The UK is set to slip down the league table of pension rankings for countries in the European Union despite plans to extend private pensions through the introduction of personal accounts.
The UK’s situation is set to get worse before the proposed system of personal accounts are introduced in 2012.
The UK was ranked in sixth place overall out of 25 EU countries in Aon Consulting’s 2006 European Pensions Barometer Report, where the categories were: demography, adequacy of state pension, affordability and sustainability and company pensions. Its state pension was found to be the poorest in Europe. Overall first place went to Denmark, the country with most favourable pension conditions.
The report, which suggests that governments need to encourage later retirement and ensure the growth of private pensions in order to address pension problems in Europe, revealed that the UK’s strong company pensions are compensating for inadequate state pensions.
Donald Duval, chief actuary at Aon Consulting UK, said: "The UK government has recently announced plans to extend the provision of private pensions through Personal Accounts. However, these plans will not start to come into effect until 2012 and in the meantime company pension schemes will continue to decline. The UK state pension is currently the poorest in Europe, and that is unlikely to change in the near future. In combination, these factors mean that the UK is likely to slip further down the ranking of EU pensions systems in future.”
The ageing population of EU countries was also highlighted as creating a dilemma between the adequacy and affordability of state pensions. In most EU countries, old age pensions are now the single biggest item of government expenditure. The report found that countries in the most favourable position are those where the majority of people between aged 55 and 64 years are contributing to the economy, not drawing from it.
Extending private pension provision is key to a number of European countries’ strong positions on the Barometer. Countries such as the UK, with a tradition of strong funded pensions through corporate defined benefit schemes, might find their position threatened as companies withdraw from these schemes due to their high cost and the unfavourable regulatory environment.
Duval added: "So far as the EU as a whole is concerned, the influx of new member states to the EU and increase in cross-border migration will add to the challenges of providing adequate retirement income for citizens. Ultimately, reforms to pension systems need to target two key issues – lifting state retirement ages and increasing private pension provision."