One in four Europeans is active member of defined contribution plan

The defined contribution plan in European continent manage the retirement savings of over 58 million active plan members, of which 5 millions are from Romania.

The pension scheme has an aggregate €1.3 trillion savings under management. The defined contribution (DC) pension provision has gained considerable importance in the past decade and will probably continue to rise in prominence. Most countries which have traditionally have witnessed a strong shift towards DC pension provision from had defined benefit provision scheme that has €2.2 trillions in retirement savings under management and 35 million active members. The DC and DB make up the second pillar European private pension system.

The EFRP survey highlights the wide diversity of DC plan in Europe, ranging from individual accounts with ample choice to collective schemes with some degree risk-sharing between participants. The DC plans differs in Europe in terms of contribution rates, participation, life-cycle, guarantees and risk-sharing, etc.

Participation. Denmark, the Netherlands and Sweden have achieved nearly full coverage of occupational plans. In the quasi-mandatory occupational DC schemes in Denmark, the Netherlands and Sweden contribution rates are – just like employee membership – determined through collective bargaining.

Governments in Bulgaria, Denmark, Hungary, Poland, Romania, Sweden, Austria, Iceland, Switzerland, Slovakia, Slovenia, Croatia and the Baltic states have introduced funded DC pillars that are mandatory for all workers. In terms of active DC plan members, Poland is by far the largest DC market (14.5 million members), followed by Sweden (6.7 million), Denmark (4.6 million), Romania (4.4 million – in 2009), Italy, Hungary and France.

In terms of contribution rates, Denmark leads the chart with 16% share of monthly wage, followed by Cyprus (12.5%), Iceland (12%), Ireland (11%) and Guernsey (10%). The lowest contribution rates to second pillar schemes were observed in Romania (with 2%). Only if schemes in which the average contribution rate is above 10% plan members are not dependent on public pay-as-you-go scheme.

In terms of accumulated assets, the United Kingdom is the largest DC market with over €560 billion in retirement provisions, followed by Denmark (€230 billion) and Switzerland (€195 billion).

Investment choice. About 60% of DC schemes in the survey offer two or more investment options (default fund, life-cycle fund). If in western European countries plan members enjoy greater freedom in choosing an investment option, in eastern European countries, the system provides a limited number of options, and pension companies are required to provide a default fund in which plan members are enrolled if they fail to make a choice. In Romania, investment options are available only for third pillar plan members.

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