GLOBAL – The Bank for International Settlements has raised the spectre of potentially “disruptive” cuts in retirement benefits in the industrialised world.

“Assuming that current trends in birth rates and immigration remain unchanged, the active/inactive population ratio will worsen dramatically in the coming decades,” the BIS said. “Hence, the claims of future pensioners are expected to rise sharply.

“The risk this entails is that the implied tax burden on a relatively smaller future generation of workers will become excessive, leading to sweeping and disruptive cuts in such benefits or their effective reduction through higher-inflation.”

The report said the prospect was most serious in Japan and continental Europe, but it could affect the US and even some emerging market economies over time. The BIS called for a “credible medium-term plan for restoring fiscal health”.

It added: “One important aspect of this in many countries will be to announce cutbacks to future entitlements so that individual citizens can try to prepare themselves. A useful preliminary step will be to confront the public still more assertively with the arithmetic of the current situation.

“In principle, no one can argue with arithmetic, but in practice this will be a long, hard sell.”

The BIS also said that pension funds have probably been tempted to take on more risk as bond yields fell.

“However, a more disturbing effect of the lower bond yields is that they may have induced a growing appetite for risk,” the report states. “In the case of insurance companies, with contractual obligations to pay high rates of return on their liabilities, such behaviour became almost a matter of survival.”

“Pension funds with target rates of return exceeding government bond yields might have been similarly tempted.”

The BIS saw three types of action to counter the pension crisis. “The first and most crucial is to raise public awareness of the simple arithmetic.” The second was to cut promised benefits “in an orderly way”. The third involves complementing public commitments with private savings.

“The key issue, however, is to increase the pool of resources (i.e. national incomes) from which future social benefits will be drawn.”

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