“Trade union contribution to pension system reforms in the Western Balkan countries”

The Regional Tripartite Conference under the title “Contribution of Trade Unions in the Pension System Reforms in the Western Balkan Countries” was held on 13 – 14 December 2011 in Zagreb- Croatia. The Conference marked the end of the 3-year project implemented in Bosnia and Herzegovina, Montenegro, Croatia, Macedonia, and Serbia with the support of the Kingdom of Norway, and together with the Norwegian trade union LO Norway, Pan European Regional Council of the International Trade Union Confederation, and the legal and economic experts from the SEE trade unions.

The Conference was organized by the Pan European Regional Council in coordination with International Organization of Employers and the Center for Employers of the Adriatic Region.

The representatives of the Ministries of labor and social policy from the Western Balkan countries participated in the Conference, and they along with the employers and trade union representatives from all the Western Balkan countries, including Albania and Kosovo, presented their positions and participated in the debate.

At the beginning of the Conference, H.E. Henrik Ofstad, Ambassador of the Kingdom of Norway to the Republic of Croatia, Grigor Gradev, Executive Secretary of the Pan European Regional Council and Eric Oechslin, Senior Advisor of the International Organization of Employers, and Marija Hanževački, SEE TU Forum Chair welcomed the participants.

During the morning Conference session, chaired by Marija Hanževački, the participants had an opportunity learn more about the new pension system in Norway, which was presented by Eystein Gjelsvik, Advisor in LO Norway. Following this presentation, Martin Hutsebaut, European advisor to the Project, reported briefly about the activities conducted at the regional and the national levels, and analytically compared the pension systems in this region and EU.

The afternoon Conference session, chaired by Lidija Horvatić – Croatian Association of Employers, was mainly marked with discussions of the participants – representatives of governments, employers, and trade unions from Albania, Bosnia and Herzegovina, Montenegro, Croatia, Macedonia and Serbia.

During the second day of the Conference, chaired by Eystein Gjelsvik, Martin Hutsebaut presented the main conclusions of the project and possible actions in order to make the pension systems sustainable, adequate and modern. This presentation was followed by an animated and fruitful discussion between the representatives of governments, employers and trade unions.

Almost all representatives of the social partners recognized the following characteristic of the actual pension systems in Western Balkan countries and results of the reforms done so far:

• The systems of pension and disability insurance in the West Balkan countries have for years been in crisis, primarily reflected in problems of financial sustainability and securing of adequate level of pensions.

• Unfavorable changes in labor markets in these countries (low employment rate, high unemployment rate), widespread informal economy, extremely low financial discipline and other factors, negatively influenced the systems of pension and disability insurance in the countries of this part of Europe.

• As for the functioning of the 1st, dominant, pillar of pension and disability insurance in the West Balkan countries, based on pay-as-you-go system, the ratio between the number of employed and pensioners in crucial. However, this ratio is extremely unfavorable, in some countries the number of employees and the number of pensions is almost at the same level.

• To overcome the problems of the pension and disability insurance systems in these countries, the coordinated activities are needed, by all the social actors, that is Governments, employers, and trade unions. At the same time, trade union organizations, as relevant representatives of workers, as the future beneficiaries of the rights arising from the pension and disability insurance, are particularly interested for the comprehensive and efficient reforms of this system. In addition to the trade union activities in each of these countries, joint regional actions are particularly important, one of which is the implementation of the actions proposed by this Project.

Main conclusions and possible actions:

The description of the old-age pension systems in the Balkan countries and their comparison with the systems in major EU countries allows us to say that much needs to be done in order to make the systems sustainable, adequate and up-to-date. Action will be needed, not only in the field of pension policy itself, but also in the area of economic and employment policy, taxation and training.

Sustainability of the old-age pension systems

If we look at the economic support ratios in the different Balkan countries, it is clear that they are too low to support a solid pension system. The major causes of these low support ratios are the high unemployment rate and the volume of the informal economy. What makes things worse are widespread contribution fraud (withholding social contributions by employers) and declaring only part of the real income instead of the total salary. As a consequence, state budgets have to contribute more and more to the financing of pensions. Given the increasing costs of ageing and the critical situation in the labour markets, it can be expected that the share of state subsidies will further increase.

Urgent action is needed to strengthen the financial base (income) of the pension systems. Besides the country-specific measures described in the national reports, we can think of:

-  Dynamic economic and investment policies oriented towards more economic growth and demand for labour;
-  Active employment policies targeted towards the mobilisation and activation of the huge labour potential available on the labour markets;
-  Preventive and curative measures aimed at the reduction of the informal economy;
-  Preventive and curative measures to strengthen the contribution and collection compliance (financial discipline) of employers and employees;
-  Consolidation of the state budgets by measures to combat tax fraud and tax evasion and to guarantee a progressive taxation of incomes;
-  Searching for alternative earmarked resources for the pension systems (e.g. certain consumer taxes, taxes on luxury products, taxes on capital income);
-  Making sure that the employers (companies) contribute at least 50% of the social contribution;
-  Taxing (higher) pensions above the average pension;
-  Reconsidering the concept and the way in which second pillar pensions are financed at the moment, in order to strengthen the financial base of the public 1st pillar pensions (which are the core of the European welfare state): instead of transferring part of the social contributions to the 2nd personal accounts pillar, the total social contribution should remain available for the first pillar; besides this, a 2nd pillar of occupational pensions should be developed by including in company or sectoral collective agreements the necessary provisions for the setting up of private pension funds or private pension insurance schemes. The social partners should be represented on the supervisory boards of these funds and the contributions should be tax-deductible;
-  Allowing private pension funds and pension insurers to invest in the international capital markets in the safest products;
-  Association of national social partners in the management of the national pension system through board representation: this is important as a confidence-building measure;
-  Major efforts for administration and institutional capacity building (better data management, linking of databases of tax and social institutions, upgrading of qualifications of the pension officials, international traineeships);
-  Better coordination between social and tax authorities which are involved in the running of the pension system;

