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Private pension coverage in nine countries.

Lorna M. Dailey heads Bedford Research Consuitants, Falls Church, VA. John A. Turner is Deputy Director of the Office of Research and Economic Analysis, Pension and Welfare Benefits Administration, U.S. Department of Labor.

How do U.S. private pensions compare with those of other countries? A dozen industrialized countries have private pension systems similar to that in the United States. (1) In terms of coverage rates (the ratio of covered workers to the labor force population), Germany (before German reunification) is most similar to the United States with 42 percent of its labor force covered.(2) Canada, Germany, the Netherlands, and Switzerland are all similar to the United States in terms of the percentage of the older population that are pension beneficiaries (about 30 percent), but pensioners in Canada and Germany receive a lower percentage of income from private plans.

This report highlights private pension coverage statistics in the United States for the 1970-89 period, comparing the data with those for Australia, Canada, France, Germany, Japan, the Netherlands, Switzerland, and the United Kingdom. While some other countries provide private pensions, and some small countries had high coverage rates, no other country had sizable numbers of participants. Also compared are types of pension plans, forms of pension payment, inflation protection, and funding.

Issues in comparisons

Within the limitations of available data, it is not possible to present statistics for precisely the same categories of workers and plans in all countries.(3) Thus, caution should be used when interpreting international comparisons. The finding that one country has higher private pension coverage than another does not necessarily indicate that country has a more successful system. It may simply indicate differing roles of the public and private sectors in the countries. Whether retirees receive adequate retirement income can only be determined by examining all sources of retirement income.

Distinctions blur when internationally comparing private pension plans, government plans, Social Security, savings plans, and severance pay plans. The difficulty arises because government involvement in pension institutions differs and because some plans serve multiple purposes.

A private pension plan is an employer-sponsored plan or an employeegroup sponsored plan which provides retirement benefits to private sector employees. The mandatory pension plans in France and Switzerland are considered as private pension plans in this report because their assets remain under private-sector control. Plans for public sector employees are excluded, as are plans for self-employed persons (where they could be separately identified in the data). Plans in which only a single individual can participate (individual retirements accounts [mA'sl, for example) are also excluded. If a plan is used predominantly for retirement, it is considered a pension plan in this report.

Private pension coverage rates are calculated as the ratio of workers covered by private pensions to the labor force.(4) The private sector labor force includes full-time and part-time wage-earners and salaried employees of private sector employers plus the unemployed and part-time employees. (To exclude unemployed and part-time workers would distort coverage statistics over the business cycle because an increase in unemployment among low coverage rate groups would raise the coverage rate.)

Pension coverage rates differ depending on the categories of workers included. Unemployed and part-time workers typically have low pension coverage rates, lowering the overall coverage rates presented in this report in comparison to rates which exclude these groups. While different definitions of coverage may be useful, an important consideration in constructing these statistics is that coverage rates be comparable internationally.

Pension coverage rates

The United States has a significant share of the world's private pension participants. Its 42 million participants in private pension plans are 43 percent of the nearly 100 million workers participating in private pensions in the nine countries (table 1). This percentage is higher than the United States 39 percent share of the working age population in these countries.

There is no consistent pattern in the changes over time in pension coverage rates. In the United States, the proportion of the labor force which participates in a pension plan has increased only 3 percentage points, from 42 percent in 1970 to 45 percent in 1988 (table 2). Canada had a similar experience, with its coverage increasing from 26 percent to 29 percent.

By contrast, France and Switzerland with historically high coverage rates, had increases in coverage of 20 percentage points or more (from 80 percent in 1970 to 100 percent in 1975 and.thereafter in France and from 46 percent in 1970 to 92 percent in 1987 in Switzerland). Mandatory private pension plans became effective in France in 1975 and in Switzerland in 1985. (The 1987 data for Switzerland represent both mandatory and voluntary pension funds.) The Swiss coverage rate of 92 percent is less than 100 percent because plans are not required to cover employees under age 18, part-time employees with low wages, temporary employees, and the unemployed.

