Although the precise details are subject to major uncertainty, it seems
likely that the process of population ageing will involve major shifts in financing,
which may give rise to financial turbulence and systemic risk. The locus and
scale of these effects will also depend on the predominant approach to
retirement income provision. It is argued that the financial-stability risks arising
from continuing with unsustainable pay-as-you-go systems would be more
threatening than those arising from funding. Fiscal crises can have incalculable
consequences for private financial markets, while pension funding involves more
an adaptation by regulatory authorities to a more securitised and institutionalised
financial system, that is likely to develop in any case. Concerning policy, for
social security, the key issue is reform, so that the fiscal difficulties and their
consequences for financial stability foreshadowed above do not arise. For
institutional investors involved in funding, policy issues arising include the need
for prudent person asset regulation, absence of guarantees generating moral
hazard and international diversification of institutional portfolios, so that they
are less dependent on the performance of the domestic economy than would
otherwise be the case. Banks would not be immune to the side-effects of the
~ various patterns ageing will generate, and an awareness of such risks as
well as firm prudential supervision is essential to both institutions and supervisors.