Pension Reform: Navigating the Future of Retirement

Pension Reform: Navigating the Future of Retirement
December 12, 2024 9 mins

Pension Reform: Navigating the Future of Retirement

Pension Reform: Navigating the Future of Retirement

Pension reforms in Europe are reshaping retirement planning, demanding more oversight from employers and new strategies for employees’ financial wellbeing.

Key Takeaways
  1. European governments are reforming pension schemes, requiring employers to manage evolving retirement plans.
  2. Many countries are prioritizing sustainable pension systems to meet financial needs and increased life expectancy.
  3. Improve employees' financial wellbeing by offering customized education, retirement plans and health benefits.

Amid continued economic uncertainty and aging populations, governments across Europe are proposing and passing regulations to shore up defined benefit (DB) schemes and make defined contribution (DC) schemes more fit for purpose. Meanwhile, employees are increasingly concerned about saving enough for retirement. To address this, employers need to stay informed about regulatory changes and develop strategies to manage their evolving retirement plans. They should also adopt new approaches to support the financial wellbeing of their workforce.

According to Aon's 2024 Defined Contribution (DC) survey findings, only 35 percent of schemes could identify what employees can expect to receive at retirement, with no change from the 2022 survey results. This stagnation highlights the pressing need for pension reform and enhanced retirement planning strategies. Although employee engagement is on the rise, it is imperative that employers ensure DC plans deliver fair and sufficient outcomes for all members.

"Globally, people have less disposable income and are living longer, which increases the cost of living and directly impacts pension systems,” says Ben Simon, associate partner in Aon’s Wealth Solutions practice. “Consequently, pension reform and enhanced retirement planning are essential for the sustainability of pension systems.”

To effectively manage these changes and new requirements, businesses must adhere to stringent deadlines and proactively seek optimal solutions. 

Pension Reform Developments

Amid a cost-of-living crisis, sustainability is a central focus of pension reform efforts in many European countries — many of which are considering changing the state pension age, shifting from DB to DC schemes or tweaking existing DB schemes to improve affordability. These reforms aim to ensure the long-term viability of pension systems while addressing the financial challenges faced by governments and individuals. This global trend highlights the need for innovative solutions to support an older workforce and secure financial wellbeing in retirement.

Country-Level Developments

  • United Kingdom

    Following legislation introduced in 2021, the UK is piloting Collective Defined Contribution (CDC) schemes, which serve as a middle ground between DB and DC plans, showcasing innovative solutions that certain countries are implementing. A notable example is Royal Mail's introduction of the UK's first collective DC pension plan. This scheme pools contributions to provide over 100,000 employees with both retirement income and a lump sum, offering a more sustainable and secure retirement solution for employees.

  • Italy

    The Italian government plans to boost pension fund memberships voluntarily by channeling a share of severance payments to pension funds. The mid-term budget plan for 2025-2029 includes changing the supervisory mechanism for complementary pensions to encourage employee uptake. To ensure the sustainability of the pension system amid an aging population and low birth rate, the government aims to extend working life by introducing incentives for staying in the job market and revising retirement access criteria. Additionally, it plans to review mandatory retirement for public employees by extending working life and retaining skilled workers, as well as further enhancements to the auto enrollment system in Italy.  

  • The Netherlands

    The Future Pensions Act in the Netherlands represents a significant development. This legislation exemplifies a global shift toward sustainable pension schemes, with governmental involvement drawing increased public attention to the issue. Companies will need to adapt their pension strategies to meet new requirements, such as automatic enrollment, which aims to assist employees in securing a sustainable financial future. The government has recently extended certain deadlines, which will impact clients' actions and timelines. Businesses operating in the Netherlands must prepare to submit transition plans by January 1, 2025, ahead of full implementation beginning January 1, 2028. Under this new legislation, all future accruals from 2028 onward will be based on a DC flat rate. DB plans will no longer be permitted. Businesses will also need to implement auto-enrollment for all employees over the age of 18 with pension contributions at fixed percentages, among many other obligations. Companies must consider how the recent extension of deadlines might affect clients' actions and timelines, and the key challenges businesses might face in preparing for the transition.

  • Poland

    In 2019, Poland introduced a new auto-enrollment retirement savings plan (PPK) with phased implementation. Initially, it was mandatory for employers with over 250 employees; however, it has now become compulsory for all employers, the only exemption being if a retirement plan (PPE) meeting specific criteria already exists. To date, this initiative has been successful, with approximately 50 percent of eligible employees participating in a PPK plan.

