An occupational pension fund, also referred to as an employer funded or employer administered scheme, is a pension offered by an employer to an employee's retirement scheme. Within the European Union (EU), these pension funds can vary throughout certain Member States due to differences in retirement ages in Europe, salaries and length of careers, labour and tax laws, and phases of reform.
This form deferred compensation can be paid out regularly each month once the employee has retired. It is both beneficial for the employee by saving on taxation and social insurance payments and the employer to attract potential employees and to retain existing as an incentive. It is known as the “second pillar” of a supplementary pension plan which includes the contribution of employers. This free movement of workers in the EU allows them to uphold their rights when moving to other Member States.
Background
Since prior to the post-World War II period, European countries embraced a Bismarckian pension system, first introduced in Germany, which allowed retirees to receive benefits from current workers. However, after this period nearly all of Europe had experienced a dramatic increase in life expectancy yet with a decreasing rate of fertility. Since the 1990s, European countries have made attempts to improve their pension systems through various multi-tier pension systems. This typically involved utilizing a combination of mandatory and voluntary schemes where both individuals and the government collectively put money into the system.
In 2003, the European Commission created the International Occupational Pension Funds Directive (also referred to as the IORP Directive) to establish the fundamental requirements of offering occupational pension funds and its regulations. However, the IORP was since revised in 2016 in response to financial crisis since 2008. In addition, pension funds have become one of the EU's largest expenditures due to increasing pressures from the aging population throughout Europe. In 2011, the European Parliament called upon the Commission to encouraged more Member States to implement occupational pensions for a mix of both public (‘first pillar’) and private (‘second pillar’) pensions as another step to reform schemes for a more sustainable future. However, the current establishment of occupational pension funds still vary in size and approach across each Member State.
Despite the various designs, occupational pension plans can be defined into two basic types: Defined benefit (‘DB’) in which the employee benefit received is calculated through the length of employment under the employer and the specified salary maintained. Defined contribution (‘DC’) where both the employee and employer generate regular contributions into an account. This type of plan is fully funded and are essentially accounts which experience tax-differed savings.
Reforms and Role of the EU
Since the early 2000s, numerous EU Member States have initiated pension reforms through the adjustment of age requirements and benefits received. These changes were a response to pressures from declining birth rates, increased life expectancies, and aging demographics. With the 2004 enlargement of the EU, ‘new’ Member States faced challenges to reform their previous pension systems to a market-based from the socialist system. However, smaller ‘new’ EU Member states, such as Cyprus and Slovenia, began to adopt mandatory occupational pension schemes. The reform changes made were through toughening conditions of eligibility for earlier retirement age, lessening public pension benefits received, and raising the age of retirement.
In correspondence with the principle of subsidiarity, Member States were capable to reform and design their new pension systems. Private pension funds had become a cornerstone part of the EU programme.