EUROPE - Central European governments are coping better than expected with the pressures of meeting long-term pension liabilities considering the EU's Institutions for Occupational Pensions (IORP) Directive is geared towards Western regimes, Allianz Global Investors has suggested.

According to an annual study produced by the Germany-based asset management firm, Central and Eastern European (CEE) pension regimes have shown 37% growth in the last few years, from a volume of €13.5bn in 2002 to €47.4bn in 2006 because they have introduced mandatory second pillar pensions and sponsored voluntary systems.

It is because of regulatory reform CEE countries now sit, in the main half, they way up its ‘Reform Pressure Gauge' - performing better than many Western European countries - even though their demographic count is likely to drop substantially over the coming decades.

Closer inspection of the report into the pensions system of 11 CEE countries suggests Latvia and Estonia are best placed to cope with demographic change and its effect on pensions funding as they closely follow the UK and Ireland in terms of low reform pressures.

Most other CEE countries sit within the middle of Allianz's Reform Pressure Gauge - 1 being low reform pressure and 10 being the highest reform pressure - because most countries have already implemented a mandatory funding requirement to their pensions systems to help ensure people have sufficient pensions income when they retire, according to Brigitte Miksa, head of international pensions at Allianz.

"As most CEE countries have introduced a mandatory funded part of their pension systems, they are on the right track. But much still needs to be done to remove the legacy of former pension systems," said Miksa.

"For instance, the retirement age is still low, even if it is rising in many countries, early retirement is still widespread, and some countries' supplementary pension elements continue to be voluntary, possibly leaving a substantial part of the low income workforce uncovered. If nothing is done to change this situation, people with low incomes will be forced to rely on modest state pensions in the future," she added.

A further drive to allow fourth pillar, or Western-style second pillar, occupational pensions has been "remarkable", suggested Miksa, as the IORP directive is not geared towards the CEE pensions legacy.

"[The IORP] directive has generally been problematic for CEE countries, as it mirrors Western European practices and is hardly compatible with the systems in place," said Miksa.

"The problem for the CEE states is that the directive takes Western European pension systems with their well-established employer-sponsored occupational schemes as a starting point, which do not exist in Eastern Europe."

Miksa also suggested while there is still "considerable growth potential" for CEE pensions, substantial inflows of pension assets may result in imbalances between supply and demand, where local markets lack liquidity, and which could lead to distortions in asset pricing.

In order to calculate the Reform Pressure Gauge, Allianz looked at the demographic change of countries and their expected changes in old-age dependency ratio, as well as their PAYG systems, reforms of the first pillar already passed and supplementary systems.