Europe’s €30trn pension fund ‘hole’

Pension wake-up.pngPensions were one of the great inventions of the past century. Now the European Central Bank (ECB) has issued a ‘wake-up call’ on the affordability issues that lie ahead.

The reason is very simple. As we note in ‘Boom, Gloom and the New Normal’, pensions were introduced first introduced in Germany in 1889, and then in the UK in 1908. The idea was to provide a small amount of money to a small number of people for a small period of time:

• Life expectancy then was 30 years lower than today
• Pensions only went to those who lived 20 years longer than average

Since then, we have failed to index pension age to rising life expectancy. In addition, Westerners have come to assume that pensions are a ‘universal right’. We forget that younger people will have to pay the bill for this dramatic increase in costs.

The ECB’s report summarises the result. It calculates state-funded pension obligations in 19 EU countries where sufficient data exists:

• They have combined obligations of €30trn ($39trn)
• By comparison, total EU GDP in 2010 was only $12trn

The ECB is not supposed to intervene in political issues. So it cannot publically state the obvious conclusion. But most people reading the report will be in no doubt about what this means. Put simply, future pensioners are most unlikely to actually receive the money that has been ‘promised’ to them. Younger generations cannot, and will not, afford to pay the bill.

In turn, this has enormous implications for the type and cost of the products and services that older people will require. Affordability will be the key criteria for them in future years, not ‘value in use’.

Companies that grasp this challenge will not only help to cushion the transition for disappointed would-be pensioners. They will also build a robust platform for their own future growth.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.


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