A looming problem that transcends the borders of Europe

Britain's pension system maybe heading for crisis but ­ until recently ­ at least we could comfort ourselves with the thought that things across the Channel were even worse. During the 1990s, the complacent consensus among British politicians was that the market solutions favoured in the UK had left us sitting pretty, at least by comparison with our continental neighbours.

Britain's pension system maybe heading for crisis but ­ until recently ­ at least we could comfort ourselves with the thought that things across the Channel were even worse. During the 1990s, the complacent consensus among British politicians was that the market solutions favoured in the UK had left us sitting pretty, at least by comparison with our continental neighbours.

But awareness of the failings of the British system have cast doubt on that theory, and politicians and analysts are beginning to reassess the merits of pension provision in mainstream Europe. The UK is one of just a handful of European countries in which the private sector plays a strong role in organising savings for our retirement.

In most other EU nations the rule is "pay as you go" ­ today's workers fund today's pensioners. That may have worked once but with people living longer and birthrates declining, that equation has begun to look problematic. According to one EU pensions study, birthrates will decline from 2020 due especially to low fertility rates.

It adds: "By 2050 the population may be more than 3 per cent lower than the current level. As the so-called baby-boomer generation starts to retire, the old-age dependency ratio [the population over 65 as a ratio of working age population] should nearly double from the current 27 per cent to 53 per cent by the middle of the century." According to some estimates, the EU would have to increase the 10.4 per cent of its gross domestic product (GDP) that it spent on pensions in 2000 to 13.6 per cent by the middle of the century.

Greece would have to devote one quarter of its GDP to funding retirement, and Germany and Spain would have to contribute around 17 per cent cent.

Although the horrific mathematics of this looks simple on paper, the reality is more complex. In a pamphlet for the Centre for European Reform (CER), David Willetts, the Conservatives' work and pensions spokesman, points out that while investment in funded pensions is low in France, the complete picture looks different.

He argues: "In the year 2000, an average French household saved 10.8 per cent of its income, according to the 2002 OECD Economic Outlook. In the UK, by contrast, the figure was 4.2 per cent. Household savings totalled 9.8 per cent in Germany and 12.3 per cent in Italy."

While these savings are not counted as pension contributions, they are still there for later life. As Mr Willetts puts it: "French pensioners draw very little income from funded pension savings but do have an unusually large amount of income from other assets."

Problems remain in European pension systems. In Germany the generous company pensions are often not portable. In Italy, the state devotes most of its social security budget to funding generous pensions.

As is now apparent, however, there are downsides to the British model, in particular the danger that pensions will be so low that the Government will have to compensate with huge increases in income support.

Experts are agreed that the same challenges face all countries. Solutions include retiring later, encouraging higher birthrate with tax and other incentives or permitting more immigration.

Chile's private scheme works ­ for time being

By David Usborne

Chile has a privatised model that was introduced by the regime of General Augusto Pinochet in 1981.

The regime decreed that workers were to have 10 per cent of their salaries deducted monthly. To make up for the resulting shortfall in disposable income, it also introduced a 10 per cent mandatory increase in salaries. If an individual's fund did not yield sufficient income, the state would make up the difference.

The funds have for the most part worked well and drew large participation from the workforce. By 2010, the combined assets of the funds are expected to equal 110 per cent of Chile's GDP. But over the past three years, the returns on the funds have averaged only 1.8 per cent. Expenses and fees associated to the funds can eat up as much as 20 per cent of their value.

Chilean workers also got in the habit of under-reporting their incomes. A recent survey by the United Nations shows that as many as 40 per cent of participants in the funds will come up short upon retirement, thus negating the purpose of the whole system ­ that it should be funded privately, not from tax-payers' funds.