SOS your pension! – The facts: EU pension scheme for dummies

If you thought you were already shipwrecked by the 2004 and 2014 staff reforms as regards your career perspectives as well as your salary, you ain’t seen nothing yet. Wait until you are old and frail and want to draw on your well-deserved pension. That’s when the real trouble starts. In this article, Generation 2004 takes a closer look at the EU pension scheme. Can we avoid the many icebergs that lurk around our pension scheme? In particular, what are the chances that EU Member States (MS) pay the €40 billion pension liability accumulated since 1958? Can we prepare a lifeboat in case the scheme were to founder?

The facts: EU pension scheme for dummies

Our pension scheme is a “notional” pension fund; meaning that MS collectively guarantee that our pensions will be paid but they do not set aside any money for that purpose. In that sense, “notional” actually means “virtual”.

  • Currently, the EU pension scheme has a €40.4 billion liability as of 2013 (see here).
  • 90% of this liability is owed to pre-2004 staff; in 2011, EUR 3.8 billion were due to rights acquired by staff recruited after 2004, while the rest was due to staff recruited between 1958 and 2004 (see here).
  • Interestingly, MS jointly guarantee the payment of pension benefits, which means that the newer (post-2004) MS have to guarantee a liability that was mostly accumulated before their accession to the EU. Moreover, because the GDP of several new MS grows much faster than the GDP of most old MS, the magnitude of their guarantee proportionally grows over time.
  • While the liability is still growing, the Commission has (hitherto) not only refused to estimate the maximum value that this liability will reach but it is even behaving recklessly by granting lots of unnecessary and costly promotions to AD12/AD13 through the artificial creation of senior expert posts (see here) … which will further increase the total liability of the pension scheme.
  • Pensions are the part of the EU official package that has been most severely cut by the 2004 reform; -30% overall, both because of direct reductions to the pension package and because of delayed career progressions (see here). The cut applied to pension rights in 2004 was thus worse than the cut applied to salaries.
  • In 2009, the Council introduced new rules for “transfers-in” of pension rights accumulated in MS before joining the EU Institutions. The new rules are much less favourable than the previous ones, and making such a “transfer-in” an unattractive option for many of us.
  • New and very significant cuts are in place since 2014, namely the reduction of the accrual rate of pension rights from 1.9% to 1.8% (pre-2004 staff get a 2% accrual rate) and the postponement of retirement until the age of 66.
  • The contributions to the pension scheme are not proportional to the benefits. Everyone contributes the same percentage of one’s salary (10.1% since 1 July 2014 – it is this contribution rate that was recently modified by the Council) no matter whether one benefits from a 2% per year accrual rate or a 1.8% per year accrual rate, or whether one will be able to retire at the age of 60 or at the age of 66.
  • On average, staff contribute 1/3 to the balance of the pension scheme and MS contribute the other 2/3 (at least theoretically since as mentioned above, the fund is virtual and no money is saved in practice). Those who enjoy the best conditions (pre-2004) actually contribute less than 1/3 to this theoretical balance. Those who enjoy the worst conditions (young post-2004 and post-2014) actually contribute more than 1/3 to this theoretical balance.
  • The average pension is already more costly than the salary of most post-2004 officials and certainly more costly than the salary of any contract agent: 70,000€/year on average (based on evidence provided in the 2010 Eurostat study on the long-term budgetary implications of pension costs, see link in footnote 3).
  • Indeed, current pensioners have reached high salary levels before retiring and most collect full pension rights (70% of last salary) through favourable transfers-in of pension rights accumulated in their MS before joining the EU institutions, high accrual rates (2% per year) and the so-called Barcelona incentives which give a perk to those who stay in service after the normal pension age (after 60 years under the pre-2004 Staff Regulations).
  • The new “method” for yearly salary adjustments introduced in the 2014 reform also applies to pensions. However, pensioners have escaped from the 6% solidarity levy, despite the fact that the solidarity levy is supposed to be the direct counterpart of the “method”!

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