On August 31, 2010, the International Federation of Pension Fund Administrators (FIAP) sent letters to the authorities of the European Council Mr. Herman Van Rompuy, President,  Mr. Olli Rehn, Commissioner for Economic and Monetary Affairs and Mr. Jean Claude Junker, President of the Economic and Finance Affairs Council (ECOFIN), giving its opinion regarding the need to modify the procedures for calculating the deficit and public debt of the Central and Eastern European countries that have introduced reforms to their pension systems, creating individually funded defined contribution programs.

In order to contribute to the important work being carried out by some international agencies for the strengthening and sustainability of the pension systems, similar communications were also sent to international agencies such as the International Monetary Fund (IMF) the Inter-American Development Bank (IADB), the International Organisation of Pension Supervisors (IOPS), the International Labour Organization (ILO) and the World Bank, urging them to review this issue and assess the convenience of recommending the suggested changes.

As is well known, in the unreformed pension systems that work on a PAYGO basis or the partial accumulation of reserves with defined benefits, an implicit debt for the future payment of workers’ pensions is being accumulated. Given demographic trends, this debt seriously jeopardizes the financial sustainability of the programs, yet it is not explicitly recognized for the purpose of calculating the public sector debt and the fiscal deficit.  In contrast, in the countries that have carried out reforms to their pension systems, introducing defined contribution programs and individual accounts, the debt that governments must assume for financially supporting the public programs whose contributions have diminished is considered in the debt and deficit indicators.  This unequal treatment is putting pressure on some of the governments that have carried out reforms to reverse course and nationalize the new defined contribution pension programs.

The reversal of the reforms would not only be damaging for workers who are members of the defined contribution pension programs, but would also negatively affect the financial situation and the sustainability of the pension systems and would aggravate the debt and fiscal deficit situation of the public sector in the mid and long term.

To view the complete letter sent to the President of the European Council, Mr. Herman Van Rompuy, kindly download the document attached below.