Co-Ordination of Pensions in the European Union: The Case of Mandatory Defined-Contribution Schemes in the Central and Eastern European Countries
| Date | 01 March 2006 |
| Author | Lauri Leppik |
| DOI | 10.1177/138826270600800103 |
| Published date | 01 March 2006 |
| Subject Matter | Article |
CO-ORDINATION OF PENSIONS IN THE
EUROPEAN UNION: THE CASE OF
MANDATORY DEFINED-CONTRIBUTION
SCHEMES IN THE CENTRAL AND EASTERN
EUROPEAN COUNTRIES
LAURI LEPPIK*
Abstract
This article investigates mandatory funded defined-contribution pension schemes of six
new Member States of the European Union (Hungary, Poland, Latvia, Estonia,
Lithuania, the Slovak Republic) in respect of the co-ordination of these schemes for
persons moving within the Community. It considers how such schemes are co-
ordinated and under which rules. It looks at the principal and practical implications. It
argues that the existing legal dichotomy of statutory and supplementary pension
schemes, upon which the Community co-ordination rules are established, is no longer
functional. The article suggests that mandatory funded defined-contribution pension
schemes should fall under the scope of Regulation 1408/71 (which is to be replaced by
Regulation 883/2004), but simultaneously the schemes should be subject to Directive
98/49 and the new portability directive, once the latter is adopted. However,
amendments are needed to all these Community instruments to make them suitable for
the co-ordination of mandatory funded defined-contribution schemes.
1. INTRODUCTION
Free movement of persons, entailing the right to live and work in other Member
States, is one of the fundamental freedoms of the European Union (EU). Effective
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European Journal of Social Security, Volume 8 (2006), No. 1 35
* Lauri Leppik is a Social Policy Analyst at the PRAXIS Center for Policy Studies in Estonia. Address:
Estonia pst. 5a, Tallinn 10143, Estonia; e-mail: lauri.leppik@praxis.ee.
36 Intersentia
application of this right includes measures, which aim to reduce the obstacles
stemming from national legislation to freedom of movement across Member States.
Some of these obstacles may relate to the pension legislation of Member States, e.g. the
conditions relating to participation in pension schemes, entitlement to and payment
of benefits. A key role of Community legislation is to overcome such obstacles through
co-ordination mechanisms. However, this objective is not yet fully met by the existing
Community legislation. Furthermore, enlargement of the EU has made the
achievement of this objective technically more complicated because of the increased
diversity of pension schemes. This article looks into the problems of co-ordination of
pension schemes, focusing in particular on the case of mandatory funded defined-
contribution schemes of the new Member States.
1
Over the last decade, six new Member States – Hungary, Poland, Latvia, Estonia,
Lithuania and the Slovak Republic – have reformed their pension systems and
introduced particular ‘mixed’ systems, where the mandatory pension system consists
of two schemes – the public pay-as-you-go scheme and the funded pension scheme
with individual pension accounts. The latter, FDC, schemes replace part of the former
public pension schemes as these were created by dividing the former social security
contribution between the pay-as-you-go and the funded scheme, with the exception of
Estonia, which also introduced a supplementary contribution for workers wishing to
join the funded scheme. All six countries, except the Slovak Republic, had already set
up such schemes before accession to the EU.
Participation in the FDC schemes is compulsory, at least for younger age cohorts,
while persons who were already participating in the labour market at the time of
launching the schemes had the option of joining the new scheme voluntarily (this is
still possible in Estonia and the Slovak Republic). However, in Poland and Latvia,
people who over fifty at the time of the reform, were not permitted to join the FDC
scheme. In Lithuania, participation in the FDC scheme is also optional for younger
workers and hence the FDC provides a means of opting out of the pay-as-you-go
scheme. Nevertheless, in this article the Lithuanian FDC scheme is categorised as a
mandatory FDC scheme as, for those who have joined the scheme, it (partly) replaces
the mandatory public scheme.
Lauri Leppik
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1
Pension schemes are often categorised as defined-benefit (DB) or defined-contribution (DC) types.
In the former case, the benefit calculation rules are pre-determined, whereas the contribution
rate may vary from year to year to collect the necessary revenue to finance the benefits. In the latter
case, the contribution rate is fixed, while the amount of benefit depends on the total contributions
made into the scheme, plus any interest earned on contributions. Depending on the financing
method, a distinction is made between pay-as-you-go and pre-funded schemes. Schemes, which are
based on pay-as-you-go financing but apply the defined-contribution principle, are often described
as notional-defined-contribution (NDC) schemes. Funded schemes are either mandatory or
voluntary, depending on the participation rules. This article analyses the issues related to co-
ordination of the funded defined-contribution (FDC) schemes, in particular the mandatory funded
defined-contribution (MFDC) schemes.
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