The funding levels of pension funds will need to be increased if the sovereign credit ratings of highly rated European Union member states come under downward pressure by the end of this decade, warns a report by Standard & Poor’s (S&P).
The report suggests that the large fiscal surpluses achieved by some European sovereigns in recent years may be hard to maintain, that surpluses over 1% of GDP are unsustainable and that member states will be unable to build up the assets required to absorb the shock of higher health and pension spending.
Andrew Campbell-Hart, managing director of financial services ratings at S&P in London, says that while the firm does not believe developed countries will allow their debt /GDP ratio to spiral out of control, the report attempts to show the long-term picture – that changes to unfunded pensions and social security systems will become inevitable.
“These projections are being made on the basis of no changes being made in the coming years to the underlying economic system. Nonetheless, S&P believes that some element of pre-funding of pensions schemes will need to be introduced in Europe and current funding levels will need to be pushed up if European countries are to cope effectively with the burden of an ageing population coupled with lower credit ratings,” he says.
Hart points to recent suggestions that compulsory pension contributions may become reality. The Swedish model is worth looking at, he says. “In Sweden, there practically already exists a compulsory contribution system in the public sector, whilst in the private sector, individuals have a choice of something like 400 asset management funds where they can save for their retirement.”