Pension Policy Co-operation within the EU from a German point of view

Bilateral Seminar
Tallinn, 12 November 2003

Dr. Rainer Fuchs 
Ministry of Health and Social Security
Germany

1. A New Phase in Pension Policy Co-operation

For  almost half a century, European activities in the field of old age pensions  have been confined to migrant workers and the co-ordination of social security systems codified in regulation No.3 and later regulation 1408/71. These regulations, like bilateral social security agreements, only concern persons moving into another country, within the EU exercising their right of free movement. The concerns of the majority of European citizens - who never work in another Member State - did not appear on the political agenda in Europe. This was not a lack of legal competency  but the general agreement of the member states not to make use of given competencies (see Art. 137 of the EU treaty) with respect to subsidiarity.

I am happy to say that this situation has changed dramatically. In December 1999, the EC Lisbon paved the way for the creation of the open method of co-ordination (OMC) and the installation if the Social Protection Committee.

As my colleague Jérome Vignon has explained in detail, it started  in Lisbon in March 2000 when the Heads of State agreed to modernise social protection and develop the European social model within the a new strategic goal for the Union: to become the most competitive and dynamic knowledge‑based economy in the world, capable of sustainable economic growth with more and better jobs and, not to be forgotten within the context of pensions, greater social cohesion. 

2. Some first experiences

In the beginning, there were big reservations against the application of the OMC in the fields of pensions. It was a novum to have the EU level on board in a classical national matter, the old age pensions. Some typical reactions were: don’t we have enough problems here to find our national solutions and political acceptance in the population! Again the Commission only wants to extend their competencies and disregards subsidiarity!

I have come to Tallinn to tell you our experiences: there is no doubt: they are positive, and we expect the OMC to be a useful tool for future co-operation on the European level in social security and especially the pension sector. Let me point out some first experience.

2.1. The application of the OMC in the field of pensions helped to establish social policy as a matter of equal importance along with economic policy (triangel-spirit of the Lisbon Strategy): 

The Lisbon Strategy has brought together employment, public finance and social policy. While the interaction between employment and social security policy is more or less evident (often it is the same ministry involved), finance and social policy stand in sharpest contrast - not only in Germany. Often it is the national finance ministers deciding about pension reforms, especially when pensions are financed not only by contributions but also or partly by tax out of the public budget. In the case of Germany, social expenditure is about 1/3rd of the Federal budget. 

The Stability and Growth Pact, the economic and monetary union has made budget policy and control an important EU-matter. In the EU, we have the BEPG’s of the ECOFIN Council formulating the budgetary demands of the finance ministers. And what you find in the BEPG’s is not only budget policy in a narrow sense, but the whole variety of social policy, including “good advice” how to create sustainable social security systems from their point of view - i.e. by cutting expenditure with effect to the public budget. Until we had the OMK, there was nothing corresponding to that strong mechanism in social policy.

In order to achieve a balance between economic policy and social policy, a new approach was needed that went beyond the projection of likely future public pension expenditure which was done by the EU finance minister level (share of public old age expenditure of the GDP in the so-called Bogaert-Report). The trade-off in question - an adequate pension level versus sustainable funding - can only be discussed if both sides are taken into account simultaneously. Therefore it was positive for the development of the EU activities that the OMC was introduced in this field. Otherwise the EU activities would still be too narrowly focused on the public finance aspect of demographic ageing and sustainability. 

The creation of the social protection committee (SPC) with the same formal status as the economic policy committee was an important step to overcome the institutional imbalance between the economic and the social sphere. With the creation of the SPC it became possible to voice concerns and interests of the social protection area on the European level. This is a crucial step in achieving a better balance between the different policy areas. 

Next steps are yet to come: let me remind you of the draft of the EU convention bringing the “Co-ordination in the field of social protection” on the same constitutional level as employment and finance policy, and let me remind you of the streamlining activities which are underway now. 

2.2. On the national level, the relevant actors have enhanced their co-operation 

The necessity to discuss and agree a joint document  - the Joint Pension Report (that you will prepare next year) - to be approved by three ministries (finance, labour market and pension policy) - and in the end by the entire government - exercised a positive pressure on both bodies for close co-operation. 

The drafting the National Strategy Report (NSR) was not at all „business as usual“. In Germany, we did not only establish a new close co-operation between the social and the finance minister. We also improved co-operation with our labour market specialists: to fight early retirement is not only a problem of the pension system which has to eliminate possible incentives or too low retirement ages. It is first of all a question of the labour market. To be successful, both policy fields must work hand in hand.

Believe it or not - this cooperation in drafting the NSR was much of a new experience to the experts of the government administration.

We have also improved our co-operation with the social partners in this field, and we started to organize an active dialogue with social and economic science, with the result that you will find today lots of German publications on the issue of the OMC.

