View from City Road: Pensions must go back on agenda

Here are a few numbers of the type that ought to keep us awake at night but will no doubt be forgotten before they unduly worry policy makers. To finance the retirement years of the entire European population of 270 million would require pension funds worth dollars 10,000bn. This is three times the market capitalisation of all the shares listed on European stock markets.

At present, Europe's pension funds add up to dollars 1,200bn. Of that total, 80 per cent is held in Britain and the Netherlands, the only two countries where fully funded pension schemes are commonplace.

Most pensions on the Continent are financed from taxation or from company reserves on a pay as you go basis - the system in Germany. Europe's ageing population, that notorious demographic time bomb, will make it impossible for governments and companies to continue to finance pensions at present levels.

There are several options: much lower pensions, later retirement or - a ridiculous suggestion put seriously in Germany - raising the proportion of young taxpaying immigrants in the population to 40 per cent. In practice, the most attractive option is likely to be a wholesale switch to funded pensions paid for by workers and their employers in advance.

Philip Lambert, head of pensions at Unilever, suggested at a London conference yesterday that it would cost dollars 5,000bn to bring Europe up to the level of the US now, where pension funds cover half the population.

If even a part of this shift occurs in the next 25 years, it would have a dramatic effect on investment patterns and on the capital markets. The amount of money that needs to be invested in equities, bonds and property dwarfs most local capital markets.

Brussels attempted earlier this year to liberalise rules that prevent cross- border investment of pension fund money, but failed. If Europe as a whole is to move towards the US and British model, the issue will have to be put back on the agenda soon; local markets simply could not cope.