A] Prelude*
* For more information about EU general and national pension plans and systems, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/europe-expat-pensions
https://expatpensionholland.nl/global-pillars-systems
Europe's population is aging fast, forcing EU states to spend more on pension benefits. While governments want to raise the retirement age, savers prefer and are demanding a much more flexible approach, assisted by technology.
Europe's demographic time bomb has been ticking for decades. (Just like in China and the USA.) European Union countries are growing older and people are living longer. More than a fifth of the European Union's population is now aged 65 or older. That figure is expected to reach a third by 2050. The World Health Organization warned last year that 2024 would mark the first time that over 65’s would outnumber Europe's under-15 population.
Despite large increases in immigration over the past two decades, the continent still needs to attract enough workers whose taxes can help meet the growing cost of public pensions. Economists predict that by 2050, there will be less than two workers in Europe for every retiree, compared to three now. Thus a funding ‘time bomb’ in progress.
Meanwhile, the annual public pension bill has reached more than 10% of gross domestic product (GDP) in 17 of the EU's 27 states – all but one of them in Western Europe. In Italy and Greece, pensions cost public finances more than 16% of GDP.
B] Raising retirement age not popular
To help address the exorbitant and rising costs, several EU states have tinkered with their public pension systems, including raising their retirement age. France, for example, faced months of angry protests last year over plans to force older workers to retire at 64, up from the current 62.
Other European countries have gone further, including the United Kingdom, which plans to keep people working until 68 from the mid-2040s. Women in Britain used to retire 5 to 7 years earlier than men, but a move to equalize the pension age sparked compensation demands for the affected women.
The Dutch have recently reformed their pension system, but it's not achieving the set goals, a pension law professor told. "Also in Germany, Belgium and many other European countries, we don't see the necessary reforms. They are digging their own graves."
Added to the already existing strain on Europe's public finances, millions of people are still not saving enough in private or occupational pensions meant to complement their state pensions. Data from the Eurobarometer last year showed that only 23% of EU residents have an occupational pension scheme and just 19% own a personal pension product. The figures vary hugely between EU states.
A separate survey by the Insurance Europe trade body found that 39% of respondents are not saving for retirement — the figure was even higher among women and workers over 50. Many of those that do are frustrated with their investment outcomes.
C] Low returns & inflation
"Over the past decade, Europe's pension crisis has significantly worsened due to persistently low real returns that have not been sufficient to outpace inflation," according to specialist Arnaud Houdmont. "That has resulted in a substantial loss of purchasing power for participants."
Analysis by the Finnish Centre for Pensions found that nominal returns on pensions worldwide averaged 8% last year. But after the decades-high inflation that followed the COVID-19 pandemic was taken into account, the returns were just 2%. Eurozone inflation peaked at 10.6% year on year in October 2022. Houdmont said high fees, poor asset allocation and a lack of transparency in pension products were also to blame for lower returns.
D] Slow rollout of portable EU pension
To help address the savings shortfall, in March 2022, the EU introduced the Pan-European Personal Pension Product (PEPP). The scheme allows workers to build up an additional pension, which is fully portable when moving to other EU states. However, only one country — Slovakia — has rolled out the scheme. "PEPP has been in force for two and a half years.
But the big investment funds say they don't have the expertise to roll out PEPP products alone and are seeking other partners."
The problem, say some pension experts, is that PEPP is also overcomplicated and restrictive. PEPP is also seen as unwanted competition for investment funds like BlackRock/Fidelity/ Vanquard, whose largest clients are the big Dutch, Norwegian and German pension funds representing tens of millions of European savers.
Some specialists are advocating for PEPP to be simplified and more flexible as some EU countries don't give the new pension scheme the same tax advantages as other retirement savings products. Which is very negative and basically makes the PEPP a non option as it is all about after tax return on investment. (Which is sometimes forgotten by university professors.)
Several industries in EU states — from Germany's chemical and metal sectors to France's national railway operator — have their own occupational pension schemes. Almost 60% of German workers who pay social insurance contributions belong to such plans. These schemes often give savers, especially those who do physically demanding jobs, the option of retiring early, among other perks.
E] Workers prefer more flexibility
Consumers are, however, demanding ‘even more’ flexibility in their investments and retirement age. The rise of neo-brokers like Robinhood, eToro and Germany's Trade Republic, which give users the ability to manage their investments on smartphone apps, has somewhat usurped Europe's many cumbersome and overcomplicated pensions systems.
Traditional finance providers argue that mobile investment apps encourage users to take uninformed and unnecessary risks that could hurt their long-term returns, while advocates say they have made investing simple, cheaper and more transparent.
In the future, more EU governments could allow workers to put some of their state pension savings directly into the stock market, like Sweden, whose private pension funds have collectively negotiated lower fees that have helped retirement funds to grow.
Some specialists think workers would be more motivated to save if they were given more say in how their investments are managed and when they retire. Do you want your savings to be green? Do you want to invest in Israel or not? Let the individual decide. Why should social partners or trade unions decide this for you? they question, referring to union-run pension schemes.
Houdmont warned of a day of reckoning in the medium term due to the "shifting burden" from public to private pension savings, which he said savers weren't ready for. "There is a good chance that the next generation of Europeans will retire considerably poorer and later than their older peers".
F] Finally
Most western countries but also China face a pension funding issue. For the EU it seems clear that the number of people that are participating in an occupational or private pension plan needs to increase substantially and on short notice.
More pay-out flexibility seems unavoidable. Likewise for participants to have a say in a green investment allocation. But letting participants totally decide for themselves how to invest, can only fail and we cannot expect them to do this better than according to the current (index tracking) systems and usual asset allocation risk reduction.
Let’s focus on the best (after tax) outcome for participants, not on trying to be popular!