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The pensions time bomb!

With people living longer, most people can look forward to a longer retirement than previous generations. But are they prepared financially?

According to the Population Reference Bureau, many European countries now face the possibility that up to one third of their population will be over the age of 65 in years to come. In the UK alone, the number of people aged 85+ has more than doubled in the last 27 years; by 2033, it is predicted they will account for 5% of its population (IFA Online, January 2010).


People are living longer than ever, resulting in increased periods over which pension benefits are being claimed. If you also consider that fertility rates in over 95% of European countries are in decline, it will come as no surprise that we will have to work longer in order to provide pension benefits for the ageing population.


What are the main problems?


Falling fertility rates

Global fertility rates are declining, especially in Western Europe, a trend predicted to continue over the next 50 years. Two children per woman is considered to be a relatively stable population replacement rate. With the exception of Albania, no European country has a total fertility rate over two1:


World ranking Country Total fertility rate 82 India 2.65 124 USA 2.06 126 Albania 2.00 130 France 1.97 215 Czech Republic 1.25 172 Netherlands 1.66 173 UK 1.66 194 Germany 1.42 201 Greece 1.37 206 Italy 1.32 207 Spain 1.32 209 Poland 1.29


If European fertility rates continue to decline, pressure on the existing workforce to sustain sufficient levels of GDP will increase.


The European debt crisis highlights the implications of a large budget deficit. Since 1993, Greek debt to GDP has remained above 100%; by 2010, it reached 120% of GDP (Reuters, November 2009). Greek Government policies including pensions amounting to 80% of wages plus 14 annual pension payments have not helped the situation (Business Insider).


Global recession

EU unemployment has risen as a result of the recession and stood at 9.6%2 in October, up by 2.1%3 from January 2007. Resulting stock market underperformance has also had an adverse effect on pension schemes.


The recession has forced many to cut their pension contributions (HMRC reported a £1billion drop during 2008/09). Others, particularly in Eastern Europe, have been exposed to currency fluctuations, creating problems for loan repayments, while some retirees have seen a marked fall in the value of their pensions (Eurofound, 2010).


Pension fund deficits

At the end of July 2010 in the UK, corporate defined benefit pension schemes had a total deficit of £74 billion (Reuters, August 2010). As at March 2008, the liability for past pension promises for public sector schemes was estimated at £770 billion which could result in effective contributions being too low – potentially 50% too low – leaving the taxpayer either facing increases to fund future liabilities, or schemes paying out largely-reduced benefits (BBC, June 2010).


EU countries including the UK and Germany are now seeing a marked shift from defined benefit contribution schemes to defined contribution schemes.


Current government pension arrangements are unsustainable

In the UK, indexation for defined benefit schemes has changed from RPI to CPI. This is great for reducing deficits, but will ultimately lead to lower pension increases. It is estimated this will cut pension income by around 25% in retirement.


Changes are afoot elsewhere in Europe. The Netherlands is increasing its retirement age from 65 to 66, Greece intends to increase the average retirement age from 61 to 63 by 2015, and Germany is looking at changing its retirement age for both men and women from 65 to 67 between 2012 and 2029 (Allianz Global Investors, www.pension fundsonline.co.uk, August 2010).


To put this into context, four employees are required to foot the bill for a single state retirement pension currently in the Netherlands. Pension contracts will require further adjustment across Europe to compensate for the effect of increasing life expectancy.


Whatever measures are taken, there are 3 main outcomes - save more, work longer or accept receiving less.


What next? A more proactive approach is now required to ensure savings meet future retirement expectations – doing nothing and hoping for the best is clearly a foolhardy approach!


Expats can have limited pension options whilst working abroad. Those with an opportunity to save should do so, especially if considering early retirement. Reviewing existing pension arrangements and investments with a view to supplementing current contributions should also be considered. Please feel free to speak with your RL360° International Sales Manager about how our product range could be of benefit to your clients.


1 Source: CIA World Factbook


2 Eurostat news release, November 2010


3 Northern Ireland Executive, April 2008