RAPPORTEUR GROUP

Programme, Budget and Administration

GR-PBA(2020)18

17/9/2020[1]

Council of Europe Pension System – follow up Item to be considered by the GR-PBA at its meeting on 2 and 6 October 2020

 

The Budget Committee at its May 2020 meeting examined the pension system of the Organisation and identified the following areas for discussion:

! Medical Insurance Costs

o    In the light of the increase in medical insurance costs of pensioners and the corresponding upward impact on the Global Contribution Rate (GCR), to examine ways to bring these costs down, including through consultation with staff.

! Staff members contribution to the pension schemes

o    The Budget Committee considered it worthwhile to examine the potential increase of staff members contributions to the cost of their pensions.

! Increase in retirement age

o    Bearing in mind the increased life expectancy, the Committee of Ministers should consider increasing the retirement age to 67. In view of the risks of infringement of acquired rights around increasing the retirement age in the closed pension schemes and of staff already affiliated to the Third Pension Scheme, the Committee was of the opinion that the change could only be made for new recruitments from January 2021.

The purpose of the present document is to describe these three components of the pension system of the Organisation and to provide elements to be taken into consideration in a possible reform. This document should be read in conjunction with GR-PBA(2020)5on the developments in the Council of Europe’s pension schemes and GR-PBA(2020)11on the Pension Reserve Fund – background document.

The medical cover together with the pension schemes are a fundamental componentof the social cover provided to staff members by International Organisations. They represent an important part of the terms of employment offered by the Organisation at the time of recruitment in the same way as salaries, career prospects or the working environment. This is particularly the case for career Organisations, such as the Council of Europe, whose staff members are forced to cease maintaining any link with national schemes at their recruitment, e.g. when being registered with the compulsory private medical scheme of the Organisation. In this context, the social cover even at the far retirement age can have an important impact in the attractivity of the Organisation as an employer.

The Council of Europe’s private medical insurance scheme was introduced in 1999 in place of the combination of the French social security system and a complementary health insurance scheme. The private scheme mirrored the French social security and complementary health scheme. The reason for the change was one of economy with a view to using the savings to bolster member States’ pension contributions.

In 2003, the annual savings (€5M per year) were transferred as member State contributions to the Pension Reserve Fund upon its creation, thereby reducing the cost to member States related to the introduction of the current funding approach for pension obligations (cf. GR-PBA(2020)11).

At the time, staff members in Strasbourg were given the option to stay in the French social security scheme if they so wished. Currently, there are around 40 staff members concerned.

ü  Former staff members in receipt of a retirement or disability pension from the Organisation;

ü  surviving spouses in receipt of survivors’ pensions;

ü  orphans or other dependents of staff members who die while still working or after qualifying for a pension.

Pensioners are only affiliated to the 1^st euro reimbursement medical cover with the Organisation if they have no right to access any national social security system unless they renounce such right and assume the cost of this choice without any additional charge for the Organisation (see section below).

Temporary staff members or former permanent staff members who leave the Organisation without a pension because they contributed less than 10 years to one of the 3 pensions schemes, do not benefit from a medical cover after they leave the Organisation.

The affiliation to the Medical and Social Insurance Scheme shall be suspended for former staff members in receipt of pension benefits from the Organisation who engage in a remunerated professional activity. Currently 11 pensioners are not covered by the Organisation’s Insurance Scheme for that reason.

Entitlement to the benefits provided by the Organisation’s Medical and Social Insurance Scheme shall begin on the date on which the beneficiary becomes entitled to the benefits provided by the Organisation’s Pension Scheme and shall cease on the date on which the beneficiary ceases to receive pension benefits.

Pensioners’ medical and social coverage consists of two pillars:

1. The reimbursement of part or all of their medical expenses. The level of coverage (type of treatments and maximum amounts reimbursed) is identical to the one provided to active staff members.