Two international Conferences in Berlin on the pension issue brought together all actors an have launches an active and positive discussion. Today reservations concentrate in parts of national and European Parliament and the Federal states who have not yet understood that OMK is a political process and legislative rights will not be touched. 

2.3. Thinking through the entire pension system

The need to explain the overall pension system to a third body (in this case the Social Protection Committee -SPC, the Economic Policy Committee -EPC-, the Commission and the Council) was helpful to foster internal reflection. The trick of the OMC is that it places the „burden of proof“ on the Member State. The National Strategy Reports have to explain how Member States achieve the 11 commonly agreed objectives. In other words, Member States have to explain why they have designed their systems or their reform measures the way they did. This helps to question and review existing provisions and reflect upon whether existing mechanisms are still up to date. 

For us the handling of “objectives” and “benchmarks” has been a new experience, because we are not used to these policy approach. Germans are more used to a qualitative approach. And when we tried, we have made very bad experience - like with the government’s target to half the number of unemployed until 2002 which we did by far not reach.

This internal reflection process has been further promoted through peer reviews among members states, asking questions and commenting on each others‘ systems as well as through questions and comments from the European Commission and the Council. The peer reviews on pensions with the members of the SPC and the EPC in Brussels last year have been a good example of very successful co-operation. Amongst other things, for us it has become evident that some countries perhaps rely too much on contribution oriented measures, the input into the pension scheme, while the output, the effective replacement rate, sometimes gets too little attention.

2.4. OMC helps to implement national pension reforms and gives examples of “best practise”

All European states are currently facing similar problems in financing their social security systems because they are all hit by the phenomenon of an ageing society. Innovative changes in the systems, but also higher contributions and painful cuts in the pension expectations will most probably become more and more common policy answers. 

An additional problem is the declining economy in many EU-states with high unemployment rates affecting pay-as-you-go-systems and problems of the capital markets affecting funded systems.

In pension policy, the acceptance of reform measures by the social partners, the different groups of the society and by the public is a crucial point. For us, it proved to be helpful that we could demonstrate that other European countries are dealing with the same problems, and that they have found or even experienced similar solutions. In the case of our 2001 German reform, good examples are the model of the British pension fund or the innovative northern European model of partly capital funded pensions. Both models have been modified and integrated into the German pension system.

Other states, like Italy and France, are currently making active use of the EU discussions for implementing their national reform projects.

3. Outlook - what lies ahead?

The Joint Report on Pensions of the Commission and the Council has been a positive pre-test for future exercise. 

But the most important element was still missing: member states have reported on common objectives, but they have not yet agreed on common indicators in the pensions field to measure whether and in how far there common goals have been achieved. 
 
3.1. The work on commonly agreed Indicators

Indicators are a most crucial point of the OMC. The Indicators Subgroup of the Social Protection Committee is working hard to finish its work, possibly until the end of this year. The general problem is to create indicators which are fair to the different systems. 

Two aspects appear to be the main problems: 
•	Firstly, the main indicator for the adequacy of pensions, the replacement rate, is something extremely difficult to measure and to compare. May I just remind you of the problem of data availability for the 2nd and 3rd pillar. Another problem is the evaluation: a high replacement rate is good from the point of view of adequacy, but it might be bad from the side of financial sustainability, where your system might be called too generous. 
•	Secondly, the available indicator for financial sustainability - the share of pension expenditure as percentage of GDP and its future development - is coming from the Economic Policy Committee. It has been designed to serve budgetary purposes. The so-called Borgaert-Report on “Budgetary challenges posed by ageing populations” from 2001 may me good enough for finance experts acquainted with the limitations of the data, which are widely not comparable or authoritative. But in the context of the OMC, the data need to be updated and improved elements saying something about the quality of the pension system. I hope this necessary cooperation is now underway in the AWG an the ISG.                

3.2. The future of the OMC and streamlining

The OMC in the pension field is still in a test-phase until 2006 according to the conclusions of the EC in March 2003. It has already shown that it is a valuable instrument of European pension policy co-operation. In 2006, the European Council will have to decide on the conditions under which it will be continued. But first we have to decide about the „streamlining“. Key issues will be:
•	the structure of the new National Strategy reports and 
•	the development of new or modified common objectives. 

To summarise, I think there is no alternative to continuing and improving the process of open co-ordination in the pension field. From our German experience, can see at least three very good reasons: 
•	We can learn a lot from one another, as we are dealing with the same problem of ageing societies;
•	Pension policy is too  complex to be dealt with on the European level exclusively in the context of economic policy co-ordination and sound public finance. At the end of the day, the “raison d’être” of any pension system are social policy objectives - therefore it would not be appropriate to reduce the discussion on the future of pension systems to the financial dimension, and thirdly
•	we all (not only the applicant countries) are waiting for clear answers to the simple Question: what will be the future of the European Social Model? We are just starting to find the answer.

Thank you very much for your attention.