Pensions in the European Union: Adapting to Economic and Social Changes

Pensions in theEuropean Union: Adapting toeconomic and social changes

Emmanuel Reynaud

Institut de recherches économiques et sociales, France

Throughout the European Union, pension schemes areundergoing a process of adaptation to a completely differentcontext. Some of the main stumbling blocks to this processare the great number of issues involved and the diversity ofquestions that these raise: demographic changes, the labour

market, economic growth, social justice, the ways ofregulating the established provisions and decision-makingin their regard. These dimensions do not offer ready-madeanswers, from the standpoint of pension financing. Apart

from the complexity of the situation, however, afundamental component of European societies is definitely

at stake here: the ability to guarantee a decent level ofsecurity to all citizens when they reach retirement age.

For several years now, Member States of the European Union have beenengaged in adapting their pension systems to a context that differs

sharply from that which prevailed when the systems were first introduced.Despite the great diversity that characterizes all the national systems, cer-tain common features can be identified among them. From a historicalstandpoint, similarities may be found in the general conditions surround-ing the establishment of these systems, with respect both to the period oftheir creation and to the overall framework in which this occurred. Thiscontext has evolved in similar ways, and the pensions debate is nowbroadly couched in very similar terms, even though the solutions pro-posed may differ substantially from one country to another.

A completely new context

In their current configurations, pension schemes in the countries of theEuropean Union were mostly devised at the end of the Second World War.The prevalent climate at the cessation of hostilities was particularly propi-

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© International Social Security Association, 1998 International Social Security Review, Vol. 51, 1/98

tious for the introduction of state social security systems. The collectiveexperience of war had reinforced social bonds, and most countries had torebuild their devastated economies with very meagre resources. Thechoices made at that time with respect to these state systems were sub-sequently decisive for the development of supplementary schemes. Thereare a wide variety of these in the European Union, and the national ar-rangements that were ultimately adopted vary considerably from countryto country. The overall framework within which these different systemswere established was no less broadly comparable, and may be describedunder three main headings:• a context of full employment;• as a point of reference, a male employee in a steady job enjoying a career

of full employment, whose life cycle was divided into three phases: educa-tion, employment and retirement;• the belief that there was no inherent contradiction in the relationship

between social welfare and the economy: a virtuous concatenation inwhich social welfare and economic growth were mutually reinforced.

Today, the situation has changed radically. The very existence of pen-sion systems, together with the fact that they have reached maturity andguarantee, on the whole, high quality benefits, has completely trans-formed the context. In addition to this fact, the importance and implica-tions of which we do not always accurately assess, the three features thattypified the initial period of these systems no longer hold true. In fact, thecurrent climate differs from the preceding period at every point, as fol-lows:• the onset of massive unemployment;• the development of so-called “atypical” forms of employment, the de-

structuring of the life cycle pattern and the feminization of the workforcewithin a trend towards gender equality;• renewed opposition between social progress and economic efficiency:

social welfare systems are considered a threat to competitiveness and toemployment.

The future of pensions at stake

Broadly speaking, the future of pension systems has been debated in theEuropean Union for the past 15 years. For the most part, discussion hasfocused on three main issues:• concern over the consequences of demographic changes;• the idea that pension schemes should aim to foster economic growth, by

prefinancing their commitments;

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• the desire to reduce state involvement in pension financing and to haltthe growth of compulsory deductions (such as taxes and social securitycontributions).

Some have contributed to this debate by calling for a major review ofexisting systems. This could even entail dismantling statutory social secu-rity, which would then be replaced by a simple safety net managed by theState and designed to alleviate poverty among older people. The pensionwould be largely made up of compulsory savings schemes that covered allsocial categories and were managed by the private sector. Extra voluntaryschemes would enable those so inclined to enjoy additional protection,matching the amount of money they were prepared to put in.

Such an approach seems somewhat unrealistic in the context of theEuropean Union, as it takes little account of the present-day situation inMember States or the history of their pension systems’ foundation. Al-though the idea may indeed be unrealistic, it does enjoy a certain appeal,since it provides a ready-made solution, based on an internally coherentmodel, to highly complex problems.

