • The minimum old age payment guaranteed by the state is related to payments from PAYG and savings from OPF, • The basic old age benefit in relation to ILO’s Convencion was based on two sources, • Private management doesn’t mean exclusion from social security, • Mandatory character of OPF’s, • Strict investment rules, • OPF as a special type of legal entity, • Swedish example • Discussed idea of centralized payout phase.
Conclusions in relation to Poland • Eventually the negotiations were closed with obligation for Poland to follow free movement of capital rule in case of occupational pension funds (in Poland this is additional component based on voluntary basis) without mentioning open pension funds
Eurostat decision • Old EU Members Countries decided to change understanding ESA 95 before enlargement of EU and Eurostat has issued a decision with new interpretation of ESA 95 on 2nd March 2004. • In the decision of Eurostat it is confirmed that ESA 95 has no direct explanation what in the reality means social security plan.
Main conclusions from the decision • Important part of the Eurostat decision is explanation that fully funded DC schemes shouldn’t be treated as a part of social security because the risk in case of DC schemes is bear not by the state but by the households. • According the decision even state guarantee is not enough if there is no payout of more that 50% of payouts financed directly by the state, what excluded newly reformed systems without payout phase even from taking into consideration from this perspective.
Construction of the decision • The wording of the decision is very complicated and has no relation to open pension funds and reformed system, the source of contribution wasn’t analyzed, the social security plans are generally related to DB schemes, it seems that there is lack of understanding of the concept of Open Pension Funds and their role in reformed systems.
General consequences of the decision of Eurostat • The consequences of the decision of the Eurostat are negative not only for new members but also for old members because implementation pension reforms there would be even more difficult than now and use of DC schemes in this reforms would be extremely difficult in context of budgetary deficit.
Main consequences • Higher deficit – problems with following the Monetary Union Requirements, • Free movement of capital – in case of new members – export of capital to more developed old EU members countries, problems with development local capital markets and problems with access to capital in the new members
Conclusions • The decision is not clear and it’s going to be subject of following bilateral negotiations. • The decision is not a part of ESA 95 – only it is an interpretation. • Chilean type open pension funds are not directly mentioned in the decision.
