Supplementary pension schemes and mobility in Europe: studies

23 January 2008
by eub2 -- last modified 24 January 2008

Supplementary pension schemes continue to pose obstacles to mobility for workers across Europe according to two new independent studies, presented by the European Commission on 22 January 2008. The Commission says the studies support the case for a Europe-wide initiative to improve people's access to supplementary pension rights when changing jobs or working in another EU country. The Commission's proposal for a directive on the issue – revised in October 2007 – forms part of the work programme for the Slovenian EU Presidency.

Why is the Commission publishing these two studies?

The Commission says the studies will support the efforts of the Slovenian Presidency, the European Parliament and the Commission to find agreement in 2008 on the Commission's amended proposal for a Directive, put forward in October 2007. The proposal aims to make a significant step towards reducing obstacles to mobility for workers in the EU without placing undue burdens on supplementary pension providers.

More information and improved data on supplementary pension provision is a priority for the Commission, as supplementary pension schemes are becoming more relevant to incomes in retirement across many Member States. Stakeholders with an interest in the progress of the draft Directive have also requested further specific information on the acquisition, preservation and transfer of supplementary pensions.

The first of the studies published on 22 January adds to the existing body of evidence highlighting the need for a reduction in obstacles to mobility found in supplementary pension schemes and for the first time gives a detailed analysis of common practise found in supplementary pension schemes in nine Member States.

The second complementary study analyses data from a 2005 Eurobarometer survey on worker mobility and provides a picture of existing and projected job mobility. This study adds to existing data on changing patterns of worker mobility across the EU and provides a backdrop to the likely impact of the draft Directive for facilitating worker mobility.

What does the analysis of the 2005 Eurobarometer tell us about worker mobility in Europe?

The study covers three main elements:

Average job tenure: On average, the European worker has been working for his current employer for the past 10 years. Important differences do however exist between countries, with the average tenure varying between 7 years in Latvia to 12 years in Belgium.

Breakdown of job tenure: The workforce of the entire European Union consists of 26% workers who have been with their current employer for a maximum two years, 12% three or four years, 22% from five to nine years and finally 40% who have been working with their current employer for more than 10 years.

Future predicted job mobility: The graph below shows that 41% of all European workers expect to change employer during the next five years. 10% gives at least one forced reason for it and 26% at least one voluntary reason.

Given the levels of current and expected mobility, these results suggest that access to and preservation of supplementary pension rights is tremendously important to a large proportion of the EU labour force. With nearly 40% of employees having worked in their current job for less than five years, conditions relating to how quickly workers can gain access to pension rights are of the utmost importance to worker's decisions about whether to be mobile or not.

What are the different types of pension schemes used in Europe?

One of the key challenges of legislating on supplementary pension schemes at both a national and trans-national level is the sheer diversity of supplementary pension provision under different legislative regimes. Supplementary pension schemes within and across Member States often vary considerably, so when looking at the key issues of acquisition and preservation of supplementary pension rights it is important to consider the impacts on different types of provision.

The first study therefore uses the common and general descriptions of the most prevalent types of pension provision, and how they impose rules with regards to acquisition, preservation and the transfer of pension rights.

These can be summarised as:

Defined Benefit schemes (DB) – in these types of systems an employer or pension provider makes a specific commitment to the pension benefits an individual will receive at the time of their retirement. These benefits are usually calculated on the basis of how many years of contributions an individual make, and are often tied to an individual's salary. In this type of arrangement the employer or the pension provider take most or all of the risks associated with pension provision, such as increased longevity or stock market fluctuations

Defined Contribution (DC) – in these types of systems the pension benefits an individual receives at the point of retirement are directly dependent on the amount of pension contributions an employee and their employer make to their pension fund during their working career. In this type of arrangement the employee takes most or all of the risks associated with pension provision

Hybrid schemes are a mixture of the two types of provision described above and the risks of the pension are usually shared between the employer and employee.

The study shows – perhaps unsurprisingly - that DB and Hybrid schemes where employers are bearing most of the risks associated with pension provision tend to be more restrictive when it comes to the access to supplementary pension provision, and are less likely to have provisions to preserve pension benefits once a worker has moved jobs.

Are there differences between Member States in the prevalence of types of schemes?

The chart below shows on average DB schemes are the most prevalent type of provision within the pension schemes surveyed. However, there are wide variations between different Member States, for example nearly 60% of the schemes surveyed in the Germany could be described as having features consistent with defined benefit provision, whereas for Poland the figure is only 10%.

What are vesting conditions?

Vesting conditions are the conditions imposed by some supplementary pension schemes to limit access to the supplementary pension benefits in some manner to reduce administration costs, promote loyalty etc.

The draft Directive aims to ensure minimum standards across the EU for both the maximum age which a scheme can impose before an individuals contributions to the scheme are considered to have 'vested' (i.e. crystallised into pension rights) and the maximum period of time that an individual who has joined a pension scheme has to wait before any contributions become pension rights. The Commission's amended proposal suggested that the maximum age should be 21 and the length of time to wait should be no more than one year.

Long vesting periods, and high vesting ages are clear obstacles to an individual's mobility choices. Leaving one job before fulfilling any imposed vesting conditions would result in the loss of potentially significant pension rights.

The first study shows the prevalence of vesting conditions by type of provision – and the country analysis shows the different practises in the Member States surveyed:

Minimum age:

A very large proportion of schemes do not impose any minimum age on joining the scheme (84% of DC schemes, 58% of Hybrid and 48% of DB schemes). In 25% of DB and 17% of hybrid schemes it is set at 21 years or below. Only in 12% of DB and 4% of Hybrid schemes, the age is set at 26 or above.

Vesting periods: The majority of DC schemes and a large part of DB and Hybrid schemes do not impose any vesting period although there are still 32% of DB schemes requiring two or more years between joining scheme and acquiring vested pension rights. When asked about other vesting conditions, age is applicable only in 27% of DB scheme, 13% of DC and 24% of hybrid schemes, while employer discretion is even less frequent.

The differences between different Member States are however quite marked.

What are the next steps for the Commission's revised proposal?

The Commission intends to work closely with the Slovenian Presidency and the EU institutions over the coming months to reach an agreement on a Directive that takes a meaningful step to reducing obstacles to mobility within supplementary pension schemes.

There has been considerable debate over the last year and the Commission remains positive that the few remaining issues that require consensus can be resolved in 2008.

Background to the draft Directive

Source: European Commission