Investors keeping an eye out for opportunities in the still-troubled European market have been warned to take a long-term view of the potential dangers of those nations' pension obligations – as they present a financial time-bomb not unlike costs in the U.S.
A recent study by the EDHEC-Risk Institute has suggested that investors take better account of the overall pension liabilities on the books when examining the solvability of European nations and considering plans for moving money into those markets.
As the study suggests, more than just the pension systems and their retirees themselves, the systemic issues related to the public finances of the countries involved and the principal-related risks need to be considered when more strategic investments are contemplated.
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And with structural deficits becoming a target in the Eurozone and beyond, the institute says it is fundamental to evaluate the extent to which the increasing funding needs and the decreasing funding sources of public pensions could add to those deficits – and more instability.
Part of the issue, the study notes, is that getting a clear image of the pension liabilities in various nations is a difficult prospect, with nations seemingly on their feet at present facing strategic danger when their long-term pension obligations are taken into consideration.
An examination of projections made out to the year 2060 suggests that relatively stable and prosperous Western European nations such as Belgium may actually face a 483 percent future liability to meet its pension needs.
Other countries, including Sweden, Luxembourg and Denmark, all present much riskier prospects when those pension issues are taken into consideration, versus the more traditional focuses of economic uncertainty, such as Spain, Italy or Portugal.
Demographics also play into the equation, with many Western European nations troubled by the continued issues of an aging population and a smaller workforce, as well as economic issues (unemployment, reduction in work hours and a drop in GDP) and political instability.
With the European Commission currently considering an agenda for nations to try to bolster their pension systems into safe, adequate and sustainable efforts, the EDHEC-Risk Institute has its own trio of overall suggestions for investors:
1. Investors must be more vigilant on pension risk when evaluating the solvency of sovereign issuers.
2. European institutions should continue to work towards more transparency and information in the area of public finances, notably with regard to the data available and the modeling of public and private pension liabilities.
3. Ultimately, one should see the inclusion of explicit criteria on pension liabilities, in addition to the goals of stability and grown and the budgetary pact. This inclusion would allow all stakeholders to better evaluate pension risk and would favor the implementation of indispensable reforms.
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