November 27
A graphic insight into EU pension liabilities

Rarely a day goes by without more news stories detailing how the UK’s Brexit talks with the EU are floundering. The problem surrounds the “Brexit bill” – what does the UK owe money towards and how much money does it owe? Reports in the press suggest that one of the most expensive, and therefore contentious, issues being discussed is pensions. This blog gives you a graphic insight into the basics of the EU pension liabilities.

In the most recent EU accounts, for 2016, the EU’s total employee benefit liability equalled EUR 67.7 billion. This is almost entirely in respect of the Pension Scheme of European Officials (“PSEO”), although there are also liabilities for other retirement benefits and sickness insurance.

EU retirement liabs.png
Unfortunately, the vast majority of these liabilities are unfunded. No assets are held to back the PSEO liabilities and a total of just EUR 0.4 billion is held to back the other liabilities. In effect, the funding level is 0.6%.

Unfunded pension liabilities are not unusual for governments. Generally speaking, funded pension schemes are much more secure for members as it means that there are assets available to back pension benefits even if the sponsoring organisation folds. This is not a problem that affects unfunded government pension schemes, because it is assumed that it will always be possible to raise taxation to pay the benefits. The EU clearly felt this way about its own pension scheme, as it pays current pension benefits out of the general EU budget, which amount to around 1% of outgoings.
Prop EU pens in payment.png
However, Brexit has shown that the stream of income that the EU assumed was guaranteed in future is not as certain as was previously thought. The loss of revenue from the UK is significant in the context of the EU budget – the UK income made up around 12% of the EU’s revenues in 2016.
EU 2016 revenue.png
On top of this loss of revenue, the annual cost of paying benefits is expected to rise over the next few decades. The PSEO is a relatively immature scheme; as can be seen in the graph below, the majority of current members are active.
2016 membership of PSEO.png
This means that both the total liabilities of the pension scheme and the amount of cash paid out to pensioners each year are expected to increase in the years to come. Research by Eurostat suggests that annual benefit payments will not peak until the 2040s.
Eu projected pension expenditure const prices.png

The problems over the EU pension obligations have arisen as they are treated similarly to a state-backed pension arrangement – i.e. the benefits are unfunded and current benefits are paid out of current revenue. The pension scheme is expected to increase in size for several decades and the EU is faced with losing one of the biggest contributors towards the EU budget. Having now charted this little-known territory, be sure to look out for a future blog where we explain why these features of the EU pension obligations mean that it is proving particularly difficult for everyone to agree on the number for the UK’s share of the liabilities.

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