Pension wake-up.pngPensions were one of the great inventions of the past century. Now the European Central Bank (ECB) has issued a ‘wake-up call’ on the affordability issues that lie ahead.

The reason is very simple. As we note in ‘Boom, Gloom and the New Normal’, pensions were introduced first introduced in Germany in 1889, and then in the UK in 1908. The idea was to provide a small amount of money to a small number of people for a small period of time:

• Life expectancy then was 30 years lower than today
• Pensions only went to those who lived 20 years longer than average

Since then, we have failed to index pension age to rising life expectancy. In addition, Westerners have come to assume that pensions are a ‘universal right’. We forget that younger people will have to pay the bill for this dramatic increase in costs.

The ECB’s report summarises the result. It calculates state-funded pension obligations in 19 EU countries where sufficient data exists:

• They have combined obligations of €30trn ($39trn)
• By comparison, total EU GDP in 2010 was only $12trn

The ECB is not supposed to intervene in political issues. So it cannot publically state the obvious conclusion. But most people reading the report will be in no doubt about what this means. Put simply, future pensioners are most unlikely to actually receive the money that has been ‘promised’ to them. Younger generations cannot, and will not, afford to pay the bill.

In turn, this has enormous implications for the type and cost of the products and services that older people will require. Affordability will be the key criteria for them in future years, not ‘value in use’.

Companies that grasp this challenge will not only help to cushion the transition for disappointed would-be pensioners. They will also build a robust platform for their own future growth.