International legal barometer – A detailed examination of statutory retirement pensions

Berlin, 20. January 2015 – Frequent upheavals on the finance markets and tight budgets in many countries are factors which are bound to affect options available with respect to financial provisions made for retirement. With this in mind, Ecovis asked its partners the world over whether statutory old age pension schemes existed in their respective countries and how they are funded and designed. Ecovis offices in 21 countries completed the questionnaire, 16 of those in Europe. “The replies show a great degree of similarity in key aspects,” says Kurt Bülow, a board member of Ecovis. For example, 19 countries (90% of those participating) have instituted compulsory pension schemes for employees; in many of these countries the obligation also extends to other groups of gainfully employed such as the self-employed and sole proprietors. Besides these, there are other pension schemes for employees particular to Malaysia and Mexico. In 80% of these 19 countries where compulsory pensions schemes have been instituted, both the employee and the employer are liable for contributions, generally as a certain percentage of gross wages or salary. In Russia, the employers are solely responsible for these contributions, whilst in Croatia and the Netherlands the employee shoulders them. There are eight countries (42%) where the state also contributes towards funding the statutory retirement pension. In 12 countries (63%) pension payments are met directly by contributions and, where appropriate, by government subsidies (pay-as-you-go scheme). Another three states (Croatia, Russia, and Uruguay) combine this with a funded pension scheme; after deduction of administrative expenses, the contributions are invested on the capital market and the pensions paid out from the capital saved by each individual. The Japanese pension scheme is entirely funded. “However, the investments are not linked to individual pension accounts,” explains Kazuhiko Chiba, Ecovis’ partner in Tokyo. “Instead, the results of collective investment is one of the factors for determining annuity rate, which the government reviews every four years.”

In the Netherlands everyone living and working there is obliged to pay into the statutory pension insurance scheme. In Switzerland the compulsory retirement insurance run by the state is complemented by the Occupational Benefit Plan, a funded pension scheme which is obligatory for employees. Its purpose is to enable retired persons to maintain their previous standard of living by receiving an income (including state pension) which corresponds to about 60 % of their salary immediately before retirement. Marcel P. de Boni, Ecovis’ partner in Zurich, says, “In principle anyone living or working in Switzerland has to contribute to the state pension system from January 1st of the year following his or her 17th birthday (20th birthday if the person has no income from work) until statutory retirement age. However, there are some exemptions. On the other hand recipients of an old-age pension remaining in gainful employment must continue to pay contributions on salaries in excess of 1,400 CHF per month or 16,800 CHF per year.”

In Ukraine, all citizens, enterprises and self-employed persons as well as foreigners and stateless persons living there, insofar as they are employed or perform contractual services under civil law, are obliged to participate in the national social insurance scheme and therefore also make contributions to the statutory pension scheme. This does not apply to foreigners working in the representative offices of non-resident businesses.

Marcin Milczarek, Ecovis’ partner and lawyer in Warsaw, says, “In Poland the basic principle is that everyone should enjoy the security of a statutory retirement pension. For this reason even self-employed businesspeople as well as individuals performing work on the basis of service and management agreements are included in the pensions insurance scheme. Certain civil servants, such as judges and public prosecutors, who are entitled to a state pension, and in many cases members of supervisory boards, are exempt from this obligation.”

In Germany, the compulsory pensions insurance scheme does not apply to all employees. “Exceptions are made for those employed only short-term and those earning less than 450 euros a month, as well as civil servants whose pensions are entirely funded by taxes“, explains Kurt Bülow.

By contrast, agricultural entrepreneurs are liable to compulsory insurance, as are freelance artists, journalists and authors. The latter three are only obliged to pay half the statutory percentage, as if they were employees. The other half, which corresponds to the employers’ contributions, is funded by a federal subsidy and a contribution paid by those businesses which exploit their artistic and literary achievements. The pensions insurance scheme for those working in agriculture is also heavily reliant on state funding.

A wide range of contribution rates

In Denmark almost anyone who has been living in the country for a certain minimum number of years is entitled to the state pension, which is funded by taxes. Employees are required only to pay a monthly contribution of 90 Danish kroner (DKK), equivalent to about 12 euros, employers 180 DKK (roughly 24 euros).

In Ukraine the statutory pensions insurance is part of the standard social insurance scheme. Those who are compulsorily insured and their employers pay what is called a Unified Social Tax (UST). The UST rate for employees is 3.6% of the wage, salary and other payments made by the employer. To this is added between 36.76% and 49.70% paid in by the employer, the rate depending on the risk of work accidents and occupational diseases forecast for the respective industry. The reason for this is that the employers’ contributions also cover the statutory insurance payments paid out in such cases too. Those who are self-employed and sole proprietors have to pay UST at a rate of 34.7% of their monthly income or their profits, as the case may be. “Over 90% of the UST goes towards retirement insurance,” says Olena Kravtsova, lawyer in Ecovis’ office in Kiev. The statutory pension is also funded by taxes on certain transactions such as foreign currency trading, mobile telephony and the purchase and sale of real estate.

