EMPL

Committee on Employment and Social Affairs (EMPL)

Table Of Contents

1. Committee on Employment and Social Affairs (EMPL)
2. Introduction 
3. Key Terms
4. Fundamental challenges
5. Key Stakeholders and Measures in Place
6. Outlook

This committee is supported by Insurance Europe, the European insurance and reinsurance federation

Introduction 

The right to pension funding for old age is enshrined in several key European declarations of rights. In particular, the 15. Principle of the European Pillar of Social Rights declares that “everyone in old age has the right to resources that ensure living in dignity”. Social rights, such as the right to pension funding, are key components of a positively peaceful society. “Positive peace” can be defined as the network of “attitudes, institutions and structures” that help a society “preempt violent conflict and destructive behaviors and attitudes” by redressing “unjust structural social, political, cultural, and economic factors that sustain and reproduce a culture of violence” and fostering “just, equitable, caring, humane, and collaborative relationships with others”.¹

However, today’s European pension systems are widely regarded as unsustainable. Their unsustainability stems in particular from two so-called “megatrends”: the demographic shift determined by the combined effect of numerical decline and ageing of the European population² and the evolution of employment, especially related to the rise of non-standard forms of work.³

The demographic shift in particular risks undermining the capacity of EU Member States’ public pension schemes to provide young people with sufficient resources for their old age. Indeed, despite efforts to diversify their makeup, an substantial part of each Member State’s public pension system is based on a so-called “pay-as-you-go” scheme, which means that current working people’s contributions are used to pay current pensioners’ pension benefits.⁴ That is why such a system has been defined as an “intergenerational contract”.⁵ However, the number of working-age people compared to the number of pensioners keeps decreasing.⁶ As a result, our societies run the risk of a “double burden on future workers: higher contribution rates when they work and lower pensions when they retire”.⁷ 

Thus, pension systems’ unsustainability risks undermining the delicate equilibrium of the “intergenerational contract” our old-age support systems are based on, rendering them intergenerationally unfair. Hence, maintaining a positive peace in our societies requires swift action on many fronts, in order to address and preempt social conflicts. Creating this social peace  will be the focus of the EMPL Committee at The Hague 2025!

Key Terms

Defined-benefit (DB) systems vs defined-contribution (DC) systems⁸

In DB schemes, pension benefits are linked to the level of earnings during working-age, thus the future pension benefit is pre-defined – or “promised” to the individual. Hence, it is the pension provider – public or private – that bears the investment risk.

In DC schemes, it is the level of contributions that a person pays into the pension system during their working life, and not the final benefit, that is pre-defined: thus, “no final pension promise is made” and the investment risk is shifted on the individual.

In Europe, a progressive shift from DB to DC schemes is being observed in both statutory as well as the supplementary pension schemes.⁹

Statutory pension schemes: public pension schemes that are set up and managed by the State. They can be financed by contributions into the social security state budget as well as by taxes paid into the general government budget.

Supplementary pension funds

Occupational pension funds: collective schemes established by employers or employers’ associations, almost always together with trade unions on the basis of a collective agreement, at company or industry sector level. They are usually financed jointly by employer and employee with contributions;

Personal pension funds: individual schemes through which a person can accumulate capital during their working life, that is then used to integrate their old-age funding;

Non-standard forms of work: employment relationships that do not meet all the conditions of (1) being open-ended (permanent employment contracts), (2) being full-time, and (3) granting a direct relationship between employer and employee.¹⁰ Examples are temporary work, part-time work or traineeship work.

Fundamental challenges

Employment-related challenges

The second “megatrend” impacting the sustainability of pension systems is the rise of non-standard employment. Young people are much more likely to work in such arrangements: in 2017, 44% of people in temporary contracts were aged 15 to 29 years, up from below a third in 1995; at the same time, in the 12 countries that were EU Member States in 1987, the share of young people in part-time employment spiked from 13% in 1987 to 37% in 2017.¹¹ This trend represents a worrying threat for young people’s future pensions, as non-standard forms of work are greatly obstructed in their capacity to grant access to adequate social protection.

