The University of Edinburgh -

Projects

Project II: Pension Policy

Combining social inclusion with financial sustainability?
The reconstruction of British and German pension regimes

1. Rationale and contribution to the programme

Challenged by ageing populations, over the last decade Western social policy-makers have concluded that pension regimes need stronger private components in order to remain financially sustainable. At the same time states have sought to ensure that their pension regimes are socially inclusive, despite significant labour market and family changes. To reach these aims the public mode of intervention has shifted from redistribution to regulation, enhancing the importance of non-state actors (Culpepper 2002). Far-reaching reforms have been implemented in many OECD countries (Pedersen, 2004), supporting the impression of a particular ‘fluidity’ in this policy area.

These developments are clearly evident in the United Kingdom (UK) and Germany, irrespective of different starting points given contrasting regime types which the countries represent. While UK non-state pension provision has always played a major role, since 1995 many employers have closed their defined benefit schemes in favour of cheaper defined contribution ones. This in turn has highlighted the fact that repeated attempts by government to boost personal pensions saving (DWP 2002; Pensions Commission 2005) have proved largely unsuccessful (Disney et al 2001). Because of concerns about the financial sustainability of its generous PAYG-systems German politicians have shrunk state provision, leading to an increased engagement of employers, insurers, and citizens, in this domain, and to the emergence of new forms of occupational and personal savings schemes since 2001 (Clark et al 2002; Lamping/Rüb 2004; TNS Infratest 2005).

Perhaps because of such fluidity important knowledge gaps have emerged regarding the implications of the recent transformations of retirement provision for the protection of citizens, particularly those with non-standard employment biographies (Bridgen/Meyer 2005). In both countries, the consequences for employees are under-researched, as are the static levels of private saving (Beverly/Sherraden 1999; Börsch-Supan 2001; Disney et al 2001; GDV 2005). We also know insufficiently about the adaptation strategies of non-state actors in relation to their changing environment. Explanations for recent shifts in state and non-state provision in developed industrialised democracies have concentrated on the structural constraints economic and political actors face, such as institutional legacies of welfare programmes (Bonoli 2003), national ‘production regimes’ (Manow 2001; Streeck 1997) or socio-demographic change (Pierson 2001; Esping-Andersen 2003; Castles 2003), and economic globalisation (Scharpf 2000; Cutler/Waine 2001). Yet, while this literature describes well the constraints on reform, and shows why similar challenges can lead actors to adopt different solutions in different national contexts, it is of less value when it comes to anticipating the likely direction and the timing of actors’ decision-making under the conditions of heightened environmental uncertainty. In these circumstances, constraints are conflicting and thus do not suggest any clear line of action.

Project II is designed to address these gaps in knowledge and is thus highly policy relevant. It will identify the main flaws and best practices in the current revamped social protection regimes. Moreover, by providing insights into the rationale behind the decision-making processes of non-state pension actors, and given the significant role states have assigned to these actors, it will help to inform public policy making. The research will thus engage directly with core elements of the AGF call because its analysis of the impact of ageing on income in retirement will facilitate the development of evidence-based policy. In project II we will do this by adopting an innovative approach. First, we will use micro-simulation to establish the pension outcomes for illustrative biographies facing typical social risks of post-industrial society. These biographies will be constructed in close consultation with project I. Secondly, our approach to understanding the reconstruction of British and German pension regimes, while framed by the structural constraints identified in the literature, will be actor-centred. We will analyse how non-state actors made - and make – sense of the uncertainty that has characterised pension policy in recent years. This will allow us to build up inductively an understanding of how non-state actor decision-making is related to broader regime-based opportunities and constraints.

2. Aims and research questions

Project II will firstly assess the significance of recent changes in the German and British pension regimes for the projected pension levels of citizens. Secondly we aim to understand the rationale behind non-state actors’ engagement in pensions since the mid-1990s. Our findings will help to establish what kind of welfare state intervention is best suited to promote socially inclusive yet financially sustainable pension arrangements, and how current shortcomings may be addressed. While empirically our research will focus on the UK and Germany, its findings will have far broader international significance given the common trends described above.