2. The provision of a home assistance allowance, in case of a decrease of at least 70% in the pensioner’s physical or mental capacities on a permanent basis. Unlike active staff members, pensioners are no longer covered against death, total or partial disability or temporary incapacity.

The way the medical cover is organised depends highly on the rights of pensioners to access national social security systems and on their country of residence. Pensioners may fall under one of the four medical cover categories below:

	1st euro reimbursement	Complementary cover (pensioners residing in France)	Intermediate cover (pensioners residing in countries other than France)	1st euro scheme by personal choice
Pensioners concerned	No right to access any national social security system (they do not have another pension giving right to national schemes)	Right to access the French Social Security (they receive a national pension for periods of employment outside of the Council of Europe, which gives them the right to benefit from the French national scheme either directly or through an intra-EU transfer)	Right to access a National social security (either directly or through an intra-EU transfer) other than the French social security	Right to access the French or other National Social Security but who renounce that right and assume the cost of this choice without any additional charge for the Organisation
Level of insurance cover	Primary insurance corresponding to the French social security + Complementary cover	French social security + Complementary cover	National social security scheme + Complementary cover	Primary insurance corresponding to the French social security + Complementary cover
Number of pensioners	182 (20.5% of all pensioners)	616 (69.2% of all pensioners)	51 (5.7% of all pensioners)	41 (4.6% of all pensioners)
Employer contribution rate	6.282%	3.300%	4.910%	3.300%
Pensioners’ contribution rate	3.141%	1.650%	2.455%	6.124%

As is the case for active staff, the split of the total Medical and Social Insurance Scheme is financed in accordance with Article 24 of Appendix XII of the Staff Regulations.

“Persons affiliated to the Organisation’s Medical and Social Insurance Scheme under Article 16, paragraph 1, of these Regulations shall contribute one-third of the cost of cover for benefits provided by the Scheme.”

The only exception to this rule is foreseen in Article 24 and corresponds to pensioners that out of their personal choice have decided to waive their right to profit from the medical and social cover granted by a national social security, in which case they shall pay the entire cost of cover from the first euro, less the part payable by the Organisation in respect of supplementary affiliation (see 1^st euro scheme by personal choice).

The Medical and Social Insurance is outsourced based on three years renewable contracts for a maximum of six years and is the object of regular calls for tenders. The last contract was awarded as of 1 January 2020 to Malakoff Humanis as insurer and Henner as claims’ manager and has engaged parties until 31 December 2022 when the contract would be renewed or be the object of a new call for tenders. The last contract award resulted in savings estimated at €700 K.

Although the different populations (permanent staff, temporary staff and pensioners) covered by the insurance scheme pay contribution rates calculated according to the guaranties being covered, the medical and social cover has traditionally been considered as a single package with a mutualization of risks.

The contribution rate paid to cover medical expenses is the same for active staff and pensioners although it is obvious that medical expenses increase with age and reach a maximum during the last years of life. Therefore, serving staff are, as a result of that risk mutualization, assuming part of the cost that should be charged to the pensioners and consequently to the pensions budget if we consider the 2/3 of the contribution paid by the Organisation.

Two options could in principle be envisaged to lower the cost that is being currently charged to the pensions budget to finance the social and medical cover.

Ø  Lowering the level of the social and medical cover

The apparently simplest solution would be to lower the level of reimbursements. However, it is worth noting that the monitoring of the Council of Europe social cover scheme and its adaptation in order to contain cost is totally integrated in the daily practice. The coverage is systematically reviewed at each call for tenders and adapted to suit the possible expenses the Organisation can afford. As such, the guarantees that are included in the scheme (which treatments can be reimbursed) and the level of the reimbursements are regularly optimized at least every 3 years.

A radical move could be to limit the medical cover to the primary level guaranteed by the French social security. For pensioners affiliated to the French scheme it would result in stopping any financing by the Organisation.  For pensioners registered with other national schemes or pensioners affiliated with the 1^st euro scheme, this would be achieved through a reduction in the level of reimbursements to that of the French social security, leaving pensioners in all cases with a significant co-payment of their medical expenses.

