EUROPE - The European Commission has urged Ireland and Greece to bring forward pension reforms to limit the impact of longevity on public spending.

In the EC's latest assessment of economic and budgetary stability of countries in the period 2007-10, it categorised Ireland and Spain as being at medium risk, and Greece at high risk, of seeing the ageing population impact on budgetary controls.

As a result, the findings of the assessment "invited" Greece to update long-term projections for age-related expenditure "as soon as possible" and to "improve the long-term sustainability of public finances" by "reforming the pensions system".

In addition, the EC noted despite "very healthy, economic growth levels", Ireland faces a significant projected increase in age-related expenditure and should be "implementing further pension reforms".

The assessment also revealed that although Spain has a strong budgetary position, the EC expects it to "further improve long-term sustainability" by introducing "additional measures to contain the future impact of ageing on spending programmes" although it does not go so far as to request pension reforms even though around half of Spain's retirees rely solely on the state pension, rather than the second or third pillars. [See earlier IPE story: Broadening the options]

In its report on Greece, the EC claimed while "good progress" had been made to consolidate public finances since 2004, the high public debt level means long-term sustainability "greatly depends on implementing comprehensive reforms of pension and health care systems".

It revealed long-term projections of pension expenditure were not available, but information dating from 2002 suggested a "substantial increase in pension expenditure as a percentage of GDP" over the long-term.

But because the country's budgetary position in 2007 "constitutes a risk to sustainable public finances" before the budgetary impact of an ageing population is taken into account, the EC recommended Greece undertake a series of pension reforms to "contain" the "likely significant increase in age-related expenditure". 

The EC report's comments follow a speech by Nicholas Garganas, governor of the Bank of Greece and member of the European Central Bank's governing council, last month, in which he claimed failure to adopt "early and major pension reform" could jeopardise essential public services. (See earlier IPE.com story: Bank of Greece urges pension reform to protect public services).

However, Kostas Karamanlis, the Greek prime minister, last week outlined a key list of pension reforms to parliament, following the unveiling of 11 initial social security
proposals in November 2007. There have been widespread strikes by workers since November in protest at proposed pension reforms, as changes will require people to work longer as well as see many pension funds merged into a smaller collective number.

Meanwhile, the EC also highlighted the need for further pension reforms in Ireland as it claimed the "long-term budgetary impact of ageing is well above the EU average", which it partly attributes to a maturing pension system.

The report noted that to pre-fund part of the future pension expenditure assets are now accumulated in the National Pension Reserve Fund (NPRF), and while it admitted the 2007 budgetary position has helped offset part of the long-term financial impact of longevity increases, it warned this "is not sufficient to cover future spending pressures". 

As a result, the EC claimed "implementing further measures aimed at curbing the increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances".

However, in the Irish government issued a consultation on its 'Green Paper on Pensions', which outlined various options for pension reform including both mandatory and soft mandatory approaches to private pension provision, which is expected to close in the middle of 2008. (See earlier IPE.com story: Options galore in Irish pensions green paper)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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