Funded Pensions in Western Europe

A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Ebbinghaus, Bernhard Article Varieties of Pension Governance under Pressure: Funded Pensions in Western Europe CESifo DICE Report Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Ebbinghaus, Bernhard (2012) : Varieties of Pension Governance under Pressure: Funded Pensions in Western Europe, CESifo DICE Report, ISSN 1613-6373, ifo Institut - Leibniz-Institut für Wirtschaftsforschung an der Universität München, München, Vol. 10, Iss. 4, pp. 3-8 This Version is available at: http://hdl.handle.net/10419/167091 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Forum SECURING PENSIONS FOR THE NEXT FIFTY YEARS VARIETIES OF PENSION weight of private (funded) pensions and discuss how GOVERNANCE UNDER they were affected by the financial market crash of 2008, as well as the long-term consequences for pri- PRESSURE: FUNDED PENSIONS vate pension governance and regulation. IN WESTERN EUROPE The stakeholders in private pension governance BERNHARD EBBINGHAUS* The recent financial crisis raises some fundamental issues of private pension governance. Conflicts of Introduction interest over supplementary pensions occur due to the complex principal-agent relations between bene- For over two decades, the financial sustainability of ficiary and sponsor, and between sponsor and finan- pay-as-you-go financed public pensions has been cial agent. Employees, for instance, rely on their questioned, while the privatization of prefunded sup - employers who co-sponsor pension contributions, plementary pensions has been advocated. The recent while both have to trust financial managers investing financial crisis, however, has challenged the merits of on their behalf. Problems arise due to asymmetric private (funded) pensions in view of the significant information between the agent and principal decline in the value of their assets. As a result, trust (McCarthy 2006). To control their agents, principals in the expected long-term returns of funded pen- have an ‘exit’ option through market mechanisms or sions has been shattered at a time when saving for rely on ‘voice’ (participatory rights). We can distin- retirement has become more important. The privati- guish three governance modes of supplementary zation of responsibility for old-age in come and the pensions based on the sponsor-beneficiary relations shift towards more funded pensions thus raises (Ebbinghaus 2011; Ebbinghaus and Wiß 2011): col- important issues about developing better gover- lective negotiated social partner schemes, employer- nance and regulation. sponsored occupational pensions and the individual’s decision to save for retirement (see Table 1). Drawing on the experiences of ten Western Euro - pean countries with mature or expanding multi-pil- In the case of collective schemes employer and lar systems (Ebbinghaus 2011), the comparative unions agree on jointly managed schemes for a sec- analysis of the variety of supplementary pensions tor, providing for broad coverage and risk pooling, presented here will focus on the role of state and col- while the voice of stakeholders (sponsors and bene- lective actors in regulating and governing private ficiaries) is indirectly represented by their organiza- pensions (Ebbinghaus and Wiß 2011). Although the tions. The advantages of such schemes include more state seems to be retreating from former commit- professional portfolio management, lower adminis- ments to guarantee secure and adequate public pen- trative costs due to economies of scale, and labour sions, the need for public regulation has increased mobility within the nation-wide or sectoral scheme. rather than diminished. Moreover, social partners – Schemes self-administered by social partners as- employers and workers’ representatives – play an sume an important second-tier income function in important role in private (funded) pensions. This Finland (a partially funded scheme) and France (an article begins by analysing the three different modes unfunded scheme for private employees), as well as of governance in the area of private pension in Denmark, the Netherlands and Switzerland, while schemes. It will map the differences in the current negotiated top-up benefits exist in Sweden and are gaining in importance in some sectors in Belgium, * Mannheim Centre for European Social Research (M ZES), University of Mannheim. Germany and Italy. 3 CESifo DICE Report 4/2012 03-08_FO_Ebbinghaus_DS_FORUM 28.01.13 15:40 Seite 4 Forum Employer-sponsored plans can be financed by book reserves, Table 1 by a trust fund external to the Collective, employer-sponsored and personal supplementary pensions firm, or by a defined contri - Collective Employer-sponsored Personal occupational pension occupational pension pension bution (DC) contract with an insurance company. Traditio - Sector-wide UK (opt-out), Mandatory public pension: nally firms offered defined ben- (social partner negotiated): Netherlands, Switzerland Swedish Premium P., efits (DB) in order to bind qua - Netherlands, Denmark, Danish Special Savings P. Finland, Sweden, Germany lified workers to the firm, Switzerland, (also book reserve*), UK (opt-out), Germany thereby limiting labour mo - Belgium, France*, Belgium, France Germany, Italy (voluntary, Riester) bility. Employers as sponsors Note: Main systems underlined; * = unfunded. mainly control these plans, Source: Ebbinghaus (2011); Ebbinghaus and Wiß (2011). while the employees and re- tirees only have a limited voice through minority representation (for instance, in UK there to be a strong relationship be tween the impor- trust funds). These employer schemes have higher tance of financial markets in Liberal Market administrative costs than collective plans, and pool Economies (LMEs) and their reliance on funded pri- risks less broadly. Employer-sponsored occupational vate pensions, whereas in Coor di na ted Market pensions play an important role in the UK, although Economies (CMEs) there is a larger reliance on many have moved from DB to DC schemes in recent patient capital and non-funded pensions (book years. Employer-specific plans are also a preferred reserves) by private sector firms. The variations in form for Dutch and Swiss larger firms, and some fund assets show the differences in the maturity of German firms provide such plans as voluntary fringe private pensions (see Table 2). The correlation benefits (often with on the book reserves only). between financial markets and funded pensions is very strong for liberal Britain, while pension fund In the case of individual decisions, there may be a assets in Germany’s coordinated market-economy collective action problem for individuals: they may are still relatively small, although growing. Similarly, not have much of a voice vis-à-vis their investment Belgium, France and Italy are laggards in pension fund; and may only be able to vote with their feet fund asset growth. However, two CME countries, (exit) by switching to a different fund. Here respon- Switzerland and the Netherlands, outperform the sibility remains solely with the individual, although UK in funded capi talism, channelling substantial the state as regulator may define particular obliga- investments through the Dutch collectively negotiat- tions or tax incentives. One advantage of personal ed and the Swiss mandatory pension funds. pensions, which are commonly DC schemes, is porta- Moreover, the Nordic CMEs (Denmark, Finland, bility, at least within national borders. In addition to and Sweden) also now have substantial funded pil- the two mandatory personal pensions in Denmark lars as part of both public and private pensions. and Sweden, voluntary personal pensions have become very widespread in Germany since 2001 due Among the more mature multi-pillar systems, the to tax subsidies. Their popularity has also grown in UK has a long tradition of pension fund trusts and the UK since 1986 when the government granted an voluntary personal pensions as alternatives to the opt-out option of the second state pension. state second pension. Indeed, both schemes cover over half of the UK population. Recent pension reforms (2007/08) have limited contracting-out and Varieties of pension fund capitalism require employers to provide access via auto-enrol- ment in a supplementary pension, which will phase- Europe’s pension landscape varies in the importance

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