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Green light for pensions

Tuesday 13 July 2010 - by Daniel Sage

The European Commission put out its green paper on pensions this month. Daniel Sage examines the good, the bad and the ugly

On 7 June, President José Manuel Barroso issued a brief to eight commissioners to “develop, outline and communicate an EU approach for adequate, sustainable and safe European pension systems”.

The first step for the group was a green paper, published on 7 July, which aims to communicate an “integrated approach across economic, social and financial market policies”.

According to the group, the mandate comes at a time when pension systems face complex obstacles to one of the key goals of pensions – adequacy – and two of the means to achieve it: sustainability and safety.

Sustainability has been a preoccupation of policymakers for some time. Rising life expectancies and declining fertility rates have resulted in what the EU terms the “steep aggravation of the old age dependency ratio”.

Many governments have taken action to address this conundrum with reforms designed to enhance long-term financial sustainability, but the green paper argues that there is still much to do. “The situation is not tenable” it argues and, unless rectified “an unsustainable rise in pension expenditure may occur”.



Problematically, however, these reforms threaten to compromise adequacy. Sustainability drives have redistributed risk towards individuals, creating the potential for new adequacy gaps to emerge as returns depend increasingly on (a) the performance of financial markets and (b) the capacity of employees to build up substantial contributions. So while pensions are more sustainable, they may be more poorly equipped to meet the essential aim of policy: to provide retirees with financial security.

Safety – the third concern – is another consequence of the sustainability drive. With stronger levels of individual financial risk, the regulatory challenge of ensuring safety within financial markets is intensified.

The key point of the green paper is that these three pillars of pension systems are not mutually exclusive. London School of Economics Professor of public economics Nicholas Barr says: “The core fact (and huge good news) is that people are living longer healthy lives. Rising life expectancy adds inexorably to the cost of pensions which, in the limit, blow a gasket.


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