The Revolution in Pension Reform Stops Here

Finance

  • Author Pension Sleuth
  • Published October 9, 2011
  • Word count 646

There is talk of a new world odour; unfortunately it smells just like the last one!

As the bulk of people in the Western World get older, the economic stability and social structure of society will become more dependent upon pension systems. Such systems provide long-term capital for industry and contribute to economic growth and job creation. The development of private pension provision can also play an important part in addressing the issue of rising national debt as it reduces reliance of the population on state pension benefits.

The success or failure of such a theory depends on whether individual workers have a sufficient level of pension savings that would allow them to replace their final year of salary when they retire. Across EU countries, Sweden and the Netherlands come closest to achieving this, with workers enjoying a level of pension income of circa 90% of individual earnings at the moment of take-up of retirement. The UK and Ireland do not fare as well with pension replacement coverage at 45% and 40% respectively; meanwhile France has currently a coverage ratio of circa 17% of individual earnings upon retirement.

As the economic environment changes, so too does the pressure on EU Member State governments to address any imbalance in their finances. The situation has not been helped by the recent EU Stability and Growth Pact (11 March 2011) which outlined policy commitments to foster competitiveness, raise employment, and reinforce financial stability. The new agreement by European 'heads of State' has encouraged governments to focus on a deficit ceiling of 3% of GDP and a gross debt limit of 60% of GDP. This approach however is likely to trigger adjustments in national pension systems and have a negative impact on pension savings, resulting in the burden of ageing being shifted onto future generations.

The promotion of sustainable pension systems has always been an important part of a nation's broader economic strategy. Unfortunately the ongoing financial crisis has left many countries struggling to jump-start their economies; it appears that national pension policies are in the government cross-hairs once again. The State coffers may profit from any short-term pension reforms, but are likely to pay dearly for it afterwards. Already in Europe there are signs of countries retreating on their pension commitments:

  • In both Hungary and Poland the governments have opted to transfer what were mandatory privately funded pension assets back into the state system in a bid to tackle its deficit.

  • In Ireland, the pension reserve fund assets were used to recapitalize the failing banks. An additional annual levy of 0.6% is now to be charged on domestic pension funds, the proceeds of which are to be used to stimulate the employment market and fund construction projects.

  • In the UK the private pension sector has been hit by a reduction in tax relief on contributions. It has also moved the link of public sector pensions from the Retail Price Index benchmark to that of the Consumer Price Index therein reducing expected pension payments by up to 25% over a lifetime.

  • In France the government increased the retirement age for drawing state pensions from 60 to 62 and raised the age of entitlement to a full pension from 65 to 67.

An age of revolution

In this new age of revolution the internet is the weapon of choice of the masses and information the bullets that load the gun. This means that the structure and management of pension systems need to be more transparent than ever. As a result of ever-changing rules, only the well-informed tend to have an understanding of where they stand; there are thus a lot of worried people along the pension food chain. No one has the power to see through the Matrix of government reform processes.... it is however expected that any such reform is connected to the people it represents.

Calculate the future value of your retirement fund: http://www.axis-finance.com/pension-calculators.php

The pension sleuth acts as the company scribe on the blog of Axis Financial Consultants (http://blog-axis-finance.com). His M.O. is to search for clues to the real story.

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