Indeed, people in non-standard forms of work are often excluded from public and occupational pension schemes¹², as such schemes are frequently tailored to the standard permanent full-time employee, for instance by requesting that workers contribute for a minimum amount of time ¹³–  harder to achieve with non-standard working arrangements. Moreover, workers in non-standard employment often have to switch among different employers, which brings about not only several breaks in the accrual of pension rights, but also small occupational pension pots dispersed across different providers, among which transfer is not always possible. This results in higher administrative costs, limiting the fund’s growth potential, and therefore in lower pension payments in old-age. Another risk is that workers switching jobs cash in on non-transferable pension pots and use them for other purposes than pension schemes, damaging their old-age financial security for short-term financial benefits.¹⁴

Such considerations are all the more valid for people undertaking traineeships or internships: as of today, trainees’ access to social protection is “denied or limited in several Member States”.¹⁵ That is why some call for traineeships and internships to be counted in working time calculations and integrated in pension schemes.¹⁶ At the same time, the diffusion of unpaid or underpaid traineeships – as of 2023, only approximately half of the respondents to a Eurobarometer survey reported receiving a financial compensation¹⁷ – lowers young people’s chances to build up their supplementary pensions by contributing to pension schemes other than the public ones.

Promoting supplementary pension schemes as a complement to public ones

Confronted with a decreasing¹⁸ pension benefit ratio, many argue in favour of promoting the development of supplementary pension schemes in order to complement public ones.

Occupational pension funds are deemed to be particularly important, as they are thought to benefit from their collective and not-for-profit nature and the involvement of social partners in order to share financial risks between pension scheme members and scale up, leading to lower administrative costs for their members.¹⁹ However, they face several challenges. On the one hand, their diffusion in Europe is still strongly regionally imbalanced, peaking in Nordic and Western Member States, while being “low to non-existent”²⁰ in Southern and Eastern Member States. On the other hand, experts have been sounding the alarm at a worsening ecosystem for high-quality collective bargaining on pensions. This is due to the combined trend of falling proportion of workplaces covered by collective agreements, falling unionisation rates (especially for young people) and falling contributions by employers into occupational pension funds.²¹ 

Collective bargaining on pensions is also hampered by the fact that recent reforms in several Member States have decentralised it from national or sectoral multi-employer negotiations to negotiation in individual workplaces – especially considering that 70% of the European workforce is employed in small and medium-sized enterprises²², in which it is much harder to set up occupational pension funds²³, since a bigger fund can normally achieve higher investment returns, and therefore a better financial standing for the fund and its contributors.

Personal pension funds, on the other hand, face different problems. Firstly, their nature of commercial products has led to documented bias by financial operators when advising potential consumers on product selection, leading experts to claim that “it can be a  challenge for consumers to obtain advice in their best interest”.²⁴ Secondly, their diffusion in Europe is not only geographically uneven, but also relatively low.²⁵ Finally, the high fragmentation of national regulations, combined with their low diffusion, hinders the development of economies of scale, leading to higher administrative costs burdening consumers, but also limited portability of personal pension funds for people who have worked in different countries.²⁶

Promoting sustainability of public pension schemes and intergenerational fairness

Supplementary pension schemes are deemed to have to complement, and not substitute, the public system. In fact, when some countries partially converted their statutory pension systems into individual funded schemes, this resulted in a lower pension benefit ratio.²⁷ That is why efforts to raise pension contributions and expand supplementary pension coverage have to go hand in hand with action on ensuring the overall sustainability of the public pension system. 

On the one hand, some argue in favour of drafting legal rules that promote the intergenerational fairness of pension systems. For instance, one recent idea, among many others, concerns enshrining the so-called “Musgrave rule” in public and occupational pension systems. This method would be an automatic adaptation of pension benefits to the effects of economic and social shocks of both current working people’s contributions as well as current retirees’ benefits. In practice, this would mean keeping the average wage-to-pension ratio equal across generations.²⁸ 

Furthermore, some argue in favour of raising the retirement age or even introducing an automatic adjustment of the retirement age to increased life expectancy.²⁹ However, in some countries such reforms have encountered deep popular discontent and political opposition, with two of the most prominent examples being the French popular mass demonstrations against the reform raising the retirement age to 64 years, and the Slovak Parliament in 2019 going as far as embedding into the Slovak Constitution a cap at 64 years for the retirement age.

