International Pension StudiesFunded Pensionsin Western Europe 2008
ImprintPublisher: Allianz Global Investors AG, Seidlstraße 24-24a, D-80335 Munich | http://www.allianzglobalinvestors.com ...
International Pension Studies Western Europe     PrefaceT    raditionally, the pension systems of most     Western Europea...
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Introduction
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Funded Pensions In Western Europe 2008
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Traditionally, the pension systems of most Western European countries were textbook examples for the dominance of public pay-as-you-go pensions. This has changed.

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Funded Pensions In Western Europe 2008

  1. 1. International Pension StudiesFunded Pensionsin Western Europe 2008
  2. 2. ImprintPublisher: Allianz Global Investors AG, Seidlstraße 24-24a, D-80335 Munich | http://www.allianzglobalinvestors.com | Editor: Dr. Alexander Börsch,Senior Pensions Analyst, Allianz Global Investors AG, E-mail: alexander.boersch@allianzgi.com, Phone: +49 (0) 89 1220 7472 | Contributors: Dr. Alexander Börsch,Allianz Global Investors AG; Dr. Renate Finke, Allianz Dresdner Economic Research; Dr. Martin Gasche, Allianz Dresdner Economic Research; Jordy Peek, risklab;Dr. Jürgen Stanowsky, Allianz Dresdner Economic Research | Layout: volkart:51 GmbH, Munich | Printing: repromüller, Übersee | Closing date: December 5, 2008 |This study was conducted in cooperation with Allianz Dresdner Economic Research. The OECD provided information on the second and third pillars.The entire content of this publication is protected by copyright with all rights reserved to Allianz Global Investors AG. Any copying, modifying, distributingor other use of the content for any purpose without the prior written consent of Allianz Global Investors AG is prohibited. The information contained in thispublication has been carefully verified by the time of release, however Allianz Global Investors AG does not warrant the accuracy, reliability or completenessof any information contained in this publication. Neither Allianz Global Investors AG nor its employees and deputies will take legal responsibility for anyerrors or omissions therein.This publication is intended for general information purposes only. None of the information should be interpreted as a solicitation, offer or recommendationof any kind. Certain of the statements contained herein may be statements of future expectations and involve known and unknown risks and uncertaintieswhich may cause actual results, performance or events to differ materially from those expressed or implied in such statements.2
  3. 3. International Pension Studies Western Europe PrefaceT raditionally, the pension systems of most Western European countries were text-book examples for the dominance of public the financial assets of European households in international comparison and includes forecasts on the future development of finan-pay-as-you-go pensions. This has changed. cial assets. The third article addresses trendsMore and more European countries are try- in Western European pension markets anding to spread the retirement income of their pension asset projections, while the conclud-citizens across a wider base. They have intro- ing article of the first part is concerned withduced new funded occupational and private the effects of a possible application of Solven-pension schemes with the goal to diversify cy II on defined benefit pension funds. Theretirement income for future pensioners. second part analyses the pension systems in each Western European country; for the pur- Despite different starting points, almost poses of this study we defined Western Europeall Western European countries have fol- as the EU-15 plus Switzerland and Norway.lowed the trend towards funded pensions.This has taken several forms. Besides the in- The evolution of funded pensions intotroduction of new schemes, many countries a crucial element of retirement income indecided to introduce state pension reserve Western Europe has important ramificationsfunds to back public pension systems and for public policy and the financial industry.strengthen their sustainability. These funds For example, the regulation of funded pen-have grown considerably and are now crucial sions, the effectiveness of plan design, theplayers in the financial markets. The world- risk management of investments and thewide shift from defined benefit to defined quality of financial products become ques-contribution plans in occupational pension tions that will shape the financial securityprovision is also taking place in Europe, how- of many future retirees. By creating trans-ever, with a different speed and depth in the parency about the pension system designsrespective countries. in Western Europe, this study aims to con- tribute to the discussion on the future of This study is divided into two main parts. European pensions. We strongly believeThe first part is comprised of four articles, in- that transparency and comparability arecluding one on the economic impact of ageing the foundations for mutual learning andpopulations. The second article focuses on best practice sharing. Brigitte Miksa, Head of International Pensions Allianz Global Investors AG 3
  4. 4. International Pension Studies Western Europe Content Imprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Western Europe – The Economic Impact of Ageing Populations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Financial Assets of Private Households – An International Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Trends and Asset Development in European Pension Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Solvency II: How it Could Affect Defined Benefit Pension Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Country Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 The Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1334
  5. 5. Introduction
  6. 6. Introduction International Pension Studies Western EuropeWestern Europe –The Economic Impactof Ageing PopulationsDemographic development Chart 1 Western European population [million]in Europe 415While Western European countries vary con- 410siderably from one another, they also havea number of commonalities. For instance, 405in most of Western Europe, the population 400is expected to stop growing within the nexttwenty years. It will not be the first time that 395European societies see a decline in their pop-ulations. The Black Death and both World 390Wars are two dramatic examples. Indeed, in 385the past, wars and pandemics led to quickly 2005 2009 2013 2017 2021 2025 2029 2033 2037 2041 2045 2049shrinking populations. Source: Eurostat In the coming decades, the decline inWestern Europe’s population will certainly be at the big picture to make rough estimates ofmore gradual. Overall population will peak in future GDP growth within a growth account-20 years. It will then start to decrease, slowly ing framework. Finally, we assess the impactat first and then increasingly faster. The age- of ageing on the Western European pensioning process of Europe’s populations will have business.a significant impact on the makeup of its so-cieties. The proportion of elderly people (i.e. Longer lives, fewer childrenpeople aged 65 and over) in the total popula-tion will increase