BELGIUM - Governments should urgently take steps to reduce the costs of funding public pensions – with a shift away from pay-as-you-go, the European Banking Federation says.

The consortium recognises that public pension schemes are likely to remain the main source of post-retirement income for the foreseeable future, but adds that the rapid ageing of Europe will soon make many of them unaffordable.

In a report, published today, the group advised a partial shift away from pay-as-you-go (PAYG) systems, prevalent in most European Union member states, to a more capital-funded approach.

The comments follow a call from the Organisation for Economic Cooperation and Development’s that companies’ unfunded pay-as-you-go pension schemes should be “prohibited”.

The banking group accepts that, for most member states, a total shift to capital funding is unlikely to be viable in the near-term. The danger is that this could lead to the present generation of workers paying twice - once for the current pensioners and again for their own pensions.

Also, capital funding systems tend to carry with them greater risk, as returns are uncertain. But limited use of capital funding would at least take some of the pressure off PAYG contributions.

Another suggestion is to encourage workers to take up more private sector pensions. But this must be handled carefully, the federation said, because increasing the pension load for individuals and their employers can have perverse consequences - such as discouraging people from taking up work and companies from hiring.

The banks also want to see a significant reduction of public debt in Europe, which it argues would help meet the future demands of those in retirement.

However, Martin Hüfner, Chairman of the FBE's Economic and Monetary Affairs Committee, warned that boosting domestic savings will have the unfortunate consequence of hampering economic growth in Europe, at least on the demand side, which is why measures will have to be introduced to increase supply-side growth.

The FBE believes that there is still time to avert a pension crisis in Europe, providing that governments act now.

The federation was set up in 1960 and represents more than 4,500 European banks.