Europe’s pension savings gap has hit an eye-watering €2 trillion. The EU and member state governments need to support and encourage people to save more for retirement, writes David McMillan.
David McMillan is CEO of Aviva Europe.
Europe is getting older. According to the European Commission, by 2060 over one in four (28%) of those living in the EU will be over 65. Many of them regularly save into a pension over their working lives, expecting this savings pot to provide them with part, if not all, of their retirement income.
However, Aviva’s research suggests that hundreds of millions of people across Europe risk facing a shortfall in the pensions they need for a secure and prosperous retirement, unless action is taken now.
In 2010 we measured for the first time whether people were saving enough to have an adequate standard of living– and if not, how much more they needed to save every year to plug the gap. As a general rule of thumb, the OECD suggests that people should aim to have around 70% of their income is just before they retire.
Our updated 2016 analysis shows that, six years later the gap has topped €2 trillion for the first time – that’s equivalent to 13% of Europe’s GDP. Despite significant actions taken by governments and individuals, the pension savings gap remains a pressing issue across the region. For Spain alone, the annual pension savings gap is 17% of its GDP. That’s as much as Spain currently spends on healthcare and pensions combined.
Closing the gap will be a major challenge for European governments already struggling with high public debt and tight public finances – and governments will not be able to bridge it on their own. We will all need to take greater responsibility for our own income in retirement. Everyone, at every stage of their working lives, must be aware of the need to save something today so they have sufficient income in retirement.
Urgent action is required now from the EU and European governments to bridge the gap. We recommend four steps – building pension systems that offer stability, increasing access to pensions, improving pension information, and helping people take informed decisions.
One good initiative to increase access to pensions is to nudge people to start saving through automatic enrolment, as advocated by the OECD. People are ‘opted in’ to save part of their salary alongside an employer contribution, but are allowed to ‘opt out’ if they don’t want to be part of the scheme. In the UK automatic enrolment means 6.5 million additional people have started saving into a pension. Ireland is also considering taking forward its own auto-enrolment programme.
Another good way of helping people take informed decisions is to provide them with a consolidated view of their pension. Governments should work with industry, the European Commission and EIOPA to improve pension information and prompt individuals to work out where they stand.
Our research stresses the importance for young adults to think about how they will fund their retirement. Younger people have the greatest opportunity to address their pension savings gap if they start to save as soon as they can. For example, in France if an average 20-year old started to save already now, they might only need to save €1,200 extra per year to plug their pension gap; however if they waited until their 50s, they’d need to save an extra €7,800 a year.
The gap can be bridged. But there is no time for delay if we want future generations to enjoy a secure and prosperous retirement.