There are four other countries in which the employers must make higher contributions than the employee. The smallest difference is in Bulgaria and the greatest in Italy (generally 30% of gross income compared to 9%) and Romania (between 15.8% and 25.8% for the employer compared to a uniform rate of 10,5% for the employee).

In China the contribution rate is as a rule 21% for the employer and 8% for the employee. “However, the percentages may differ in various cities”, says Yi Wang, a partner of Ecovis in Shanghai. The employers’ contributions are paid into an investment pool whilst the employees’ contributions are credited to their individual pension accounts.

In roughly every third country the employees’ and employers’ contributions to the statutory retirement pension are at the same rate (see table). The highest rate in these cases is to be found in Spain with an average of 23.6% of the gross wages or salary for each, and the lowest being Cyprus with 7.8% for each. However, the Spanish rate covers other aspects of social security as well, mainly health insurance. In five other countries, namely Germany, Japan, Poland, Slovenia and Switzerland, the contribution rate for both employers and employees is in single figure percentages.

In contrast, in the two countries where the employees are solely liable to pay contributions, they are expected to foot hefty bills. In Croatia the rate is 20% and in the Netherlands 17.9%. However, any wages or salaries in excess of 33,363 euros are exempt, which means that the maximum annual contribution is 5,971 euros. In Russia the employer has to pay 22% in contributions up to an annual gross wage of 624,000 roubles (roughly equivalent to 11,000 euros) and 10% on anything above that.

It is the French taxpayers who have to pay the greatest government subsidy. In 2012 the rate was about 38% of the pension budget. Under the German retirement pension scheme 27% of the expenses was funded from the federal budget in 2013.

Tendency to later retirement age

The standard retirement age when employees become entitled to a full statutory pension ranges between 50 and 68 (see table), depending on the country and gender. In almost two thirds of the countries surveyed (63%) with statutory retirement schemes, the standard pensionable age is the same for both men and women. This also applies to Malaysia and Mexico, where employees are expected to make their own provisions for retirement, such as by paying into a pension fund.

There are two countries in which women are permitted to retire at an early age. In China the age is 50 or 55 and in Russia 55 as a general rule. The regular pensionable age for men in both these countries is 60. In China employees are expected to have made contributions for 15 years to become entitled to a state pension.

In Ukraine and Uruguay, the threshold for entitlement to a full pension is a uniform 60 years; however, today male civil servants have to work to the age of 62 in Ukraine. In France employees of both genders who were born before 1st July, 1951, are entitled to a pension at the age of 60. Those born between 1st July, 1951, and 31st December, 1954, are entitled to a pension at the age of 60 plus 4 months to 61 plus 7 months, depending on their year of birth, whereas those born on 1st January, 1955 or after have to wait until they reach the age of 62. In Great Britain the normal pension age is between 61 and 68 years old, those born more recently having to wait long to draw their pension.

In Germany the standard pensionable age, which is currently 65 years and three months (for employees born in 1949), is being increased in stages to 67 years in the year 2031. In the Netherlands, where the current pensionable age is almost identical (65 years and two months), this target will be reached as early as 2021.

In Slovenia the standard pensionable age for women, which is currently 64 years, is to increase by four months every year up to 2017 to come level with that of the men (65).

Statutory retirement age (entitlement to full pension)

current retirement age (years): 50 to 60 1)
2 countries: China, Russia

current retirement age (years): 60 to 65 1)
8 countries: Bulgaria, Croatia 2), France 3), Switzerland 2), Slovenia, Ukraine 3), Uruguay 3)

current retirement age (years): 65 (male and female)
4 countries: Denmark, Japan, Romania, Spain, Cyprus

current retirement age (years): later (male and female)
3 countries: Germany, the Netherlands, Poland

current retirement age (years): others
2 countries: Great Britain 4), Italy (women: 63, men: 66)

1) If not otherwise stated, lower for women.
2) men at 65, women at 64
3) men and women the same, below 60
4) men/women 61 to 68, depending on year of birth

Apart from Russia, entitlement to a pension is also linked to a minimum number of contribution years (resp. years of residence in Denmark and the Netherlands). In six countries this is 15 years, in three other countries between 25 and 30 years.

In Germany the statutory pension may be claimed after as short a period as five years in total, but such a pension is then correspondingly small. In France those born after 1973 must have paid contributions for 172 quarters (corresponding to 43 years) and those born before then between 160 and 171 quarters.

In Bulgaria a distinction is still made between men (at least 38 years of contributions) and women (35 years), as in Poland (28 resp. 25 years). However, in Poland the period for women is to be extended to 28 years by 2022. In Ukraine at least 15 years of social insurance contributions are required before a pension can be claimed. However, in order to obtain the minimum pension which corresponds to the statutory minimum cost of living, women need to have completed 30 years of social insurance contributions and men 35.

In the Netherlands, the full pension is only paid out when the pensionable age is reached if those entitled to such pension have lived there at least 50 years. For every year below that, 2% is deducted.