In fact, the search for feasible ways of carrying out reform is much morechallenging. In democratic countries, there is no way that a scheme de-vised by experts can be imposed on society. Rather it is a question of initi-ating a decision-making process in the course of which discussion betweenthe various social players concerned has a key role. This Conference1 is anintegral part of this process. The objective is to supply new ideas for dis-cussion, by reviewing the current state of work by academics, researchersand practitioners belonging to several different disciplines.

Some of the main difficulties at present stem from the multiplicity ofissues and the diversity of questions that have been raised. For that reason,we propose five main areas for discussion:• demography, the labour market and competitiveness;• pensions and economic growth;• equity within and between generations;• techniques of financing pensions;• decision-making processes.

In this introduction, I will briefly set out these five areas so as to placethem in perspective. I shall then examine how they affect central issuesconcerning the future of pension schemes in the European Union.


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1. This article is a revised version of the introduction to the conference “Pensions in theEuropean Union: Adapting to economic and social changes”, held from 13 to 16 June 1996 inMünster, Germany, by the European Network for Research on Supplementary Pensions(ENRSP) and the Gesellschaft für Versicherungswissenschaft und -gestaltung e.V. (GVG).

Demography, the labour market and competitiveness

In defining the difficulties facing pension schemes in industrialized coun-tries, stress is frequently placed on demographic factors. As a result, popu-lation ageing is often seen as the major challenge facing schemes already inforce; for example, we see colourful references to “demographic timebombs” and, more prosaically, to “the old age crisis”. In fact, the overallclimate determining the future of pensions is much more diversified, andit cannot be reduced solely to the demographic factor. Furthermore, theway in which the demographic factor is liable to be felt must itself be ana-lysed in terms of its various facets and not simply as the demographic linkbetween the population of working age and the population of pensionableage.

For the most part, the diagnosis of the current situation and of futuredifficulties rests on a number of factors, and these in turn have their owndiverse implications. Clearly, demography is an important element. Theproblem is well known, and has two basic components: the entry of nu-merous postwar “baby boom” generations into old age, and a markedlyincreased life expectancy. Over the next 50 years, the conjunction of thesetwo phenomena will lead to an increase in the number of elderly peopleand in their proportion of the population as a whole: this will take place inall European Union countries and in the other industrialized countries aswell.

The prospect that the numbers of people of pensionable age are growingfaster than the population of working age arouses considerable anxiety.However, the impact of ageing needs to be put into perspective. The valueof the ratio of the working population to the retired population depends onthe age used to fix the dividing line between these two populations. It istherefore possible to maintain this ratio constant by raising the age. Forexample, projections show that, in France, all that needs to be done in theyear 2020 is to place the dividing line between the two populations at 65 inorder for the working-population-to-retired-population ratio to be more orless the same as it was for 1990, calculated on the basis of 60 as the retire-ment age, which is now considered to be normal (2.7 as against 2.8). Inother words, extending the working age from 60 to 65 outweighs the effectthat population ageing has on the main pension schemes in France.

From a strictly technical viewpoint, then, the solution is simple: raise theretirement age. On the face of it, such a solution seems to make good sensethese days, as the threshold for old age — given increased life expectancyand the better health that older people now enjoy — is being pushed backfurther and further. This position marks the limit of an exclusively demo-


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graphic approach; it raises socio-economic and political questions relatingto the capacity and the will to lengthen working life. However, not alldevelopments over the past 20 or so years have tended in this direction. Onthe contrary, people have been stopping work at an increasingly early age,and for many employees this has come to pass before they become entitledto full pension rights. In sum, the main pension schemes have to tackle adual phenomenon: a reduction in the period of employment in which con-tributions are made, and an increase in the period in which pension ben-efits are paid out.

The inevitable but largely foreseeable nature of population ageing mustnot be allowed to conceal other dimensions at work. In particular, currenttrends in the labour market are a major factor of change to which pensionschemes must adapt. These changes may be broadly classified under thefollowing headings: a high level of unemployment, a decline in full-timeemployment, an expansion of so-called “atypical” forms of employment,an increase in job mobility, and a tendency to enter employment late andleave it early. This simple list gives an indication of the breadth of thechanges currently taking place, and of the difficulties they are causing tothe financing of pensions.

Changes in the structure of the economy must also be taken into accountwhen assessing the current situation and the prospects for development.There are two things to say about this: first, in relative terms, employmentis declining in manufacturing industry and increasing in services; second,small firms are playing an expanding role in job creation. Such trends arelikely to have important consequences for pensions, and for companyschemes in particular; in the main, they have been developed by largemanufacturers, that is to say in the sector and type of company where em-ployment is dropping.

