Peter, a 37-year-old senior manager at a midsize German industrial company who makes $140,000 a year, is getting nervous. Talk of cutbacks in Germany's underfunded retirement system has him doubting that the government will be able to provide him with an adequate pension when he hits 65. Indeed, retirees these days are getting an average of only $13,000 a year. So, starting next year, he is planning to put up to $280 per month into equity mutual funds earmarked for retirement--even though he'll get no tax break for doing so. Meanwhile, he rails against Germany's leaders. "Never get into the trap of believing politicians," he gripes.
Peter represents a trend that many financial executives see as one of the biggest business opportunities ever in Europe. Citizens' fears about being left destitute by bankrupt government systems, coupled with the advent of a single currency in January, 1999, seem certain to force a revamping of Europe's state pension schemes. Reform, in turn, will dramatically expand financial markets, increasing European pension assets an estimated ninefold, to $9 trillion by 2020. "Pension reform is the single most important legislative change needed to create competitive capital markets in Germany and the rest of Europe," says Paul M. Achleitner, who heads Goldman, Sachs & Co.'s German unit.
Many governments are postponing the inevitable. They fear that offering tax deductions to promote pensions will cut into revenues and swell their budget deficits. So jittery investors are creating a supplemental pension market, purchasing everything from annuities to mutual funds to shore up their nest eggs.
Companies are already positioning themselves for the bonanza. Indeed, the prospect of a huge market for high-return investments was one reason behind Merrill Lynch & Co.'s $5.2 billion bid for Britain's Mercury Asset Management Group PLC in November. And major U.S. financial outfits, from Bankers Trust New York Corp. to Fidelity Investments, are going after the European market, too. Virtually every big European bank and insurance company is expanding its pension products and services.
One reason for all the activity is that many Continental pension systems are nearing a crisis point. Most are pay-as-you-go state plans with no money set aside ahead of time to pay benefits. Many are also over-generous. France pays out nearly 70% of employees' gross salary, and Germany half, compared with about 30% in Britain and the Netherlands. As baby boomers head into retirement, such systems are becoming increasingly untenable.
DRAGGING THEIR FEET. In the few nations where significant reforms have passed, results have been dramatic. In 1988, Britain started giving tax deductions for personal pensions designed to supplement state benefits. By last year, such products accounted for 27% of the $88 billion in long-term premiums generated by its insurance industry. In the Netherlands, the civil servants' pension fund, which was privatized last year, has $110 billion in assets, second only to the California Public Employees' Retirement System.
Other Continental governments are dragging their feet. But Europe's move toward a single currency could be the catalyst for change. That's partly because budget-deficit limits mandated under European Monetary Union regulations make it increasingly difficult for governments to subsidize state pensions.
Meanwhile, market forces are likely to create new options for retirement savers. European mutual-fund assets have nearly tripled since 1991, to $1.8 trillion at midyear, figures Lipper Analytical Services International Corp., and pension jitters have had a lot to do with that growth. For instance, Fidelity's European pension assets under management have doubled since 1995, to $9.3 billion.
Still, there's a limit to how much companies can do without new tax breaks to encourage a shift to private retirement funds. "It will be too late if governments wait until retirees really start hurting," says Paul O'Donnell, a London-based managing director at Bankers Trust. Just about everyone involved knows that. Now, it's just a matter of taking it to heart.