The pension problem

Pensions have not historically been a big news issue, but recently they have made the headlines, causing strikes, protests and furious debate – not just in Britain but all over Europe.

Living longer, and retiring early, would not be a problem if the supply of workers was increasing. But declining fertility rates imply that, by 2050, France, Germany and Italy will respectively have just 1.9, 1.6 and 1.5 workers supporting each pensioner. The OECD average is currently four workers for every one pensioner.

The issue is global: just as the European debt crisis is reflected in the USA, there too the pensions shortfall is staggering. The US Congress is now proposing a federal approach that could enable states to declare bankruptcy as a way to duck their promises to pensioners and bondholders. Illinois alone has paid only 54% of what it owes to state pension funds, a shortfall of more than $85bn (€59.7bn).

OECD economist on pension policy analysis Anna D’Addio says that the many risks and uncertainties affecting pensions have been compounded by the financial crisis.

“No country or pension system has avoided the effects,” she says. “Pensions are a long-term issue, but investment risk is not the only uncertainty. The crisis is also exacerbating the challenges of changing old-age dependency ratios, and continuously increasing life expectancy at pensionable age.”

State intervention

Most governments are already planning increases in the retirement age to counter this. The USA is heading for 67, the UK for 68. Others are moving more slowly. Belgium allows women to retire at 60, for instance, and has no plans to change that. Under current policies, the mean retirement age by 2050 will still be less than 65, barely higher than it was after the second world war.

But moves by governments to stem the deficit in pensions can only work up to the point that the state is involved. In some countries, such as Italy, pensions have been tightly controlled, with the state largely in the driving seat, according to Telecom Italia risk manager and the president of Italian risk association Anra, Paolo Rubini.

He says: “Italian pension funds are in a better position than in many other countries: the private pension schemes are only in excess of the public pension system, and have a strong regulator that imposes strict rules to the boards and the managers of the funds. The funds managed by insurance companies are still playing a major role, under the control and surveillance of another regulator.”

As a result, he says that in Italy the contribution of the pension funds to the capital of private businesses is still very limited.

That is not the case in the UK, where the demise of final-salary pensions – see box ‘Fall of the final-salary scheme’ – leaves employees facing two big risks: that falling markets will undermine their retirement planning, and that they will outlive their savings. One in five workers is saving nothing at all and this has remained static for the past five years.

Changing attitudes

The problem is one that clearly needs to be addressed by the employers. Ralf Jacob, the head of the unit on active ageing and pensions in the employment unit of the European Commission, says that retirement age can only go part of the way to solving the crisis, but adds: “There need to be accompanying measures in the employment sphere to achieve that goal.”

First, even if workers are prepared to work on later in life, employers are not always convinced of the benefits. Too few companies recognise the value of employing older workers. Policy adviser on employment at charity Age UK Chris Brooks says: “A shift in attitude is needed towards a more positive view of older workers. Employers must stop believing in the negative stereotypes that prevail.”

Western managers will need to overcome fears about the quality of older workers. In physically demanding occupations, some may be unable to work into their late 60s. But this should be less of a problem than it used to be now that economies are based on services not manufacturing.

In knowledge-based jobs, age is less of a disadvantage. But employers must weigh up the greater experience held by older workers with the fact that most people’s productivity does eventually decline with age. This requires the implementation of more sophisticated pay-scale systems that cater to varying work capabilities. Traditional seniority systems, under which people get promoted and paid more as they age, need to be addressed by management.

Swiss Re head of life and health products Alison McKie says it is not simply a matter of people living longer but the uncertainty of not knowing how much longer that creates the challenges for business. Life expectancy statistics both within workforces and in states have been consistently underestimated for decades, she says, and this is a significant issue for insurers and risk assessors.

If governments are to join the private sector to support a market where risk can be transferred more broadly, this will require regular, credible, consistent data on ageing and working capacities. After all, age is much more than just a number. SR