The largest impact to date has been on private pension schemes which have seen an average decline of over 23% or USD 5.4 trillion in their investments across the OECD, according to the new OECD report Private Pensions Outlook. Two thirds of the losses (USD 3.5 trillion) are estimated to be in the United States alone, with the United Kingdom, Australia, Canada, the Netherlands, and Japan accounting for a further USD 1.4 trillion.
Pension funds, which account for most private pension assets, have been hit hardest in OECD countries where equities make up over a third of total assets invested. Irish pension funds experienced the worst investment performance, losing 33% of their value in real terms.
Occupational defined-benefit schemes are adding to the pressure that the crisis is already putting on companies; many employers are finding it increasingly difficult to finance the pension promises made to their current and former employees.
Public pension schemes are also starting to feel the effects of rising unemployment rates, falling wages and, consequently, a decline of contribution revenues.
Who is affected?
People close to retirement or who have just retired in countries where private pensions provide a large part of retirement income. Often these are middle and high-earners as low-income workers have less capacity to build up retirement savings.
Among these, those most affected are in defined contribution plans, as pension benefits in these arrangements depend on the market value of the investment portfolio at retirement. Countries in this situation include Australia, Canada, Ireland, the United Kingdom and the United States. In Australia and the US, for example, many retirees keep very large shares of their pension savings in equities whose value has fallen sharply.
What can be done?
Both private and public pension systems should be reformed. The immediate challenge for governments is to prevent old-age poverty from rising. Most OECD countries have publicly-financed old-age safety-nets in place. But in some countries, these anti-poverty provisions are very low. Finland, Germany and Japan, for example, should bolster their old-age safety-nets.
Private pension funds should be managed better. They should be more transparent and better regulated. Their governance and risk management need to be much improved. Policymakers also need to introduce regulations and incentives that reduce the risk that individuals are exposed to as they get older. Governments and industry need to invest more time and money in financial education for people.