Most of the pensioners reside in France, where a complementary scheme is necessary, insofar as the French social security never reimburses the totality of each individual medical bill (between 60 and 90% of its standard rates) and integrates in its main principles a co-payment by a complementary scheme. 

If the Organisation decided to limit the medical cover to the primary level guaranteed by the French social security, having to subscribe an individual complementary contract at retirement age would be rather a challenge for pensioners.

It should also be noted that the formerly more generous medical cover of pensioners has in fact been leveled down in the past decade to lead to the current situation in which medical expenses are covered at the same level for active staff and pensioners. This change was motivated by the protection of the scheme in general and introduced on the basis of equality of treatment. Modifying the structure of the coverage for pensioners would mean reverting to an inequality of treatment between active staff and pensioners.

In general, the whole scheme (active staff and pensioners) was reviewed several times over the last 15 years and numerous changes (i.e. reductions in the coverage, capping of reimbursements, etc) were introduced in order to contain the costs of the scheme. The levels of coverage are in line or are even less generous than those of other International Organisations.

As regards the home attendance allowance, the criteria set by the scheme are quite high, and only very dependent pensioners can benefit from this guarantee. Pensioners’ representatives have frequently claimed the dependency criteria should be brought down and a partial dependency should be introduced. This guarantee is also in line with national policies of member states, which are concerned with the ageing of their populations and the ever-increasing burden of long-term care, and are striving to set up solutions, under public or private schemes.

All in all, lowering the levels of social and medical cover at the period of life when it is probably most needed does not seem to be in line with the principles defended by the Organisation and could be considered as a violation of acquired rights. It would be very badly perceived by staff or pensioners, who would be put in difficult situations for various reasons.

Ø  Altering the 1/3 to 2/3 distribution between pensioners and Organisation

Increasing the financial burden on pensioners in order to make savings for the Organisation’s budget might be perceived by staff and notably by pensioners as an attempt against their acquired rights and might involve a legal risk for the Organisation. In particular, this option would not appear to be financially justified: the total amount of contributions would remain unchanged, but the burden would be transferred from the Organisation to the pensioners without apparent justification except that member states would prefer to contribute less than what they have previously undertaken to.

The 1/3 to 2/3 is the rule in all the Co-ordinated Organisations and in the European Commission. Changing that distribution would disadvantage the Organisation to attract and retain skilled staff in the international job market.

Contributions to the Pension Schemes

The pensions system of the Organisation is financed by:

ü  the staff members contributions,

ü  the contributions of member States and

ü  the financial income generated by the Pension Reserve Fund.

According to the Pension Scheme Rules, staff members shall contribute to the Pension Scheme and their contribution shall be calculated as a percentage of their salary and shall be deducted monthly.

The rate of the staff contribution is calculated based on the cost, in the long term, of the benefits provided by the Pension Scheme.

As provided for by Article 41 and its appendix actuarial studies are carried out every five years. In accordance with the results of those studies, the staff contribution rate is automatically adjusted, with effect from the fifth anniversary of the preceding adjustment. In the event of exceptional circumstances, the date of those studies, and of any adjustment of the contribution rate resulting therefrom, could be advanced.

Since the Council of Europe maintains with three pension schemes with different populations and which provide different benefits upon retirement, three different actuarial studies are carried out every five years.

The actuarial studies are prepared by the ISRP’s actuaries considering the following actuarial parameters:

• Discount rate
• Rate of increase in salary scales
• Demographic assumptions
• Mortality tables

Ø  Discount rate

 

The discount rate is based on the observation of the rates of return of long-term bonds issued in the reference countries.

The discount rate used for the calculation of the 2020 contribution rate was equal to 2.83%, significantly lower than that for the previous actuarial study (3.72%). The magnitude in the change of the discount rate was unprecedented and contributed significantly to the evolution of the staff contribution rate.