The Netherlands had the largest increase in coverage for cormtries with voluntary planns--an increase of 16 percentage points, to 66 percent. The Netherlands also had the largest increase in coverage between 1988 and 1989, with a 4-percentage point increase. The Netherlands is the only country with a voluntary private pension system that covers more than half of the labor force.

In Japan, the pension coverage rate for funded pension plans was 39 percent in 1989, although most other employees are in unfunded severance plans. There has been a steady growth of participants in funded plans, but that growth ineludes a movement from unfunded to funded plans.(5)

The United Kingdom was the only country with a major decline in coverage rates. This decline occurred in the early 1970's, with only minor declines in the 1980's. In 1987, Germany had a coverage rate of 42 percent, compared with 46 percent for the United States. However, the coverage rate for 1987 was higher for the United States than for the other English-speaking countries. The United Kingdom had a coverage rate of 29 percent (1987); Canada, 29 percent (1989); and Australia, 30 percent (1989).

Types of plans

Private pension plans can be categorized into two types, according to whether the investment risk of the plan is borne by the worker or the employer: defined contribution plans or defined benefit plans. Defined contribution plans are similar to saving accounts. Money is periodically deposited into an individual account, but the worker's ultimate benefits depend on the investment pefformance of the account the workerbears the investment risk. By contrast, defined benefit plans are based on a benefit formula, usually involving years of service and earnings. In defined benefits plans, the investment risk is borne by the employer.

In all countries, there are more assets in defined benefit plans than in defined contribution plans (table 3). In the United States, 66 percent of private pension assets are in defined benefit plans. In Canada, 94 percent are in defined benefit plans; in Germany and Japan, nearly all pension assets are in defined benefit plans.

The United States and Australia are the only countries that have a sizable percentage of participants in defined contribution plans. In the United States, there are nearly as many participants in defined benefit plans as in defined contribution plans. Australia has slightly more participants in insured defined contribution than in defined benefit plans (52 percent), but data for noninsured plans were not available. In Canada and the United Kingdom, by far the larger number of participants are in defined benefit plans, while in Japan, virtually all participants are in such plans.

Pension vesting

Pension coverage rates and types of plans mean little if the workers who are covered do not have vested rights to their pension benefits. All the countries studied, except Japan and Australia, had some form of mandated minimum vesting for all employees (table 4). The United States (5 years) and Germany (10 years) had the longest vesting requirements.

In Australia, benefits earned under collective bargaining agreements vest immediately, as do employee contributions. However, there is no mandated vesting requirement for benefits accrued outside of collective bargaining agreements. In Japan, there are no minimum vesting requirements, but under customary practice, most covered workers were provided a vested benefit after 2 years.

In Canada, pensions are regulated at the provincial level. (Because the province of Ontario accounts for 40 percent of the Canadian work force, that province was chosen to represent Canadian regulations.) Vesting is required after 2 years of participation in a pension plan in Ontario.

In Germany, vesting must occur after 10 years of participation for workers aged 35 and older, and after 12 years for younger workers. In the Netherlands, vesting must occur after 1 year, and in the United Kingdom, it must occur after 2 years.

In France, vesting is immediate. In Switzerland, vesting is immediate for mandatory pension benefits, however, most employers provide additional benefits, and for those benefits, there is no vesting requirement.

In the United States, single employer plans must provide full vesting after 5 years of participation or a graded schedule that provides full vesting after 7 years. Multiemployer plans must provide full vesting after 10 years. Most single-employer defined benefit plans provide full vesting after 5 years, while most single-employer defined contribution plans provide full vesting after 2 or 3 years.

