Why Europe needs emerging markets
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Why Europe needs emerging markets

Pensions are the greatest pyramid scheme ever, argues Arnab Banerji. As Europe turns from unfunded to funded schemes it will need the higher returns that only emerging markets can provide.

Europe's pension system, like those in other developed countries, is underfunded. In the developed world, deficits in pay-as-you-go schemes vary between 40% and 250% of GDP because such schemes rely on an environment of strongly growing economies and few dependants versus a large number of contributors. However, this environment no longer exists as the developed world moves towards an ever-ageing population.

We know that Europe's state pension schemes are in trouble and the same rationale applies to funded schemes. We are all, in the long run, supported by our children. In past times this was achieved directly. Today it is through modern pension schemes. At the end of the day, all our pension savings do is ensure that there is money to invest in our children's education and provide sufficient equipment to produce goods which we will consume in our retirement. The problem is that with a rapidly ageing population, funded schemes require a real rate of return of 2% to 3% higher than the annual growth in OECD earnings in order to meet liabilities at current contribution rates. Not an easy return to achieve across the whole pension fund industry.

How then can we meet modern pension fund liabilities?

There would appear to be three routes.

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