Occupational pensions

The concept of occupational pensions covers a range of very different types of institutional arrangements. The common denominator is the rela-tionship to the employment contraet, with the accrual of pension benefits being an integrated part of the terms of employment - or perhaps more precisely, the package of remuneration offered to employees. ^It is charac-teristic that the initiative to establish a certain pens ion coverage lies with the employer and/or the unions involved in wage bargaining, and not with the individual employee.¹⁴² Occupational pension schernes might therefore be looked upon as a kind of forced saving from the perspective of the individual, conditional of course on employment with this particu-lar firm (or in this particuparticu-lar sector of the economy). The force is in this case not exercised by the state but by the employer or by the parties to a collective wage agreement.

In almost all OECD countries occupational pensions are a very signifi-cant source of retire ment income, being in many countries second only to income from public pensions. The performance and dynamics of occupa-tional pension provision is, thus, extremely important for the evaluation of the overall hypothesis of the present thesis. As a matter of fact, the his-torical proposals to establish a second tier of earnings related pensions in Scandinavia and the UK, diseussed in the introductory chapter, were pri-marily conceived to provide an alternative to the observed proliferation

142 The distinetion between individual and collective/occupational pension provision is not always as cIear-cut as suggested here. Often employer financed pension arrange-ments for top executives are tallar-made, negotiated individually and administered as individual accounts. It should also be noted that there have been important recent ten-dencies to individualize occupational pension schemes more generally, with the intro-duction of the concept of "portable" pensions in the UK being one important example.

of occupational pension schemes among the more privileged strata of the workforce. The equalizing potential of earnings related public pensions hinges very much on their presumed capacity to crowd out and replace occupational pension provision.

Theoretical perspectives

It is possible to distinguish between two strands of theorizing about the dynamics of occupational pension schemes in the literature: a labor rela-tions and aretirement provision perspective. The latter would lead us to expect astrong substitution between public and occupational provision, while the former seems to imply that their respective developments are largely independent. The following quotations are typical of each of the two perspectives:

Why are there private [occupationall pensions? Because of tax advantages, and because pensions are auseful device for reducing labor turnover. (Blinder, 1981:66) Social security and private [occupationall pensions are alternative vehicles to achieve a targeted level of guaranteed retirement benefits. (Munnell, 1982:13-14)

The labor relations perspective is, of course, represented by labor econo-mists and students of industrial relations who put emphasis on the capac-ity of occupational pensions as a form of labor remuneration, and hence see pension benefits primarily as a supplement to or substitute for ordi-nary wages and salaries. The dynamics of occupational pensions should thus be sought in labor relations and the process of wage formation.

There can be little disagreement about the claim, made by Blinder in the quotation above, that the preferential tax treatment given to pensions vis-a-vis take-home pay is part of the reason why occupational pensions exist and grow. The labor relations perspectivee can provide different theoretical arguments why employers in particular could have special motives for including pension schemes as part of the compensation pack-age. They generally focus on the role of occupational pensions as man-agement too1s (Quadagno and Hardy, 1996).

Some authors suggest that the granting of pension rights can be under-stood in the light of human capita1 theory. The motive for offering pen-sions as part of a long-term employment contract might be, first, to tie the employee to the company in order for the firm to get back investments in screening and training, and then to facilitate the termination of the employment contract at a time that is suitab1e to the employer, when the investment has paid off (Blinder, 1981). This explanation is consistent

with the presumed fact that coverage with occupationa1 pensions is re1a-tively high among segments of the labor force with high educational

cre-dentials and high training costs. .

