Introduction: Studying Pension Privatization in Europe

During the post-war years many European countries have implemented far-reaching but diverse pension systems with the objective of providing those in retirement with adequate incomes. In this study, we explore the link between pension systems and the adequacy of retirement income. We analyse the mix of public and private pensions and consider the impact of different policies on poverty rates amongst pensioners. We suggest that only a few European countries have been successful in providing combinations of private and public pensions that improve the adequacy of retirement income.

Šiame straipsnyje analizuojama prieš penkerius metus pradėta Lietuvos socialinio draudimo senatvės pensijų struktūrinė reforma, kurios metu dalis socialinio draudimo įmokų pervedama į gyventojų pasirinktus privačius pensijų fondus. Šio straipsnio tikslas - apžvelgti reformos pradžioje jai keltus tikslus, įvertinti jų pagrįstumą socialinės apsaugos ekonomikos teorijos požiūriu, išanalizuoti pradinius pensijų reformos rezultatus. Siekiant šio tikslo išanalizuotas pensijų reformų regione pobūdis, socialinio draudimo pensijų dalinio privatizavimo Lietuvoje ypatybės, kelti privatizavimo tikslai ir besiformuojanti privačių pensijų rinką Lietuvoje. Straipsnyje remiamasi pasaulyje gerai žinomų pensijų ekonomikos tyrėjų publikacijomis, pensijų reformą reglamentuojančiais Lietuvos Respublikos įstatymais, Lietuvos valstybės institucijų skelbiama ekonomine ir socialine statistika.Autoriaus atlikta analizė rodo, kad privačių pensijų fondų klientų asmeninėse kaupiamosiose pensijų sąskaitose kaupiamo turto investicijų grąža nepadengia nuostolių, kuriuos jie patirs dėl dalinio pasitraukimo iš socialinio draudimo pensijų sistemos. Straipsnyje taip pat parodyta minėtos pensijų reformos našta, kuri tenka dabartiniams pensininkams. Pagrindinė straipsnio išvada - reformos tikslai buvo per daug ideologizuoti, o pirminiai rezultatai nepalankūs nei dabartiniams, nei būsimiems pensininkams. Lietuvoje 2004 metais įvykdytos pensijų reformos analizė akademinėje literatūroje pateikiama pirmą kartą.

This descriptive piece discusses the multidimensional aspects of the prevailing pension system in Bangladesh and provides a visionary roadmap for designing a pension system in comparison to international policy views. In Bangladesh, some two million government employees are entitled to draw retirement pensions and so are the employees of the formal private sector. However, the large chunk of the workforce employed in the informal sector are out of the pension scheme. Within the limit of laws, rules and regulations, this chapter identifies the details of government pension schemes, key differences between the public pension schemes, and private pension plans. The public pension program follows the traditional unfunded pay-as-you-go system where the payment is made from budgetary revenue. In contrast, the private pension schemes are either defined-benefit plans or defined-contribution plans where the contributed amount is invested to generate pension payments in the future. The financial sector (e.g., private commercial banks operating in Bangladesh) is no exception from the above-mentioned corporate pension schemes. The study notes that there is a direct correlation between the tenure of service and the size (as a percentage) of pension benefit. This case is found to be true in both public and corporate pension schemes. This chapter also explores the regulatory framework of the pension system in Bangladesh and finds that the absence of one single comprehensive legal guideline for the pension system has made it complex to manage pension funds. There is more wriggle room to make the existing system more flexible and more pro-employee.

This comparative chapter by Ebbinghaus and Neugschwender discusses the institutional differences in the public–private mix, distinguishing mature from emerging multipillar systems and hybrid from dominantly public pension systems. It focuses on exploring the interaction between income inequalities in working life and pension system features for old age income. In particular, it considers the first tier of minimum income support, the public and private second-tier earnings-related pensions, and the particularities of private pensions. The empirical analysis compares poverty rates over time and across countries, discussing the impact of public pensions. The further analysis reveals variations in the recipient rate and income share of private supplementary pensions among the elderly. The importance of mandatory or negotiated occupational pensions in order to reduce inequality in multipillar pension systems is evident in addition to the role of public minimum income protection for poverty reduction.

This article examines the recent Korean pension reforms from a political economy perspective. It argues that these reforms are of particular interest because, unlike major pay‐as‐you‐go pension schemes in Europe, the Korean pension scheme is a funded one and, therefore, is subject to market exposure. Also in contrast to the problems that public pension reforms have encountered in European and other OECD countries, especially ‘blame avoidance’, the more radical Korean reforms were implemented without significant challenge or resistance. First of all, the National Pension Scheme is described prior to the 1997 Asian economic crisis. Then the impact of this crisis on the Korean welfare state and, especially, its pension system are analysed. The main part of the article consists of a political economy of the pension reform process, in which the key roles of the international governmental organizations and the domestic neo‐liberal policy elite are pinpointed. This neo‐liberal ideology was critical in developing and sustaining an influential discourse on the ‘crisis’ in Korea's national pension fund. The article concludes by arguing, against the neo‐liberal tide, for the inclusion of a pay‐as‐you‐go element in the national pension in order to tackle escalating poverty in old age.

