This chapter provides an overview of the main issues, policy options and recommendations presented in the report. It begins by examining how the use of multi-employer pension plans and financial incentives can increase access, participation, and contributions to asset-backed pensions. It also looks at the advantages of investing in equity markets to improve retirement income outcomes. Looking at the payout phase, it discusses how improving its design can help meet financial needs in retirement, and how well-designed home equity release products can help people to optimise the use of their financial resources in retirement. Finally, the chapter explores countries’ experiences in developing individual pension dashboards to assist people in better planning for their retirement.
OECD Pensions Outlook 2024
Abstract
Asset-backed pension plans, in which savings for retirement are invested and earn a return and assets accumulated help finance retirement, have led to a diversification of the sources to finance retirement. The amount of assets earmarked for retirement (Figure 1.1) and the proportion of the working age population participating in asset-backed pensions (Figure 1.2) have grown in the last two decades (OECD, 2023[1]). By complementing pay-as-you-go public pensions, these asset-backed pensions have contributed to the development of multi-pillar pension systems, a key OECD recommendation (OECD, 2016[2]).
As a percentage of GDP
Note: Data is for 2001 for all countries except Belgium (2005), Brazil (2014), Croatia (2002), Estonia (2002), Finland (2011), France (2006), Greece (2007), Korea (2002), Lithuania (2010), Luxembourg (2005), Mexico (2005), Romania (2007), the Slovak Republic (2006), Slovenia (2003), Spain (2002) and Türkiye (2004). Data is for 2023 for all countries except Belgium (2020). The OECD Pension Markets in Focus 2024 provides detailed country-specific notes and information on the plans covered by the data.
Source: OECD (2024), Pension Markets in Focus 2024, OECD Publishing, Paris, https://doi.org/10.1787/b11473d3-en.
As a percentage of the working-age population
Note: See the OECD Pension Markets in Focus 2024 for details.
Source: OECD (2024), Pension Markets in Focus 2024, OECD Publishing, Paris, https://doi.org/10.1787/b11473d3-en.
Asset-backed pensions that are well regulated, supervised and designed, can help deliver better retirement outcomes. Policy makers need to consider the many potential challenges before introducing or reforming asset-backed pensions, during the implementation phase of the reform, and when trying to maintain or strengthen existing asset-backed pensions (OECD, 2022[3]). The OECD Core Principles of Private Pension Regulation (OECD, 2016[4]) and the OECD Recommendation for the Good Design of Defined Contribution Pension Plans (OECD, 2022[5]) provide guidance to assist countries in developing a framework to introduce and strengthen asset-backed pensions.
The Core Principles of Private Pension Regulation highlight the importance of ensuring that asset-backed pensions are well regulated and supervised, with strong governance structures to ensure that pension providers manage retirement savings in the best interest of pension plan members. The Recommendation for the Good Design of Defined Contribution Pension Plans provides guidance on how to design asset-backed pensions. It recommends that these plans be coherent and inclusive, and contributions are in line with objectives and supported by appropriate incentives. It also recommends that they should offer good value to people, include adequate investment options, ensure protection from longevity risk and are supported by effective communication and financial education. This policy guidance is based on experiences shared across countries on what works and why, taking into account the specific characteristics of each country.
Policy options for regulating, supervising and designing asset-backed pensions can vary depending on the objectives and associated risks. OECD recommendations provide policy makers with a range of options. Each policy option has different implications, and it is critical that policy makers understand these implications to make informed decisions. The objectives of policy makers and how they would like to address the different risks involved in saving for and financing retirement (e.g. demographic, financial, labour markets, macroeconomics risks) will drive their choices, together with the characteristics of their country’s pension system and legal framework.
The OECD is currently developing guidance to support policy makers in implementing the Recommendation for the Good Design of Defined Contribution Pension Plans. In this context, the current edition of the OECD Pensions Outlook complements previous editions and provides policy messages for a set of issues related to the design of asset-backed pensions. It focuses on improving inclusiveness, strengthening financial incentives, and highlights the importance of equity investments, the design of the payout phase and communication.
