“In Europe, the big issue is the demographics of an aging population,” says Denise Voss, chairman of the Association of the Luxembourg Fund Industry (ALFI) and conducting officer at Franklin Templeton Luxembourg. “Where you now have four working people for every one over 65, soon it’s going to be two.” That shift in the age of the population is going to create an enormous stress on the state pensions in European nations, and it’s compounded by another factor.
“It’s going to be a challenge to get people used to individual savings,” Voss says. In most European countries, people are simply very used to getting the state pension. The answer lies in a combination of investor education and awareness.
Even now, Voss says, the messaging to people in their 20s and 30s is that the state will take care of you. “That’s always been the messaging,” she explains, even while countries have begun creating a three-pillar system similar to that in the U.S.—leveraging state pensions, company pensions and individual savings. The one exception is the U.K., which more closely resembles the U.S.
Another difference between Europe and the U.S. is the sense of urgency, which at the moment seems to be greater in the U.S. “There’s conversation around demographics and aging,” Voss observes, but the retirement systems have only had minor tweaks. “No one has had the courage to strengthen the state pensions.”
Some economies have advantages that don’t exist in the U.S., says Ed Farrington, executive vice president of Natixis Global Asset Management, starting with a political environment that can make changes more quickly than the U.S. “Given our process, addressing structural themes takes longer,” he observes. Even though improvements to the retirement system are being made, the U.S. moves more slowly.
NEXT: Information access and a coming political shift
“As our population ages and more have to live on accumulated savings and Social Security, I think there is an opportunity,” Farrington says, contending the political environment will be forced to respond. The good news is that there is tremendous access to information. “You can quickly see if systems are improving, not improving. Put those two together, and it becomes more likely we’ll see some change.”
Another pattern in European retirement systems, Farrington notes, is that countries with the lowest income inequality, such as Denmark, and high per capita incomes have the strongest retirement systems. Even allowing for the higher tax burdens, he says, low income inequality minimizes the impact of that burden.
Taken together the growing urgency and the challenge of reaching people mean that education and messaging will become more important, in the U.S. and globally. “It’s a challenge to get to people at any age, but the best age is when people are young,” Voss says. “Telling them they need to save for their own retirement. That’s the main challenge.”
One population that might be thriving, comparatively speaking, in the U.S. is Millennials. “They have grown up in a DC world,” Farrington says. “They have never had the promise of a workplace pension.” Whether it’s a matter of formal education or they have simply absorbed lessons from the world they live in, they seem to have grasped the idea of taking control of their financial futures at an early age.”
The demographics show that it’s not just Baby Boomers who face a savings gap for retirement, Farrington says, but Gen Xers as well. As awareness of people’s retirement shortfall grows, political pressure could also mount to broaden incentives for savers, even later in life, such as catch-up contributions.NEXT: A retirement world down under
Farrington believes it is instructive to look at successful retirement systems in other countries and study what has made them successful. “Why has KiwiSaver [in New Zealand] worked?” he asks. “One clue is the auto environments, government incentives and the employer-mandated participation.” The program is not dissimilar to the U.S. defined contribution (DC) plan, and works on worker contributions plus or minus investment returns, minus any withdrawals, fees and taxes. The beginnings of political change can be seen, Farrington believes, in the state initiatives to broaden access to DC-like plans.
A growing trend, Voss believes, will be ever-more specific and creative messaging. She cites a video game created for kids (most likely Bite Club), which uses a vampire theme to target teenage girls. (“Even when you live forever, it’s never too early to start saving for retirement.”) Germany has a magazine and website targeted at 16-year-old high school students who are likely to work after they graduate. “They’ll need basic financial skills for budgeting and saving,” she says of this state-level initiative. “It’s a great magazine with pictures of the kids and social media. There are a lot of tools at our disposal, and we don’t have to rely on schools as much.”
But if school is the place for financial literacy and education initiatives—and many believe it is—school districts might want to take a look at France. Paradoxically, discussing money in France is just not done, Voss says. “It’s considered gauche.” But they have a robust transversal approach that Voss believes is the soundest way to teach financial skills to students. Each teacher, across the curriculum, incorporates some element of financial education into whatever is being taught: mathematics; history, French and so on.
“I think they find the teachers are quite open to it,” Voss says, “especially those that understand the topic themselves—because they themselves were educated in finance.”NEXT: States’ rights
European states act autonomously in setting retirement policy. In Luxembourg, for instance, where Voss lives, 8% of a person’s salary up to a specific ceiling is given to the state pension. This contribution is matched by the government as well as the employer, and that is the extent of mandatory saving in Luxembourg.
From member state to member state, and company by company, the offerings across Europe are varied, Voss observes. A pension could be a traditional monthly payout or it could be a lump sum. The contribution levels can be different and the requirement to contribute can vary. Some countries have tax incentives or use a limited amount of personal savings to link to a life insurance product.
Voss notes that countries like Brazil and China could soon be interesting models of retirement practices to look at, as their middle class populations increase and they have additional expectations for living well in retirement. They are not ready to provide that kind of support, she says, but they have begun successful messaging programs to help people see the need to start saving. Anbima, a Brazilian association of states, and financial and capital markets, offers a university-level investor education program with college-age messaging.
Voss looks on the 401(k), which has no true equivalent in Europe, as a positive addition to the retirement system. The answer is, when administered to fullest extent, the 401(k) plan has proven to be a very strong vehicle that has helped people save for a longer, dignified life in retirement, Farrington notes. “Make sure we’re providing access and a strong as incentive as possible. It is proving to be a successful system when those things are in place.”