On the other hand, pension system reform must not come at the expense of the adequacy of pensions provided to current and future pensioners. As of today, public pension systems are financed by working people’s contributions. When contributions are insufficient – for instance, in the case of people who have not got the chance to accumulate enough contributions during their working life – the government’s general budget has to finance the gap through tax revenue. Now, with the total welfare state old-age-related costs expected to significantly rise³⁰, and a numerical decrease in workforce, some experts argue in favour of identifying new sources of financing the government³¹, with some proposing an increase in corporate taxes, adopting financial transaction taxes, or wealth taxes ³²– even if some others oppose this approach.³³

Key Stakeholders and Measures in Place

The EU and its Member States

Pension systems are first and foremost a national competence. That means that big pension reforms can only be driven by Member States. Indeed, over the past 30 years they have engaged in intense reform activity, which has been deeply analysed and compared.³⁴ 

The EU instead has limited power, but it can legislate on specific elements of pension systems:

• for instance, it can legislate on Member States’ public and supplementary pension schemes’ coordination, to try and make sure that people moving within the EU do not lose access to pension rights. For instance, Directive 2014/50/EU sets minimum standards for the protection of mobile workers’ supplementary pension rights. However, it does not guarantee their transferability to a new scheme in case they find work in another country³⁵;
• it can also set minimum standards for supplementary pension schemes in order to protect workers and consumers from fraud or unfair conditions. Examples are the Directive on Institutions for Occupational Retirement Provision and the Regulation establishing a voluntary Pan-European Personal Pension Product.

Furthermore, the EU can legislate on employment issues. A relevant EU initiative in this area is the proposed ‘Traineeships Directive’, aiming to “improve and enforce working conditions of trainees and combat regular employment relationships disguised as traineeships”. Such an initiative is particularly relevant for young people’s capacity to start accruing pension rights as soon as possible. However, the concrete proposal, much awaited by youth representation bodies, has been welcomed with mixed feelings, as it falls short of a ban on unpaid traineeships.³⁶

Within the EU, relevant actors are also some EU decentralised agencies:

• the European Insurance and Occupational Pension Authority (EIOPA) advises EU institutions and supervises financial pension institutions and occupational funds;
• the European Labour Authority (ELA) focuses on enforcing EU legislation on labour mobility and social security coordination.

Social partners and civil society organisations

Considering the relevance of occupational pension funds, and the fact that “medium to high supplementary pension coverage is mostly found in countries characterised by an active role of social partners and collective bargaining”³⁷, social partners are a fundamental actor. They engage on the one hand with public authorities to provide their views on policy making, and on the other hand with one another in collective bargaining.

Trade unions and employers organise according to geographical and sectoral criteria. The most prominent levels are the national cross-sector level (unions that represent all workers in a country) and the national sectoral level (e.g. unions that represent all services workers). At cross-sector European level, workers are represented by the European Trade Union Confederation (ETUC) and employers by BusinessEurope. Furthermore, European social partners too organise at sectoral level: for instance, UNI Europa is the trade union for Europe’s services sector. Among such actors, particularly relevant on the employer side are the ones that gather pension funds institutions, such as Insurance Europe and Pensions Europe.

Finally, a further important stakeholder representative is the European Youth Forum (EYF), which interacts with EU institutions on behalf of the EU’s youth. The EYF has been particularly vocal on the issue of young people’s social rights, for instance on the topic of traineeship regulation.

Engaging all of these actors is crucial in order to develop concrete pension policies that can take into account the interest of all of the stakeholders.

