Aart-Jan Riekhoff (Senior Researcher, Finnish Centre for Pensions)
Dirk Hofäcker (Professor of Quantitative Methods of Empirical Social Research, University of Duisberg-Essen)
Traute Meyer (Professor of Social Policy, University of Southampton)
Hayley James (Senior Research Fellow, Centre for Personal Financial Wellbeing, Aston University)
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In March 2025, the SPA Pension Policy working group held a public online event on ‘The Public-Private Mix in Pensions – A Comparative Perspective’. Hosted by the group’s co-lead Liam Foster, the event involved three presentations on the public-private mix from academics working on pensions in different countries – Aart-Jan Riekhoff from the Finnish Centre for Pensions, Dirk Hofäcker from the University of Duisberg-Essen and Traute Meyer the University of Southampton.
The public-private mix is a timely topic in pensions in the UK and many other countries, referring to the balance of provision for later life across the public and private pillars of pension saving. Beveridgean schemes are identified as having low basic rate public provision which necessitates more private saving, while Bismarckian pension schemes have more adequate earnings-related public systems which crowd out the need for private saving. While there has been path dependence across countries since the first public pension schemes were set up, not least by layering of reforms, there are some instances which defy straightforward categorisation. Reports that all countries have employed more private provision are not strictly untrue yet there are nonetheless surprising developments in how this has come about – and how successful reforms have proved. This sets the scene for a lively discussion about the public-private mix across our three case study countries.
In this blog we will review the content of the session and highlight key takeaways.
Watch it back here: https://youtu.be/1_wv3lWEhYE
Pensions in Finland: A typical case of public crowding out private?
In the first presentation, Aart-Jan discussed pensions in Finland, a unique case which goes against the grain of other countries since the vast majority of later life provision in Finland is from public pensions with low levels of private pension saving. Nevertheless, Finland is regularly recognised as one of the best pension schemes in the world, despite its rapidly ageing population (see for example, the Mercer CFA Institute Global Pension Index, where Finland has been in the top 10 for many years).
The public provision in Finland is comprised of two elements. One is a residence-based, basic state pension which is financed through taxes. The value of this is tested against the income accrued in the other, earnings-related pension element, up until around 1500 euro per month. This scheme therefore redistributes money to those on lower incomes.
The primary element of public provision is a statutory earnings-related scheme which operates on defined benefit principles. Entitlement accrues at a rate of 1.5% of average income per year from age 17, meaning that working for 40 years means you will receive 60% of average income earned during your life, adjusted with a life expectancy co-efficient, with no benefit ceiling. The way this scheme operates means that replacement rates are stable across all income groups.
Contributions to the earnings-related scheme are around 25% of income shared between employers and employees, although the contribution rate can be adjusted to take account of changes, based on projections negotiated by labour market parties. However, the scheme is only partly based on pay as you go mechanisms, as some of the funds are collectively invested. This is undertaken by private companies who run the earnings-related scheme. While they have to provide the same basic insurance product to employers for their staff in line with the statutory rules, competition exists on the basis of quality and investment returns. For example, some providers offer payouts based on investment gains.
The retirement age in the earnings-related pension scheme has been rising from 63 years to reach the same age as the national pension scheme by 2027, which is currently 65 years old. The vast majority (95%) of pension provision comes from the statutory earnings-related scheme. Around 2/3 of pensioners receive income just from the earnings-related scheme, and only 5%of pensioners received just basic national pension.
Key conclusions regarding public-private mix
- Public provision is dominant in Finland across redistributive and earnings-related schemes, and that does not seem to be changing. Could we call this Bismarck plus-plus?
- While private provision is limited private companies are involved in delivering statutory schemes ensuring competition on quality and investment returns, rather than cost.
The unfinished privatisation of the German pension system
In the second presentation, Dirk took us through the evolution of the public-private mix in German pensions. The first occupational pension schemes in Germany were introduced in 1889 by Bismarck to provide basic or limited social protection for industrial workers. These were statutory earnings-related schemes with contributions mainly from employers and employees, intended as an answer to the “social question” by guaranteeing a basic minimum income during old age.
While they have gone through changes since the Bismarckian era, public pensions in Germany remain significant, currently covering around 80-90% of population, as they do not mandatorily include the self-employed (who can opt in) and the public sector (who have their own scheme). The schemes operate on a pay as you go basis on social insurance principles, with contributions amounting to 18% of gross wage, shared evenly between employers and employees.
