Talk is Cheap

Reforming expensive European pension systems such as France and Italy is infinitely easier to talk about than it is to take action.

However France’s new president, Nicolas Sarkozy, has made pension reform a key battle ground in his first major confrontation with the nation’s unions representing public sector workers with the knowledge the result of this struggle could well define his premiership.

It will not be easy for the president to push through his reforms, despite his mandate from the French public, many of whom recognise the need for reform.

France’s public sector workers are renowned for their militancy and will fight hard to preserve a system that allows, for example, train drivers to retire on a full pension at the young age of 50.

However, a visit to France by a CoreData Research UK staffer last week found the transport strike was far from water tight after only a few days.

The fast and comfortable trains, a legacy of France’s investment in its transport infrastructure, were running on most major rail lines, while the cross-Channel Eurostar service, did not experience any strikes at all.

Many of the private sector French workers who are struggling to work are likely to quickly lose sympathy for the public sector unions and there is even talk of counter-demonstrations from those fed-up with the lack of reform.

Union leaders are, apparently, willing to negotiate over pensions, but a strong element in the rank and file, it seems, are less interested in talks and more willing to fight for their pensions.

One thing that should strengthen Sarkozy’s hand is the potentially massive impact of the recent and rapid increases in life expectancy in most developed economies.

Actuaries and the maths experts able to make sense of longevity tables are struggling to keep up with the recent acceleration in life expectancies.

In the UK, the actuarial profession has told its members to select the data they feel most appropriate to use from a library of projections.

One of these, known as P Spline, predicts that a staggering 27% of today’s 25 year-olds will live to 120. Science fiction perhaps?

No, just the continuation of current rises in longevity into the future, as opposed to assuming a fall in rising life expectancy.

Longevity on such a scale makes almost any final salary pension, as public sector pensions invariably are, unaffordable.

After all, this means many train drivers retiring at 50 will draw pensions for far longer than they were sitting in a cab.

Sarkozy might just mention this sort of evidence in his battle to win the argument for pension reform.

But even if he succeeds, it must be feared that France, and other European governments, are already sitting on massive pension liabilities already.