Different opportunities for early retirement

In most of the countries which have a statutory pension scheme (74%), it is also possible to take early retirement, and in almost half of them (47%) this is possible in certain cases without any deduction. In Croatia, for example, women can retire without deductions at the age of 56 and men at 60, provided they have paid in contributions for 41 years.

In Romania 43 years of contributions are sufficient to qualify for a full pension from the age of 60. In Germany recent legislation allows retirement two years before the regular pensionable age if contributions have been paid for a period of 45 years.

In France people covered by the pension insurance scheme may apply to retire before the standard pensionable age if they started working before they were 20 and have fulfilled the minimum requirements with respect to years of contribution paid.

In Ukraine women may retire between the ages of 45 and 50, men between the ages of 55 and 55, without any deductions to their pensions, if they had particularly arduous occupations or jobs which may have been detrimental to their health, were in the army, or were mothers of several children, or victims of the Chernobyl catastrophe, among other conditions. “In Uruguay it is possible to take early retirement without any deductions to pensions if you are suffering from a longstanding illness and are unfit for work”, explains Alejandro Bouzada, a partner of Ecovis in Montevideo.

There are twelve countries in which it is in principle possible to retire earlier, generally between two to five years early, if one is prepared to accept deductions. The greatest difference between the standard pensionable age and the earliest entitlement to claim a pension is in Poland, where men can retire at 60 and women as early as 55, but then, however, only for 80% of the full monthly pension.

In Germany employees may claim the benefits of the statutory pension scheme up to four years early. This means that 0.3% of their pension is deducted for each month, in other words 3.6% for each year earlier that they retire from the work force. The system is similar in Japan, where, depending on the claimant’s year of birth, retirement may be taken between the ages of 60 and 64 with corresponding deductions from the full pension.

In Switzerland the beneficiaries may opt for receiving the state pension one or two years earlier or one to five years later, with according adjustment of the monthly amount.

In Slovenia those claiming an early pension are not allowed to work for a salary at the same time, and in four countries (Denmark, Germany, Croatia and Poland), a supplementary wage is only permitted within limits, being, for example, a maximum of 450 euros per month in Germany and the equivalent of 640 euros in Poland.

Malaysia and Mexico are two special cases

Malaysian citizens employed in the private sector are compelled to become members of the Employees’ Provident Fund (EPF) which is run by Malaysia Government agency under the Ministry of Finance; foreigners working in Malaysia may become members if they wish on a voluntary basis. The main aim is to save money to provide for a retirement pension. Employees must pay 11% of their gross wages or salary into the provident fund and their employers generally 12% (monthly wages of more than 5,000 Malaysian ringgits, equivalent to 1,175 euros) or 13% (monthly wages of 5,000 MYR and below). For Employees aged 60 until 75, their contribution rate will be at 5.5% while employers must pay 6% (monthly wages more than 5,000 MYR) or 6.5% (monthly wages of 5,000 MYR and below).

The EPF may invest the savings in approved shares and bonds. Although the majority of these investments are low-risk and at fixed interest rates, the fund exceeded the statutory minimum dividend of 2.5% in the past 14 years by a good margin.

Since 2007 the individual savings amounts have been allocated to two accounts:

• 70% are attributed to the account dedicated to pension payments. „Once a minimum amount of savings is reached, the EPF member is permitted to invest 20% of the excess him- or herself in approved investment products. From the age of 50, 30% of the capital saved so far can be paid out, but in order to claim the full amount the age of 55 has to be reached, or if the member is unemployed, emigrates or returns to his or her home country,” says Esther Choy from Ecovis in Kuala Lumpur. As an alternative, the member can opt for payment in the form of a pension.
• 30% of the monthly contributions are allocated to a second account. Here the money saved can be used for medical bills, to pay for housing or educational fees, and from the age of 50 for any purpose at all.

In 1997 Mexico converted its retirement pension scheme for employees in private enterprise from a predominantly pay-as-you-go scheme to a funding-only system. Here the employees are obliged to invest the savings amounts which they, their employers (the largest portion) and the federal government have jointly accumulated in one or several pension funds through specialised pension fund management firms. These latter are free to pursue their own investment policy independently.

“Early retirement can start at 60. However, then you can only claim 75% of the full retirement pension which is paid out at the age of 65”, explains Arturo Quibrera Saldaña, a partner of Ecovis in Mexico City. “Between the ages of 61 and 64 the pension increases in stages of 5% of the full pension.” Those who have reached the age of 65 and paid in 1,250 weeks of contributions (approximately 24 years of contributions) or more can choose either to apply for a fixed pension calculated beforehand by the pension administrator or to convert the money saved into a private pension insurance policy.

The self-employed may volunteer to participate in the funded pension scheme. Those who were being paid a pension by the statutory social insurance scheme before the introduction of this new system in 1997 are still entitled to receive it as before. Anyone who was entitled to a pension under the old system at the time of conversion and who has been paying into the pension fund since then is at liberty to opt for the more favourable version. Civil servants continue to be covered by the national social insurance scheme.