12/02/2009 - According to the new OECD Private Pensions Outlook workers are rightly worried about the fall in the value of the private pension savings and there is growing pressure on governments to act. The OECD estimates that the loss in private pension assets in the year to December 2008 has increased to US$ 5.4 trillion, up from US$ 5 trillion until October. The average pension fund had a negative rate of return of 23 percent over the year.
The OECD recommends policy actions in line with the long-term horizon of private pensions. In particular, it calls for using public safety nets to address the impact of the crisis. The OECD also calls for structural changes in the way private pensions are managed, regulated, and promoted.
The report finds pension funds are very costly to manage in some countries, either because they are too small or because they are sold on a commercial basis to often ill-informed consumers. For instance, if pension funds’ members in Hungary paid fees as low as in Sweden, their pension benefits would be about 30 percent higher.
Policymakers also need to step up action to improve the way both defined benefit and defined contribution systems are regulated. For defined benefit plans, regulations should encourage the build-up of funding buffers in good market conditions and provide more flexibility during a period of market turmoil. Investment rules for defined contribution plans should promote a reduction in exposure to risky assets substantially as the worker ages, especially in countries where such plans are a major component of retirement income.
The OECD also makes a strong case for pursuing the expansion of private pension systems, especially in countries where future reductions in public pension benefits are already legislated or expected in order to make them sustainable. The report finds that in 10 OECD countries, the average worker is unlikely to have a combined public and private pension greater than 60 percent of his/her final salary. The greatest policy concern is in countries where low income households receive low public pension benefits and are not covered by private pension plans.
Further efforts are also needed to support public pension systems with public pension reserve funds. Only countries like Ireland, Japan, Mexico and Sweden have accumulated reserves sufficient to cover more than twice the annual expenditure on public pensions.
The executive summary of the publication and key facts and figures are available at www.oecd.org/daf/pensions/outlook.
For further information, journalists should contact Juan Yermo (tel. + 33 1 45 24 96 62) or Jean-Marc Salou (tel. + 33 1 45 24 91 10) in the OECD’s Financial Affairs division.