from about 17% today to 30% Across Western Europe, the basic demograph-in 2050. In this publication, we have defined ic trends of ageing and shrinking populationsWestern Europe as the former EU-15 coun- are to blame for many political reforms thattries, plus Norway and Switzerland. have seen benefits cut – particularly pension benefits – and extended working lives. The un- The present article examines the impact derlying causes of low or falling fertility andof ageing and declining populations on GDP increasing life expectancy are well known.growth. We discuss how the shrinking labour However, the reasons and mechanisms be-force has a negative effect on growth prospects hind these factors are not as well understood.and also address the impact of ageing. First, A number of questions need to be answered,we look at the impact of population decline on among them why women do not have morethe labour market. Next, we discuss the quali- children and what can be done to increasety of labour, the role of education, and the im- fertility. Other open questions include howpact of ageing on productivity. Third, we look fast life expectancy will increase, or whetherat whether capital input can offset shrinking it will decrease due to less healthy lifestyles.labour input and shed some light on the ques-tion of how ageing affects an economy’s ability Since there are many possible answers toto innovate. Once we have done this, we look these questions, it has thus far been impos-6
  7. 7. Introduction International Pension Studies Western Europesible to make any sound scientific conclu- Can ageing societies remainsions. Population development forecastsmust therefore rely on assumptions about competitive?future developments.1 For the EU-15 coun- To answer this question, the effects of ageing 1 We have used Eurostattries, fertility is expected to increase slightly on the economy and its growth prospects must figures for all countriesexcept in France and Ireland, where current be examined. The following paragraphs shed except Norway andhigh fertility levels are forecast to decrease. some light on this issue. We will identify the Switzerland. For each ofGiven the lack of scientific evidence on the relationship between demographic change these two countries, wedrivers of change in fertility in industrialised and economic growth and discuss its poten- have used the figurescountries, it is possible that actual develop- tial impact on Western Europe. and forecasts of nationalments will deviate from these assumptions. statistical offices. Demographic development affects eco- Even if fertility in France keeps rising as nomic activity in many areas. Gross domes-it has in recent years and current low levels tic product (GDP), i.e. the sum of all goodsremain constant in other countries, the im- and services produced within a given period,pact would barely be noticeable in the near is the result of an application of capital andfuture. Indeed, it will take many years for labour combined with the effects of techni-such small developments to alter the age cal progress. Clearly, labour force develop-composition of populations. After several ment has an influence on output. It shoulddecades of low fertility, the number of poten- be noted, however, that not only the numbertial mothers has significantly decreased,so that an increase in fertility will not have Chart 2 Fertility rates in Western Europe [children per woman]a noticeable impact in the short term. 2.5 A similar argument can be made about 1990life expectancy. An increase has been fore- 2 2006cast for all countries in our sample, thoughit will be higher in some than in others. Thehighest life expectancy increase for men be- 1.5tween 2006 and 2050 will presumably occurin Austria, with 7.2 years. For women, life ex- 1pectancy will increase the most in Belgium,by 6.4 years. We have assumed the lowestincrease in the Netherlands, with 3.8 years 0.5for men and 2.7 years for women. Currentnational assumptions may deviate from the 0estimates used by Eurostat. However, even Germany Italy France Spain UK The Nether- Sweden Switzer- lands landif deviating national assumptions were used,changes to the overall picture would benegligible. Chart 3: Old-age dependency ratios [65+-year-olds/15–64-year-olds] 70 The continuous ageing of societies is one 2008of the consequences of these developments, 60 2050and is reflected in the old age dependency 50ratio. It depicts the number of people aged65 and older per 100 people of working age 40(15–64 years) and demonstrates that theageing process varies in different Western 30European countries. For instance, Spain, Italyand Germany are much more affected than 20countries like the UK, France or Sweden. 10 0 Germany Italy France Spain UK The Nether- Sweden Switzer- Western lands land Europe Source: Eurostat 7
  8. 8. Introduction International Pension Studies Western Europeof workers matter, but also their quality. of the 15-64 age group will differ considera-Education, i.e. the quality of human capital, bly across Europe. Germany and Italy will seeis an important determinant of productivity. the sharpest declines. Labour force potential in these two countries will shrink by 25% by Since population development and the 2050. In contrast, Ireland will see an increaseage structure of a population affect the use of 15%, the increase in Luxembourg will beand quality of production factors in a number almost 30%, and Sweden’s labour force po-of ways, the impact of demographic change on tential will grow by 3%. All other countriesoutput is difficult to determine. Some simple will have to cope with a declining potentialeconomic models describe these relation- labour force.ships. In this basic accounting exercise, GDPis the product of the number of employed A decline in the potential labour forcepersons (working population) times the does not mean that the size of the labouroutput in goods and services per employed force automatically shrinks. This is becauseperson (labour productivity): many people aged 15-64 are not active in the labour market. A substantial number of people are pursuing their education, some GDP = have retired early and others are currently at labour productivity x working population home to raise children or for other reasons. In 2007, the labour force participation rate The working population is a subset of the (i.e. people aged 15-64 who were either em-people aged 15-64 who could potentially work ployed or looking for a job) stood at 74% for(potential labour force) and do participate in men and almost 60% for women. The figuresthe labour market. for Norway and Switzerland are well above the EU-15 average. Working population = These participation rates can change for participation rate x potential labour force a number of reasons. Developments in the economic cycle are an important influence, This leaves us with: but changes in the legal environment also play a role. Since 1995, the labour force participa- tion rate in the EU-15 has increased by 3.5 GDP = labour productivity x percentage points for men and 10 percentage participation rate x potential labour force points for women. Legislation to increase Labour productivity depends on the avail-ability of capital (i.e. tools and machinery), Chart 4 Development of the working age population aged 15–64the quality of human capital and technologi- [2005=100]cal progress. All of these items are influenced 105by demographic development – some moredirectly than others. Let us begin our analysis 100with the most obvious variable, the potentiallabour force. 95 Germany ItalyDemographic impact 90 Franceon the labour market 85 Spain UK The NetherlandsHow do demographics affect the labour 80 Swedenmarket? If we assume that the potential Switzerlandlabour force comprises all people between 75 Western Europe15 and 64 years of age, we will see somechanges throughout Western Europe. 70According to current population forecasts, 2005 2009 2013 2017 2021 2025 2029 2033 2037 2041 2045 2049labour force potential will decline by 15% Source: Eurostat, national statistical officesbetween 2008 and 2050. The development8