As for the expenditure side of the pension system, positive budgetary effects can be expected from measures to stimulate and allow older workers to stay longer in the labour market, e.g. substantial pension bonuses and tax benefits for workers over 55 or with 35 years of insurance, flexible and progressive retirement options, gradual reduction of working time with income compensation, flexible work organisation, more autonomy at work, home working, child- and elderly-care facilities, better health and safety protection at work, training and retraining in order to keep workers employable. Also, the employers should be stimulated to hire and maintain older workers in the company.

A progressive harmonisation of retirement conditions for male and female accompanied by measures to ease the reconciliation of work and family life, e.g. pension credits for parental leave, maternity leave, career breaks for elderly or sick care, can also contribute to higher employment rates and have a positive effect on the growth of the expenditure of pension systems.

The regular adaptation of retirement conditions to increases in life expectancy (be it automatically as in Norway, Sweden and Germany, or through social negotiations as in Spain) could be a further step to relieve the financial pressure on pension funds.

All these measures aim at an increase in the effective exit age from the labour market and can contribute to a strengthening of the sustainability of the pension systems. Also, the switch towards lifetime earnings as a calculation base for pensions will result in slower expenditure growth.

Adequacy of the old-age pensions

In the Balkan countries the level of old-age pensions in relation to average earnings is very different from country to country: the replacement rate (benefit ratio) of the pensions is highest in Macedonia and lowest in BiH and Croatia. In general, benefit ratios are not lower than in the selected EU countries. But what makes the difference is the calculation bases of these ratios, namely the gross and net salaries which are for most EU countries higher than in the Balkan countries. The result of this is that the average old-age pensions in the Balkan countries are in nominal terms much lower than in most of the selected EU countries. Globally we can say that the average old-age pensions in the Balkan countries are not adequate.

It is also important to note that the replacement rates of the public old-age pensions in the Balkan countries are on the decrease: this phenomenon can also be observed in the EU countries. But, contrary to what is the case in a number of EU countries, in the Balkan countries the decrease in the value of the public old-age pensions is not (yet) compensated for by (an increase of) complementary occupational or personal pensions.

Efforts should therefore be made to guarantee workers in the Balkan countries net replacement rates of at least 65% to 70% after a full career. The development of complementary pension schemes through social dialogue and collective bargaining can be helpful to reach this objective.

Looking at the minimum pensions, it goes without saying that these pensions are extremely important in the Balkan countries and in the EU countries as a buffer against poverty. These pensions are particularly important for workers with an irregular and incomplete career: and given the fact that in most Balkan countries non-contributory periods, e.g. during unemployment, are not considered as insurance periods, these minimum pensions have a higher relevance than in most EU countries. It is therefore important to guarantee a decent level of minimum pensions and to protect their purchasing power parity.

Another important element in the debate about the adequacy of pensions is the adjustment of the pensions. By suspending the adjustment during 3 years in Croatia, the real value of the pensions in that country will decrease considerably. Also, in BiH the announced adjustment to wage developments has been suspended since 2007. In Macedonia and Montenegro the Swiss formula is used (partly indexed to wage developments and partly to the increase of the cost of living) and in Serbia the pensions are in reality linked to the consumer price index (with, in 2011 and 2012, a small supplement in line with GDP growth, if there is any). This mixed situation is comparable with practice in the EU countries: some countries maintain more or less the adjustment to wage developments (Germany, Norway, Netherlands), others switched completely to price indexation (Poland, Italy) and still others have a mixed system (Belgium, Czech Republic).

In countries with a high inflation rate it is very important to adjust the level of the pensions twice a year: this is for the moment the case in Serbia.

Modernization of the old-age pension systems

Given the fact that society changes and that pension systems become more complex, it is important to examine if the pension rules have been adapted to these societal and systemic changes. The question must be raised whether the pension systems are suited to respond to the needs of mono-parental families, of part-time workers, of multiple job holders, of internationally mobile workers, of people with extended study duration, of victims of restructurings, closures and privatizations, etc. The questions must also be raised if the introduction of new pension rules and structures has been communicated clearly enough to all the workers, if the necessary control and supervisory structures, with representation of the social partners, have been foreseen to oversee and monitor the private pension funds, if the necessary transparency and reporting rules are in place, e.g. concerning the risks, the return on investments, the costs/fees, the payout method, and if the current trend towards individualized defined contribution schemes should not be corrected by collective risk sharing, e.g. on the basis of minimum return guarantees. Shifting choices and responsibilities to the individual requires that people understand the information in order to allow them to make the best choices. Given the growing complexity of pension systems, it is equally important that people have a competent body that they can trust and that can answer their questions relating to pensions: the trade unions can be such a body.

Reported by:
Enisa Salimović, ITUC PERC SEE Office Sarajevo