Another key element in this changing climate is the globalization of theeconomy. It is one of the key economic phenomena of the past 15 years,and may have quite serious implications in the European Union for thefinancing of pensions and, more broadly, for social welfare as a whole. Thecombination of the liberalization of trade, the emergence of newly indus-trialized countries and the opening up of the former socialist countriesmeans that the capacity of Member States to support the cost of their socialwelfare systems is now being seriously questioned. In schematic terms,among economists, there are two opposing schools of thought on this is-sue. One of them, which is currently predominant, holds that social wel-fare has negative effects on national competitiveness and employment,and that it thereby harms economic efficiency. The other, in contrast, de-fends the idea that the relationship between social welfare and economic


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efficiency is not oppositional but complementary, and that the preserva-tion of social cohesion is itself a condition of economic efficiency.

This debate is essential for the European Union in that it touches on afundamental dimension of what underpins the European model of society:the capacity to integrate social welfare mechanisms into the functioning ofa market economy so as to guarantee everyone a decent level of securityagainst the vicissitudes of life.

Pensions and economic growth

In parallel with anxieties relating to demographic trends, there is anotherfactor that has become a major element in the pensions debate over thepast few years. This is the idea that one of the objectives of pensionschemes is to foster economic growth through an increase in national sav-ings. The emergence of this new reasoning has been accompanied by thestrengthened influence of financial institutions (notably banks, insurancecompanies and pension fund managers) in the area of pensions. Indeed,pension funds have themselves become institutional players with leadingroles on international financial markets. British funds represent one thirdof market capitalization in London, and American funds between a quar-ter and a third of market capitalization in New York. The pensions debatehas been profoundly changed by the conjunction of these two factors. Pen-sions are no longer restricted solely to the area of social welfare, but arealso linked to the world of finance. The fact that the draft reform with thegreatest international impact in recent years comes from an institution likethe World Bank (1994) says a lot about the changes that have been takingplace.

Seen from an economic perspective, the very idea of using pensions tofoster growth by increasing savings raises a whole series of questions.Broadly speaking, the process that is envisaged consists in introducingfunded schemes that would lead to an increase in global savings, whichwould make it possible for growth to be financed. There are, therefore, twosuccessive stages in this reasoning, and they trigger two questions:• is the increase in the financing of pensions through funded schemes

likely to augment national savings?• would an increase in national savings lead to more efficient financing of

growth?There are no easy answers to these two questions. The first relates to the

opposition between pay-as-you-go and funding and harks back to a debatethat has been taking place between economists for over 20 years, on thecomparative impact of the two financing methods on national savings. Al-


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though much econometric work has been done on this since the 1970s, theresults are far from conclusive. The introduction of funded schemes leadsto substitution mechanisms and to rechannelling of savings. Moreover, al-though tax incentives have been granted to encourage their development,the response has been one of public dissaving likely to cancel out the netincrease in private savings. The impact on national savings has thereforebeen more complex than it appears at first glance. In any event, empiricalresearch does not enable us to state incontrovertibly that the introductionof funded schemes has a positive effect on savings. It remains a controver-sial matter, and the debate is far from over.

The second point concerns funded schemes and raises the question ofthe quality of resources released by schemes prefinancing their commit-ments. This factor is directly linked to the opposition between two models.

The dominant model is based on funds invested on national and inter-national markets: pension funds, contracts underwritten with insurancecompanies and individual pension plans. Such a mechanism contributessignificantly to the vitality of these markets, but also raises a number ofquestions about the consequences for national economies. In particular, inseveral countries there has been growing criticism of the role of pensionfunds in financing the economy, and of the way their managers operate onthe markets. The latter have been criticized for their short-termism whichmeans they look for quick, substantial gains with no consideration for theeconomy’s long-term development. As a result, proposals for alternativeinvestment practices have been put forward, particularly by the trade un-ion movement; these support investment that encourages employment,the development of infrastructures, and the environment.