Ø  Rate of increase in salary scales

The rate of increase of salary scales is used in the actuarial calculations to consider changes in future salaries which are the basis of calculation for future new pensions. It is based on the average salary increase over the last 15 years and was estimated as 0.24% above inflation.

Ø  Demographic assumptions

Demographic assumptions are specific to each of the Co-ordinated Organisations and include parameters such as turnover, annual probability of retiring, annual probability of becoming invalid, new entrants’ profiles, marriage rate etc.

Ø  Mortality tables

The mortality tables have been developed by the ISRP in collaboration with Eurostat considering the specificities of international civil servants based in Europe from a life-expectancy point of view and introducing a prospective trend.

The staff members contribution to the pension schemes has evolved in accordance with the evolution of the actuarial parameters considered in the regular actuarial studies.

As shown in the table below, the staff members contribution rates have constantly increased but it is in the last revision of 2019 that the increase was especially significant due to the decrease in discount rates and to a lesser extent to the changes in the mortality tables and the demographic assumptions. These increases were of 19.5%, 21.2% and 11.3% respectively in the Coordinated Pension Scheme (CPS), the New Pension Scheme (NPS) and the Third Pension Scheme (TPS).

The graph below shows the distribution of the employee/employer contribution in the three pension schemes, going from the initial 1/3 to 2/3 in the CPS to the less costly split of 45% to 55% of the TPS. It is worth noting that the European Union and the United Nations have kept the 1/3 to 2/3 distribution in their pension schemes.

In 2012 the Committee of Ministers already proposed to the Co-ordinated Committee on Remunerations (CCR) the reform of Article 41 of the CPS to adopt the 40%-60% split already existing in the NPS. The proposal was studied by the CCR which concluded that such a reform posed a large number of difficulties from a legal point of view and decided not to follow the proposal of the Committee of Ministers of the Council of Europe.

While the contribution rates change according to the regular actuarial studies, an unilateral modification of the distribution of those contribution rates imposed by the Organisation to the staff members does not seem therefore feasible except for new recruitments under the Third Pension Scheme.

The minimum retirement age without any reduction of entitlement is fixed at 60 for the Co-ordinated Pension Scheme (CPS) and at 65 for the New Pension Scheme (NPS) and the Third Pension Scheme (TPS). The CCR analysed in the reform of the CPS introduced as of 1^st January 2020 a possible increase of the retirement age. Although considered as legally feasible, particularly if phased in over time, this measure was finally abandoned in view of its impact in the human resources policies of some of the Co-ordinated Organisations.

New recruitments are affiliated to the Third Pension Scheme, an increase in the retirement age could initially have the following effects in the scheme:

Ø  Financial

·         The increase in the retirement age would reduce the benefits paid to pensioners and would therefore render the pension scheme cheaper. This would reduce the contribution rates from staff and the Organisation to the scheme.

·         Despite a reduction in the contribution rates, the staff and the Organisation would contribute for two additional years to the pension scheme transferring financial obligations from the pension scheme to the budgets of the Organisation.

·         Prolonging the careers of staff by two years could in principle lead to higher salaries before retirement and therefore higher pensions. However, since the Organisation put in place in 2011 the doubling of steps, two additional years of career should not have a significant impact in financial terms.

·         Although the impact would be marginal, prolonging the career of staff by two years would make it easier for staff to reach the ten years of service and have access to a retirement pension.

Ø  Human resources policies

·         In a continuously changing environment in terms of technology and working processes, if the Organisation wants to keep up to date and follow the evolution of society, it will require a minimum turnover that would facilitate the recruitment of staff with new skills.

·         Prolonging the career of staff will reduce the turnover and require active human resource policies to update the staff skills and keep them motivated.

·         Increasing the average age of staff might also have an impact in the absenteeism rate and the cost of the medical scheme.

Given that the increase in the retirement age would only apply to new recruitments the effects listed above would only be visible in the long term depending on the turnover and the levels of recruitment in the coming years.

