Bilateral Seminar
Promoting Adequate and Sustainable Pensions through the Open Method of Co-ordination
Tallinn, 12 November 2003

Presentation by the European Commission

…, Ladies and Gentlemen,
I am very pleased to take part in this bilateral seminar that brings together the Commission and national policy makers responsible for pension issues in Estonia. It is part of a series of seminars that we are holding with all acceding countries. The aim of these seminars is to provide an opportunity for discussing with you the scope and purpose of the open method of co-ordination on pensions. We hope that today's seminar will pave the way for a full involvement of Estonia in that process. 
In most of the present Member States, for example in Germany, Italy, Spain, France, pension reform is high on the agenda because of profound changes in the demographic structure, but also on the labour market. Even though demographic situations are somewhat different, pension reform is also high on the agenda of the acceding countries, for example in Poland, Czech Republic or Slovakia. 
All present and future Member States are indeed faced with economic and social challenges, which  would be better addressed if we co-ordinate our efforts. This was the main conclusion of successive European Councils, especially the Lisbon Council, which set the course for a global strategy encompassing the macroeconomic, the employment and social protection dimension.

Recently, The European Council in Brussels on 16/17 October highlighted again the need to strengthen the existing co-ordination processes on the policies adopted by Member States in the field of social protection. 

But let me turn back to the original starting point which was the Lisbon European Council in March 2000:

In order to achieve the ambitious  goal set by the Lisbon Council, we need determined policy efforts in the Member States. These are coordinated at EU level through the Broad Economic Policy Guidelines, the European Employment Strategy and through a new tool that is targeted notably at social cohesion, namely the Open Method of Coordination. It is inspired by the two successful treaty-based co-ordinating instruments, the Broad Economic Policy Guidelines and the European Employment Strategy.
In this presentation, I wish to highlight some important aspects of the Open Method of Coordination in the field of pensions. I intend to introduce successively first, the rationale of the Open Method of Coordination as a political commitment to a jointly monitored process; second the integrated approach underpinning that process; thirdly I will describe the three strands of objectives at the heart of the Open Method of Coordination; finally I shall turn to the next steps to which Estonia is invited.

1. The rationale of the Open Method of Coordination
The Open Method of Co-ordination follows a similar approach as the existing treaty-based policy co-ordination tools. It preserves the rights of Member States to design their pension systems and reforms as they wish. The Open Method of Coordination comprises several steps:
•	First we agree on common objectives or guidelines for national policy makers.
•	These are accompanied by appropriate indicators that allow us to monitor progress and to identify examples of good practice.
•	The common objectives are translated into national action plans.
•	The policy measures and outcomes at national level are periodically monitored so as to facilitate mutual learning and to encourage further action where this is required.
In December 2001, the European Council endorsed 11 common objectives for the application of the Open Method of Co-ordination in the area of pensions. The fact that there was agreement on these objectives shows that, regardless of the huge variety of pension systems, fundamental goals in this area are shared, which gives real meaning to the idea of the 'European Social Model'. 
On the basis of the common objectives, Member States submitted national strategy reports in September last year. These were then analysed in a joint report adopted by the Commission and the Council and presented to the Spring European Council in March this year.

2. The Open Method of Coordination in the area of pensions promotes an integrated approach
It considers all relevant issues for pension systems at the same time. What does this integration mean?

Integration of social and economic objectives
On the one hand, the Open Method of Co-ordination looks at the social objectives of pension systems, namely to provide adequate pensions. But it would be short-sighted to look at adequacy in isolation: what use are generous pension promises if there is no money to pay for them? On the other hand, neglecting the adequacy of pensions could lead , at some point in the future, to strong political pressures to increase public spending on pensions. This may turn a financially sustainable pension system into an unsustainable one. 
In the Open Method of Co-ordination, we therefore look at ways of achieving financial sustainability of pension schemes that allow Member States to preserve adequacy. This work must be complementary to, and consistent with, the examination of pension related issues in the framework of economic policy co-ordination through the Broad Economic Policy Guidelines. We also look at the financial sustainability of public pensions in the broader context of the overall sustainability of public finances as required by the Stability and Growth Pact. 
Integration of different policies
An integrated approach is also necessary because the challenge of securing sustainable pensions is broader than the overall design and parameters of pension systems. By looking at the interactions between social protection, employment and budgetary policies, we can break out of a debate on the future of pension systems that simply pitches the interests of one generation against those of another: the active against the retired, the young against the old. And it helps avoid the false idea that the future of adequate pension provision only depends on the choice between financing pensions on a pay-as-you-go or on a funded basis. 
Integration of actors
An integrated approach is also needed because the design and operation of the pension system is not the sole responsibility of governments. The development of sound second and third pillars requires the input of social partners and of the insurance and financial services industries. The social partners can also contribute to achieving common objectives in other ways – for example by facilitating the labour market participation of older workers. We consider it highly desirable that the expertise of social partners and of different types of pension providers be used in the elaboration of national strategy reports – but it is for each Member State to define the best way to mobilise all relevant stakeholders.

3. Three strands of objectives
I would now like to comment briefly on each of the three broad areas covered by our common objectives: Adequacy, financial sustainability and modernisation. 

First, the issue of adequacy
There are three objectives under this heading. 
The first objective refers to the need to prevent poverty and social exclusion among the elderly. They should share in the economic well-being of their country and be able to take an active part in public, social and cultural life. 
The second objective concerns the possibility of maintaining one’s living standard after retirement. Most of the current 15 Member States consider that this is, up to a certain earnings level, a task of their public pension schemes, or their first pillar. However, some other Member States leave it, to a large extent, to the social partners who establish occupational, or second-pillar schemes.