  9. 9. Introduction International Pension Studies Western EuropeChart 5 Labour force participation rates of 55–64-year-olds, 2007 [%] men 55–6490 women 55–648070605040302010 0 EU-15 Denmark Ireland Spain Italy The Netherlands Portugal Sweden Norway Belgium Germany Greece France Luxembourg Austria Finland UK Switzerland Source: Eurostatretirement ages and an improved economy policies can certainly alleviate its mosthave contributed to that development. dramatic effects.This demonstrates that a declining potentiallabour force does not automatically mean For instance, extending working life andthat fewer people are available on the labour closing loopholes that lead to early retire-market. Participation rates could increase, ment are two possible measures that couldjust as unemployment could decrease. be implemented to protect the labour mar- ket from a declining population. Another is About 13 million EU-15 citizens are current- increasing the willingness to join the work-ly unemployed, which represents the entire force by offering childcare facilities for youngcombined potential labour force of Belgium parents and/or more flexible working hours.and Greece. With unemployment rates be- Taxes play an important role, too. If taxestween 2.5% and 4%, Norway and Switzerland on a couple’s secondary income are too high,have reached almost full employment. Given the incentive to work is low, as experience inthe high participation rates in these two coun- the Netherlands has shown.tries, changes in the potential labour force willhave a more direct impact on the availability Even if the total number of workers doesof labour. In other EU-15 countries, there is still not drop by as much as some may fear, theresome room to manoeuvre. For instance, la- is no denying that the workforce is ageing.bour force participation rates for those aged In Western Europe, the current median age55 to 64 can increase substantially in most is about 40 years; it is expected to increaseEU countries. Currently, only Sweden comes by roughly 7 years by 2050, as will the medi-close to Switzerland and Norway. an age of the labour force. Until now, there has not been any empirical evidence on how If it were possible to increase labour force such a process will affect productivity.participation across EU-15 states to rates ashigh as Sweden’s, the demographic impact on The role of educationthe labour market could be cushioned con-siderably. In fact, the expected labour force As already mentioned, the quality of thedecline of 15% could be reduced by half. Even labour force plays an important role – espe-if some aspects of demographic development cially in countries with decreasing popula-cannot be changed in the short term, smart tions. In Western Europe, Germany and Italy 9
  10. 10. Introduction International Pension Studies Western Europein particular must cope with pronounced pop- To assess the development of productivityulation decline. In these countries, and also in in an economy, the weight of different jobsPortugal, Greece and Spain, efforts must be in the overall workforce is important. Mentalmade in the realm of education to counter abilities, such as problem-solving skills whenthe effects of ageing and population decline. faced with new challenges, logic and theThe decline in the absolute number of po- ability to understand complex topics, seemtential workers must be countered by an in- to decrease with age. Verbal abilities andcrease in the productivity of each individual. communication skills, on the other hand, tend to improve with age, as experience plays To achieve this, national school systems are a more important role. The importance ofone of many factors that must be examined. different combinations of these abilities vary,Certainly, reducing the number of school depending on the industry. For older em-dropouts is critical. However, the education ployees, changes that are the result of rapidof the workforce as a whole must also be technological development pose a particularconsidered. Lifelong learning should not challenge with regard to productivity, as theyonly be a catch phrase, it must become an make experience acquired over decadesembedded concept in companies’ personnel irrelevant. For this reason, industries thatdepartments. Giving the increase in retire- are characterized by such change will sufferment age, workers aged 55 and over will have more from an ageing workforce than others.to spend a decade or more in employmentbefore they can access their pensions. Hence, There are very few empirical studies thateven for these experienced workers, continu- demonstrate these dynamics, and those thating education will become increasingly com- are currently available do not provide clearmon. The depreciation of human capital in answers to the critical questions. Most stud-a shrinking labour force must be prevented ies conclude that productivity declines with(Ludwig, Schelkle, 2007). age. However, it is unclear at what age the de- cline sets in and whether it is significant. ThisAge and productivity leaves us with the following results: While a decline in productivity due to ageing is pos-The development of labour productivity is sible, it appears that it will not be substantial.extremely important for an economy’s long- We must also consider the possibility that theterm growth prospects. Ageing populations deterioration of productivity can be counteredand workforces require that answers be by further education and training. There isfound to the question of how productivity ample evidence that employees can acquireis affected by ageing. In rapidly ageing coun- new skills at any age. If companies keep thistries like Germany and Italy, this question in mind, they may be able to maintain pro-is high on the agenda. The fact that certain ductivity despite ageing societies. This is par-mental abilities decrease after early adult- ticularly true in sectors where experience ishood is one of several aspects that are un- important.disputed. However, this does not mean that produc- Demography and the usetivity decreases as workers age. Experience, of capitalwhich increases with age, is also important.A good balance between mental ability and When the supply of labour declines for demo-experience leads to the best results. If we look graphic reasons, the importance of capital inat purely physical work, the picture is slightly maintaining economic performance grows.different, as productivity undoubtedly decreas- Capital must be used to substitute laboures with age. In Western Europe, however, ever and increase the productivity of the remain-fewer jobs rely exclusively on physical abili- ing jobs. In other words, investment in realties. Even in the automotive industry, it has capital will gain importance. In ageing West-not been proven that younger assembly line ern Europe, capital investment is influencedteams are more productive than their older by the need to substitute labour, which willcounterparts. While younger teams tend to become more expensive. Production will be-be faster, they also make more mistakes. come even more capital intensive. The neces- sary increases in productivity will be achieved10
