Pensions in crisis: Europe and Central Asia regional policy note

The financial crisis has had significant impacts on pension systems in the Europe and Central Asia region (ECA),  tempting governments to make policy changes in response to the increased pension deficits they are facing. The crisis has exacerbated the existing financial imbalance in the public pension systems by reducing contribution revenues sharply while leaving expenditures constant or even higher. The crisis has also resulted in a sharp drop in financial asset values which affects pensions provided by funded pillars. Consequently, no pension system, however structured, has been immune to the crisis.

This paper argues however that, due to the continued ageing demographic transition in the region, the worst is yet to come. Future pension system deficits are expected to be threefold what is currently being experienced in the worst hit countries and are expected to remain at that level for more than 20 years before slightly improving.  The authors discuss the impact of the financial crisis on pension systems and the initial responses by different countries so far.  The paper then goes on to suggest recommendations for future action, looking at both first pillar (unfunded) pension systems, and second pillar (funded) systems.

Short-term recommendations:

• do not be hasty and make changes in long run programs to address short term needs
• use the opportunity of the crisis to address long-run issues which will help when the demographic crisis hits

Longer-term recommendations:

First pillar:

• move to inflation indexation of pensions after retirement
• increase the retirement age and equalize the retirement ages of men and women
• reduce early retirement
• promote public awareness that public pensions will necessarily be less generous than in the past
  

Second pillar:

• provide better insurance against vagaries of the financial market during accumulation and decumulation phases
• accelerate regulatory and supervisory reforms that will allow pension funds to earn better rates of return for participants
• pro-actively engage in capital market development, particularly by offering inflation-indexed bonds