EU pensions prove to be robust despite downturn
6 March 2009
Written by Sophie Baker
The European Union (EU) has admitted that pensions are not
‘immune’ from the financial crisis, but have shown themselves
to be ‘robust’ in comparison to other financial institutions.
The memo examines different pension schemes throughout the EU, and concludes
that the long-term nature of pensions works to their advantage, giving
some natural protection. However, they said that the precise impact the
crisis will have depends on the specific mix of schemes in place in a
Member State.
The
pay-as-you-go (PAYG) schemes would be affected should there be a serious
economic downturn, or larger national debt, forcing policy adjustments
in order to secure the long-term sustainability of such schemes in some
countries. However, short-term, the EU said people will get their expected
pensions, and should any adjustments be necessary in the longer-term,
these will be phased in gradually.
Defined benefit (DB) occupational schemes, however, take on the investment
risks, therefore increasing the risk of direct impact on investments.
There will, the EU said, be challenges going forward as DB schemes in
deficit as a result of falls in investment seek to restore their funding
balance. It is also feared that the crisis may also accelerate the long-term
trend for DB schemes to close to new members, or even to future accruals,
to control costs.
There could, however, be more serious impacts, although the Insolvency
Directive and measures Member States have already put in place provide
a layer of protection.
Those with defined contribution (DC) pension schemes, and are close to
retirement, may still be protected from the downturn should they have
‘lifestyle’ strategies, moving into less volatile investments
like cash and bonds as retirement approaches. However, those who are not
will face less well paid or later retirements. However, the EU said this
is an atypical scenario for most European citizens. Those some years from
retirement may also be safe as the markets will have time to recover.
The EU concluded that the crisis has highlighted that there is no perfect
pensions system, and there is room for improvement in the EU’s current
pensions framework.
For more information, click here.
