Report warns of EU pensions funding crisis

Europeans will be forced to top up their state pensions with private pensions as their governments cannot afford to support the growing number of senior citizens.

The European Commission should liberalise pensions as soon as possible to help avert a funding crisis brought about by the European Union's ageing population, according to a new report published by the Federal Trust. The trust - a think-tank set up in 1945 by William Beveridge, the architect of Britain's welfare state - says demographic trends will make private funding of pensions essential.

Dick Taverne, author of its report, The Pension Time Bomb in Europe, said: ``There will be a crisis if we do not act now. This issue cannot be left on the political shelf for 10 years.''

Most state pensions in the EU are provided through "pay-as-you-go" schemes, where taxes paid by people in work fund current pensions. The proportion of the population in retirement is increasing so fast that in many countries the pensions bill will become intolerable.

A falling birth rate and higher life expectancy mean the ratio of pensioners to workers will rise from 24 per cent to 39 per cent in the UK between 1990 and 2040. This is one of the smallest increases - in Italy it will rise from 20 to 48 per cent.

The report estimates state pension payments in Britain would have to grow 30 per cent, adjusted for inflation, by 2030, and in France an astronomical 75 per cent. With a shrinking workforce, the increase in individual contributions required would be evengreater.

Britain is ahead of other European countries in its liberalisation of private pensions. With a less generous state pension than its neighbours, too, it faces the least grave problem.

In other countries the withdrawal of lavish state support could prove controversial. Sir Brian Corby, chairman of the Prudential and chair of the Federal Trust working party, said: ``There is a danger that states will have to break promises that have been made to their populations.''

However, the report argues that extending private pensions provision would increase the savings available for investment and improve the liquidity of Europe's capital markets.

A switch away from pay-as-you-go state schemes would mean those in work now will have to save for their own pensions as well as support the retired population.

The Federal Trust calls for a new European directive to set up a supervisory framework for pensions management. It also suggests the creation of a Euro-pension that would allow people to move jobs between member countries more easily.