The second model for prefinancing pension commitments uses the com-pany’s book reserves. This mechanism is widely used in Germany to fi-nance large companies, and some have attributed to it a significant role inwhat has been termed the “German miracle” of the postwar period. In thiscase, available resources are directly allocated through the self-financingof companies and not, as in the case of the first model, through the media-tion of the financial markets. This is of great importance in terms of eco-nomic efficiency. All of the money available is used to finance companyinvestments, as compared with the systems where available resources areinvested on the financial markets. This leaves us with two questions: Canthe model be transferred to countries other than those that have alreadyadopted it? and What lies ahead for the model where it is already devel-oped?

Lastly, to complete this overview of the link between pensions, savingsand growth, it should be said that the need to increase private savings to


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the detriment of consumption, particularly during a period of recession,does not elicit unanimous agreement among economists.

Equity within and between generations

A central issue in the pensions debate focuses on the questions of equityand justice. Once again, there is no simple way of approaching this prob-lem. Pension schemes are vehicles for distributing resources, and societiesmake fundamental choices with regard to justice as they see fit. What withthe technical nature of the existing procedures and the variety of dimen-sions involved, the choices are not always explicit, let alone fully undercontrol. It is all the more important, therefore, that this issue be given dueconsideration.

A number of different factors overlap. The first is the time dimension.Pension schemes mature at an unusually distant point in the future, andthe commitments they make involve successive generations: the questionof equity therefore arises within and between generations. In this context,there is a current trend aiming to appraise transfers between generations,the underlying purpose of this being to demonstrate that the main pay-as-you-go schemes operate for the benefit of the first generations of retireesand to the detriment of those who follow.

In practice, one of the characteristics of pay-as-you-go schemes is thatthey allow for benefits to be paid out immediately, without waiting forcontributions to build up. During their first years of existence, therefore,such schemes were able to pay out full pensions to employees who havecontributed little in the course of their working lives. This is no longer pos-sible, and future generations will receive pensions that reflect the amountsthey have actually contributed. But is such a mechanism equitable? If werestrict ourselves to an appraisal of transfers carried out through pensionschemes, the answer is crystal clear: future generations are quite clearly“losing out”. In contrast, if we take account of other transfers that takeplace between generations, the answer is not so straightforward. In par-ticular, it would appear that, within the framework of family relationships,future generations “benefit” from the fact that they do not have to takefinancial responsibility for their elderly parents (“the first generations”)because, in fact, the latter are in receipt of adequate pensions.

On a broader front, one may ponder the importance attached to compar-ing intergenerational transfers when account is not taken of the fundamen-tal differences in the situations that the generations in question have livedthrough. In other words, does a strictly bookkeeping approach to equitybetween generations really mean much?


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Generally speaking, the problem of equity depends on whether the pen-sions are pay-as-you-go or funded. In the main pay-as-you-go schemesthese days, the principal issue concerns the balance that needs to be foundbetween benefits that correspond to contributions paid in and those thatdo not. In other words, it is a question of drawing a distinction betweenwhat is based on contributions received, or actuarial fairness, and what isbased on solidarity or the pooling of risks. Decisions are based as much onthe extent of the solidarity to be practised as on the definition of the groupwithin which this solidarity takes place (inhabitants, citizens, workingpopulation, employees, and so on). In particular, the question arises of thetime period and the activities (such as unemployment, maternity, child-care and looking after people with disabilities) for which these “free enti-tlements” may be granted. There is also the question of benefits linked tomembers’ differentiated family situations (survivors’ pensions, pensionfor a dependent spouse, or supplementary benefits for children). Decisionson these matters are based on choices that are strictly political.

In most Member States at the present time, there is a desire to achievetransparency with regard to the redistribution mechanisms that operate inthe big pension schemes. This has turned into a trend to establish a moredirect link between the level of benefits and the amount of contributionspaid. Such an approach, which is part of a process geared towards adapt-ing pension systems to current developments, responds to a concern aboutequity between members but does not totally resolve the question of jus-tice. The choices that have to be made in this respect go further than that.They relate not only to the extent and form of the solidarity that operatesacross schemes, but also to the roles played by the respective players (em-ployees, employers and the State) in supporting it. Today, this type of de-cision is taken against a twofold backdrop: on the one hand, there are newfamily structures and relations between men and women; on the otherhand, there is a shift in the labour market that is introducing a new distri-bution of work over the life cycle, greater mobility and a higher risk ofunemployment.