The last objective under the heading ‘adequacy’ invites Member States to promote solidarity both within and between generations. This requires that we look at the economic and social situation of older people compared to people of working age and thus at the way in which resources are shared between the active and the retired. But it also implies looking at the way in which the resources of pension systems are shared among older people – or the distribution impact of pension policies.

Financial sustainability
The next group of five objectives concerns the financial sustainability of pension systems. The objectives refer to different and mutually reinforcing ways of securing the future affordability of adequate pension provision. 
The first objective with regard to financial sustainability is to achieve a high level of employment. Demographic ageing causes a financial challenge to pension systems because it results in a less favourable balance between people in employment and people in retirement. We have considerable scope for raising employment levels in the EU and thereby sharing the cost of providing for the elderly more widely.
We are particularly interested in raising the employment rates of older workers – and this is reflected in the second of the financial sustainability objectives. Prolonging average working lives has a strong impact on the financial sustainability of pension systems. Employment incentives in pension and other benefit systems should therefore be strengthened and  pension systems should no longer be used to patch up labour market problems.
The Lisbon European Council set precise targets for employment rates to be reached by the EU as a whole by the year 2010. The overall employment rate should rise to 70%, the employment rate for women to 60% and the rate for people aged between 55 and 64 to 50%. And, finally, the average age at which people withdraw from the labour market should be raised by 5 years by 2010. 
Another common objective concerns the link between pension systems and public finances in general. Clearly, unsustainable public pension schemes are a threat to sound public finances. The objective therefore calls for reforming pension systems with the aim of maintaining the sustainability of public finances. Conversely, sound public finances allowing the reduction of public debt or the creation of dedicated pension reserve funds provide a way for making room for manoeuvre in the preparation for the increased age-related public expenditure.
The fourth financial sustainability objective refers to the need to strike a fair balance, in terms of financial burdens and pension benefits, between the active and the retired populations. Adjustments to the levels of benefits and contributions or taxes will determine how the burden of demographic ageing is shared between the active and the retired.
The last objective under the heading ‘financial sustainability’ concerns funded pension schemes. They are expected to play an increased role in providing incomes for pensioners across the EU and in many acceding countries. This objective calls for a review of the management and regulatory framework for such pension provision to ensure efficiency, affordability and security against financial market risks.

The modernisation of pension systems
The last group of three objectives concerns the modernisation of pension systems in response to the changing needs of the economy, society and individuals. 
The first objective calls for pension systems to be adapted to the requirements of modern labour markets characterised by increased flexibility and mobility. We have to ensure that part-timers, people in temporary employment, the self-employed and people who change jobs can obtain adequate pension coverage.
The second modernisation objective calls for pension systems to be examined from the gender perspective. It calls for equal treatment between women and men, and it is important to monitor whether pension systems offer adequate protection to older women. 
The final objective calls for greater transparency and adaptability of pension systems – a precondition for maintaining confidence in them. A well-informed public debate and the development of a broad consensus on reforms require reliable information on the long-term perspectives of pension systems. Moreover, individuals should have a clear idea about their own pension prospects so as to enable them to make any additional provision for retirement that they may consider necessary.

4. Involving Estonia in the next steps of the Open Method of Coordination
How is this work going to continue?
End of January 2004, the last bilateral seminar will take place. A preliminary overview of the outcome of the bilateral seminars will be presented on 18 December 2003 when Commissioner Diamantopoulou meets the Ministers of Social Affairs.
A new, full assessment of progress with regard to pensions in all the current and new Member States will only be carried out in time for the 2006 Spring European Council. This will be done on the basis of new strategy reports from all current and new Member States, which should be presented by the middle of 2005 and which should also be backed up by new expenditure projections.
However, the European Council of March this year also asked us to maintain the momentum for co-operation by delivering special studies focusing on common challenges for pension systems and to continue the work on indicators covering the adequacy, financial sustainability and the modernisation of pension systems. The Social Protection Committee and the Economic Policy Committee will be actively involved in this over the coming months.
The first topic to be studied by the Social Protection Committee will be the interaction between social protection schemes and the labour force participation of older workers. This is of course particularly important in view of our target of raising the effective age of retirement by five years. The work of the Indicators Subgroup on current and prospective replacement ratios could also be presented as special study. On both of these topics we should be able to present some results to the next Spring European Council.
The acceding countries are now taking part in the work of the Social Protection Committee, the Economic Policy Committee and their sub-groups. I hope that they will not just be passive observers, but active participants and contributors to the special studies I just mentioned. This will ensure a smooth integration of the new Member States into the Open Method of Co-ordination.
But conversely what could Estonia and the actors of the pension reform process expect from their participation in the Open Method of Coordination? 
Participating in the Open Method of Coordination will offer a permanent opportunity of learning from others. I am convinced that our colleague Rainer Fuchs from the German Federal Ministry of Health and Social Security who is a member of the Social Protection Committee will agree. 
I would also like to insist on the transparency and confidence-building dimensions of the Open Method of Coordination. Making one's pension systems and reforms transparent to other Member States should also help governments to explain their choices to their own citizens and to justify those choices in the light of the experience made in other countries. This should be the basis for strengthening confidence in the future of our pension systems. They are built on trust and our task is to ensure that they can deliver adequate incomes for older people well into the future..