Annex 1: Main features of pension systems in the EU
Pension arrangements are very diverse in the EU Member States, due to both differenttraditions on how to provide retirement income, and to different phases of the reform processof pension systems.The large majority of pension systems in the EU 27 Member States are public pensionsystems. Still, several Member States have introduced occupational pension schemes and/or private mandatory and voluntary schemes. As documented by Table 1, pension arrangementsare very diverse in the EU. The importance of occupational and private pension provisionsvaries across countries. Regarding the type of pension benefit paid out by public earnings-related schemes, mostMembers States provide defined-benefit pensions, i.e. pension rights are defined in terms of earnings and service years, without a direct link to contributions. But recently, a number of Member States, including Sweden and some new Member States such as Bulgaria, Estonia,Latvia, Lithuania, Hungary, Poland and Slovakia, have switched part of their public pensionschemes into private funded schemes. Typically, this provision is statutory but the insurance policy is made between the individual and the pension fund.In most Member States, the core of the pension system is based on the statutory earnings-related old-age pension schemes. At the same time, the public pension system often providesalso a minimum-guaranteed pension to those who do not qualify for the earnings-relatedscheme or have accrued only a small earnings-related pension. Minimum-guarantee pensionsare usually means-tested and are provided either by a specific minimum pension scheme or through a general social assistance scheme. In a few Member States, notably in Denmark, the Netherlands and Ireland, the public pension system provides in the first instance a flat-rate pension, which can be supplemented by earnings-related private occupational pensionschemes.The type of benefits provided by the public pension systems differ across countries. Most pension schemes provide not only old-age pensions but also early retirement, disability andsurvivors’ pensions. Some countries, however, have specific schemes for some of these benefit types; in particular, some do not consider disability benefits as pensions (despite thefact that they are granted for long periods), and in some cases they are covered by the sicknessinsurance scheme.The financing method of the pension systems also differ across countries. Most public pension schemes are financed on a pay-as-you-go (PAYG) basis, whereby contributionrevenues are used for the payments of current pensions. In most countries, minimumguarantee pensions are covered by general taxes. Earnings-related schemes are oftensubsidised to varying degrees from general government funds. Some specific schemes,notably public sector employees’ pensions sometime do not constitute a well identified pension scheme but, instead, disbursements for pensions appear directly as expenditure in thegovernment budget. On the other hand, some predominantly PAYG pension schemes havestatutory requirements for partial pre-funding and, in view of the increasing pensionexpenditure, many governments have started to collect reserve funds for their public pensionschemes.While occupational and private pension schemes are usually funded, the degree of their funding relative to the pension promises may differ, due to the fact that future pension benefits can be related either to the salary and career length (defined-benefit system) or to paid contributions (defined-contribution system).