By and large, questions of equity raised by funded schemes are of aquite different order. First, where such schemes are not compulsory, as isfrequently the case in Member States, in those countries where they aremost highly developed they cover only a small proportion of the popula-tion, and in any event less than half of all private-sector employees.Broadly speaking, they mainly cover men, people employed by large com-panies, full-time workers, managers and skilled workers, and those em-ployed in industry and financial services. Then there is the questionwhether, from an equity point of view, it is justifiable to grant tax advan-


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tages to arrangements which in essence benefit only the better-off employ-ees. Furthermore, those sections of the working population that are cov-ered are not in forms of employment, such as part-time work, jobs in smallfirms and precarious contracts, that are currently expanding.

Equity problems also arise in different ways according to whether theschemes belong to the defined-benefit or defined-contributions category.In the former case, there is no direct link between the level of the individ-ual pension and the amount of contributions paid in, because of mecha-nisms involving internal transfers. Redistributions of this sort, which arenot necessarily intentional, are described by English-speakers as “cross-subsidies”. They stimulate much discussion, both in the United Kingdomand in the United States, for example, over whether it is equitable for somemembers to receive benefits that are not linked to the cost incurred, andwhich are in a way “subsidized” by other people. On a broader front, de-fined-benefit schemes favour employees with steady jobs and can heavilypenalize more mobile workers. In countries where they are widespread,frequently voluminous legislation has had to be introduced so as to rees-tablish a degree of equity between members remaining in the scheme andearly leavers.

Defined-contribution schemes raise different issues. No commitment ismade in respect of the benefits, the contributions are invested on the finan-cial markets, and the benefits are paid out according to how well theseinvestments have fared. Relatively speaking, schemes of this type are notwell developed at an international level, but if they become more wide-spread they could have a major impact on justice and equity. There are twomatters that require close examination: the trade-off between the remu-neration of labour and the remuneration of capital, and the link betweeninvestment income and employment. New conflicts of interest are likely toemerge and more generally, a new form of relationship between capitaland labour could take shape. For example, it is possible to envisage a chainof events in which, given that the level of pension depends on investmentreturns, employees of quoted companies could face pay freezes and aworsening of their conditions of employment, and could even be dis-missed so as to ensure good pensions. If the process were to continue inthis vein, it would clearly have quite serious consequences for equity, bothbetween generations and within a given generation.

Techniques for financing pensions

The opposition between pay-as-you-go and funding is an essential dimen-sion in the pensions debate. Customary approaches involve comparing the


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two modes of financing, and highlighting their respective advantages anddisadvantages. The aim is to work out the best combination of the twotechniques in the context of demographic transition. This approachquickly runs up against its own limitations. Opposing two pure models offinancing pensions does not take account of the diversity of ways in whichschemes implement them.

Moreover, from a theoretical point of view, the pay-as-you-go/fundingopposition does not provide us with a cut and dried response to the ques-tion of adapting pension systems to demographic changes. At a macro-economic level, there is no transfer of purchasing power over time: at agiven moment, it is a matter of distributing the current national incomeamong employed people and retirees. However the elderly population islooked after, the onus for doing so falls on the economically active popula-tion at all times. The elements that change according to the system are themechanisms of distribution and the ways in which the different playerscan influence the regulation process.

In the context of pay-as-you-go financing, the wide variety of existingschemes includes defined-benefit schemes and defined-contributionschemes. The former make commitments to an overall level of benefits thatare assessed on the basis of a formula for calculating the pension; the latterdo not operate on the basis of benefits, as these are a function of contribu-tions and the amount of money in the scheme. The ways in which the play-ers regulate the schemes and operate in them also vary. In broad terms,defined-benefits schemes are very well established these days among themain pay-as-you-go schemes, although a trend toward favouring defined-contribution schemes has emerged recently in some countries, notablyItaly and Sweden.

The same distinction exists in funded schemes between defined benefitsand defined contributions. There has been a trend for many years now forthe defined-contribution method to develop among funded schemes: thelongest-established schemes are mostly of the defined-benefit variety,while more recent ones are more often based on defined contribution. Thisis particularly true in those countries where pensions are for the most partfinanced on a pay-as-you-go basis and which are introducing a new,funded pension system. What is more, unlike pay-as-you-go schemes,which are by nature collective, irrespective of how they operate, fundedschemes can be organized on a collective or an individual basis. The dis-tinction is important because, in the former, provision can be made for soli-darity mechanisms through scheme rules whereas, in the latter, benefitsstrictly reflect the flow of contributions and investment returns.

