Private pensions

Private pensions and policy responses to the financial and economic crisis

 

21/04/2009 - The current financial crisis has had a major impact on global pension assets, with the OECD estimating declines of $5.4tn (over 20%) at the end of 2008. This is putting pressure on funding levels for defined benefit (DB) pension plans, and has served a severe blow to members of defined contribution (DC) plans close to retirement, denting confidence in many DC systems.

Several representatives of the OECD and the International Organisation of Pension Supervisors (IOPS) met to assess policy responses to the financial and economic crisis in light of their international guidelines and best practices. Consequently, some lessons have been drawn on the important role of private pensions in complementing public systems, and on how pension systems should be best designed to introduce some degree of protection, improve sustainability of funding, enhance management and supervision, and step up disclosure and communication.

The resulting Working Paper on ‘Private Pension and Policy Responses to the Economic and Financial Crisis’ conveys the following:

   

MAIN MESSAGES

Stay the course: complementary private provision for retirement remains a necessity

  • Some governments are being pressured to retreat from private pensions…
  • …but public PAYG systems face sustainability problems given ageing populations and are also affected by the crisis as unemployment increases
  • Private pensions still have a major role to play to maintain balanced sources of retirement income

Saving for retirement is for the long-term

  • Some flexibility allowing access to pension assets may be necessary in difficult economic times...
  • …but should be strictly controlled to avoid too much ‘leakage’ from the system
  • Reducing contributions also risks creating a long-term shortage of pension assets

Supervisory oversight should be proportionate, flexible and risk-based

  • Monitoring of pension funds has been strengthened by most authorities (via stricter stress testing, more frequent on-site visits and increased reporting)
  • Coordination – with industry, government ministries and other regulators - has also been stepped up
  • Supervisory oversight should be risk-based, focusing on the main threats facing pension fund beneficiaries and the pension system as a whole

Funding and solvency rules for defined benefit plans should be counter-cyclical

  • Flexibility in meeting funding requirements has been shown by authorities (longer time for recovery plans etc.)…
  • …thereby avoiding ‘pro-cyclical policies’ and allowing pension assets to act as long-term investors and potentially stabilising forces within the global financial system

Use the safety net to address issues of insufficient income at retirement

  • Public provisioning should provide adequate pensions for low income workers
  • ‘Top ups’ for DC accounts are hard to administer affordably or fairly
  • Incentives to keep working and to increase contributions would help rebuild pension assets

Improve the design of defined contribution plans, including default investment strategies

  • Default, life-cycle funds can help protect those close to retirement
  • Guarantees for DC accounts may help – but it is unclear what level is necessary or who would pay for these
  • Flexibility should be allowed in the timing of annuity purchases

Improve the governance and risk management of pension funds

  • Pension fund risk management needs to be strengthened to reduce exposure to unduly risky investments
  • Pension fund governance needs to be improved to avoid exposure to assets not fully understood

Step up disclosure and communication and improve financial education

  • National campaigns to explain the long-term nature of pension assets are required to rebuild confidence in pension systems
  • Better disclosure of performance and costs is also necessary
  • Financial education is needed to help beneficiaries (and to some extent pension fund managers) to improve the understanding of investing, risk and return etc.

Download the full text of the working paper.

For further information, journalists are invited to contact Fiona Stewart (Tel. + 33 1 45 24 14 52 or + 33 6 84 06 28 49) or Pablo Antolin (Tel. + 33 1 45 24 90 86), OECD Financial Affairs Division.

 

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