Distribution of payment

The most common form of pension payment in Japan is a lump-sum distribution which occurs at job termination, whether that be at retirement or preretirement. 6 By contrast, Canada (Ontario) allows preretirement lump-sum distributions only of the retiree's own contribution relating to service prior to 1987, and the return of the worker's contributions if they represent more than 50 percent of the accrued benefit. In the Netherlands, lump sums also are permitted at job termination before retirement only for an individual's contributions before vesting. Otherwise, funds for a person changing jobs could be left in the employer's plan or transferred to another plan. Similar options are available to job changers in the United Kingdom, with only unvested contributions transferred directly to the participant upon job change. Further, in the United Kingdom, job changers who want to change funds are given a variety of options. The United States allows lump-sum distributions for workers changing jobs if the pension plan rules permit.

Inflation protection

In the United States, less than 5 percent of participants in private pension plans are covered by automatic cost-of-living increase provisions.(7) However, postretirement increases are occasionally given. Similarly, in Canada, only 7 percent of private pension participants are in plans with formal inflation protection. Post-retirement cost-of-living increases are relatively rare in Japan, because most Japanese retirees choose a lump-sum distribution instead of an annuity.

Widespread indexation in the Netherlands and the United Kingdom may be attributable to economic and policy differences. Eighty percent of all pension participants have formal benefit indexation in the Netherlands, and in the United Kingdom, 75 percent of all pension participants are in plans which make formal provisions for guaranteed increases. An additional 20 percent of all participants are in plans that have annual reviews of benefits without promising benefit increases.

Pension funding

To insure benefit security, policymakers establish minimum funding standards that are enforced by departments of labor or welfare. In addition, government agencies that insure private pension plans are found in the United States and Japan.s

Japan is the only country in this study with a partially unfunded private pension system. Many corporate pension plans are not funded. They do not maintain a separate pool of assets that are managed specifically to provide pension benefits. Sponsors pay benefits out of their current operating revenues. The other countries surveyed have fullfunding on average, but not all plans are funded to the same degree. Defined benefit plans are funded either by insuring them through an insurance company or by setting up a special pension trust.

EVEN IN COUNTRIES with well-developed voluntary private pension systems, generally less than half of the work force are covered by private pensions. In nearly all of the countries studied, mandatory vesting occurred after fewer years of participation, compared with the standard for the United States. And, in all countries, defined contribution plans tended to be secondary, having considerably less assets than defined benefit plans. Footnotes

1 See John A. Turner and Loma M. Dailey, eds., Pension Policy: An International Perspective (U.S. Department of Labor, Pension and Welfare Benefits Administration, 1990).

Under contract to the U.S. Department of Labor, Dailey collected pension statistics for the period 1970 to 1989. Considerable effort was made to compile statistics that are comparable across countries.

2 All data for Germany reported in this study refer to West Germany before German reunification.

3 For a more detailed discussion of the data and sources, see appendix I to Pension Policy. Because there are sometimes major differences in the data provided for each countty, the derailed discussion must be consulted for a full understanding of the tables in this report.

4 For the United S tates only, the data on covered workers also include all nonvested plan participants who have left employment in the past year. (Starting with data for 1988, this requirement was changed to 5 years.) Plans are required to report these workers in the annual report to the Internal Revenue Service. Although reliable data on the size of this group are unavailable. this group appears to have liule effect on U.S. coverage rates. For studies covering both public and private pensions, see Reforming Public Pensions (Organisation for Economic Co-operation and Development, 1988).

5 In funded pension plans, the sponsoring employer sets aside money in advance for payment of future benefits. In unfunded pension plans, the sponsoring employer sets aside money for payment of benefits in the period the money is disbursed to the retiree.

6 Emily S. Andrews, "Pension Portability in Five Countries," Pension Policy, pp. 39-51.

7 Robert L. Clark, "Inflation Protection of Retiree Benefits," Pension Policy. pp. 53-58.

8 Zvi Bodie, "Pension Funding in Five Countries," Pension Policy. pp. 59-71. Note, the five countries surveyed are: the United States, the United Kingdom, the Netherlands, Japan, and
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Author:Dailey, Lorna M.; Turner, John A.
Publication:Monthly Labor Review
Date:May 1, 1992
Previous Article:Wage and compensation changes in settlements, 1991.
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