LONDON - Leading members of the European Union such as Germany and France have a long way to go to ensure the long-term sustainability of their state pension systems as the ratio of pensioners to those in active employment starts to increase.
A recent report for Merrill Lynch & Co., London, by independent consultant Jan Mantel examined EU member countries and ranked them according to a range of diverse steps taken to reform their state pension systems.
Top of the class was Ireland, where limited debt issuance, low tax levels and pension assets at a relatively high 60% of gross domestic product put the country in a relatively secure position when it comes to funding future state pension liabilities.
Ireland's government late last year approved setting up a pension reserve fund designed to build up assets to partially fund future liabilities. Around 1% of GDP will be invested in the fund every year with possible further additions from money raised through privatization. Asset managers have yet to be appointed, but announcements are expected starting this month.
Other notable good performers were the United Kingdom, although Mr. Mantel warned pensioners' standard of living there is among the lowest in Europe; the Netherlands, where pension assets are worth 110% of GDP; and Sweden, which in 1999 restructured its state pension system and introduced a funded defined contribution plan.
Italy at No. 5
Pension reform efforts in Italy pushed the country to No. 5, after Sweden and two places above Belgium, which recently announced the setting up of a pension reserve fund similar to Ireland's. Mr. Mantel praised the Italian government's reform of its public retirement system, which will result in the country having the smallest increase in pension expenditure over the next 50 years of all 13 countries surveyed.
Surprisingly, Germany ranked ninth. Pension assets there account for about 7% of GDP, but pension expenditure is expected to fall at one of the fastest rates in the region. Mr. Mantel said pension reform is "well under way," but the state system has been put under considerable pressure during the past 10 years following the unification of East and West Germany.
France's report card was marked "could do better." In the pension reform charts it came 11th out of 13 countries and scored its best ranking from its pensioners' high standard of living, the highest in Europe.
But Mr. Mantel warned this level of benefits will not be sustainable without reform. Pension assets are around 5% of GDP and this percentage is unlikely to grow in the near future.
Spain was awarded the lowest ranking in terms of its pension reform which was unfortunate, said Mr. Mantel, as reforms put in place in the past two years will see state pension assets grow rapidly in the next 50 years. Pension assets are 3% of GDP. A key factor in Spain's low ranking is its demography; in the next 30 years the country will experience the strongest increase in the old-age dependency ratio of all European countries.
Overall, Mr. Mantel believes most governments are taking effective steps to alleviate what could become a massive fiscal burden in 30 years' time.
France has some way to go. But it is hoped, particularly in Brussels, that peer pressure will encourage the country to take some painful but necessary steps toward reform.