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Comment by Joy Dunbar, Editor of Absolute UCITS
When the fog eventually lifts over the Eurozone sovereign debt crises it will make one thing very clear – European governments will no longer be willing or able to fund generous pensions for their citizens.
The combination of ageing populations, deteriorating public finances and gigantic unfunded pension liabilities mean that European governments can no longer afford many pension promises that were made decades ago.
Governments have had problems with their pension promises for at least the last couple of decades. But successive governments have refused to reform the system. This is because it is an issue that is unpopular with voters – so, as parliamentary terms of office are usually no more than five years, pension liabilities can therefore be the next government’s problem.
However, the Eurozone crisis that started in Greece may finally present the necessary catalyst to take radical action and scale back provision. European politicians will probably point to the deep-rooted problems in the weaker economies, most notably Portugal, Ireland, Italy, Greece and Spain, and argue that radical reform is a bitter pill that citizens have to swallow in order to retain economic stability and maintain jobs in their respective areas.
Greece is an extreme example of the failure of European governments to provide sustainable pensions provision. Before the crisis erupted 18 months ago, it had a pensionable retirement age for some groups beginning at around 50 which was way out of kilter with most of Europe.
So what does this mean for the citizens of Europe? First, they will have to work longer. Second, people will be responsible themselves for providing for a comfortable retirement in the future through a defined contribution scheme where the individual makes the investment decision.
The asset management industry will be one of the key beneficiaries if defined contribution schemes grow. Indeed the European Commission has been looking into developing an Officially Certified European Retirement Plans – a standardised and portable personal pension plan system that would be recognised across Europe.
Claude Kremer, president of the European Fund and Asset Management Association, believes UCITS are the ideal investment building block for this. It is potentially a golden opportunity for absolute return UCITS funds – but only if they perform and produce a consistent absolute return (preferably within a calendar year) above inflation with low volatility.
But the elephant in the room remains – namely inflation. Individuals may not see any point to saving, especially if European governments decide that the best way to deal with the economic storm surrounding them is to inflate their way out of their respective sovereign debts – thereby reducing the value of individuals’ savings. This may again result in governments of the day leaving it for the next party in power to resolve the problem.