One of the current problems in the debate on financing pensions is re-


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lated to the fact that the logical underpinnings of the pay-as-you-go systemare not usually taken into account. Pay-as-you-go is a financing techniquewith its own tools and rules, and must not be confused with the paymentof benefits day by day as commitments fall due. This is closely linked to thequestion of sources of financing and the institutional organization ofschemes. Two fundamental elements come into play here: first, the distinc-tion, which is beginning to become blurred in international discussions,between taxes and contributions; and, second, whether or not there areautonomous institutions separate from the administration. It may be espe-cially important today to distinguish clearly between, on the one hand, thefinancing of pensions through pay-as-you-go schemes financed by contri-butions and initiated by autonomous funds and, on the other, the financ-ing of benefits by a government service and relying on the State’s budget.A choice must be made between these two methods of financing that havequite different implications for the future of pensions.

In terms of dynamics, there is a fundamental opposition between pay-as-you-go and funding. Pay-as-you-go allows full pensions to be paid outimmediately, whereas under funding it is necessary to wait until sufficientfunds have been built up. However, when the scheme comes to an end,there is an intrinsically difficult problem for pay-as-you-go: the cessationof contributions leads immediately to the cessation of benefits. On the con-trary, in a funded scheme, the existence of a fund means that commitmentscan be met at least up to the real value of the accumulated capital. This hasmajor implications in terms of public policy and of members’ perception ofrisk.

As for the demographic dimension of problems concerning pensions,pay-as-you-go and funding are often opposed in a quite inappropriateway. Pay-as-you-go schemes respond directly to demographic develop-ments through changes in the ratio between their contributors and retirees.However, mature funded schemes, that is to say schemes paying out fullpensions after 30-40 years of existence, are similarly affected by imbal-ances between employed and retired workers. For example, it is easy toenvisage that excessive supply on the financial markets, resulting from arelative increase in the number of beneficiaries, might lead to a drop in thevalue of the assets and, therefore, to a fall in the value of the pensions paidout.

In the shorter term, it is worth noting that, in most Member States, in-creasing life expectancy has been reflected in a substantial rise in the costof buying life annuities. In other words, in the course of a few years, thelevel of pension obtained for a given sum of capital has declined drasti-cally, and this is a result of one of the main factors in current demographic


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movements. In general, because of the manner in which it operates, fund-ing is certainly not a solution to problems posed by population ageing.

A key element that clearly distinguishes the two financing techniques isrelated to schemes’ long-term durability. For pay-as-you-go schemes, thisrequires respect for very strict rules. In particular, coverage must be wide-spread and compulsory. The application of such conditions to fundedschemes could lead to serious problems when they mature. The accumu-lated funds would be very large and, if we were to replace pay-as-you-gowith funding, they would be colossal. For example, it has been calculatedthat, in France during the 1970s, funding for the country’s pay-as-you-gosystem would have required a fund equal to four or five times the GDP.Accumulation of this magnitude would pose a whole series of questionsrelating to the use of and control over the sums of money involved, andone might well wonder if the effects would be seriously destabilizing forthe economy.

By contrast, funding does not mean in any way that coverage should bewidespread and compulsory. Funding is not subjected to the same con-straints as pay-as-you-go as far as durability of commitments is concerned,and it leaves the way open for the development of voluntary arrange-ments. Although funding cannot provide a solution to the rising cost offinancing pensions, the introduction of funded schemes is likely to makethe payment of contributions more tolerable, given the fact that they arevoluntary and carried out in the context of the company’s overall manage-ment system, collective bargaining or an employee’s individual decision.

Decision-making processes

A variety of players can intervene in the decision-making processes onpensions. In this arena, there is no simple opposition between public andprivate provision, or between the State and the individual. In addition tothe State, players include employers’ organizations, trade unions, and in-dividual employers and employees — in other words, all those involved inthe world of work. There are also numerous possible arrangements andmodes of organization, and they vary from country to country. The currentprocess of adaptation should lead to a reorganization of national systemsand a new linkage between the various schemes. It is also likely that therespective roles and importance of state and supplementary schemes arechanging, with the role of the latter on the increase. However, that comesnowhere near exhausting the question. Diversity within the EuropeanUnion is enormous. There is no single model but, instead, a variety of dif-ferent types of involvement on the part of various players. There is huge


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diversity in state schemes, which are managed either by an administrativebody or by autonomous institutions, but there is even greater diversity inthe field of supplementary schemes; these may derive from the employer,from sectoral or national collective bargaining, or even from a contract be-tween the employee and a financial institution.