The Third Pension Scheme was put in place in 2013 by the Council of Europe, it can be amended by the Council of Europe without requiring any consultation of the Coordinated Committee on Remunerations (CCR).

However, any changes to the Third Pension Scheme or to any of the other existing schemes would need to take into account the legal principles that govern the power to unilaterally alter the terms of employment of international civil servants, particularly with regard to pension rights established by international administrative case-law (see GR-PBA(2020)5).

Given that the proposed reform would only concern new recruitments, this should not contravene the legal principles mentioned above.

The International Service for Remunerations and Pensions (ISRP) has analysed the impact of the GCR and concluded that increasing the normal retirement age (NRA) for the new entrants from 65 to 67 would reduce the current estimate of the GCR to be implemented in 2022 by a range of 0.4% to 1.3% (cf. Appendix).

Appendix

Analysis of the impact on the global contribution rate of an increase in the normal retirement age of new recruits to 67

1. The objective of this Memorandum is to analyse the impact on the Global Contribution Rate (GCR) of the change of Normal Retirement Age (NRA) to age 67 for the new entrants to the Third Pension Scheme (TPS).

Assumptions Used

2. For this analysis, the latest GCR calculations with their respective populations and assumptions have been used. These are the population and assumptions as at 31/12/2018 as set out in the report entitled “Global Contribution Rate Considerations” (SIRP/E(2019)17).

3. The pension scheme specific assumptions required for changing the NRA to 67 (e.g. rate of retirement) have been adapted from the assumptions used with regards to the current TPS. No account has been taken of behavioural impact that might be due to a change in the NRA.

4. Of particular impact is that the staff contribution rate used for the current TPS scheme has been applied to the new entrants in this analysis. However, as the NRA would change for new entrants, it can be expected that the staff contribution rate would be lower to reflect this. This would reduce the impact of the change to NRA on the GCR, as lower contributions than those used in this analysis will likely be received which would require a higher GCR to offset this. Different scenarios of contribution rate have been analysed to take this into consideration.

5. As the objective of this analysis is to determine an estimate of the impact (and not the final value) on the overall GCR of the increase of NRA to age 67 for new entrants, the population and assumptions of the latest GCR calculations are deemed appropriate.

Impact on Projected 2022 GCR

6. The analysis performed concludes that increasing the NRA for the new entrants only from age 65 to age 67 would reduce the current estimate of the GCR to be implemented in 2022 by a range of 0.4% to 1.3%. This range is calculated by using different contribution rates for the new TPS with NRA 67 (assumed 8.2% staff contribution rate for the lowest impact scenario and no change of contribution rate, 10.6% for the highest impact scenario).

7. The change in the projected 2022 GCR is predominantly due to a reduction in overall benefits being paid as members are projected to retire later and, therefore, having a shorter period receiving retirement benefits. Depending on the contribution rate to be applied, there may also be overall higher contributions due to members staying at the Council of Europe for longer and therefore receiving comparatively higher salaries on which contributions are paid.

8. Note that this analysis does not consider the impact of changing the NRA on Council of Europe’s salary budget and human resources strategy where savings made in the pension scheme, and GCR, may be offset, or even negated, by higher expenses to the general budget.

Further Considerations

9. It is also important to remember that this is only an estimated change in the GCR based on the populations and assumptions used in the report entitled “Global Contribution Rate Considerations” (SIRP/E(2019)17).

10. The analysis set out in this memo does not take into account any changes in the population since 31 December 2018. It is also important that no account has been taken of changes in the Pension Reserve Fund (PRF) performance since 1 June 2019. Recent market turbulence since the start of 2020 has not been taken into account. The update of these inputs could materially impact the calculations of the GCR to be implemented from 2022.

11. For the calculations to be performed next year in anticipation of setting the GCR to be implemented from 2022, the current population and PRF value will be updated for the position at 31 December 2020. This could result in a significant change in the conclusions presented in this memo.