One of the primary concerns for world leaders gathered at Davos will be how to handle the financial challenge of the world’s ageing population and understand the risk it poses for future economic and political stability.

Published ahead of the conference, The World Economic Forum's report, Global Risks 2011, warns of huge unfunded liabilities created by ageing populations. The problem is so great some of the world's most advanced economies - including the UK - would be insolvent if they accounted properly for the pension and health promises they have made to their ageing populations, according to the WEF. It outlines a sobering scenario in which demographic imbalances could contribute to a "systemic risk" to the entire financial system. The situation is particularly worrying in Europe, where countries have some of the oldest populations in the world. And the soaring number of pensioners versus workers is already a burden for many economies. Struggle for reform Governments in the region are trying to push through unpopular reforms to raise retirement ages in a bid to contain their pension liabilities. The European Union has an average of 25 people over the age of 65 for every 100 people of working age, a figure predicted to more than double by 2060. This will put tremendous strain on national budgets and potentially hold back economic growth. Europe's governments will have to spend on average an extra 2.5% of their gross domestic product on pensions in 50 years' time. With nearly everyone in Europe eligible for a public pension, governments are attempting to get people to spend more years working as a matter of urgency. The economic challenge of ageing populations is one of the key issues under discussion at Davos. WEF managing director Robert Greenhill called on countries to rein in their pension commitments. "We cannot keep placing the cost of retirement on the next generation in a global Ponzi scheme," he said, likening the layering of costs to a pyramid investment scheme that uses new investment to pay off earlier investors. George Magnus, senior economic adviser at UBS who predicted the collapse in the sub-prime market would lead to recession, does not believe trimming pension liabilities will be enough. Magnus said cuts might save money but will not address the structural problem of an ageing society and shrinking workforce. He said with the EU's working-age population projected to drop 15% between now and 2060, the real problem is maintaining economic growth. He added: "Theoretically every percentage point reduction in the workforce leads to a percentage point off growth." Getting more women and older people working is the answer, according to Magnus, who argues employers will have to change their attitudes to older workers, no longer seeing them as difficult and expensive. However, the demographic change in Europe will also lead to fresh market opportunities. Ryan Hughes, senior fund manager at Skandia Investment Group, said: "The obvious growth sector is healthcare. People think about drug manufacture, but it is a broader opportunity, with healthcare appliances such as hearing aids." Magnus adds to the list increased opportunities in leisure, holidays, independent care in the home, technology adapted for older people, residential care, educational and financial services. Throughout Europe, governments have brought in reforms to cap increases in pension liabilities, but different challenges remain for individual countries. Public pension liabilities in Greece were projected to soar from 11.7% in 2007 to 24.1% of GDP by 2060, forcing the government to institute painful reforms last year. Hungary too has had to scale back its generous pension promises. In 2008, the median income for Hungary's pensioners was about 59% of what a worker in their fifties would be earning. A series of reforms has included an increase in state retirement age and a reduction in inflation indexation. However, the country's pension system remains under pressure as rising unemployment and falling wages in real terms have significantly reduced contributions to schemes. While increases in Italy's already high pension costs have been contained, its ageing society and low birth rates mean its old-age dependency ratio is set to increase from 30% in 2008 to 59% by 2060. In 2001, the European Council warned the effect of demographic changes on the long-term sustainability of Europe's finances should be reviewed regularly. And by 2006 costs relating to ageing populations, in particular projected pension and healthcare expenditure, were factored into budgetary projections of the Stability and Growth Pact, an agreement that requires eurozone members to limit their budget deficits. Drag on growth The European Union is working hard to promote longer working lives and wants to see a move away from unfunded public sector pension systems where governments pay for pensions out of tax revenues. The drag on Europe's economic growth caused by its ageing population will inevitably lead to further investment in emerging markets, according to Hughes at Skandia. "The shift of capital from the Old World to the New World will only accelerate." Hughes expects a growing number of investors to be attracted to the faster growing economies that are not weighed down by pension liabilities. However, Edward Whitehouse, pensions policy expert at the Organisation for Economic Co-operation and Development, said developing economies have problems of their own. He said: "It is true that the emerging economies in the east are still in a demographic dividend situation because they do not have many children or old people. "But the demographic change that has taken 125 years in Europe, China is doing in 20 years. And Korea is currently the third youngest OECD country but by 2050 it will be the second oldest after Japan."