At an international level, a pension system model has been produced bythe World Bank. It is the only model that exists as such. It is open to ques-tion whether it is a realistic exercise, or whether it is rather the expressionof a form of Utopia that relies on a belief in the market’s ability to self-regulate. If it were to take root, it would cause a major upheaval in theexisting system. In particular, the role of the State would be fundamentallyaltered: it would become limited in terms of the benefits paid out, as themodel breaks with the principles of social insurance; on the other hand, itwould be extremely important with regard to control, regulation and im-posing compulsory contributions on private schemes. On this latter point,the Chilean example shows that evasion of compulsory savings is likely tobe every bit as prevalent as tax evasion. In other words, the State wouldnot be withdrawing from financing pensions, but becoming involved in adifferent way.

A number of factors are at work in this alteration in the State’s role. Twoof them emerge from an analysis of existing systems. One factor signals animportant choice that has to be made in the context of setting up the pro-posed system: the respective roles of compulsory savings and incentives tosave. Experience shows that most incentives of this type rely on the grant-ing of tax advantages. It follows that the development of a voluntary op-tion involves a potentially high cost for the State in terms of lost receipts.The other factor comes back to the fundamental question of control andprotection. Two points should be made here: first, the desire to protectprivate-scheme members is likely to lead to a substantial increase inlegislation; second, major deficiencies in the past few years, particularlyin personal pensions in the United Kingdom, have shown that the problemof efficient control procedures should never be underestimated.

At the opposite extreme, in the model devised by the World Bank, onlythe individual stands against the State. In broad terms, the individual iscompelled to save, and makes personal choices between savings and con-sumption if he or she wishes to go further. The whole structure of societyis ignored in such an approach; this applies particularly to work-relatedplayers such as employers, trade unions and trade associations. However,history tells us that these have played a key role in the construction of cur-rent pension systems, particularly in Europe; in fact, these systems are theproduct of a combination of public and private initiatives. Their main dif-


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ferences reflect major national specificities such as the relationship be-tween State and society, the organization of industrial relations and thestructures for financing enterprises.

In the context of developing supplementary provision, an analysis of thediversity of national arrangements which is characteristic of the EuropeanUnion throws interesting light on how schemes are regulated. In countrieswhere there are significant private arrangements, such as the companyschemes set up by employers, a range of centralized forms of regulationhave been introduced in parallel; these include the establishment of a vastlegal apparatus, the introduction of national control mechanisms and, insome cases, the setting up of a national guarantee system. In contrast, thoseschemes that have come into being as a result of collective bargaining havegiven rise to very little legislation, and rely on self-regulation whether theyare industry-wide schemes, such as those to be found in the Netherlandsand Denmark, or the national schemes of Sweden, Finland and France.

One last point needs to be made in respect of decision-making pro-cesses. A characteristic of developments currently taking place is the ap-pearance of the individual employee as a player with choices to make inrespect of pensions. In historical terms, this is quite new. Hitherto, pensionschemes have mostly developed according to paternalistic and compul-sory membership patterns. The addition of the employee in person to thegroup of players participating in the decision-making process introduces anew dimension whose implications will need to be assessed.

At the present time, with regard to pensions, the Member States of theEuropean Union do not need to make a clean sweep of existing arrange-ments. It is more a question of adapting systems by searching for new com-promises and by redefining the roles of the various players involved. Thisis already taking place in a number of countries, and is taking a variety offorms including discussion, research, the confrontation of interests, nego-tiations and possibly conflict. Through this progression, appropriate to thedecision-making process in contemporary democracies, a new balanceamong the various components of the national pension systems is sought.Obviously the choices to be made differ from one country to another, ac-cording to the characteristics of their existing systems, and the choicesmade will be greatly influenced by their national idiosyncrasies. Neverthe-less, beyond such differences, the same issue is at stake in each case: themodel of European society and its intrinsic capacity to provide collectivesecurity and guarantee a decent income to everyone at the end of theirworking lives.


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Documents

Pensions in the European Union: Adapting to Economic and Social Changes