Management of pension schemes has always been a difficult task for governments and the challenges that governments are facing today are growing faster than many countries anticipated. Pension plans have evolved overtime as public and private sector schemes slowly switching to PAYG system of funding and the uncertainty over current contributors’ future is growing. However, the recent financial crisis turned attention towards this hidden deficit of the countries where pension funds around the world lost significant amount of their value and the mounting pressure forced the policy makers to take actions to address this issue which they did by suspending and scaling down pension privatisation which once was proposed by World Bank and supported by countries around the world specially in Eastern Europe to answer the funding problems of pension plans. Recent studies such as Drahokoupil and Domonkos (2013) and Orenstein (2014) among others have analysed the impact of financial crisis on pension funds and the role played by private pensions during that period but were unable to find any significant differences between public and private pensions in terms of returns and risks. These studies raise questions on the rationale behind the recent reforms that not only significantly reduced the funding through private pension plans but the initiatives such as UK government allowing pensioners to take their pension savings as single cash payment instead of buying annuity does not seem like a insightful step that can minimize the pension deficit but will result in extra cash burden on treasury (Flood, 2014). Many European countries such as Hungary, Latvia and Poland completely abolished private pensions as a response to resolve the problem of pension deficit. However, on comparing the portfolios of public and private pensions during the period of financial crash, analysts found that both were holding risky assets and due to the market turmoil, the fund lost their value but question of why only private pension funds were penalized is still far from answered that can make economic and financial reasoning. Resulting reforms imposes constraints and stringent requirement for pension funds where regulators in US and Europe have made attempts to prevent the use of financial derivatives to hedge the portfolio risk. The case for these regulations in reducing risk is debatable while some supported, other criticised as it leads to increased costs and impedes fund growth. These also resulting in misalignment of interests as assets managers are forced to focus on short-term volatility rather than sustainable returns (Randle and Rudolph, 2014). There are many reasons that have created this enormous pension deficit such as political, social, demographical, economic and financial. But some risk can be managed easily than others, as most of the literature focuses on the impact of political and social policies on pension plans, the discussion in this paper is on financial aspect of the problem and attempts to find solutions to manage the pension risks through financial markets. While many governments such as Detroit city sunk down the pension deficit abyss and defaulted on their obligations, Norwegian pension fund and Australian superannuation fund have emerged as ideal models that can be followed by countries facing pension crisis as the longer they take to react the deeper they sunk in to the deficit hole. The aim of this discussion is to: 1) gain insights into the underfunding problem of pension funds and the impact of financial crisis on pension liabilities and how it has amplified the pension risks and liabilities, with underfunding and risk mitigation as focal point. 2) Critically discuss post crisis pension reforms and how they are likely to resolve the problems. The focus will be on risks associated with private and public pension plans. 3) While regulatory law is not the main focus of this discussion but there are some regulations that directly impact the financial performance of the pension funds such as imposing constraints on investment of funds. Therefore the discussion follows the extent to which fed should intervene, and attention will also be drawn on inconsistent and biased regulations. 4) For sustainable pension plans strategies, Australian superannuation and Norway’s pension funds have been discussed in detail including their investment strategies, risk management techniques and supervision in order to find solutions that can be used by other countries such as US and UK.

Pension adequacy is gaining importance as old-age poverty remains a pressing problem. In many advanced welfare states, the population is ageing rapidly and recent pension reforms have led to cuts in public pension provision. There are, however, few comparative longitudinal studies on the relationship between pension generosity and old-age poverty. This study provides a comparative empirical assessment of how the prevalence and depth of old-age poverty relates to generosity of public pension benefits in 14 advanced OECD welfare states from 1980-2010. We focus on the role of mandatory public pension provision of mainly first tier schemes that grant the major share of retirees’ income in most countries. We use data on theoretical pension replacement rates for retirees who had different working-age incomes. In order to address endogeneity issues, we adopt an instrumental-variable approach. Our main finding shows that pensions systems and earnings-related schemes, in particular, are quite efficient in reducing the risk of old-age poverty. Yet they still do very little to alleviate poverty among those pensioners in the most disadvantaged situations. We also found that redistribution within the pension system does not substantially contribute to poverty alleviation.

