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Retirement Pension Systems In The EU (European Union)

A common observation about people all over the world is that they make various efforts to find the best investment options for themselves. 

They do research on; which investment vehicle will bring in short term benefits, how to secure their loved one's life, once they are no more there to look after them.

However, what people hardly think about is their life after retirement. 

Yes. If you are not smart enough to worry and plan about your post retirement life, there are a lot of chances that you will end up in financial crisis.

What is Actuarial involvement?

The Actuary is the person involved for the purpose of computing the insurance risks, premiums and probabilities involved in future events of the retirement plan and are properly defined. The benefit is calculated by means of final salary.

The actuary is particularly involved in defining “when benefit payment are to be made" and the “level of benefits to be paid". With this assumptions of future events, the projection is done.

In most of the European countries, cost of providing retirement benefits is calculated “before the benefit payments are made". The actuary is involved in choosing the method that should be used to fund the benefits.

The actuarial calculations made determines the “annual cost” for providing the pension benefits and the “level of liabilities” that should be calculated at a specific point of time. 

The result of the calculations considers the following:

Taxation authorities – who confines the level of contributions to a fund or tax deductible expense by allocating them to a book reserve.

Supervisory authorities – who says that the funding of a pension scheme is sufficient to enable all benefits to be paid

Accountancy bodies – which ensure that the cost of providing pension benefits is identified with the accepted accounting principles

The main actuarial involvements are:

1. Direct Pension Promise:

  • When it comes to direct pension promise, they are generally funded with a book reserve accruals, i.e. the employee is promised by the employer to pay him or her fixed amount once he or she retires.
  • The external pension scheme (pensionskasse in Swiss) are applied with a limit of 4 percent tax deductible contribution that is not applied to the book reserve accruals.
  • Recently the German companies are setting up CTAs (Contractual Trust Agreements) and the purpose of these CTAs is to fund the pension liabilities off balance sheet. The CTAs are becoming popular since they have zero restrictions when it comes to their asset.
  • In UK, when providing benefits to senior employees an unfunded approach has been used by some of the companies in respect of their earning.
  • Book reserves are found in addition at Netherlands to allow unfunded past service liabilities.
  • The countries using main financing vehicle are Germany, Luxembourg, Austria, France and Sweden.

2. Externally Sponsored Institutions:

  • This is the common way of providing occupational retirement benefits for countries with well-developed system. The employer or both the employee and employer pay the contribution to an institution and it then pays benefits to the employees.
  • The level of contribution and the value of liabilities of the institution will be determined by the actuary. Considering the funded status will be involved in the later calculation.
  • The countries in EU, providing pension benefits with this are: UK, Ireland, Netherlands, Finland, France, Belgium, Spain, Greece, Austria, Switzerland, Iceland, Germany, Luxembourg, Italy, Denmark and Sweden.

3. Insurance:

  • In this insurance scheme, employer takes life insurance policy on behalf of the employee and pays contribution to the contract.
  • The employee has direct entitlement to the benefits under the contract by the insurance company.
  • Employer and employee combines to contribute up to 4 percent 2.976€ (West Germany) and 2.592€ (East Germany) in this contribution limit of 1.800€ are tax exempt.
  • The insurance company is under the supervision by the Federal Financial Supervisory Authority. This scheme involves strict quantitative investment regulation that is to be applicable.
  • Insurance is the main vehicle for providing pension benefits in many countries, though some countries the use of it is limited to smaller pension schemes. (Netherlands, Ireland, Germany, UK).

Retirement Pension System in Switzerland:

There are three pillars on which the Switzerland’s Pension System is based on, which are as follow:

First Pillar:

  • First pillar of the Switzerland Pension System is based on the basic pension insurance also commonly known as Alters- und Hinterlassenenversicherung (AHV) in German, Assurance vieillesse et survivants (AVS) in French and Assicurazione vecchiaia, superstiti e invalidità (AVS) in Italian. As per the 112 article of Swiss Federal Constitution, the first pillar of the pension system covers the basic expenses for living.
  • It is also known as PAYGO system and is financed by the contributions made by the employers as well as employees (4.2% of each employee’s income), from self employed people (7.8% from their income) and also from people who are not part of any paid employment.
  • Different authorities like cantonal or federal authorities and union of employees also contribute in the form of direct funding, revenues collected from the gambling clubs in the form of tax and VAT. This pillar also covers the benefits for the orphans as well as widowers.

Second Pillar:

  • The second pillar is based on the Occupational Pension Scheme. As per the article 133 of Swiss Federal Constitution, the second pillar is funded pension plan and covers that every insured person is able to maintain his/her lifestyle in the best possible way.
  • This funded pension plan is funded by the employers as well as employees. The total sum of contributions made by employees and employers should be equal if not more.
  • Furthermore, on voluntary basis, it is opened to self employed as well. The overall contribution can differ as per the rules and regulations that the institutes have. These fund system is created by authorized or the private corporations.
  • This pillar also offers pensions for the old age. There are some pension funds that offer benefits to, in cases like invalidity and to the survivors in the case of the premature death.

Third Pillar:

  • This last pillar is totally Private Pension Scheme. It is completely covered by private sector. This pillar is optional and is funded by the person itself.
  • The so-called 3a schemes result in less taxation and are regulated, whereas 3b are unregulated, and don't have any advantages relating to taxation.

German Retirement Pension System:

The German Government Retirement System is based on the so called "Generationenvertrag" and there is accrual made or money saved. Future generations have to pay the pensions of the older generations and the payments of the current generation is always used to pay for the current system.

