LONDON, 13 November 2007– The third annual European Pensions Barometer Report published today by Aon Consulting, a leading pension, benefits and HR consulting firm, highlights that early retirement amongst EU workers, and in particular the fact that 55% of 55-64 year olds are not contributing to the European economy, is playing a key part in weakening the sustainability of European pension systems.

Aon’s European Pensions Barometer Report highlights the risks that EU countries face and focuses on the impact or strains that pension systems place on the economy, employers and the population of each EU country. It ranks countries by assessing four key areas of pension risks: demographics, adequacy of State provision, affordability and sustainability of the State pension, and company pensions.

Although the risks and concerns are varied and complex, a broad theme across EU pension systems is dealing with an ageing population. A positive sign that this issue is being addressed is shown by the increase in the average retirement age across Europe in the past year from 60.5 to 61 years. Countries with higher retirement ages, like Denmark (61), the UK (62.6), Ireland (64.1) or Sweden (63.7) tend to perform well in a range of areas and therefore, top the list, while those at the bottom of the rankings tend to have lower retirement ages, such as France (58.8) or Italy (59.8).

To cope with demographic changes and challenges to economies, pension reforms continue to be popular across Europe with the trend being to cut back in state schemes. Picking up this slack will be private schemes and the pressure will continue to mount for employers to ensure schemes are robust and sustainable. Between 2006 and 2007 the average workforce participation rate in private schemes increased from 40.2% to 41.9%. Ten countries revised estimates of private pensions participation upwards, while only Cyprus revised its estimate downwards. As various forms of compulsion and regulation become more popular, this trend is likely to continue.

Key Findings of the Report

The winners

• Denmark retains the top spot for the second year running.
• Sweden has moved up five places to gain a spot in the top three, due to improvements in statistics relating to average retirement age and the deterioration in other countries’ figures.  Luxembourg and Austria have also seen substantial jumps in their position.
• Belgium has moved up from last year’s bottom position as a result of improved participation rates in private pension schemes, as well as increase of 2% of older workers (55-64) employed.

Fallers

• Some of the larger falls this year are for Estonia (which loses its top three slot) and Cyprus.  Portugal continues to fall and has had a dramatic change of fortune, from 1^st in 2005 to 19^th in 2007.  One of the main reasons for this being a far higher projected cost of state pensions by 2050. 
• The largest fall this year, as well as the unwelcome position at the bottom of the table, is for Italy.  It has seen a substantial worsening of demographics, with a decline in the growth of the population and projections for the old age dependency ratio increasing yet further.

UK

The UK has improved its position gradually this year, now making the top 5 of the Barometer rankings. However, the adequacy of the State pension is still ranked the worst in the EU.

The inadequacy of the State system is beyond question, with the system showing last at almost every level of earnings. For an average earner retiring in 2007 the UK replacement rate of 30% is far below the average of 60%. It is the worst in Europe. Only for the lowest earners, where the Labour government has specifically targeted benefits, does the replacement rate start to approach other countries.

The basis of the UK pension system for many years has been a gradual shift away from the State towards employers and individuals. This attitude has been sustainable due to the slack being taken up in the private sector- the UK has the largest funded private system in Europe.  However, a spate of scandals, crises and legislative reaction has jeopardized this position, generating lack of confidence in the system amongst both employers and individuals.

In terms of demographics, the UK is looking strong. Its average retirement age of 62.6 is among the highest in Europe and 57% of the 55-64 age group are actively working. However, the UK does have a high reliance on immigration (2.17% compared to an EU average of 1.5%) to boost the working age population and offset some of the side-effects of an ageing population. In the short-term it helps make the pension system look a lot healthier than perhaps it is.

Donald Duval, chief actuary at Aon Consulting UK, said:

“Migrant workers have helped boost the pension pot in the UK to mitigate against its demographic problems but this is not a sustainable measure and is a smoke-screen hiding deeper issues facing the pension system. More needs to be done to restore confidence in private schemes so as to drive an increased level of contributions – people cannot afford to rely on the state pension, which remains the lowest in Europe. 

“In the 2005 Turner Report on the future of UK pensions, it concluded that the ageing population left the UK with four choices: lower pensions, higher retirement ages, higher member contributions or higher taxes.  Assuming that the first is unacceptable, some combination of the latter three needs to be encouraged. Throughout Europe, in one form or another we are already beginning to see this take shape, although in some areas perhaps too slowly.”

“In Europe, the countries with the worst problems tend to be those where the average retirement age is low and they face major demographic and social security issues, which if not addressed, will create unsustainable pension systems. The rising pressure an ageing population is placing on government expenditure can be mitigated by governments encouraging greater use of funded pensions, which mean that today’s workers pay for their own pensions instead of relying on the next generation to do so.

“We expect that legislative measures such as the EU anti-age discrimination laws which came into effect last year should help to improve the situation in the long term.”

About Aon

Aon Consulting

Aon Consulting is the world's third largest employee benefit consultant, with local benefit consulting and benefit broking capabilities in close to 100 countries. Aon Consulting advises clients about the design and the placement of their employee benefit programmes such as pensions, health, accident and disability. Aon Consulting is part of Aon Corporation (www.aon.com), a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. The company employs approximately 48,000 professionals in its 500 offices in more than 120 countries.

Aon Corporation (NYSE: AOC), ranked by A.M. Best as the number one global insurance brokerage based on brokerage revenues and voted best insurance intermediary, best reinsurance intermediary and best employee benefits consulting firm by the readers of Business Insurance, is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 43,000 employees working in Aon's 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

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Aon Consulting Limited is authorised and regulated by the Financial Services Authority.