For a long time, the self-employed were considered to be less at risk of poverty in old age than employees. However, due to the increase of solo-self-employment and precarious forms of self-employment, today, the self-employed face a higher risk of poverty than other parts of the labour force. This is of high relevance for younger cohorts on the labour market. The chapter studies how far the duration of self-employment in the working career affects the risk of poverty in old age in twelve European welfare states and examines whether this is linked to the design of the countries’ pension systems for the self-employed. The findings show that from a cross-national perspective, a longer duration of self-employment does indeed lead to a higher risk of poverty. However, the design of old-age security for the self-employed does not affect the risk of poverty in old age in a notable manner.

The demographic changes that have occurred in European countries in recent decades have made the policies of the public pension system one of the most debated issues of the welfare state. In this paper, I focus on preferences for three pension policy reforms with different distributive consequences: raising contributions, raising the age of retirement, and allowing free choice between public and private pension plans. I use multilevel models to analyse how individual attachment to different solidarity principles (universalistic, conservative, liberal and familistic) affects attitudes toward pension system reforms while controlling for institutional factors. The empirical results strongly support the hypothesis that solidarity principles have a significant influence on individual preferences. I find that individuals who adhere to universalistic or conservative principles are more in favour of increasing contributions in order to maintain the level of pensions, whereas they oppose a postponement of retirement age. In contrast, those who adhere to liberal or familistic principles are against increasing contributions and prefer extending retirement age. The findings at least partially support the ‘regime hypothesis’, as a more generous pension system appears to increase support for raising contributions while decreasing support for a raise in the age of retirement.

An economic theory of public and private pensions is developed, and the implications of the theory are compared with some empirical evidence, of both the econometric and casual varieties. Among the questions addressed are: why are there private pensions? why have they grown so rapidly in recent decades? why do they have the particular features that they do? why does the government intervene by regulating the provisions of private pensions and mandating a public pension system? what are the effects of private and public pensions on savings and retirement decisions?

1. Introduction and Overview Katja Hujo PART I: POLITICAL ECONOMY ISSUES IN PENSION REFORM 2. Pension Privatization and Economic Development in Central-Eastern European Pension Reform Katharina Muller 3. Pension Schemes and Pension Reforms in the Middle East and North Africa Markus Loewe 4. The Reform of the Civil Service Pension Programme in Korea: Changes and Continuity Huck-ju Kwon PART II: PENSION SYSTEM AND REFORM IN THE BRICS 5. Recent History, Perspectives and Challenges to Pension Policy: The Brazilian Case Marcelo Abi-Ramia Caetano 6. Social Security Reform and Economic Development: The Case of India Mukul G. Asher and Azad Singh Bali 7. Towards Universal Coverage: A Macro Analysis of China's Public Pension Reform Lianquan Fang 8. The Private Affairs of Public Sector Pensions in South Africa: Debt, Development and Corporatization Fred Hendricks PART III: BRINGING THE STATE BACK IN 9. Pension Reform in Bolivia: Two Models of Income Security in Old Age Peter Lloyd-Sherlock and Kepa Artaraz 10. Pension Reform in Chile and Argentina: Towards More Inclusive Protection Katja Hujo and Mariana Rulli 11. Conclusions Katja Hujo

The European pension policy landscape is generally depicted as a major building site, where governments are scaling back the pension systems they have inherited from the postwar years in order to adapt them to population aging. Europe is often seen as a graying continent that will have to face the effects of a demographic time bomb and that needs to reduce its pension commitments radically. As a matter of fact, in the last decade pension policy has gained unprecedented levels of prominence in the political arena throughout western Europe, and several countries have cut pension schemes. This image reflects some broad trends, but a closer analysis of pension policy in western Europe reveals a number of other important developments. Pension systems are not simply being adapted to population aging but are responding to at least two additional sets of pressures: the new career profiles that have emerged with the transition to a postindustrial labor market structure and highly integrated international financial markets. Current pension systems were designed in a time characterized by stable labor markets and limited cross-border capital mobility. Changes in these two areas, as well as in the demographic composition of societies, create economic and political pressures to rethink part of their structure. European pension systems are exposed to these pressures in broadly similar ways. However, the way in which they respond to them varies considerably across countries and is to a very large extent shaped by the institutional structure of the pension systems that are currently in place. Population aging, labor market changes, and stronger financial market integration generate different political demands and policy responses depending on whether countries have a pension system based on the social insurance model, where one single public pension scheme provides the bulk of retirement income to the whole resident population, or a multipillar system, where the state takes responsibility only for basic income security and additional coverage is provided by occupational and private arrangements. European pension systems are path-dependent; micromechanisms link existing institutional structures to new policies.' In particular, policymakers face different incentive structures and political pressures under different pension institutional settings. Empirically, pension

