Private pensions

Private pensions need long-term, appropriate performance benchmarks

 

15/10/2009, Rio de Janeiro - The OECD and the World Bank - at the occasion of the OECD/IOPS Global Forum on Private Pensions, held in Rio de Janeiro, Brazil - today announced the preliminary results of their project evaluating the financial performance of pension funds around the world.

The project – which was launched by the World Bank and OECD in 2006, along with three private sector partners (the international banks BBVA and ING and the Dutch pension fund organization VB) – aims to examine how to measure financial performance of pension funds taking into account the link between participants’ benefits to the performance of financial markets. The recent financial crisis has shown the potential volatility and unpredictability of retirement income which can result, increasing the need to establish meaningful performance measures that consider pension funds in relation to the ability to effectively provide income replacement at retirement age.

Although pension funds aim to provide income replacement in retirement over the long-term, while other forms of collective investments are primarily concerned with short term wealth maximization, the performance measures that have typically been applied to pension funds are identical to those used to evaluate the performance of other type of investments. The report highlights that performance measures should focus on the long term instead.

Recommendations from the report also highlight how policy makers and regulators can help encourage pension funds to adopt investment strategies that not only take a longer-term perspective, but also take into account the individual preferences and work history of participants. Carefully designed ‘life cycle’ default portfolios could be used as benchmarks with supervisors using a ‘traffic light’ system to highlight how closely pension funds adhere to such standards.

Speaking at the Conference, Mr. Pablo Antolin – Senior Economist from the OECD’s private pension unit – and Mr. Rudolph Heinz – Senior Economist from the World Bank - said:
“Pension portfolios need to be better designed and measured with criteria that are explicitly derived from what they are trying to achieve – i.e. to deliver stable and sufficient income in retirement. Market mechanisms currently focus too much on the short-term returns. The key message from this project is that we need to find a better balance between the role of the market and the role of government in enhancing the performance of pension funds and reducing the risk of individuals’ retirement with insufficient income due to the misallocation of their pension assets.”

Final results from the project and a publication are scheduled for release in December 2009.


Notes for Journalists

The Organisation of Economic Coordination and Development (OECD) is an international organization that brings together the governments of countries committed to democracy and the market economy from around the world to support sustainable economic growth; boost employment; raise living standards; maintain financial stability; assist other countries' economic development; and contribute to growth in world trade. The Organisation provides a setting where governments compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies
Further information and the Working Paper can be found on the private pension’s page of the Organisation’s website www.oecd.org/daf/pensions

 

Contacts:

Senior Economist, Financial Affairs Division, OECD
Pablo Antolin, Pablo.Antolin@oecd.org
Senior Financial Sector Specialist, Financial and Private Sector Development,
the World Bank
Rudolph Heinz, hrudolph@worldbank.org

 

 

 

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