  11. 11. Introduction International Pension Studies Western Europeby investing more in human and physical cap- the propensity to innovate seems to in-ital – increasing capital demand even more. crease until age 40 a positive correlation between age and innovations can be found in younger populations. Chart 6 shows thatDemography and techno­ such a relationship is not contradicted bylogical progress the data, even though it does not prove it. At least an increase in the share of elderly, hereTechnological progress is an important factor the number of people aged 45 to 64, corre-for economic growth. It results in new products lates positively with the number of patents.or new, more efficient ways of producing exist-ing products. Innovations are frequently the Ageing and economic growthresult of technological progress. For WesternEuropean economies, which trade a great deal Having addressed all of these considerationswith the rest of the world (and of course with regarding future labour force development,each other), technological progress is one of productivity and technological progress, wethe pillars of growth. Western Europe can only can now have a closer look at Western Europe’ssuccessfully compete on global markets with growth prospects. The frame of reference forvery advanced products. If ageing were to in- this task is the simple growth accountingterfere with countries’ ability to innovate, their framework introduced above. GDP growthinternational competitiveness would face can be broken down into productivity growtha direct threat. Countries such as Germany, and employment growth. The latter dependswhich is a very strong exporter of highly so- on the growth of the working age populationphisticated machinery and cars, would suf- and changes in labour utilization (i.e. labourfer if it could not maintain its competitive force participation). For example, the Euro-advantage over foreign competitors. Assess- pean Commission and the European Centraling the effect of ageing on technological Bank (ECB) conducted this exercise, and theprogress is therefore critical. result of our own research is in line with their findings. It is very likely that GDP per capita It is a commonly held thought that a soci- growth will decline over the next four decades.ety’s ability to innovate suffers when it ages. However, this decline will not be dramaticThis rests on the assumption that creativity (Table 1).decreases with age. In fact, recent empiricalresearch has shown that age tends to correlatenegatively with the propensity to innovate Chart 6 Share of people aged 45–64 and number of patents(Schneider, Ragnitz, 2007). The likelihood of per 1 million inhabitants in the USa successful innovation (new product, majorprocess or product improvement) peaks at an 350 0.26average age close to 40. Afterwards, the likeli-hood begins to decrease, dropping to lower 0.24than at the age of 30 when the average age of 300 0.22personnel is over 48. Hence, there is quite a Share of people aged 45-64,long time span with fairly high innovation po- right scale [%] 0.20tential. What is more, empirical results sug- 250gest that a good balance of older and younger 0.18employees must be reached to achieve highinnovation potential. 200 0.16 Number of patents per US data on patent activity shows a rather 1 million inhabitants, 0.14 left scalepositive correlation between age and innova- 150tions. This means that even if age affects the 0.12likelihood to innovate negatively, this seemsto take effect only at higher ages – at least com- 100 0.10pared to the average age of the workforce. 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005Given the projected increase in the age of the Note: Patents are defined as Utility Patents granted to US inhabitantsworkforces in Western Europe, a strong neg- Source: US Census Bureau, US Patent and Trademark Officeative impact is unlikely to materialise. Since 11
  12. 12. Introduction International Pension Studies Western EuropeTable 1 Economic growth scenarios for Western Europe [average annual changes in %] Labour Change in Working age Total GDP Real GDP productivity labour force population population per capita Past: average 1 .1 0 .8 0 .4 0 .5 2 .3 1 .8 1995–2005 Base case 2011–2030 1.7 0.4 -0.3 0.1 1.8 1.7 2031–2050 1.5 0.2 -0.5 -0.2 1.2 1.4 Pessimistic assumptions 2011–2030 1 .2 0 .1 ­0 .3 0 .1 1 .0 0 .9 2031–2050 1 .1 0 .0 ­0 .5 ­0 .2 0 .6 0 .8 EU commission assumptions 2011–2030 1 .8 0 .2 ­0 .3 0 .1 1 .7 1 .6 2031–2050 1 .7 0 .1 ­0 .5 ­0 .2 1 .3 1 .5Notes: Western Europe = EU 15, labour force participation: share of employed persons of working age population Source: ECB, Eurostat, European Commission, own calculationsThe scenarios have two main results: EU policies currently aim to achieve pre-• As the table shows, growth will be affected cisely these goals, as summarised in the Lis- dramatically only under very pessimistic bon agenda. Norway and Switzerland have assumptions. In our base case scenario, similar goals with respect to growth. Indeed, which is slightly less optimistic than the policies across Western Europe are geared European Commission with regard to towards increasing labour force participa- productivity developments, but more op- tion with higher retirement ages or better timistic on labour force participation, in childcare facilities. They also aim to increase the medium term GDP per capita growth labour productivity with efforts to raise edu- will remain roughly at the level seen in the cational standards and foster research and last decade. Towards the end of the fore- development. While progress towards reach- cast period, growth will slow down as the ing these targets has not been consistent change in the working age population in all countries, we expect all of Western becomes more pronounced. Europe to make substantial progress within the next decades. Although Europe is ageing,• The table also demonstrates the impor- it will remain an economic force to reckon tance of maintaining high labour produc- with in the future. tivity. If the increase were to fall below the past average of one percent, GDP growth would be severely impeded. In fact, GDP Consequences for pensions growth above one percent would be diffi- and pension investments cult to obtain. An increase in labour force participation is another important pre- What does all of this mean for pensions? condition for economic growth to stay at First, the prospect of decent economic levels close to those reached in the past. growth rates means that there is no need12
