Navigating Challenges in Pension Sustainability

Good morning, ladies and gentlemen,

Thank you, Ante, for the invitation to speak today—and thank you as well, Minister Piletić, for your warm welcome. 

When I attended this conference last summer, we discussed the pressing need to address Europe’s pension gap. I am pleased to be here today to continue this conversation with you. It is indeed more essential than ever that we work together on finding solutions. 

Today, over 18.5 million seniors across the EU face the risk of poverty or social exclusion—around one in five. Due to past inequalities, women’s pensions are nearly 30% lower than those of men, placing them at a 35% higher risk of poverty.

Europeans are aging and living longer. This means that the old-age dependency ratio will rise drastically over the coming years. Currently, we have nearly three working-age people supporting each retiree. However, according to the European Commission’s latest Ageing Report, this ratio is expected to drop to just two working-age individuals per retiree within the next two decades, with a further decline anticipated beyond that. And I understand that in Croatia you are already below two.

These statistics are a serious wake-up call. If we fail to address pension gaps now, we face a future pension crisis that will be much harder to manage than today’s challenges.

Bridging the pensions gap is about, first and foremost, the wellbeing of those directly impacted: people who have spent their lives helping to build our communities, whether by actively participating in the working, or raising children and taking care of the elderly, or taking entrepreneurial risks, or innovating in their fields. They all deserve financial security in retirement.

This is also a question of social equity. Young people entering the workforce today deserve a stable future too, yet they are far less likely to have that same sense of security in their later years than previous generations.

In the end, when a large portion of the older population faces financial hardship, it affects more than just them. It impacts consumer spending, economic growth, and the overall health of our societies. Moreover, if the younger population does not have faith in a financially healthy future, they will behave economically accordingly.

The pension gap is an issue affecting not only Croatia. It impacts every EU member state. When we consider that we live on an ageing continent with the majority of citizens relying on state pensions for their future, it becomes clear that this gap is not just a national concern but a European one—one that carries a potential systemic risk.

This is precisely why addressing pension gaps has been a core focus for EIOPA in recent years. With the new Commission now forming, we see a timely opportunity to pick up momentum and bring new wind into this important work 

Given the changing socio-demographic makeup and evolving labor market conditions, Europe’s pension systems will need both robust public pensions and strengthened personal and occupational plans. Getting the pension gap under control means finding a balanced approach to strengthening all three pillars. 

This is why we must look at pensions in a holistic way. 

Pillar I is, and will continue to be, very important because it remains the main source of retirement income for most Europeans, especially for those who are not in the position to accumulate much in savings. Today, only 23% of Europeans participate in an occupational pension scheme and 19% own a personal pension product. Moreover, it is the pillar that can ensure equity in a society, which is essential for social cohesion.

This is not enough. 

We know that the state alone will not be able to provide a liveable income at retirement. In order to have sustainable pensions, state pensions need to be supplemented by solid occupational and private pension schemes. 

So how do we get there? How do we increase the uptake of Pillar II and III schemes so that citizens have a diversified and stronger income at retirement?

For one, we need greater awareness. That is, we must convey the urgency of saving for the long term, especially to younger generations. Many people do not prioritize retirement savings early in their careers, and by the time they recognize its importance, there’s often too little time left to build a sufficient pension. 

But even more fundamentally, people need clarity about their future entitlements. Everyone should be able to go online, see what they are projected to receive at retirement, and track how contributions grow with savings and investments. Wouldn’t this empower citizens to take an active role in shaping their pension outcomes, rather than being passive recipients?

EIOPA has long advocated for pension tracking systems. With tools that show real entitlements, citizens can make more informed spending and saving choices, and it could positively influence their financial behaviour.

Not only European citizens need a clear overview. Policymakers too need a clearer picture of the full, multi-pillar pension systems at the national level. This is where pension dashboards come in. While some Member States already have these tools, they are needed more widely to better inform decisions on additional measures to reduce pension gaps.

EIOPA has long advocated for the development of both pension tracking systems and comprehensive dashboards for each Member State to display all existing pension schemes across all three pillars. In 2021, we delivered our technical advice on these measures to the Commission.

This also formed part of our advice on the review of the IORP II, last October. And as I said, we expect renewed attention to this topic once the new Commission is in place and will continue to convey the message on the importance of these tools in first capturing and adequately addressing protection gaps. 

Returning to my earlier point on empowering citizens to make informed retirement planning decisions: Pension tracking systems are one solution, but there is room to do more. With the shift from defined benefit to defined contribution schemes, citizens are increasingly responsible for managing the risks and costs of retirement planning and investment performance.

That’s why our advice to the Commission was for IORPs to perform long-term risk assessments focused on members and beneficiaries in defined contribution schemes. This approach will help address their specific needs more effectively.

IORPs should assess the risk tolerance of their DC members and tailor fund allocations in investment portfolios according to each member’s ability to bear risk and their risk-return preferences. Placing members’ and beneficiaries’ needs at the forefront would enhance pension schemes’ transparency, accountability, and ultimately foster consumer trust.

The shift from defined benefit to defined contribution schemes requires not just a focus on the design of the accumulation phase but also on the payout phase. Traditionally, pensions are paid out as a lifelong income, which can be either fixed or adjusted for inflation. But low interest rates make annuities with guaranteed payments expensive, and this results in relatively low retirement income for beneficiaries.

