Europe needs urgent pension reform to secure retirement
Developing future-proof pension systems in Europe over the near term is critical to ensuring retirement security and providing capital for the real economy, a report from the World Economic Forum (WEF) has stated. Its Leaders for European Growth and Competitiveness report noted that European pension systems were facing a range of challenges as longer life expectancies, lower birth rates, and a shrinking working-age population were increasing old-age dependency ratios and putting growing pressure on public pension systems.
These pension systems were not only mechanisms for providing retirement income, the report said, but also a critical source of funding for the continent. It added that, as funded pension contributions are accumulated over decades, they can therefore be deployed into strategic, illiquid assets to support long-term growth and competitiveness.
Fixing the Foundation
The challenges outlined in the report included that pillar one, or state-run pensions, were carrying an overwhelming burden, were often insufficient for sustaining average living costs in retirement, and were reliant on economic growth of individual countries. “It is critical – and ultimately cost-effective – to make the necessary changes to develop future-proof pension systems in the near-term,” the WEF stated. “By addressing these challenges today, funded pension pots can be invested and grow as populations age.
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If unsustainable systems continue, pension and government buffers may be eroded to cover shortfalls, and necessary contribution levels will continue to climb.” Therefore, it argued that supplementary pensions were important to help ensure a decent standard of living in retirement and create pools of capital to invest in productive assets.
Other challenges cited by the WEF included coverage gaps; weak transparency and engagement; and fragmentation and failed design. To address these issues, the WEF outlined five recommendations for future-proofing pension systems. It called for clear long-term goals that define objectives for each pillar that considered factors such as poverty prevention, consumption smoothing, preserving purchasing power, bequeathing capital, risk mitigation, and insurance against certain life events. Once these targets were set, the forum said pension systems should be designed around the right mix of public, occupational, and personal pension provisions, with the design and implementation to be independent of politics due to the long-term nature of enacting the reforms.
Managing the Shift
The WEF added that the inputs (accumulation) and outputs (decumulation) of pension systems needed to be organised to ensure the effective provision of long-term retirement income. Its fourth recommendation was to ensure pension systems can withstand demographic change, market volatility, and fiscal pressure. Finally, the WEF said pension systems need to deliver on execution, which will depend on factors such as cost-efficient administration, reliable IT, effective contribution collection, strong asset and risk management, and clear communication with pension scheme members. “Change should be phased carefully so that employers, administrators and members can adapt,” the report said.