There are three pillars in the German Pension Systems which are as follow:

1. Statutory Pensions (First Pillar)

  • Germany’s first pillar is also known as Statutory Pension Scheme is a “pay-as-you-earn” pillar offered by government subsidies employers and employees. The rate of contribution is shared equally by both the employee as well as employer with a contribution assessment of (West Germany) 74,400€ and (East Germany) 64,800€.
  • Legally the age for the retirement is 65 being it a man or a woman but it is planned to increase to almost 67 years from 2012 to 2029 (status 2017). People who are more into the statutory pension insurance almost for 35 years can retire at an age of 63.
  • However, some deduction will be made for the months that they were supposed to work until new retirement age i.e. 65. If they are retiring 4 years before new retiring age, a deduction of almost 14.4% is to be made to pension entitlement.

2. Occupational Pensions (Second Pillar)

  • Back in 2013, people were still active members in an occupational pension with almost 59.5% of employees in it.
  • According to the German occupational pension system, the employers have option to choose from two different types of funding methods.
  • The already discussed methods are involved here such as Direct Pension Promise, Direct Insurance, Support Fund, Pension Fund and Staff Pension Fund (pensionskasse).

3. Private Pensions (Third Pillar)

While Germany invests on occupational and statutory pensions, people may also improve the retirement pension benefits by choosing to invest on some private pension. Some of the private pension plans are:

3A. Riester Pension:

  • A life annuity plan which is also government subsidized, provided up to a total of 2.100€ annually.
  • Almost 4% of the employee’s income is transferred to the pension plan along with the sitting government subsidizing 154€.
  • This pension plan has five investing types: unit-linked, classical, bank savings plan as well as two different kinds of loan contract that makes this pension plan 100% taxable.

3B. Rurup Pension Plan:

  • It is a more flexible pension plan if compared to Riester pension plan, thus it is more suitable for freelancers and self-employed persons.
  • Both private pension plans have been criticized for high cost and low performance.

Future of Retirement Pensions in EU

Till now Europe differs much in their retirement systems and the way the function in terms of finance of an ageing population, which represents the present and future environment

Pensioner’s living standards:

The living standards of the pensioners to those working population has almost reached a level in Europe, though there are some differences in the development levels.

Relative median income of over 65’s compared to under 65’s


The retirement pension level represents over 60 percent of pensioner’s living standards.

Demography will probably demand changes:

The decline in fertility increases the life expectancy; retirement of baby boomers, ageing of the population is inevitable. As per the forecasts by European commission, the retirement pension share will rise from 11.3% to 12.9% in 2060.

Share of state pensions in GDP.


Retirement spending can rise sharply in countries where there are rapid ageing. Italy, Sweden and Poland are experiencing negative and moderate difference in retirement spending. Forecast is calculating the present or future reform on the success of it.

The affect of Crises and rifts on public as well private pensions:

In 2007, the economic crisis started to affect the growth of the European economic with the employment rates going down made it difficult in retaining senior workers, state pension has also suffered due to the crisis, and low economic growth.

Financial crisis and its impact have been pretty much proportional when it comes to weight of private pension funds of the economy.


40% of Irish pension was affected in 2008, Finland and Netherland results were negative and British funds went down to -13%. 

Different EU Countries pension systems:

Retirement Pension Systems In Belgium

  • In Belgium the pension system is based on the statutory public schemes (first pillar). This will include three pension schemes: general scheme for wage earners, the scheme for self-employed workers and for the civil servants.
  • Occupational pension scheme and voluntary individual pension schemes also exist but there is less importance for those schemes. The pension scheme for the wage earners is calculated as 75% of the wage with the dependent spouse and 60% in all other cases.
  • An assured minimum pension exists for the pensions acquired over a full career.
  • For self-employed the pension is calculated as 75% of the wage of a dependent spouse and 60% in other cases as the same as wage earner scheme.
  • A minimum pension exists is granted in proportional to career fraction for two thirds of the full career. No minimum claim per year.
  • The pension scheme for elderly person with no income or an insufficient income can receive the guaranteed income for elderly persons.

Mistakes People Make While Planning Their Retirement Investment:

Retirement investment is not as easy as it may sound. A huge percentage of people end up making common set of mistakes which are as follow:

Not planning enough:

Before you step up to do any type of investment, it is important that you should do proper planning for it. Setting the milestones is extremely important step that no one should ignore. Setting the goals brings in motivation to hit the targets that come during your way to success.

Not diversifying:

When it comes to investment, the number rule to success is diversification. Putting all your eggs in one basket can always be a risky thing do. The market has the tendency of going up and down which makes it necessary for the investors to diversify.

Compulsive decisions:

Investors tend to panic every time the stock market hits the ground. Most of the time they instead of waiting for the market to get stable, ends up selling whatever they have invested in. This is a form of compulsive decision making and is of no good.

Keep cash with them:

One of the common mistakes made by most of investors is that during their pre and post retirement time, they start keeping too much cash with them. There is nothing bad with keeping little bit cash with you all the time. However, instead of keeping cash with you, if you invest it in some investment vehicle, your annual returns will increase.

Not consulting a financial advisor:

Just because you managed your daily expenses, you cannot think of yourself as financial advisor. If you want to live a stress free retired life then it is wise to hire a financial advisor who can manage and invest your funds in a better way. If you are inexperienced person and do not know where to start with Ways2wealth is the best financial adviser that you will find in finance field.


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