Investors should take pension liabilities into account more when analysing the solvability of European countries, EDHEC-Risk Institute has said.

Because pension systems vary across the continent, obtaining a clear view of the liabilities is not straightforward, but the European Commission’s 2012 Ageing Report provides comparable figures and projections of public pension expenditures up to the year 2060.

The present value of pension liabilities is very sensitive to the discount rate chosen, the institute said, but is not negligible in any event. With a high discount rate of 5 per cent, accrued-to-date liabilities are around or above 100 per cent of 2010 GDP in 18 out of 27 EU countries, above 200 per cent in 8 countries and up to 483 per cent for Belgium.

With the central hypothesis of a 4 per cent rate, 12 countries are above 200 per cent and 7 countries above 400 per cent. For the lowest rate of 3 per cent, 11 countries are above 400 per cent and six are above 800 per cent of GDP, while it is impossible to calculate a discount rate for three countries whose pension expenditure growth rates are above 3 per cent.

The public pension liabilities that the institute has calculated are very different from those that rating agencies and investors usually take into account when making their solvability analyses. When these public pension commitments are taken into account, countries such as Sweden, Luxembourg and Denmark look much less virtuous, while countries such as Spain, Italy and Portugal look relatively better.

EDHEC-Risk Institute’s new publication ‘Towards Better Consideration of Pension Liabilities in European Union Countries’ can be found here.

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