  13. 13. Introduction International Pension Studies Western Europeto fear the future. The consequences of rule out some major European countries suchageing can be dealt with. Second, public, as Italy, Spain, and Germany, among manypay-as-you-go financed pension systems others. However, as the above analysis haswill encounter difficulties as a result of the shown, an ageing society does not necessarilychanging ratio of people over 65 to the 15-64 face a bleak future.age group, which finances pensions. Thisratio, which is commonly referred to as the The move towards a pension systemold age dependency ratio, will increase from that is funded to a much higher degree than27 today to 52 in 2050. past systems can be seen as a reaction to the changing needs of an ageing society. To suc- This means that in the future, there will cessfully offset the decline in labour throughbe 52 elderly people for every 100 people of investments in physical and human capital,working age, compared with 27 today. Still, an economy needs a great deal of capital.the outlook for public pensions would be Across Western Europe, the need to adaptmuch worse if ageing automatically meant to demographic change varies significantly.economic decline. This is not the case, as in- The situations in Sweden, France and the UKcomes are expected to keep growing. Wages, differ considerably from Germany or Italy.which finance public pensions, will not be The need for reform is highest in the coun-affected that much by ageing. However, age- tries that are ageing the most quickly anding will have a large impact on the viability have not yet sufficiently reacted by adaptingof public pension systems. their pension systems and economies to the demographic conditions they will face The most common reaction to this fore- in the future.seeable development continues to be de-creasing the generosity of public pension From an investment point of view, evensystems and strengthening private pension an ageing Western Europe seems like aprovision. The latter is usually of a funded promising place to invest. The demand fortype. People save money while working and capital to finance the investments requiredreceive the proceeds of their savings after to offset the decline in labour will grow. Inretirement. While this arrangement exposes some countries, notably Germany, this proc-them to investment risk, pension asset man- ess has already begun or will start sometimeagers do their best to keep this risk manage- soon. In the end, return on investment andable. They must continuously ask themselves the associated risks determine whether orwhere the best possible investment can be not an investment is appropriate. Even ifmade. If ageing societies were doomed to higher returns can be expected in emergingslow growth, stagnation or eventual decline, economies, these also entail higher risk.the only answer would be in young and/or Among others, exchange rates and politicalfast growing economies. This concept would risks should be considered. Dr. Jürgen Stanowsky, Allianz Dresdner Economic Research 13
  14. 14. Introduction International Pension Studies Western EuropeThe Financial Assets ofPrivate Households –An International ComparisonIntroduction above the level Japanese households had put aside (EUR 9.7 trillion). However, because ofOver the past decade, Europe has seen many the difference in size of the regions, an anal-pension reforms that have paved the way for ysis of the absolute values does not correctlya shift from pay-as-you-go to funded pension reflect the ratios. Taking financial assets as asystems. These reforms have led to a strength- percentage of gross domestic product (GDP),ening of the second pension pillar in most we find that wealth in Western Europe, whichcountries and highlighted the importance amounts to about 220% of GDP, is significant-of third pillar provision, as replacement ly lower than in the other two regions. In 2007,levels in the first pillar have been cut back. the United States’ monetary wealth of privateEspecially in Continental Europe and EMU households was 328% of the country’s GDP.(European Monetary Union) countries, the In Japan, it stood at 310%. In contrast, Easternintroduction of tax-favoured savings prod- Europe lagged way behind, reaching onlyucts for retirement has triggered a build-up 73% of GDP.process in this segment. The new members of the EU in Central The increasing importance of the pension and Eastern Europe (CEE) showed the mostsegment is reflected in the financial assets dynamic development among the regions inof private households. In many countries, the review. Over the past five years, they have seen 1 Former EU memberproportion of pension products has increased annual growth rates of almost 15%. Western states plus Norway andin private household portfolios in recent years. Europe recorded annual growth rates of 7.2% Switzerland, not includingTo a large extent, the differently structured on average after 2002. That year, an economic Luxembourg.portfolios in European countries can be viewed upturn laid the foundation for resuming finan- 2 Conversion at 2007as a result of differing pension systems and cial asset build-up in the household sector, rates.saving behaviours. This study generally fo-cuses on a narrow definition of retirement Chart 1 Financial assets of private households [2000=100]assets (i.e. pension funds and life insurance 260reserves), as it is difficult to earmark otherfinancial assets as destined for retirement Western Europe 230income. However, analysing the total finan- EU15cial wealth of private households is a worth- EMU 200while endeavour, as most financial products USAcan be used to top up retirement income. Japan 170 CEE 140Trends in financial assetdevelopment 110At the end of 2007, financial assets in West- 80 2000 2001 2002 2003 2004 2005 2006 2007ern Europe1 reached EUR 25.8 trillion2. Thiswas around 15% below the US level (EUR 30.8 Note: Europe excluding Luxembourg Source: Central banks, statistical offices, Eurostattrillion) and more than two and a half times14
  15. 15. Introduction International Pension Studies Western Europewhich had ended abruptly with the stock Chart 2 Private households’ financial asset structure, 2007 [%]market crash at the beginning of the newmillennium. In the US, financial assets even 100 3.4 3.6 3.5 4.4 6.4increased by 9.3% p.a. after the downturn Other 10.9had torn an exceptionally large hole in house- 27.4 30.9 25.3 Insurance/ 80 34.7hold portfolios because of the high affinity pension fundsto capital market investments in the US. In 34.5 10.4 Shares/ mutual fundscontrast, Japanese households, with their low- 60 29.4 9.5 Bondsrisk and hence low-yield portfolios, recorded 26.0 2.4 40.6 Bank depositsonly a moderate increase of 2.7% per year. 40 7.9 6.1 However, the investment environment 45.8 50.5changed in 2007. Growth rates dropped to 20 8.8 29.8 31.7 Note: Europe excludinghalf the former average at the beginning of 16.3 Luxembourgthe downturn in housing markets and due to 0economic uncertainties in many countries. Western EMU CEE USA Japan EuropeThe impact of the subprime crisis on financial Source: Central banks, statistical offices, Eurostatmarkets worldwide also played a major role.In 2008, indications have thus far shown thatthe growth of household wealth will slow down ments, but this is due to the privatisationconsiderably. Assuming a stock market down- process in some Eastern European countries.turn of 30 % year-end 2008 on year-end 2007financial wealth in all major regions will even To a certain extent, bank investments indecrease. both the US and Europe have seen a revival, which is the result of a heightened desire for In the US, the crisis will have an even larger safe investments. Nevertheless, US householdimpact than in Western Europe, EMU