To address this, there has been a rise in the use of variable annuities, which allow for ongoing investment risk during the payout phase and thus offer the potential for higher expected income. Additionally, we’re seeing more combinations of partial and deferred annuities with programmed withdrawals.

Lifelong annuities are important because they prevent a situation where beneficiaries outlive their pension savings. On the other hand, they provide little flexibility, especially for those beneficiaries whose spending habits are not constant. To address this need for flexibility, many countries have given plan members—particularly those with defined contribution pensions—more options in the payout phase.

In the UK for example, the possibility of full lump sum payments raised concerns that plan members would use their pension for extravagant purchases—to buy a Lamborghini so to say. Currently, in the Netherlands, there is also a discussion taking place to allow beneficiaries to withdraw 10% of their pension savings as a lump sum at the moment of retirement, but the discussion is not easy.

Indeed behavioural economics shows that people are not always good in making financial decisions. Deciding how to withdraw money from pensions can be complicated, and making the wrong choice can be costly. This highlights the importance of having a clear and helpful system to guide these decisions.

Next year, EIOPA will start working on a blueprint for the design of DC pensions, including the payout phase. We will draw on existing best practices to develop a blueprint to assist Member States in developing their own DC pension systems.

Another area where we see potential is the automatic enrolment of employees in Pillar II pension schemes, which should also include self-employed individuals.

Automatic enrolment naturally generates more interest in and demand for supplementary pensions. It pushes people to consider the benefits of staying in the system before deciding whether to opt out. In this way, automatic enrolment helps raise awareness and motivates people to save for their future retirement. That’s why it is essential that it be accompanied by clear communication about its benefits.

Auto-enrolment is indeed one effective way to address the low demand in an area where ample supply exists. But it is products like PEPP that can strengthen the third pillar by increasing the supply of attractive private pension products that are tailored to today’s diverse workforce.

As we all know, the current PEPP has not performed well. However, it has many features of a product that is needed: it is digital, simple, portable, and cost-effective. As such, it makes sense from a European integration point of view, as it provides access to additional Pillar III products for citizens across all Member States. 

A pension product like this is attractive to people who work cross-border in the EU, as well as to freelancers, independent contractors, and other self-employed people who value greater flexibility in private pensions. It could also be interesting to any European citizen who would like to save more for later with a simple, inexpensive, reliable product.

EIOPA believes that the PEPP’s performance can improve with time, better economic conditions and some changes. So last month EIOPA published a paper setting out the reasons for the limited uptake of PEPP and suggested improvements to its design to overcome supply-side, demand-side and structural barriers hindering its broader adoption.

With approximately 34 trillion euro in EU citizen savings, much of which sits in bank deposits, providing for viable retirement options, including PEPP, or PEPP-like products, is crucial.

Having a well‑functioning occupational and private pension systems can increase the competitiveness of EU capital markets in the long term, by providing a significant source of capital to finance the green and digital transitions. 

That is to say, a greater uptake of supplementary pensions will not only improve people’s income at retirement, it will also strengthen the Single Market. 

We need a shift in mindset. 

Th prevalent trends in Europe is to save, but not to invest. In 2022 the personal saving rate of Europeans was three times higher that than of Americans (13% vs 4%). 

So the savings are there. The potential for increased direct retail participation in capital markets is there. What we are lacking is an investment culture.

Encouraging a shift in behaviour towards private pension products requires better incentives. Consumers must see the value in investing differently. 

And a precondition for this is consumer trust, which we must continue to build. 

And this means ensuring that products offer value for money, that there is independent advice in the interest of the consumer, and that consumers are protected, particularly when purchasing across borders.

We want to see consumer needs taken into account throughout the full product lifecycle, from design to distribution. And we want to see costs that are proportionate to benefits. This is what value for money means: Value that needs to be offered regardless of where an EU citizen has bought their insurance policy.

This is highly relevant in many EU Member States, like Croatia, where many of the pillar III products are sold on the basis of freedom of services. This is a benefit of the Single Market. Insurers can sell their products throughout the EU on the basis of one license. However, while we have created a Single Market for insurers, we also need to ensure a Single Market for policyholders. 

EIOPA places a strong focus on consumer protection for all EU citizens, regardless of where they bought their product and from whom. We need assurance that products sold to consumers provide value for money.. And when they do not, EIOPA needs the powers to intervene and to remove cross-border products from the market, jointly with the NCA’s, but where National Competent Authorities do not do so quickly and adequately, on its own. Moreover, we need a harmonised Insurance Guarantee Scheme, ensuring that in case of a failure, all policyholders are treated equally. 

So there is a full agenda for pensions in the EU. EIOPA stands ready to support the Commission, together with all its members, including HANFA. 

Before I come to a close, I would like to touch on one more important consideration in the future of the European pension systems, and that is sustainability. 

All financial service providers, and this includes pension funds, need to factor in sustainability when making investment decisions.

In Europe we have a solid policy framework in place promoting transparency and accountability. This includes the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), and the Sustainable Finance Disclosure Regulation (SFDR). 

Ladies and gentlemen, to effectively bridge Europe’s pension gap, we have to strengthen all three pillars of our pension systems—by raising awareness about the importance of early saving, improving transparency through tools like pension tracking systems and dashboards, and fostering an investment culture. 

And since the pension gap is both a national issue with varying impacts across Member States and a European one that affects us all, it’s essential that we coordinate our efforts. We need to learn from each other, and where appropriate, work together. 

And in that spirit, I look forward the discussions we will be having today. 

Thank you for your attention.