The provision of pension benefits can also be rationalized in terms of efficiency wage theory, which is focussing on problems of monitoring and sanctioning the day-to-day performance of the workforce. In order to secure the loyalty of the employees and their continued commitment to the goals of the company, the employer might find it rational to offer a higher compensation than the employee could expect to achieve if she were to leave the firm, and by making part of the compensation depend-ent on a continuation of the employmdepend-ent contract (Lazear, 1983). A simi-lar emphasis on the capacity of pensions to prornote loyalty towards the employer can be found in the sociological and the historical literature (Hyman and Schuller, 1986; Graebner, 1980; Hannah, 1986; Quadagno and Hardy, 1996). The most clear example can perhaps be found in the history of civil service pensions - almost everywhere the true pioneer of occupational pension provision. The fact that the often extremely valua-ble pension right could be withdrawn in cases of infidelity or misconduct was ·an important feature of the retirement provisions for civil servants (Hannah, 1986). This line of theorizing can explain why occupationa1 pensions are often granted first to personne1 in staff functions and to occupational groups whose performance cannot be monitored mechani-callyor whose loss of loyalty could entail a particularly high risk (i.e., mil-itary personnel, railway workers, etc.). ^It can also help to explain the very robust finding that the coverage with pensions is relatively high among employees in large companies, where presumably the problem of con-trolling the labor force is bigger. The efficiency wage logic could also help explain the lack of success students of labor costs have had in find-ing empirica1 support for the strong theoretical expectation that pension benefits are, by and large, paid for by the recipients through lower take-home pay (Triplet, 1983).

A different strand of theorizing, which is also firmly within the labor market perspective, focusses primary attention on the demand side - i.e., the interests of employees and their organisations. It has be en suggested that unions have a special preferenee for pensions because they corre-spond to the interests of senior workers, who tend to have an upper hand in the political controlover unions and their bargaining strategies (Free-man, 1981; Freeman and Medoff, 1984; Free(Free-man, 1985). This hypothesis can he1p exp1ain the robust empirical finding of a higher coverage with

occupational pension schernes in unionized companies that has been reported in several countries (Freeman, 1981; Hyman and Schuller, 1985;

Hippe and Pedersen; 1992).143

Finally, one might add a further explanation associated with the logic of wage formation in modem economies. Pensions seem to be a form of remuneration that enjoys a high degree of legitimacy in the political realm. The almost universal pattem of preferential tax treatment of contri-butions to occupational pens ion funds, as compared to take-home pay, is a clear indicator of this. In sectors of the economy that are not strongly competitive, where the employers are either not really profit maximizing or operating under highly imperfect market conditions, wage bargaining will tend to follow a political rather than economic logic. In such a setting employees and their unions might be well advised to bargain for pen-sions as a strategy to maximize compensation. 144 This mechanism helps explain why occupational pensions are so prevalent: in the public sector throughout the entire OECD area and in the often highly sheltered indus-tries of banking, insurance and other financial services. It is also a possi-ble, additional explanation for the difficulties in finding evidence of a trade-off between take-home pay and pension accrual among wage-eam-ers in studies based on cross-sectional data (Triplet, 1983).

As for the competing perspective on occupational pensions, students of financial economics, public economics and social welfare tend to locate the dynamics of occupational pensions in the context of savings behavior and the quality of public pension systems. They emphasise the role of occupational pension schernes as vehicles for the provision of retirement income in competition with private insurance on the one hand and social security pensions on the other.

The pathologies of the market for individual annuities are usually invoked as standard arguments for social insurance, but they might also help to explain why the bulk of private pension provision takes the form of collective, work-related occupational pension schernes (Bodie, 1989).

Because of economies of scale and the fact that participation can be made quasi obligatory, some of the most serious obstacles to the devel-opment of an adequate market for individual pension insurance can be bypassed in company-specific or broader occupational pens ion plans.

143 But as we shall see, there are other ways to account for the interest unions aften take in pension benefits.

144 The low visibility and transparency of pensions as a form of remuneration, as well as their presumed legitimacy, might play a role here.

Occupational pension schernes can thus be conceived of as outlets for a demand for retirement provision that happens not to be satisfied by the public pension system, and which cannot be adequately met by the avail-able, purely individual instruments.

Of course, welfare state researchers tend to see the development of occupational pensions in similar terms, as linked with the quality of soeial security and public pensions. Occupational pension schemes are pre-sumed to fulfill a demand for income protection in old age that is left uncovered by the public pension system. Hence, the naturai expectation is that there should be a dear relationship of substitution between public and occupational pensions.

