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Impact investing


Pension systems ‘to have macroeconomic impact’

NETHERLANDS – Pension systems will have an increasing macroeconomic impact and population ageing will affect capital markets, the Netspar Pension Workshop was told recently.

The workshop, held in co-operation with Dutch bank ING, brought Dutch, German and American pension experts and economists together to explore the differences and similarities of their pension systems.

“Future macroeconomic changes will largely be influenced by a country’s pension system,” said Axel Börsch-Supan, a professor of the University of Mannheim. “Holland should learn from the German experience in respective to real old-age labour participation. The Dutch are lagging behind EU standards and if dramatic changes are not made in the coming years it will be an increasing burden on GDP growth.” He estimated the impact at around 1.1% of GDP a year.

Börsch-Supan added that downward pressure is expected on assets around 2020 when the baby boom generation retires as they cash in their assets, especially real estate, and national savings rates will go down at the same time. To counter these developments countries like the Netherlands should invest in life-long learning, training and retooling to generate enough capacity to keep older employees at work and productive, he said.

His research found the overall share of Dutch workers aged over 55 would double by 2020-2025 and of they all took early retirement the pension system would collapse, he reported.

Olivia Mitchell, a professor at the University of Pennsylvania’s Wharton School and a member of the pension committee that has been advising President Bush, said the US privately organised pension system based on 401K schemes, state-welfare and possible annuities was underfunded by around $11trn.

There was a 50:50 chance that Bush would need to change the current first pillar system, but that of he did not first pillar overall payments would decline by 33% per person in the coming years, Mitchell said. She added that she expected that the US first pillar would become cash flow insolvent within the coming decade.

Looking to the future of pension funds Börsch-Supan indicated that the way to go for most countries is a transition from a pay-as-you-go (PAYG) system to a fully funded system. He said that a PAYG system was only feasible where there were infinite human capital resources. Bit he added that a major concern was that as soon as a country has opted for a specific pension system, it is stuck with it. So most countries could only revamp their existing systems at high cost.

It became evident during the conference that there is difference of opinion between the European and US delegates. Europe’s higher risk aversion was in stark contrast with the current US attitude, and European delegates commented on what they saw as a lack of risk mitigation in the US system, which they characterised as an optimistic free-for-all, 'take out what you want' free-market approach to a pension policy.

However, most participants agreed that liberalisation and 'personalisation' of choice in the pension would not deliver the hoped-for results. Nevertheless, they saw the substitution of the current DB system with a more collective DC system. Dutch pension funds said that the failings in the US system showed that a personal choice option would need to be supported by a mandatory savings scheme to counter possible under-coverage for the coming decades.

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