If the global economic crisis posed a massive financial
challenge to the European Union it is surpassed by severity by the
challenge posed by an ageing population and a burgeoning shortfall
in pension savings. The situation requires urgent action on a
European Union-wide and national level, warns Aviva.
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Populations across the European
Union (EU) are ageing, a demographic reality that represents
perhaps the most serious challenge facing the region.
Put into perspective the EU
statistical organisation Eurostat estimates that the ratio of
retirees to workers will increase from one-in-four in 2010 to
one-in-two by 2060.
To address the situation national
governments in the EU have adopted policies to start to address
problem, says Andrea Moneta, CEO of UK insurer Aviva’s Europe,
Middle East and Africa operations.
These policies range from modest
increases in the state retirement age, a shift towards defined
contribution schemes, and the introduction of mandatory or
voluntary private pension schemes for all workers.
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By GlobalData“These are positive steps, but
governments still face ever-increasing pressure on public pension
provision,” Moneta says.
“This has been further exacerbated
by the recent financial crisis and means that individuals will have
to take increasing responsibility for providing for their own
future.”
To determine the scale of the
challenge Aviva in conjunction with professional service company
Deloitte has undertaken the first in a series of studies into the
magnitude of the potential under-provision in retirement savings
across the EU.
Their findings point to a
staggering total savings shortfall of €1.9trn ($2.52trn), an amount
equal to about 19% of the EU’s 2010 GDP. The study covers 11 EU
member states housing some 80% of the EU population.
The total savings gap assumes that,
on average, people need on average 70% of their pre-retirement
income to provide an adequate standard of living in retirement and
a 5% return on investments in pension funds.
Based on income levels low income
earners require a 90% salary replacement after retirement, mid
income 65% and high income 55%, according to Aviva.
Notably, in a recent survey
insurance broking and risk specialist Aon found that the average
European thinks that he or she will need to retire on 74% of their
annual salary in order to live comfortably. According to Aon the
reality is that the average European will actually have only 57% of
their salary as a retirement income.
Further assumptions in Aviva’s
study were:
- The model is on an as-is basis –
that is, assets do not accumulate interest and there is no
inflation; - The 60- to 64-year age group is
4.87% of population for each country; - The number of people in the age
band 60-64 remains fixed over the next 30 years – that is, no
account is taken of ageing populations; and - Retirement age of 65 in each
country except France where it is 60.
With respect specifically to
Central and Eastern European countries, Aviva noted that
assumptions around wage inflation and informal earnings
significantly influence the size of the pension savings gap in.
Aviva assumed that wages in these economies will, over time,
converge with Western European economies, but excluded informal
earnings from the analysis.
If estimates for informal earnings
were included, Aviva believes the pension gap would be almost 60%
larger.
According to Aviva, further
analysis reveals that no single factor can close the gap completely
on its own. Specifically:
- Increasing the rate of return from
5% to 8% still leaves a pensions gap of €1.66trn; - Increasing the state pension by
10% still leaves a pensions gap of €1.59trn; - Getting by on only 50% of
pre-retirement income leaves a pensions gap of €669bn; - Increasing the national retirement
age by 10 years leaves a pensions gap of €841bn; and - Non-pension assets may only fund
as little as 20% of the pensions gap, on average.
As significant as the pensions gap
already is, Aviva warns that will increase unless urgent action
which encompasses a combination of reforms and changes in consumer
behaviour is taken.
At an individual level, Aviva
believes that because lower income groups are more likely to be
provided for by state pension and welfare systems it will be middle
income earners that are likely to feel the greatest impact of the
pensions gap.
The insurer estimates that some
people will need to increase their savings by an average of €12,000
each year to fully close their personal pensions gap.
On an EU-level Aviva stressed that
action must be taken to incentivise higher levels of saving. To
this end Aviva called on the European Commission (EC) to create a
European Quality Standard for Pensions to restore consumer
confidence in pensions savings vehicles.
In addition, it urged the EC to
establish and monitor a European Pensions Savings Target so that
national governments are encouraged to rebalance their pensions
systems with greater funded schemes.
Aviva also called on national
governments to work towards issuing regular pension statements to
all citizens. This Aviva feels would encourage consumers to
consider the state pension as only part of a mixed strategy for
providing for their future, and prompt them to take action as a
result of seeing clearly what they stand to get in retirement.
National governments, believes
Aviva, must also review of national measures to encourage
savings.
The review could consider the
effectiveness of existing incentive schemes for pension saving,
their impact and visibility and whether they are appropriately
targeted at changing the behaviour of the people who need the most
encouragement to save.
Severity of problem
varies
The pensions savings gap is more
pronounced in some countries than in others with the worst impacted
being those in Western Europe, specifically, the UK, France,
Germany and Spain.
Aviva noted that these countries
have large populations and will therefore see more people
retiring.
The four countries also have some
of the highest levels of pre-retirement income in Europe which
means that the levels of retirement income people in those
countries need in their retirement have been estimated to be higher
than in other markets.
Of the four countries second in
line is the UK with a total shortfall of €379bn. However, in terms
of the additional savings required to close the savings gap the UK
fares worst with an average of €12,300 additional annual savings
per person required.
The large shortfall in the UK –
some €379bn annually in terms of total required savings – is due
not only to high final salaries but also a relatively low level of
state pension compared to many other EU countries.
It is a problem many British
workers are acutely aware of indicates Aon’s survey which revealed
that 54% of UK employees were concerned about not having saved
enough through their pension arrangements.
Of the four countries the most
serious problem in absolute terms exists in Germany where Aviva
estimates the total pension savings gap to be €468.8bn. To close
the gap Aviva estimates that German’s will be required to save an
additional €11,600 annually.
Many German workers are also keenly aware of the risks they
face. In its survey Aon found that 53% of German employees –
despite having state pension benefits that are about double those
in the UK– are also worried about not having saved enough.
