The economic crisis could leave pension reforms stranded says AllianzGI

Allianz Global Investors

Allianz Global Investors | 18th June 2009 

The economic crisis could leave pension reforms stranded says AllianzGI 


London, June 18, 2009

A new paper by Allianz Global Investors AG (AllianzGI), one of the world’s largest asset management companies, reveals that the current economic crisis threatens to leave the process of pension reform stranded in a twilight zone.

Key findings include:

  • The financial assets of private households in Western Europe declined in 2008, some countries have been affected more severely than others
  • The economic crisis will widen government budget deficits and increase debt burdens which will increase the need for pension reforms
  • But there could be the danger that they may become too distracted to continue their reform efforts


Pension reforms have been a constant feature of the European political landscape in the last decade as governments have sought to re-weight pension provision from pay-as-you-go to funded systems. However, the current economic crisis threatens to leave the process frozen in limbo with some governments distracted by events or losing the political will to implement further steps in the process.


The reform process of the last decade has been particularly marked in countries that introduced tax-favoured savings products for retirement and the growth in importance of these products can be seen by their increased presence within household portfolios. However, the global turmoil dragged down stock markets in 2008 and triggered massive losses in equity and real estate valuations. The financial assets of private households are estimated to have declined by 8.5% in 2008. But this aggregate picture hides significant variation between countries resulting from differences in investment behaviour and pension systems. For example, the Swiss and Dutch authorities reported losses in pension fund assets in 2008 of almost 18%. UK losses may be even higher due to the drastic fall in real estate prices and their crossover effects to financial assets.


Brigitte Miksa, Head of Pensions International at AllianzGI, comments, “The current financial crisis has had a drastic effect on the household finances in Western Europe. As a result, the role of funded pensions in the overall system of retirement provision could be put to the test in countries with mature funded pension systems. In particular, this will be a challenge for countries where second and third pillar pension provisions are still being built up.”


But can governments afford a reversal or halt of pension reforms? These pension reforms were introduced primarily to ease the increasing cost of first pillar (public) pensions stemming from the rapid ageing of society. The impact of the financial crisis on public finances are manifold, and as well as the direct costs of rescue and stimulus packages and associated costs for example, higher unemployment, they could also be affected in the pension area. This could be either directly as a provider of guarantees for investments made by government pension funds or indirectly as a rescuer for participants covered by private pension plans severely hit by the crisis.


Brigitte Miksa adds: “Coping with the current economic crisis will widen government budget deficits and increase debt burdens that have to be cut back in the years ahead. The end result is that governments cannot reverse pension reforms. But there could be the danger that they may become too distracted to continue their reform efforts.”


Moving forward, the development of monetary wealth in many European countries will be driven by increased savings for retirement as households seek to repair the gap torn into their portfolios. This will not only occur in countries with mature funded pension systems like the UK, the Netherlands and Switzerland, but also in states where reforms of pay-as-you-go systems will lead to lower pension levels that need to be compensated for by a build up of capital to ensure an adequate standard of living.


It can be assumed that most countries will have a higher savings rate than in the recent past. However, the ratios will struggle to reach the levels of the early nineties due to two countering effects. On the one hand additional retirement saving will probably be a substitute for other precautionary savings efforts. On the other, increasing numbers of elderly people will reduce their personal savings efforts as they retire.


For Western Europe the structure of financial wealth of households is expected to change further in favour of insurances and pension products. The portfolio share of these products could be extended by approximately 6 percentage points to 40 percent till the end of 2020. Capital market products, particularly shares and mutual funds, will probably regain their weight within household portfolios by 2020 after a major loss at the end of this decade. Bank products could take on a role as a buffer stock investment in the years to come.


Brigitte Miksa concludes, “The climate for long-term saving remains difficult and the extreme swings of the capital markets in the last decade have led to a massive loss of confidence among investors and those saving for retirement. This has occurred at the very time when the build up of fully-funded pensions is an increasingly urgent issue in all industrial nations.”


About Pensions International 

The Allianz Global Investors’ International Pensions team in Munich, Germany provides thought leadership on pension trends worldwide. The group has released numerous reports on pension systems in various global regions, including developed and emerging countries throughout Europe and Asia Pacific.


About Allianz Global Investors 

Allianz Global Investors, the asset management subsidiary of Allianz SE, has EUR 920bn of assets under management for our clients worldwide. The Allianz Global Investors investment managers –AAAm, NFJ Investment Group, Nicholas-Applegate, Oppenheimer Capital, PIMCO and RCM – offer their own distinctive philosophy and culture, and provide clients with a comprehensive and constantly evolving range of investment styles and products. Our approximately 4,700 employees around the globe, including more than 950 investment professionals, are committed to helping our clients achieve
their goals by combining global expertise and local market knowledge with innovative solutions and world-class professional service.
(source: Allianz Global Investors as at 31st December 2008 - latest available - unless otherwise stated)