Pensions provision is in trouble around the world, so Vicki Taylor looks at solutions to funding issues and ponders which strategies have the best chances of success
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An increasing number of retirees combined with declining birth rates have helped to cause pension shortfalls worldwide. Measures designed to help tackle the problem include: increasing employers’ responsibility, reducing the benefits given to pensioners and increasing the retirement age. Compulsory contributions have worked well in countries such as Australia and are now set to be introduced in others.
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The pension challenges faced by the UK are by no means unique. All over the world, countries are struggling with changing demographics, with increasing numbers of employees retiring and less people remaining in work to support them. According to Simon Wasserman, managing director of the global benefits network at Aon Consulting, these countries are tackling the problems in a similar way to the UK. "There are three choices: one is that the government can shift the cost away from social security towards the private sector, which is part of what you are seeing [in the UK] with the suggestion of mandatory contributions.
The second, which is generally deemed not to be very palatable, is to reduce the share of the economy given to pensioners. And there is a third, do-nothing option." Many countries have already moved away from state pensions by taking social security payments and putting them into individual defined contribution plans. "[This] has worked very well in Poland as well as most other European countries. It started in Chile in the 1980s, where it was hailed to be successful. It has led to imitations across most of Latin America and was also copied in the Far East by one or two countries," Wasserman explains. Countries such as France and Italy have traditionally provided higher levels of state benefits than the UK. This has helped to make Italy one of the most indebted nations globally, while it has been predicted that by 2010, France may not have enough people in employment to fund retirees’ pensions. Mark Sullivan, worldwide partner at Mercer Human Resource Consulting, says: "Demographic changes mean [some countries] are having to address the benefits they are providing or are looking to increase taxes. Both are difficult politically and we have seen industrial action in countries like Italy and France where the government is trying to reform state benefits."
Germany currently has an average pension deficit of 12% of market capitalisation and one of the lowest levels of scheme funding in Europe according to Pension deficits: up and down published by Mercer Human Resource Consulting. It is taking steps to tackle its problems by raising the retirement age from 65 years to age 67 and increasing employee contributions. Organisations are legally obliged to pay members’ benefits and are covered by an insurance scheme which will make these payments if they are unable to. However, Sullivan doesn’t believe this is enough. "We have seen limited reform in countries like Germany. There is a need to continue that reform if they want to move to a state system that is affordable." Mandatory employer contributions have also worked well in countries such as Australia, where in 1992, all employers were ordered to pay a minimum of 3% of each employee’s salary into a pension. This has now increased to 9% and incentives also exist to encourage employees to contribute.
New Zealand is also set to introduce a new retirement fund, the Kiwisaver, in 2007. Workers will be automatically enrolled in the scheme, with a three-week opt-out window, and can contribute either 4% or 8% of salary. While employers must offer the scheme, however, they do not need to make contributions. The trials and tribulations of these nations in dealing with the pensions issue are providing a text book of learnings for emerging markets such as the Czech Republic. "[They are] able to learn from some of the best practices and the mistakes made in other countries," Sullivan adds.