Trade unions can play a key role in this line of theorizing about occu-pational pensions, with their presumed capaeity and interest to register and voice the demand for old age pensions vis-a-vis individual employers and employers' assoeiations. While occupational pension provision has historically been introduced on the initiative of employers, trade unions have in many countries striven successfully to gain the right to negotiate the terms of such schemes. The best example is taken from the US, where unions gained the right to negotiate about pensions in the late 1940s after intense conflicts with employers (Stevens, 1984; 1996), and a rather simi-lar process has been reported to have taken place in the UK in the 1960s and early 1970s (Hyman and Schuller, 1985). As we shall see below, an important category of occupational pension provision is comprised of schemes that are linked to occupation- or industry-wide wage agree-ments that cut across individual firms and companies. It is obvious that this particular type of occupational pension has a rather limited potential as a management tool, and hence the rationale for the existence of this type of scherne must be sought in a different domain, presumably in an unsatified demand for retirement provision among wage earners.

Historical studies in both the US and in Scandinavia show that trade unions have in many instances, at important policy cross-roads, consid-ered public and occupational pensions to be dose substitutes in the pur-suit of a satisfactory level of income protection on behalf of their constit-uencies (Stevens, 1984, 1996; Dobbin and Boychuck, 1996; Pedersen, 1990; Kangas and Palme, 1996). Public sector unions, white-collar unions in the private sector and professional assoeiations are often deeply engaged in defending and expanding occupational pension schemes for their constituencies (MoHn, 1965, Pedersen, 1990; von Nordheim Nielsen,

1996).145 While there appears to be a general tendency for blue-collar unions to harbor a primary preference for public pension provision, there are many examples where the development of occupational pension schernes has been willingly adopted as a subsidiary strategy Of, on occa-sion, as the preferred alternative, even by union confederations of a social democratic persuasion (Pedersen, 1990; Hippe and Pedersen, 1996;

Edebalk and Wadensjo, 1989; Kangas and Palme, 1996).

The so-called integrated pension plans, found in many countries, pro-vide the clearest illustration of a mechanism of substitution between pri-vate occupational and public pensions. In an integrated pension plan, estimated benefits from the public pens ion system are taken into account as the occupational scherne prornises to bring total compensation up to a certain standard - for instance, a percentage of the final wage/salary.

Such integrated occupational schernes might then further be associated with explicit provisions securing that, if public pensions are expanded, the supplementary occupational benefits will automatically be reduced, and vice-versa. Integrated plans with this kind of clause have been common in the US (Dobbin and Buychuck, 1996; Stevens, 1984; 1996).

Stevens (1984) reports that AFL/CIO unions were much in favor of such clauses. They give an impression of occupational pension schernes as being temporary arrangements in anticipation of more satisfactory public provision, and they can be expected to provide employers with motives to accept future improvements in public pensions and to resist proposals to cut back on public pensions. While not all integrated plans have explicit provisions for automatically compensating changes in public provision, they do help to focus expectations on a certain level of total compensation,146 and hence they facilitate a logic of substitution.

It would be mistaken to assert a clear choke between the labor market and the retirement perspectives. The important lesson from the labor market perspective is that the pattern of occupational pension provision is likely to reflect variation in the general institutional context of labor rela-tions. In order to explain the historical and present nature of occupational

145 The most spectacular recent example is the upheavals in November and December 1995 against the proposal by the French government to trim occupational pension schemes for public sector employees and to bring them more in line with the condi-tions in the mandated schemes for private sector employees.

146 After compensation levels in the public pension system were reduced in Norway in 1992, most private employers surrendered to the pressure to compensate the loss rather than lower the projected total compensation levels promised by their company pension plans (Fløtten and Pedersen, 1996).

pension schemes, one has to take account of their (original) functions as management tools and their relationship to wage bargaining and labor relations more generally. Occupational pension schemes are complex institutional structures, and hence they are likely to be subject to forces of institutional inertia and to reflect specific historical legacies in different countries. Below Ishall go somewhat more into detail about the high degree of diversity among the types of occupational pension systems that can be found in different countries, as weU as within each country.

