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Tuesday, March 11, 2003

More Fuel for the Pensions Fire

We all know it's coming, but we try not to think about it. The 'it' in question this time: the looming pensions crisis.This week it's the turn of the European Financial Services Round Table, an entity which represents such institutional lynchpins as Deutsche Bank, ABN-Amro, Axa and Barclays, to enter the fray by writing to European leaders urging them to speed up the creation of a single market in financial services to try to help solve the European pensions problem. Of course whether these estimates are in any way realistic, and whether private pension plans, depending as they normally do on equity values, offer any security or solution, this is another matter. (See my arguments: eg here).

Europeans need to save an extra €456bn (£315bn) a year to preserve the level of retirement benefits while holding down the cost of public pensions, Europe’s leading financial services companies claim. Pehr Gyllenhammar, chairman of the Round Table and of Aviva, the UK’s largest insurer, said: “This is a call for very urgent action. If European governments deliberately want to erode the livelihood of 377m and more people because they dare not touch the pensions bomb, that is not responsible behaviour.” European Union government figures show that if policies remain unchanged, the cost of state pensions in the EU is expected to rise from 10.4 per cent of gross domestic product in 2000 to 13.6 per cent by 2040.

For its estimate, the Round Table supposed that the cost to the state in each EU country were capped at its 2000 share of GDP, but pensioners were still to receive the same level of benefits. Based on the current best projections, private savings for the next four decades would have to be 456bn a year higher - about 5 per cent of the EU’s GDP in 2002. The greatest need for increased savings is in France, which according to the Round Table needs an extra €137bn a year. Mr Gyllenhammar said making personal pensions portable within the EU, opening national markets to competition and allowing greater economies of scale were essential to encourage private saving. The Round Table calculates that the European fund management industry could save 10bn a year in administration if the average EU fund was were as large as the average US fund. The attempt to create a single market in financial services has been seen as one of the relatively successful elements of the economic reform programme that the EU committed itself to at the Lisbon summit in 2000. Of the 42 measures in the financial services action plan, 32 have so far been signed off. But Mr Gyllenhammar said progress had been slow, with the directives only rarely translated into genuinely open markets.
Source: Financial Times

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