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The Actuary The magazine of the Institute & Faculty of Actuaries

Global pension gap at ‘crisis’ $100trn

The difference between the present value of yearly lifetime income needed for a reasonable standard of living, and the actual amount saved for retirement, is now at an estimated $100trn (£81trn) worldwide, according to The Geneva Association.

'Extreme pressure on an already stressed pension system' ©iStock
'Extreme pressure on an already stressed pension system' ©iStock

Their The Pension Gap Epidemic report shows that ageing populations and a drop in fertility rates, combined with a low interest rate environment since the financial crisis, has created a ‘perfect storm’ for private and public pension systems.

The insurance industry think tank believe that, in developed countries, advances in medical technologies will add approximately three years to the life expectancies of 60-year-olds in 2050, further exacerbating the issue.

Their Global Ageing research programme director, Ronald Klein, said: “While longer lives are a tremendous human achievement, their occurrence alongside a widespread and persistent drop in fertility rate and inadequate funding is exerting extreme pressure on an already stressed pension system.”

“There is potential to address the issue but the window of opportunity for reform is closing rapidly.

“As populations in most countries continue to age, the political climate will change with them as they favour policies and governments that keep their existing benefits intact.”

When deducting pay-as-you-go (PAYG) contributions, which is the estimated finance that the working generation will give to help provide the benefits of pensioners, the global pension gap is cut by more than half to $41trn.

The Geneva Association believe that Japan has the highest current pension gap due to their life expectancy being the second longest in the world (Monaco is first), along with one of the lowest fertility rates.

Although the US have the fourth largest pension gap behind China and Japan and Germany, before deducting PAYG contributions, their very high GDP virtually eliminates this gap when you adjust the figures to include this extra finance.

The pension gaps for the top 5 countries are:

Source: Geneva Association
Source: Geneva Association

There are eight suggestions that the report gives to governments, corporations and the general public in order to reduce the pension gap, which are:

• Employer defined contribution pensions should automatically enroll workers at a high enough level to ensure adequate retirement income
• Governments should further encourage retirement contributions with additional tax-advantaged savings opportunities
• Governments should strongly encourage or mandate annuitisation of all or a large portion of employer defined contribution plans
• Retirement ages should continue to increase commensurate with the increase in life expectancy
• Governments and the industry should create more opportunities to allow work past normal retirement age
• Contribution rates for social pensions should increase for employers and individuals until, in conjunction with other solutions, the national system is sustainable based upon realistic actuarial assumptions
• Governments should be required to disclose current pension funding gaps and show expected benefits to future retirees under best estimate assumptions
• Financial literacy should be part of core education systems around the world.

“The problems are significant and chronic, requiring far-reaching and potentially unpopular structural reforms,” The Geneva Association secretary general, Anna Maria D’Hulster, said.

“But as the most serious consequences of this crisis lie in the future, and extend far beyond the political cycle, there is little appetite and support for the kind of holistic political and legislative reforms required.”

“However no single stakeholder can address this challenge alone, and adequate solutions will require a concerted effort, and perhaps compromise, from governments, corporations and individuals alike.