Pensions may have to be cut by half

People may be forced to work for an extra 10 years or see their pension cut by half if state pensions around the world are to be sustained in the long term, an adviser from the World Bank has warned.

"Demographic changes will mean that, in some countries, pensions could have to be reduced by half or retirement age increased by up to 10 years to make the current systems financially viable in the long run," Mr Richard Hinz, a World Bank pension policy adviser, told the World Pension Association conference in Dublin yesterday.

Demographic changes will see the proportion of the EU population over 65 almost double between 2000 and 2050, raising questions about the sustainability of existing state pension schemes.

Speaking at the conference, the Minister for Social and Family Affairs, Ms Coughlan, said the fact that Ireland had a younger population than other EU states did not mean it was exempt from the pension challenges facing other states.

Ms Coughlan added that the relatively low age profile of Irish pension schemes meant they would have time to recover from losses before they would have to meet their liabilities. Irish managed pension funds lost an average of 18.9 per cent of their value in 2002.

Ms Coughlan said losses over the last three years had brought a short-term focus to a long-term investment. "That said, the volatility we have seen does not inspire confidence in a public we are trying to encourage to save for retirement," she said.

The National Pensions Reserve Fund, established to pre-fund state and public sector pensions in Ireland from 2025, will continue to invest heavily in equities despite the losses made during its first two years, its chairman, Mr Donal Geaney, told the conference.

The Government had invested €8.2 billion in the fund by the end of last year, but it has lost more than €760 million due to falling markets.

The fund will next report on its assets in July, with losses expected to remain steady.

Equity investment is currently well below the fund's long-term benchmark, which targets 40 per cent investment in euro-zone equities, 40 per cent in non-eurozone equities and 20 per cent in bonds.

"For equities to underperform bonds over 30 years, the return on invested capital would never exceed its cost. If this ever transpired, it is highly likely that capitalism would have failed," Mr Geaney said.

Mr Geaney said it was not sensible to plan for this, adding that he hoped future generations would not judge the pension reserve fund too harshly for failing to predict the death of the capitalist system.