  • Ireland

    Auto-enrollment will begin next year in Ireland, making it easier for employees to join pension schemes automatically. Additionally, multi-employer pension funds are being introduced to provide better and more cost-effective governance compared to stand-alone pension funds. 

  • Greece

    Greece implemented some pension reforms in January 2024. The changes include solidarity contributions for pensioners, a 15-year minimum for supplementary pensions, revised terms for widow/widower pensions and adjustments to disability pensions. Furthermore, social benefits under EFKA will be consolidated, and a new formula for calculating pensions will be introduced.  

  • Belgium

    On April 4, the Belgian government enacted pension reforms, including a new bonus for working past the earliest retirement age and changes to the pension minimum guarantee. Starting from January 1, 2025, civil servants' pension equalization will be capped at 0.3 percent annually.

  • Switzerland

    The Swiss Parliament proposed pension reforms (BVG reform), which included measures to strengthen the financing of occupational pension provision. However, this proposal was rejected by a public referendum vote in September 2024.

Employer Initiatives

In today’s rapidly evolving workplace environment, it is essential for companies to adopt innovative best practices that support their employees' financial wellbeing and retirement readiness. Here are five recommendations to consider:

1. Support Financial Wellbeing: Companies are increasingly recognizing the importance of supporting their employees’ financial wellbeing, which has a direct impact on emotional and mental health. Organizations can enhance employee financial wellbeing by providing retirement and health benefits, financial education, and tailored planning to help employees manage day-to-day expenses and increase their pension contributions. Behavior-based interventions targeting specific populations, like lower-income employees, can enhance overall financial stability. Refining retirement strategies through retirement adequacy analysis is essential for fostering a secure financial future for employees. 

2. Implement Auto-Escalation: Some large multinationals have implemented auto-escalation in DC plans, where the contribution rate gradually increases with the length of employment. This approach encourages employees to save more over time, enhancing their retirement security. This is just one example of ways employers are reviewing their existing DC benefit design, as well as DC investment options. 

3. Enhance Pension Communication and Employee Engagement: Providing clear and accessible information about specific pension positions is essential. Employers must effectively manage the substantial amount of information and activities that employees encounter while fulfilling regulatory obligations. Technology is also likely to play an increasingly important role. For example, in certain countries, projection tools are available to help employees understand the numerical aspects of their retirement planning. 

4. Review and Enhance Company Contribution Structures: Ensuring employees have easy access to their workplace pension schemes is another critical initiative. According to the 2024 Aon DC survey, the median joining level of company contributions has remained at around 6 percent since 2019. This suggests that many employers have not reviewed their contribution structures recently, despite growing concerns about pension adequacy.  

5. Take Advantage of Multi-Employer Pension Funds: Multi-employer pension funds are generally more cost-effective and better governed than stand-alone pension funds. By pooling resources from multiple employers, these funds benefit from economies of scale, resulting in reduced administrative expenses and more efficient management. They also offer better diversification, access to professional management and enhanced regulatory compliance. With multiple employers involved, there is greater scrutiny and governance, ensuring the fund is managed in the best interests of all participants. 

55%

of multinationals know how their DC plans compare to both their peers and the wider market.

Source: Aon’s 2024 Global Retirement Management Survey

Quote icon

Given the current economic environment and desire for individuals to have a reasonable income in retirement, it’s crucial to provide more flexibility, education and options for individuals to make better use of their pension funds.

Ben Simon
Associate Partner, Wealth Solutions, Europe, the Middle East and Africa

Ensuring a Secure Retirement

Achieving an adequate standard of living in retirement is unlikely to occur by chance; it requires well-structured DC schemes with appropriate contribution rates, effective scheme design and support to assist members in making informed choices. Government regulations are designed to enhance retirement readiness and affordability for employers. To optimize outcomes, companies must assess the implications of these regulations for their employees and consider necessary adjustments to their schemes.

However, only a minority of schemes currently know whether they are on track to deliver an adequate retirement for their members. This stagnation is concerning and highlights the need for more robust strategies. “It is essential to engage employees effectively by providing behavioral support rather than merely offering additional information and tools to manage their financial decisions,” says Fleur Iannazzo, associate partner, financial wellbeing in Aon's Wealth Solutions practice. “By doing so, employers can better support their workforce in achieving financial security and a comfortable retirement.” 

Aon’s Thought Leaders
  • Fleur Iannazzo
    Associate Partner, Financial Wellbeing, Wealth Solutions, United Kingdom
  • Ben Simon
    Associate Partner, Wealth Solutions, Europe, the Middle East and Africa

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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