FOOTNOTES

1. Yulia Nesterova, Eun-Ji Amy Kim (2024). Peace as Social Cohesion, Equity, and Democracy: Local Peacebuilders’ Conceptualizations of Peace. Peace Review, 36(3), 531–544. Link ↩︎
2. European Commission (2023). The Impact of Demographic  Change in a changing  environment. Link ↩︎
3. Burkhard Heer, Vito Polito, Mike Wickens (2023). Pension Systems (Un)sustainability and Fiscal Constraints: A Comparative Analysis. CESifo Working Paper No. 10487. Link
   ↩︎
4. Marketa Pape (2023). Understanding EU action on pensions. European Parliamentary Research Service of the European Parliament. Link ↩︎
5. Andreas Wagener (1997). Pay-as-you-go Pension Systems as Incomplete Social Contracts. Universität Siegen. Link ↩︎
6. Eurostat (2021). Old-age dependency ratio increases across EU regions. Link ↩︎
7. Economic Policy Committee and Social Protection Committee (2020). Joint Paper on Pensions 2019. Link ↩︎
8. European Commission, Social Protection Committee (2024). 2024 Pension adequacy report. Link ↩︎
9. High-level Group of Experts on Pensions (2019). Final Report of the High-level Group of Experts on Pensions. European Commission. Link ↩︎
10. International Labour Organisation (2017). The rising tide of non-standard employment. Link ↩︎
11. Arthur Corazza (2019). Of Carts and Horses: Youth in non-standard Employment. London School of Economics, European Student Think Tank – Working Group on Employment. Link ↩︎
12. OECD (2019). Pensions at a Glance 2019 – OECD and G20 Indicators. Link; High-Level Group on the future of social protection and of the welfare state in the EU (2023). The future of social  protection and of the  welfare state in the EU. European Commission. Link; Economic Policy Committee and Social Protection Committee (2020). See note n. 8 ↩︎
13. Economic Policy Committee and Social Protection Committee (2020). See note n. 8 ↩︎
14. High-level Group of Experts on Pensions (2019). See note n. 10 ↩︎
15. High-Level Group on the future of social protection and of the welfare state in the EU (2023). See note n. 14 ↩︎
16. European Youth Forum (2016). Social Inclusion and Young People. Link ↩︎
17. European Commission (2023). Integration of young people into the labour market with particular focus on traineeships. Eurobarometer Survey. Link ↩︎
18. European Commission (2024). 2024 Ageing Report. Link ↩︎
19. High-level Group of Experts on Pensions (2019). See note n. 10 ↩︎
20. See previous note ↩︎
21. See previous note ↩︎
22. European Investment Bank (2018). Small businesses: the backbone of the EU economy. Link ↩︎
23. High-level Group of Experts on Pensions (2019). See note n. 10 ↩︎
24. See previous note ↩︎
25. Economic Policy Committee and Social Protection Committee (2020). See note n. 8 ↩︎
26. High-level Group of Experts on Pensions (2019). See note n. 10 ↩︎
27.  Economic Policy Committee and Social Protection Committee (2020). See note n. 8 ↩︎
28. Pia Hüttl, Karen Wilson, Guntram Wolff (2015). The growing intergenerational divide in Europe. Bruegel Policy Contribution. Link ↩︎
29. Economic Policy Committee and Social Protection Committee (2020). See note n. 8 ↩︎
30. European Commission (2024). See note 20. ↩︎
31. Economic Policy Committee and Social Protection Committee (2020). See note n. 8 ↩︎
32. High-Level Group on the future of social protection and of the welfare state in the EU (2023). See note n. 14 ↩︎
33. Burkhard Heer, Vito Polito, Mike Wickens (2023). See note n. 3 ↩︎
34. For instance, see Chapter Two in Giulia Giupponi, Arthur Seibold (edited by) (2024). Rethinking Pension Reform. CEPR Press. Link ↩︎
35. Marketa Pape (2023). See note n. 4 ↩︎
36. European Youth Forum (2024). Two steps forward, one step back. Link ↩︎
37. High-level Group of Experts on Pensions (2019). See note n. 10 ↩︎