As part of its austerity package, Greece will cut state pension pay-outs to retirees by up to 10%, whilst the retirement age will increase from 65 to 67 in 2013. With a rapidly ageing population, Greece's pension payments represented up to 14% of its GDP before the crisis hit. This is not sustainable if the Greeks are to meet the spending cuts being demanded of them and reductions in pensions and wages will make up the lion's share of the 11.5 billion euros to be saved.
The UK, France and Spain have resisted pressure to cut pensions so far, due to lobbying from voters. However, in the face of cries from international investors and the rest of the euro zone to improve their debt position, this resistance may not last.
In the UK, the value of pension pots is in "free fall" as annuity rates drop by record amounts due to the Bank of England's quantitative easing (QE) programme. QE works by electronically creating new money, which is used to buy UK government bonds, known as gilts, pushing down the interest rate, or yield paid on them. As pension companies use the value of gilt yields to determine retirement or annuity incomes, there is increasing downward pressure on those pay-outs. The value of annuities has plunged by 7% in just three months, research has found.
The deepening of the euro zone crisis means yet more pain for Britons nearing retirement because it could speed up the death spiral of annuity rates, which determine a person's retirement income for life and are already at historic lows.
Amid record high deficits in pension liabilities, even corporate pension schemes in the UK are under pressure. According to a new report by consultants and actuaries, Hymans Robertson, UK companies should do their utmost to mitigate the risk, rather than use corporate cash contributions to make new investments. The review shows that 5% of companies have unhedged pension liabilities that are greater than 100% of their current market capitalisation.
Investors, whether they be expatriates or South African, should seek to manage their pension investments directly with an advisor who specialises in providing tax-efficient bespoke products to suit their needs, rather than be at the mercy of a third party.
There's no use waking up one day when you're 60 and finding out that the state, or your employer, has provided too little, too late to make you secure in your retirement.