coun- portfolios contain only 16% bank products.tries and Japan. This is because the disparate In Western Europe, the bank share is almostperformance described above stems largely twice as high as in the US; in Japan, the figurefrom differing household investment patterns is more than three times higher. In CEE coun-in the respective regions. Compared with most tries, the share of bank products is almostEuropeans and the Japanese, American house- three times as high as in the US, which canholds show a strong affinity to investments in be explained by a very low average income.stocks and mutual funds, which bears both op- Usually, the portfolio mix initially comprisesportunities and risks for performance in the less risky and liquid assets (mainly bank de-overall investment portfolio. posits) and shifts towards capital markets and more sophisticated products as income About 40% of US household portfolios is and wealth increase.invested in equity and investment assets; in1999, this share peaked at almost 50%. Direct Chart 3 Share of bank products in household financial portfolios vs.investment in corporate stocks is no longer GDP per capita, 2007 [EUR]as attractive as it was at that time. Indeed, onbalance, US households have reduced their 70%exposure to equities. In Western Europe, the 60%portion of equity and mutual fund shares Gr CEE Jap Acurrently stands at 26%, after peaking at 30% 50%in 2000. 40% Other Western Eurpean countries Nor 30% As in the US, the increase in the overall fig-ure in many European countries stems from 20%valuation changes over the course of positive US 10%stock market performance up to 2007. It isnot the result of new investment flows, as 0%households began to invest more cautiously. 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 [EUR]The household portfolio mix in CEE contains Source: Central banks, statistical offices, Eurostata surprisingly high portion of equity invest- 15
  16. 16. Introduction International Pension Studies Western Europe Insurance and pension products also hampered insurance/pension asset build-up 3 In this context, the termmake up a major portion of household finan- in Greece, where only 3% of financial assets pension fund implies allcial assets. These have benefited from strong- are allocated to this segment. This figure is types of investment in fullyer occupational and private pension provi- far lower than in all other countries. funded pension schemes.sioning. In Western Europe, the share of these The investment vehiclesassets as part of household financial wealth Nevertheless, in most Western European have different featureshas increased by 6.5 percentage points over countries, growth in the insurance/pension and names in some coun-the last decade. Moreover, in most CEE coun- segment outperformed total financial asset tries. Wherever they aretries, capital funded pension arrangements growth in previous years. Again, this demon- subject to regulation bywere introduced as mandatory plans. This strates the importance of insurance and pen- the insurance supervisorygave an enormous boost to this investment sion products. Below average growth can be authorities, they are record-segment in Europe’s emerging markets. Even seen in the mature pension markets of Swit- ed for statistical purposesin the US, with its traditionally stronger capi- zerland and Denmark. It can also be observed in the “Insurances/Pensiontal funded pillar, improvements to the sys- in countries like Spain, where pension reforms Funds” category, in accord-tem are an ongoing process. If IRA (Individual have yet failed to materialise. ance with ESA ’95.Retirement Accounts) assets are also takeninto account, which are invested in other Chart 4 Gross financial assets in Europe, 2007product types such as mutual funds, bank [% of GDP, private households]accounts, insurance products or brokerageaccounts, the share of pension assets in the Switzerland 373US further increased from an already high UK 295level of 35% in 1997 to 40% ten years later. The Netherlands 280 Belgium 253 Italy 240European countries Denmark Portugal 235 223 Western Europe 218The Western European figure for financial EMU 202assets combines a variety of investment pat- Ireland 193terns and levels of wealth. The four biggest France 189 Germany 188economies combine two-thirds of total finan- Spain 182cial assets, which amounted to EUR 25.8 trillion Sweden 165in 2007. As the most populous country with Austria 152 Greece 139the highest GDP, Germany ranked second be- Finland 112hind the UK. In terms of gross financial assets Norway 103relative to GDP, Germany is in a much lower 0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375position (188%) than the UK, where 295% wasregistered in 2007. With 373%, Swiss house- Chart 5 Share of pension and insurance assets in the total financial assetsholds are the wealthiest in Europe, and are of private households, 2007 [%]also ahead of US or Japanese households. The Netherlands 58 These states are followed by the Nether- UK 55lands, Belgium and Denmark, all of which Denmark 43 Switzerland 42have stronger funded pension systems than Ireland 41countries with traditionally more extensive Sweden 40pay-as-you-go pension systems such as Ger- France 38 Norway 36many, Spain or Austria. The latter countries Western Europe 35all rank in the lower part of the listing. Pre- EMU 27sumably, the different pension systems have Germany 26 Belgium 24an impact on asset formation and can par- Finland 21tially explain the differing trends and finan- Portugal 18cial asset levels in European countries. The Austria 18 Italy 17share of insurance and pension fund assets3 Spain 14as part of total financial assets reflects the Greece 3importance of the segment in the respective 0 10 20 30 40 50 60countries. The Netherlands, the UK, Denmark Note: Europe excluding Luxembourgand Switzerland are at the very top. Very high Source: Central banks, statistical officesreplacement rates in the first pillar have16
  17. 17. Introduction International Pension Studies Western Europe Very high growth rates of pension / insur- Chart 6 Insurance/pension asset growth vs. total financial asset growth,ance assets compared to total financial asset 2001–2007growth can be observed in Belgium. This hasbeen triggered by a new occupational pen- 16sion scheme (“Vandenbroucke” law), estab- 14 Insurance/pension growth CAGR [%]lished in 2004, but also life insurance products Irlsaw a strong development. Greece also saw 12 B Grhigh growth rates in pension/insurance as- N 10 I Fsets. This is likely to be the result of the gen- SP 8erally low level reached up to now, which rep- NL US S Dk UK Finresents high potential to catch up. Ireland is 6 Ger Aanother country where performance is high, 4as it belongs to a group of countries that have CHa very basic first pillar only. Low replacement 2 Jrates must be topped up with occupational 0and private pension provisioning. The extreme- 0 4 6 8 10 12 14 16ly dynamic growth of the overall Irish economy, Financial asset growth CAGR [%]which has shown the highest average growth Source: Allianz Dresdner Economic Researchrates in Western Europe in the last decade, hasgiven households the financial leeway theyneed to save for retirement. The different behaviours and influences from differing regulatory, statutory and fiscal Other reasons for the varying development arrangements have led to strongly varyingof