Pension policy in Europe is facing a midlife crisis.
After years of contemplating sweeping visions of Europe-wide pension systems, a period of consolidation has taken hold, according to speakers at the European Federation for Retirement Provision and National Association of Pension Funds biannual conference in Cascais, Portugal.
Instead of grand visions, pension experts are thinking smaller.
"We come from an era of building (state pension) systems and now are in an era of consolidation and perhaps reduction in state pensions," said Philip Lambert, head of Unilever PLC's corporate pension division and formerly chairman of the EFRP.
Notions of harmonizing pension policy across Europe are viewed as a far-off hope that may never occur.
"If harmonization was a holy grail, it's now recognized that it is pretty remote," said Tom Ross, chairman of the NAPF and acting chief executive of Alexander Clay & Partners, London. "I don't regard that as retrenchment, I regard that as common sense."
The failure of the EC's draft pension directive marked a major setback for European pension policy. Originally designed to promote portability of pension benefits freedom of investment and provision of investment services, the draft directive became mired in tax complications, protectionism and investment restrictions that were unacceptable to the European pension community.
"The directive was altered to the point where it was no longer acceptable," explained Alan Broxson, the EFRP's chairman and head of the Irish Pension Trust, Dublin.
"So the lobbying (strategy) very much changed so the directive would not see the light of day," he added.
State pension costs loom
Nevertheless, European pension experts say they cannot quit seeking to revamp pension policy, given the size of massive state pension liabilities. These "first pillar" liabilities threaten to swamp European budgets. In 1990, EU states spent on average 9% of gross domestic product on pension benefits. Without any reduction in benefits, that figure would double to 18% by 2040 if benefits keep pace with economic growth, according to Eurostat, the statistical arm of the European Commission and the Organization for Economic Cooperation and Development.
In Italy, the annual state pension cost represents 14.4% of GDP but even then contributions are too small to cover current pension benefits, said Koen de Ryck, the EFRP's permanent representative and managing director of Pragma Consulting N.V., Brussels..
The problem is these state pension systems are funded on a pay-as-you-go basis. Private pension systems, on the other hand, benefit from investment income. Rapidly aging populations are placing increasing pressure on the state systems.
Tax subsidies to cover European state pensions generally range between 10% and 20% of total social security costs for private-sector employees, although it reaches 30% in Italy, Mr. de Ryck said. With its aging population, Italian state pensions could reach 75% of salaries in 2040 - half of which would need to be financed out of general revenue, he said.
Despite changes trimming state pension benefits enacted this year, the costs of the Italian system still are too high, he added.
Nor are other European countries facing up to their pensions' crisis. "The French are.....defending their system - as are the Germans, the Dutch and the Brits although they are all very different - and fighting for it as if this were another religious war," Mr. de Ryck said.
But European nations cannot bear these high pension costs indefinitely. Already, public debt financing and transfer payments to cover various welfare-state benefits together comprise the bulk of government spending. State pension and welfare costs are choking governments' ability to spur growth and create jobs - a huge problem in Europe where unemployment still tops 11% in France, 10% in Germany, and 20% in Spain.
Maastricht criteria pressure
What's more, the pressure to meet Maastricht Treaty limits on total government debt to 60% of GDP and annual government deficits to 3% of GDP, are weighing heavily on European nations.
If countries fail to meet the criteria, they will be relegated to a second-tier status and be ineligible to participate in a single European currency, which may start in 1999.
Experts argue Europe needs to both trim its costly state systems and adopt advance-funded private systems. This would both reduce public expenditures, improve their international competitiveness and provide a ready source of capital. Europe has a total of 1.4 trillion ECU ($1.8 trillion) in pension assets - peanuts next to the United States's $4.5 trillion in pension assets.
But progress in cutting state benefits and devising private funded systems has been painfully slow. Besides Italy's half-measure, efforts at pension reform have stalled in Spain because of political scandals while criticism of generous state pensions for civil servants helped bring about the downfall of French Finance Minister Alain Madelin, who had promised to reform the system.
Great Britain, Ireland and the Netherlands remain the only EU countries with sizable private pension systems - except Germany's book-reserve system.
In the past two years, "I have become more pessimistic about things changing in different member states," said Karel Lannoo, head of the business policies unit and research fellow at the Centre for European Policy Studies, a Brussels think tank.
Some changes have occurred, but not enough, he said.
Compulsory systems aired
Instead, more pension experts are talking about adopting compulsory second-pillar systems to help offset scaled-back state systems.
Increasingly, experts are pointing to the examples of Chile, Argentina, Switzerland, Australia and Hong Kong for support for adopting mandatory private-pension systems. Even in Great Britain, which is far more individualist than the more socialist-oriented continental Europe, the NAPF has proposed creation of a compulsory second-pillar pension.
Many countries have found that lower-income workers fail to participate in voluntary systems. Both the United States and the United Kingdom have coverage rates of about 50% of the working population.
Voluntary systems are likely to be effective only to top up minimum benefit levels for higher-salaried employees, said Ron Goldby, manager-European affairs for Legal & General Assurance Society, London, and formerly an European Commission pensions official.
"At the lower levels of income, compulsion is, in my view, the only way that governments can ensure that future generations are not dependent on minimum subsistence state benefits in their retirement," Mr. Goldby said.
Most compulsory schemes are defined contribution, which puts the individual at risk to investment performance, while offering more attractive portability and vesting rights - more alluring to an increasingly mobile workforce, some experts argue.
Experts are increasingly willing to accept a defined contribution system. "It's better than no scheme it all," said Geof Pearson, pensions manager for J. Sainsbury PLC, London. For lower-paid workers, a defined contribution scheme is better than losing benefits from integration with the state pension, he said.
(Sainsbury workers earning less than 90 pounds a week receive no pension benefits.)
Jane Platt, chief operating officer for BZW Asset Management, added: "People talk about keeping defined benefit (plans) at all costs."
But the practicalities require taking a look at defined contribution plans, she said.
The jury, however, still is out. Mr. de Ryck noted defined contribution plans in Europe still are centrally managed by employers, without individual investment discretion. Furthermore, he said they essentially are a retail product and are more expensive to run and to buy than defined benefit plans.
