ISLAMABAD: The world’s six largest pension systems will have a joint shortfall of $224 trillion by 2050, imperiling the incomes of future generations and setting the industrialised world up for the biggest pension crisis in history, a whitepaper published by the World Economic Forum notes.

To alleviate the looming crisis, governments must address the gaps in access to the pensions system and ageing populations as they are the key sources of the widening pension gap.

These are the main findings of the new report ‘We’ll Live to 100 – How Can We Afford It?’ which provides country-specific insights into the challenges being faced at a global level and potential solutions.

The report is the latest study to calculate the impact of ageing populations on the pension gap in the world’s largest pension markets, which include the United States, United Kingdom, Japan, Netherlands, Canada and Australia. The gap in those markets is the largest in the US, where a current shortfall of $28 trillion is projected to rise to $137tr in 2050.

Over the past ten years, long-term investment returns have been significantly lower than historic averages. Equities have performed 3 to 5 per cent below historic averages and bond returns have typically been 1pc to 3pc lower. Low rates have grown future liabilities, and at the same time investment returns have been lower than expected and unable to make up the growing pension shortfall.

To support a reasonable level of income in retirement, 10pc to 15pc of an average annual salary needs to be saved.

Today, individual savings rates in most countries are far lower. This is already presenting challenges where traditionally defined benefit structures would have provided a guaranteed pension benefit.

Now, as workers look at their defined contribution retirement balances, with no guaranteed benefits, they are realising that the retirement income their savings will provide will be much lower than expected. This will continue to be a challenge unless the importance of higher savings rates is better understood and communicated.

The key driver of the challenges facing retirement systems is increasing life expectancy and a falling birth rate. This leads to a smaller workforce supporting an ever growing population of retirees. If increases in life expectancy were matched by corresponding increases in the retirement age, the challenge would be less acute, but so far we have seen only gradual steps to increase retirement age. In some countries, the retirement age is falling.

Looking at the US specifically, the gap is growing at a rate of $3tr each year. This increase is the equivalent of five times the annual US defence budget (or 60pc of ‘BlackRock’, the world’s largest asset manager) assets under management, which in 2016 stood at $5 trillion.

Of the $70 trillion gap for 2015, over 75pc is associated with un-funded government-provided pillar one pensions and pensions promised to public employees.

According to the whitepaper, many workers in developed and developing markets still lack easy access to pension plans and saving products. In many cases there are options available, but take-up is low. The lack of opportunity to begin saving, and encouragement to make putting money aside a habit, is severely limiting many people’s ability to accumulate savings.

The self-employed and informal sector workers are least likely to have access to a workplace savings plan. Those working at smaller companies, where regulation may make providing a plan overly burdensome for employers, are also at a disadvantage.

Published in Dawn, May 28th, 2017