However, it seems obvious that the demand for retirement provision and the relationship to the public pension system does play a significant role in explaning for variation in the scope of occupational pensions. First of all, it must be recognized that, in order for the provision of occupa-tional pensions to be an effective management tool, there must be a cer-tain demand for (additional) retirement income among the employees covered. Secondly, the role of occupational pens ion schemes as discrete instruments in the hands of employers and their personnel managers has in many countries been eroded both by the involvement of trade unions, as described above, and by public regulations. Most OECD countries have legislated requirements about vesting, portability, funding, etc., in occupational pension schemes implying that the possibilities for employ-ers to manipulate the conditions for actually receiving benefits have been severely curtailed. To the extent that trade unions become involved in negotiating the terms of occupational pension schemes, and as the schemes are subject to public regulations that inhibit their use as manage-ment tools, the retiremanage-ment provision aspect is likely to become more pro-nounced.

It should be recognized, though, that the presumed centrality of a retirement provision motive for the development of occupational pension schemes does not necessarily lead to expectations about a clear-cut sub-stitution between public and occupational pensions. As I have argued in the previous section, the demand for retirement income is not liable to be well-defined and fixed in absolute terms. ^It is likely to have astrong rela-tivistic component, whereby individuals and groups adjust their prefer-ences according to the perceived behavior and conditions enjoyed by other groups in society.

The dynamic between public and occupational pensions seems occa-sionaUy to be characterized by a process of leap-frogging, whereby differ-ent occupational groups strive to close or maintain relative differences in the quality of pension rights. As pointed out by 0verbye (996) with

reference to the Scandinavian countries, the very generous pension pro-visions traditionally enjoyed by civil servants have served as a focal point for the aspirations of other socio-economic groups. The efforts by other sodal and occupational groups to get on par with the dvil servants has be en driving the agenda of pension policy developments in much of the postwar period. When public pens ion provision was extended in Swe-den, with the introduction of a highly generous second tier of earnings related pensions in 1959, white-collar unions managed to secure a contin-uation of their occupational pension schernes as an integrated supple-ment to the reformed public system, and thus to maintain a significant rel-ative advantage vis-a-vis blue-collar workers (Molin, 1965; Hedo, 1974;

Salminen, 1993). Swedish LO made a further attempt to dose the gap in the quality of pension rights between blue- and white-collar workers by negotiating a contractual, supplementary pension scherne for the LO con-stituency in the early 1970s, but a significant gap still remains (Edebalk and Wadensjb, 1989; Kangas and Palme, 1996).

The observation that the substitution/crowding-out effect associated with improvements in public pensions is often surprisingly weak could, thus, be explained with reference to processes of preference adjustment.

More privileged social and occupational groups respond to the improve-ment in public pension provision by further increasing their taste for pen-sions. However, the relationship will not necessarily work in the same way if and when the process is reversed. As pointed out by Lieberson (1985), it should not be taken for granted that all causal relationships work in the same way for upward and downward changes in the treat-ment variable. One could very weU imagine that preference formation is a domain, where such "asymmetrical" causal relationships are liable to appear. Cut-backs in a highly developed public pension system might, therefore, not have the same propensity to trigger adjustments in the pref-erences for retirement income as expansions from a low level of public

More privileged social and occupational groups respond to the improve-ment in public pension provision by further increasing their taste for pen-sions. However, the relationship will not necessarily work in the same way if and when the process is reversed. As pointed out by Lieberson (1985), it should not be taken for granted that all causal relationships work in the same way for upward and downward changes in the treat-ment variable. One could very weU imagine that preference formation is a domain, where such "asymmetrical" causal relationships are liable to appear. Cut-backs in a highly developed public pension system might, therefore, not have the same propensity to trigger adjustments in the pref-erences for retirement income as expansions from a low level of public