total financial wealth include the general trends. Depending on investment preferenc-propensity to save and differences in invest- es, the stock market boom in the late 1990sment behaviour itself. As already shown for had a number of impacts on portfolios. Inthe different regions of the world, risk aversion most European countries, financial assetslevels differ tremendously. Greek households grew rapidly between 1996 and 2000. Thishold the biggest share of bank products. This was related directly and indirectly to stockrisk aversion may be due to a lower level of market gains in particular, which affectedincome and economic development. As one both the valuation of existing stockholdingsof the wealthier countries, portfolios in Aus- and attracted massive new inflows of funds.tria are geared heavily towards security, withalmost 50% invested in bank deposits and The boom gripped the Finns, Swedes andanother 9% in debt securities. Spain and Greeks in particular, generating strong growthGermany are also among the countries that between 1996 and 2000 – and losses in theinvest conservatively compared to other subsequent downturn. Still, together withEuropean countries. Spain and Norway, these countries experi- enced the highest asset gains. At the end of Savings ratio Savings ratios are often used as an indicator of savings behaviour . This can be misleading for cross­ country comparisons, as contributions to pension schemes are not counted as savings . In contrast, the accumulated savings of pension assets do count as financial assets . The savings ratio is usually calculated as the difference between income and consumption . Contributions to pension schemes and investments in other financial assets, such as bank deposits, are treated differently . While the former is recorded in national accounts as a household expense that reduces saving potential, the latter is viewed as saving . However, since contributions to pension schemes increase financial wealth, countries with large funded pension systems often show low savings ratios, but high finan­ cial wealth (as share of GDP) . This puts the very low savings ratio of UK households compared with the higher ratio in Germany, for instance, into a more realistic perspective . See also: Eurostat, Savings rates in Europe, Statistics in Focus, 33/2002. 17
  18. 18. Introduction International Pension Studies Western Europe2007, their wealth was about one and a half lead to higher asset valuations in the medi-times higher than at the beginning of 1997. um and long term. In turn, this will provide aIn contrast, during this period Belgium and partial substitute for saving. This correlationGermany registered respective increases of may be one of many reasons for the decreas-only 50% and 60%. By 2005, all countries that ing savings ratios that were observed in mosthad suffered absolute losses of wealth passed European countries until the beginning of thetheir previous wealth peaks. And as a result new millennium. For the projection period,of favourable capital market developments, we have assumed a share performance of 7%they further increased their financial assets p.a. from 2009 onwards.until 2007. In 2008, the financial crisis that resulted from the subprime crisis in the UnitedFinancial asset projection States has put a burden on stock markets.through 2020 The high 2007 year-end figures are unlikely to be reached by the end of 2008. Our fore-Moving forward, we expect the acquisition casts were undertaken in the third quarterof financial assets to progress dynamically. of 2008 and we have assumed that stockIn many European countries, the develop- markets lose 30% in 2008. These perform-ment of monetary wealth will be driven by ance figures also influence the assets underefforts to provide for retirement. This will not management of investment funds.only be the case in countries with alreadystrong funded pension systems (such as the Investments will flow into a wide variety ofUK, the Netherlands and Switzerland), but product categories. A precise product-specificalso in states where reforms to public pay- forecast or econometric estimate is virtuallyas-you-go systems will lead to lower pension impossible for a longer period, as preferenceslevels. Particularly in these countries (such as for particular investment vehicles may dependGermany, Italy and Austria), people are grad- on factors that are difficult to predict, such asually learning to accept the need for supple- legal or tax circumstances and interest ratementary private provision and are building developments. For this reason, our assump-up capital accordingly. Although this process tion on asset allocation is based on long-termwill develop differently across European coun- historical structural shifts. These are driventries and depends on awareness and the by rising incomes and personal wealth, whichprogress of reform, sales of products for old- lead investors to higher performing, riskierage provisioning are likely to be very suc- products. Although stock market volatilitycessful in the coming years. during this decade has reinstated the security aspect, the basic change in investment be- Moreover, the need for personal pension haviour with increasing income is likely toprovision will encourage broader sections of remain stable.the population to save beyond state-incentiv-ised pension schemes. In most countries, our In light of these patterns, countries withprojection therefore assumes a slightly high- higher portions of direct or indirect exposureer savings rate than in the past. However, the to equity markets (through mutual or pensionratios will barely get back to the levels of the funds), such as the UK, Sweden, Finland, Ire- 4 This growth rate differsearly 1990s. Additional retirement saving will land or Spain, will see higher growth in house- slightly from that in thelikely replace other precautionary savings hold financial assets than countries with a following article on pen-efforts and the increasing number of elderly more conservative investment approach or sion assets. This is due topeople will reduce their personal savings smaller funded pension systems. On average, some classification dif-efforts as they retire. we expect the financial wealth of Western ferences in the financial European households to increase by 4.4% p.a. flow statistics of national The increase in wealth is driven not only accounts and the specificby savings, but also by asset valuations, as Total financial assets will therefore increase pension statistics we usedthe development of financial assets has dem- by 75% until 2020, reaching almost EUR 45.3 for the market analysis.onstrated in past decades. Stock market per- trillion. The strongest growth will be registered One major difference isformance also represents an important part in the area of insurance and pensions (5.4%)4. that non-life insuranceof the increase in monetary wealth. Rising By 2020, the importance of these products in products are included ininvestment in equities and equity funds will household portfolios will gain 3.5 percentage the financial accounts.18