The project will consist of three connected parts, each guided by the following questions:

A. Mapping pension change

Against the context of documented changes in public pension schemes, how has the occupational/personal pensions landscape changed in the UK (since 1995) and Germany (since 2001)?

1. How have regulatory frameworks developed? How do they compare?

2. How did change evolve across FTSE/DAX companies? Who were the pioneers, followers, laggards and persisters? Are patterns evident by company size or sector?

3. Who are the main personal pension providers, what is the spread of personal pension schemes?

B. Assessing pension outcomes

What is the impact of the change in public/occupational/personal pensions for the social inclusion of future pensioners?

1. How do entitlements granted by typical occupational pension schemes in different companies (by sector) affect projected pension outcomes of employees?

2. How do typical personal pension schemes affect projected pension outcomes of citizens?

3. Which groups of citizens fare well, what groups are at risk under the new regime?

C. Understanding non-state actors' response to structural change

What factors determine the responses of non-state actors to structural change?

1. Who makes the decisions to close/to change/to open occupational schemes in the company?

2. On what basis have decisions been made? How important are factors external to the company (e.g. relationships with trade unions, interlocking directorships)? How does information flow between companies?

3. Why do insurers offer or not offer Stakeholder pensions / the Riester-Rente?

4. What types of households save/do not save for personal pensions?

3. Methods and data sources

The description of the regulatory frameworks of British and German occupational and personal pensions in part A builds on the findings of a recently-completed EU fifth framework project undertaken by leading members of this group. The mapping of dynamics of the occupational and personal pension landscapes involves charting the DB/DC shift since 1995 in FTSE-companies, and the transformation of existing/evolution of new German occupational pensions by sector and type since 2001 in DAX-companies. We will identify which companies started the trend and how it spread across sectors. On this basis we will map any formal connections (eg inter-locking directorships) between relevant companies using databases on UK and German company interlocks (Haunschild/Beckman, 1998). Regarding personal pensions, we will map the main providers of Stakeholder Schemes and of the Riester-Rente and determine the number of schemes sold. The result will be an overview of the timing and scope of change, and of the regulatory differences of both countries' pension regimes. Researchers will evaluate archives, newspapers, companies' annual reports, other documents, professional journals. For the UK we have access to a database on interlocking directorships and we will use the Incomes Data Service (e.g. IDS 2003/4) and Union Pension Service (2003) data for occupational pension schemes. During part A, we will discuss with project I the possibility of approaching identical companies to explore relationships between family and pension policies.

Part B also builds on the micro-simulation expertise and models developed during the EU-fifth framework project. First we will compile a data base of types of occupational schemes by sector offered by a range of FTSE/DAX companies and of typical Stakeholder and Riester-Rente schemes, obtainable from companies, data services and insurance companies.

Using these schemes and economic assumptions from National Statistical Offices we will conduct micro-simulations of projected future first and second pillar pension entitlements (occupational welfare) and first and third pillar entitlements (personal pensions) for a range of hypothetical, illustrative ‘biographies’, who experience different employment histories (ie in relation to wages, attachment to the labour market, full and part-time work, and sector of employment) and/or lifecourse events (eg divorce, single parenthood etc.). Features of our biographies will be constructed in consultation with project I. Their entitlements will be assessed in relation to standard income measures of social inclusion (e.g. 60% median income and social assistance). Our results will be interpreted in the context of other European countries because of the findings generated by the EU-project.

Part C builds on the findings on pace and scope of change across sectors developed in part A, which will guide our choice of expert interviews. We will conduct up to 20 interviews with main insurance companies and approximately 100 interviews with pension managers, board members, consultants, trustees, trade unionists in selected DAX/FTSE companies, including some pioneers of change, some followers, some recent changers and some who maintained their db-scheme (UK) or did not open occupational schemes (Germany). To assess savings behaviour of citizens for private pensions we will use the British Household Survey Panel and the German Socio-economic Panel. This phase will also build on the investigation of project III into the question of how values regarding private sector provision in general and private savings in particular differ.