Occupational schemes are not universal or mandatory in Germany; oftentimes they were used as a HR tool to bind their core workers long-term. However, in the 00’s reforms were brought in that meant that any worker covered by a collective agreement could ask their employer to demand inclusion in an occupational scheme. Currently, about half of the working age population are covered by occupational pension schemes but there are entrenched social inequalities in access, with people on lower incomes, women, East Germans and those who work for smaller firms being covered to a lesser extent.
More recently, private pension saving in Germany experienced a boost after the introduction of so-called “Riester pensions” in 2002. These are private schemes offered by banks and other institutions, topped up by public allowances and granted favourable tax treatment. Yet, after an initial boom in take-up, coverage has declined, attributed to constraints on people’s ability to save privately as well as complicated and opaque administration processes. As such they have only modestly changed the public-private mix.
The public pension remains the dominant pillar of provision for later life, responsible for over 53% of income in later life, with another 17% coming from other forms of social welfare. In contrast, occupational pensions provide only 7% of income, which is even less than earned income in later life (13%). Income from private funds is similarly low. Nevertheless, public pension replacement rates are declining overall (currently around 48%) and are expected to fall further, meaning that old age poverty could become a significant concern – currently sitting at almost 20%.
So from the Bismarck-led origins Germany’s pension system has experience incremental change, although without changing the public-private logic significantly. It is unclear where the path of pensions reform will go next with differing views from political factions within the country.
Key conclusions regarding public-private mix
- The German pension system may be considered a Bismarck plus system, where public provision for later life is dominant.
- There have been some attempts to change the mix, albeit without substantially changing the public-private logic.
Pension reform and pension adequacy in the UK 1993- 2020
In the final presentation, Traute presented her research on pensions in the UK, particularly focussed on the period 1993 – 2020 drawing on her co-authored paper ‘Retrenchment without effect? Exploring the link between pension reforms and public pension adequacy of new retirees in seven European countries’.
Before 2010 UK pensions had the features of a liberal model: the state pension was mandatory and its level was far below the poverty line, while the limited state earnings related pension had a diminishing role. Most people were without occupational pensions and thus at risk of poverty in retirement while means-tested social assistance benefits were a significant last resort.
After Labour came into power in 1997 it led fundamental reform to pensions supported by a cross-class coalition. This involved first, reform of the Basic State Pension in 2010, which broadened entitlement to include those previously disadvantaged by recognising care entitlements, low pay and employment gaps, increased the basic level and removed all earnings-related elements. Second, since 2012, the adoption of automatic enrolment into workplace pensions covered most workers (subject to age and income thresholds) with minimum contributions from the employer and the employee totalling 8% of income. Coverage of workplace pensions has increased significantly, yet there has been a decline in the average rate of contributions. Employers of newly initiated workplace schemes offer lower packages than those who created schemes on a voluntary basis, anchoring to the minimum levels set out by the policy.
These reforms shifted from low public benefits and reliance on heavily regulated employers albeit with a lack of coverage towards increased state benefits for the previously un- and under-insured along with a loss of benefits for the middle classes. According to the OECD the projected replacement rate at retirement for average earners (assumed to start employment in 2002) was 37% before the reforms, and 22% after them..
In the paper the authors argue that pension reforms are no reliable predictor of pension outcomes. This is because there is a long time-lag between reforms and outcomes, and because labour market activity dynamics also affect individuals’ pension accrual and benefit levels.
Investigating real pension levels, the comparative study of change between 1993 and 2020 shows that real pension incomes in the UK have consistently been among the lowest in Europe, but that they have risen, from 17.6% of average wages 1994-97 to 21.7% in 2018-20.
These results show that despite significant reforms we need to be concerned about the adequacy of future pensions in the UK. In July 2025, the Government announced of a Pension Commission and Independent Review of state pension age, with their first report expected in the summer of 2026. While this is needed, it is important to recognise that the impact of contemporary pension reforms may well not be evident for a long time for someone in their thirties today. Any pension reform must be cohort-sensitive and consider employment change.
Key conclusions regarding public-private mix
- Legacy of a liberal model with low, mandatory state pension with focus on voluntary savings
- Reform to state pension broadened entitlement alongside introduction of automatic enrolment shifted to liberal plus model
- However, the time-lag of reform with changes to labour market activity affect pension outcomes
For more information about the SPA Pension Policy Group visit https://social-policy.org.uk/news/spa-policy-groups/.
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Image: Photo by Liezl Wilken: https://www.pexels.com/photo/open-book-with-reading-glasses-on-wooden-table-36404861/