Saturday, 27 May 2017

The Telegraph/Szu Ping Chan: Pensions are sitting on a global time bomb, warns WEF

Telegraph Business

Pensions are sitting on a global time bomb, warns WEF

  By Szu Ping Chan

26 May 2017 • 8:00am

The world’s biggest economies are sitting on a $70 trillion (£54 trillion) pensions time bomb that will balloon to more than $400 trillion within four decades unless policymakers take urgent action, the World Economic Forum has warned.

Analysis by the WEF showed the six countries with biggest pensions – the US, UK, Japan, Netherlands, Canada and Australia – as well as China and India – the two most populous countries in the world – faced a retirement savings gap of $428 trillion in 2050, up from $67 trillion in 2015.

This is based on the Organisation for Economic Co-operation and Development’s (OECD’s) recommendation that savers should aim for a retirement income of 70pc of earnings when they stop working.

The gap is expected to grow to the equivalent of $300,000 per person by 2050, adjusted for wage inflation, which is larger than the size of the global economy.

In the UK, the current shortfall of $8 trillion is forecast to rise by an average of 4pc per year to $33 trillion in 2050.

A study by the OECD in 2015 found that savers in the UK could on average expect the state to fund 38pc of their working-age income when they retired, lower than any other major advanced economy.

Across the 35 major economies in the OECD, the average was 63pc.

But while the think tank has praised the UK Government’s shake-up of the pensions system, which is now linked to life expectancy, it described the notion that it had found a “beautiful balance between affordability and sustainability [as] some sort of Panglossian fantasy”.

Many are not saving enough into private pension schemes, it warned.

The WEF said a five-point plan was needed to ensure those born today can retire and still receive a comfortable income.
Ageing populations

The WEF noted that life expectancy has been increasing “rapidly” since the middle of the last century, rising on average by one year, every five years.

This means babies born today can expect to live for more than 100 years. According to the forum, the number of people aged over 65 will increase from 600 million today to 2.1 billion in 2050.

As population growth slows, this will mean the number of workers paying for the pensions of those in retirement will fall from eight workers today to four per retiree in 2050, putting pressure on the public purse.

All this will be against a backdrop of slower growth, lower interest rates and weaker returns on investments.

The WEF said: “Over the past 10 years, long-term investment returns have been significantly lower than historic averages.

Equities have performed between 3pc and 5pc below historic averages and bond returns have typically been around 1pc and 3pc lower.

Low rates have grown future liabilities, and at the same time investment returns have been lower than expected and unable to make up the growing pension shortfall.

Taken together, these factors have put increased strain on pension funds as well as on long-term investors that have commitments to fund and meet the benefits promised to current and future retirees.”
Saving for the future

The WEF believes working for longer is inevitable. George Osborne, the former chancellor, linked the state pension age to life expectancy in the previous parliament.

As a result, the Office for Budget Responsibility (OBR), the government’s fiscal watchdog, forecasts that workers will have to retire at 69 by 2055.

Under current plans in the UK, the state pension age will rise to 66 by 2020 for both men and women.

The OBR’s latest long-term projections suggest this move is necessary for state pensions to remain sustainable.

Official projections show 26.2pc of the UK population will be aged over 65 in 2066, compared with 18pc last year and 12pc in 1961.

The WEF believes workers need to save between 10pc and 15pc of their annual salary to support a reasonable level of income in retirement.

It warned that many workers faced a shock in later life, with current savings rates “not aligned with individuals’ expectations for retirement income – putting at risk the credibility of the whole pension system".
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