The reforms of Germany’s pension system (i.e. the fundamental pension reform of 2001 known as the “Riester pension reform”, as well as the implementation of the Pension Sustainability Act and the Retirement Income Act which became operative in 2005), which entailed a reduction of the state benefit level and an increased focus on occupational and private pensions, represented a fundamental socio-political challenge. The framework conditions in tax, social security and labour law in regard to occupational pensions have fundamentally improved in Germany since 2001. Successes have meanwhile become noticeable. The results of official studies have shown that since the pension reform of 2001 a lot has been achieved, even if Germany will still have a long way to go to reach the socio-political goal of a nationwide occupational pension: The share of workers covered by a social security insurance with occupational pension promises in the private industry was at 46% (on 30 June 2004, as compared to 38% as of 31 December 2001). The equivalent share of workers in the private industry and the public service was at 64% (31 December 2007). Trade unions and factory committees are involved in all levels of governance processes as regards occupational pensions. This helps to make sure that the various needs of the employees of the different industries are met. It also helps promote the idea of occupational pensions. An important part of the safety net of the German occupational pension system is the protection against insolvency. In Germany, occupational pensions are reliable – even in the case of insolvency on the part of the employer. The Pension Security Association PSVaG, which guarantees the payment of occupational old-age pension benefits in the event of insolvency, commenced business operations on 1 January 1975. The basis of its activity is the Improvement of Occupational Pension Schemes Act, BetrAVG. The employees’ representatives are members of the consultative panels of the PSVaG. “Safety first” is the motto of German occupational pension systems. Guarantees are typical for those pension plans. Therefore, the investment structures are rather conservative. This has been an advantage in regard to the current financial crisis, since the German system has been coping much better than many other occupational pension systems in Europe.

Most EU Member States have carried out substantial pension reforms over the last decades in order to enhance fiscal sustainability, while maintaining adequate pension income. The intensity of pension reforms has been particularly strong since 2000. These reforms have been implemented through a wide range of measures that have substantially modified the pension system rules and parameters. One of the most important elements of pension reforms, aside of whether countries engaged or not in a systemic change, has been the introduction of mechanisms aimed at automatically adjusting (indexing) the key pension parameters (pension age, benefits, financing resources) to demographic pressure (e.g. changes in life expectancy, increase in the dependency ratio). Indeed, since the mid-1990's, half of the EU Member States have adopted either automatic balancing mechanisms, sustainability factors and / or automatic links between retirement age and life expectancy. All these pension reforms are projected to have a substantial impact on containing future pension expenditure trends. According to the latest long-term projections in the 2015 Ageing Report, public pension expenditure is projected to be close to 11% of GDP over the long run in the EU, almost the same as in 2013. However, the fiscal impact of ageing is still projected to be substantial in many EU countries, becoming apparent already over the course of the next two decades. This is also due to the very gradual phasing in of already legislated reforms, an issue that raises questions about the intergenerational fairness of the reforms and poses some doubt on the time-consistency of their implementation. Indeed, the sustainability-enhancing pension reforms legislated in a majority of EU countries will lead to a reduction of generosity of public pension schemes for future generations of retirees. But to make sure that these reforms will not have to face political and social resistance and risk of reversal in the moment they start to be implemented in full, other flanking policy measures are likely to be necessary: for example, reforms that boost retirement incomes by effectively extending working lives and employability of older workers (also through flexible working arrangements that allow people to keep working beyond current formal retirement age and to step down gradually from full-time to part-time to very part-time work) and provide other means of retirement incomes (e.g. private pensions) and appropriate social-safety nets to avoid that low-wage people follow back in poverty at old age.

Private pensions have expanded in recent decades in many European countries, albeit to different extent. As private pensions historically have been more unequally distributed than public pensions, it is reasonable to expect that pension privatization has increased the dispersion of incomes among the retired. However, few studies have empirically tested this claim. The purpose of this study is to assess how the expansion of private pensions affects developments of income inequality among the retired. Using microdata from the Luxembourg Income Study, decomposition analyses of income inequality by income source are conducted around 1986 and 2018 in nine European countries. To account for cross-country variations in the public–private pension mix, the study distinguishes between mature multi-pillar systems, emergent multi-pillar systems, and dominant public systems. The results highlight an interesting paradox. Higher shares of private pensions in retirement incomes have a substantial inequality-increasing effect; yet, overall income inequality among the retired has not necessarily increased, for 2 reasons. First, more equally distributed public pensions in emergent multi-pillar systems and declining shares of capital income in mature multi-pillar systems either fully or partially compensated for increased inequality due to larger shares of private pensions. Second, private pensions became more equally distributed among the retired in most countries.