  19. 19. Introduction International Pension Studies Western Europepoints. Above average growth will also be ob- Chart 7 The financial asset structure of private households, 2007–2020served in the shares and mutual fund segment(4.6%). This will extend their portfolio share 100 3 3by roughly one percentage point. The main 3.4 3.6 Otherlosers in this process will be bank products. 27.4 32 Insurance/ 80 34.7 39 pension funds In Continental Europe, particularly in coun- Shares/tries that belong to the monetary union, growth mutual funds 60rates in the insurance and pension segment 29.4 Bonds 26.0 31are slightly higher (5.6%) due to emerging pen- 27 Bank depositssion saving programs. With its above-average 40 7.9 6.1growth rate, the UK market is not included. 5 7In EMU countries, financial assets will grow 20 31.7by only 4.3%, amounting to EUR 30.9 trillion 29.8 26 27 Note: Europe excludingin 2020 from EUR 17.8 trillion in 2007. Luxembourg 0 2007 2020 2007 2020 Prospects for the long-term development Western Europe EMUof financial assets are quite good, as growth Source: Central banks, statistical offices, Eurostat, Allianz Dresdner Economic Researchrates are expected to be higher than GDPgrowth. However, it should be noted that thefinancial turbulence of 2007/08 is yet again At the same time, introducing fully-fundedputting individual investors and long-term pensions in industrialised nations has be-savers in capital market products to the test. come more pressing than ever. Explanatory notes Financial assets The household sector’s financial assets are calculated in the financial flow statistics provid- ed by central banks or national statistical offices. The aggregate financial account shows by whom, on what scale and in which form financial resources have been made available in an economy. The system is aligned to the “European System of Accounts” (ESA), which was made binding in the European Union in 1999. Its aim is to provide a consistent set of criteria with which all economic sectors and activities can be defined. Insurances and pension products comprise one product group in the financial accounts. In this category, investment vehicles are recorded that are subject to regulation by insurance supervisory authorities, in accordance with ESA ’95. These include all types of investment in fully-funded pension schemes and insurance products. Prepayments of insurance premi- ums and reserves for outstanding claims are also included in this segment. The values are technical reserves. Insurance reserves and pension fund assets are not separated for all countries. This means that non-life, life and pension assets are shown in an aggregate fig- ure in the analysis of financial assets. This figure differs slightly from the definition in the “retirement asset” part of the study (see next article). Projections While accruals in financial assets can be traced back to valuation changes and flows, flows come from savings and contributions from other sources. As far as saving is concerned, assumptions must be made on the development of disposable income and savings rates. For disposable income, an increase in line with nominal GDP growth has been assumed. The growth forecasts for real GDP and inflation in the individual countries up to 2020 are based on Allianz Group Economic Research projections. The data on savings rates up to 2009 are sourced from OECD statistics; constant or slightly increasing savings rates have been assumed for the respective countries. 19
  20. 20. Introduction International Pension Studies Western Europe Particularly with regard to allocation, assumptions are difficult to make, as preferences for special types of investment depend on interest rate trends or legal or tax conditions, for instance. Inflow allocation to the various financial instruments has therefore been based on the average behaviour of the past 10 years. Allowance has further been made for the likelihood of additional funds being channelled into private retirement provision in any one country, insofar as there are newly introduced private pension plans that are incentivised by the government.Dr. Renate Finke,Allianz Dresdner Economic Research20
  21. 21. Introduction International Pension Studies Western EuropeTrends and AssetDevelopment in EuropeanPension MarketsReforming public pensions Nevertheless, almost all countries have trimmed their public pension systems toWestern Europe’s pension systems have varying degrees and increased the retirementchanged continuously and considerably. age to strengthen the sustainability of theirFor the most part, reforms of the last decade public pension systems. Countries like Swe-were triggered by the insight that ageing den, Austria and Italy have established a veryWestern European populations would place strong link between contributions and bene-an unbearable burden on the public pension fits in the public pillar. They have introduced asystems in place in the medium and long term. notional defined contribution system in whichThis is because the ratio between contributing contributions are recorded in notional indi-employees and retirees will worsen, in some vidual accounts and benefits depend on thecountries dramatically. The degree of change accumulated sum and cohort life expectancy.and the depth of reform have differed acrossEurope. This is hardly surprising, as the pen- Despite these reforms, Western Europe’ssion policies of Western European countries public pensions are still very generous inhave been based on very different foundations. a worldwide comparison. Some European countries show exceptionally high replace- Western Europe’s public pension policies ment rates, which are defined as the ratio ofare largely based on two different systems. post- to pre-retirement income. In Italy andBismarckian systems comprise public pen- Portugal, the net replacement rate for aver-sions that provide earnings-related benefits age earners is around 90% of pre-retirementand aim at maintaining income in retirement. income. In Luxembourg, Spain and Greece,In contrast, Beveridgean systems mainly aim it is 100% or more. This dominating publicto prevent poverty, often through flat-rate pillar will have a strong impact on publicsystems. Austria, Belgium, France, Germany, finances in the future, which will influenceItaly and Spain belong to the former group, the need for pension system reform.while Ireland, the Netherlands and the UKare examples of the latter. Mixed models can The Allianz Dresdner Reform Pressure Gaugebe found in the Scandinavian countries and summarises the effects at work, compares andSwitzerland. Since Bismarckian systems are illustrates the sustainability of pension systemsassociated with higher public pension expe- and the need to reform. It includes the likelyditures, they have also faced a much greater effects of reforms already initiated. In so doing,need for reform. Another factor that has de- it assesses the future sustainability of pensiontermined the urgency of reform has been a systems and shows that reform pressure iswidely differing demographic outlook from highest in Greece. Generally, countries withcountry to country. While Spain, Italy, Por- very high replacement rates and underdevel-tugal, Greece and Germany must cope with oped funded systems are under the higheststrongly ageing societies, populations in reform pressure, as they will face dramaticSwitzerland, the Netherlands, the UK, Ireland increases in public pension expenditure in theand Scandinavia are not ageing quite as future. Portugal, Spain and Luxembourg facedramatically. this very situation. For Sweden, the UK, Den- mark and the Netherlands, the Pressure Gauge 21

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