Debt crisis reveals need for pension reform

Pensioner-with-caneIncreased levels of sovereign debt are putting pressure on many countries to overhaul their pension systems and it is no surprise that Greece, the country at the locus of the European crisis, is deemed to be in greatest need of reform.

This is the conclusion of a pensions index produced by Allianz Global Investors (AGI), which also identified India, China and Thailand as under pressure to reform, though for different reasons.

The problem in Greece is that the retirement age is low, the payout relatively generous and the ratio of elderly people to working adults higher than in other countries. Given the country's high level of sovereign debt, these conditions are unsustainable, said AGI.

In contrast, India and China are in need of reform because pension coverage is extremely low and governments are not doing enough to improve it. Thailand has a combination of the two problems in that it has only “sporadic” pension coverage but a low retirement age of 55.

The country that is best prepared to deal with its pension burden, and in least need of reform, is Australia, which has a “lean” public pensions system and highly-developed funded pensions, said AGI. It helps that Australia has relatively low levels of sovereign debt and is untainted by the European debt crisis.

Sweden, Denmark, New Zealand and the Netherlands also scored high on the index.

“Over the last decade, almost all western European countries have been trimming their public pension systems in an effort to make them more sustainable,” said AGI. “However, a key driver of the index results this year was the increase in sovereign debt as a result of the financial crisis.”

Greece and Ireland were the worst affected by the rise in sovereign debt, but they were not the only ones. In both France and Spain, the benefits of pension reform have been largely wiped out by increased levels of sovereign debt, which have left public finances in the same position as they were before the reforms.

AGI says some countries should consider dramatic changes to their pension systems if they are to prepare for the future.

“Though it’s not a patent remedy, the rise of effective retirement age seems to be a decisive factor for improving the financial sustainability of pension systems in many countries,” said Andreas Hilka, head of pensions Europe at AGI.

©2011 funds europe