Asset-backed pensions need to be as inclusive as possible. Involving employers in the provision of these plans encourages and assists people in participating and saving for retirement in pension plans (OECD, 2022[6]). However, small and medium size employers face many hurdles (e.g. administrative, costs) in setting up pension plans.
Chapter 2 discusses the extent to which pension arrangements that pool multiple employers improve access to asset-backed pension plans by encouraging or facilitating employer provision of pension plans. It also analyses the characteristics of these multi-employer pension arrangements.
There are two main models of multi-employer pension arrangements depending on which stakeholders establish them. In the “representative model”, either worker and/or employer representatives establish them. In the “financial institution model”, financial institutions establish multi-employer pension arrangements.
Under the representative model, a multi-employer pension arrangement for employees requires a collective bargaining agreement at the level of the firm, the industry or sector, or at the national level. The governing body comprises employer and employee representatives, but the management may be delegated to a financial institution. Only employers in certain industries or sectors covered by a collective bargaining agreement have access to the arrangement and participation is usually mandatory for employers. Membership is also usually restricted to certain employees depending on their union membership, industry or sector. Onboarding into the arrangement is automatic for employers covered by a collective agreement or requires simple adherence to the plan in case of voluntary participation. The self-employed tend to be excluded as agreements between employees and employers are not binding for them. However, some arrangements specifically target these workers.
Under the financial institution model, a multi-employer pension arrangement can cover different employers without any kind of pre-existing relationship. The governing body comprises financial professionals, although a mix governance structure with employer and employee representatives exists in some countries. The employer is usually responsible for selecting the financial institution for its pension plan. Nevertheless, at the firm level, this model may require a consultation or an agreement with employee representatives. The arrangement provides unrestricted access to all employers, but some providers may refuse to cover selected employers (e.g. small employers). Onboarding into the arrangement requires the employer to select and sign a contract with the provider of the arrangement. The self-employed may be able to join the arrangement on a voluntary basis.
Multi-employer pension arrangements have advantages over single-employer arrangements. For example, they may encourage a broader range of employers to offer a pension plan to their employees, in particular small employers. They also bring challenges. Table 1.1 shows that these advantages and challenges vary depending on the model.
Countries contemplating multi-employer provision of asset-backed pension plans may consider introducing a mix of different models, so that they complement each other to provide access to all types of employers and workers. On the one hand, while multi-employer pension arrangements established by employer and employee representatives through collective agreements can cover a wide range of employers and employees across sectors and industries, they tend to exclude employees not covered by collective agreements as well as the self-employed. Multi-employer pension arrangements established by financial institutions and by associations of self-employed workers may fill that gap. On the other hand, multi-employer pension arrangements established by financial institutions can cover a wide range of unrelated employers but may not serve well the needs of small employers. Multi-employer pension arrangements established through collective agreements in industries with many small employers could better serve the needs of small employers.
The design of financial incentives for retirement savings in asset-backed pensions should aim to maximise their impact on enrolment and contributions. Financial incentives are a useful tool for promoting savings for retirement and they seem to have been effective at increasing retirement savings and helping individuals to diversify their sources to finance retirement income (OECD, 2018[7]). Tax rules should be straightforward, stable, and common to all asset-backed plans as complex tax incentive structures and frequent changes may reduce the positive impact of tax incentives on retirement savings by hindering the ability of individuals to plan. Their design should at least make all income groups neutral between consuming and saving. Identifying the retirement savings needs and capabilities of different population groups could help to improve the design of incentives. In addition, non-tax incentives, for example matching contributions and fixed nominal subsidies, could help low-income earners save. Moreover, tax-deductibility ceilings for contributions should be updated regularly and consider factors beyond price inflation (e.g. when wages grow faster than inflation) to reduce the likelihood that individuals will reach the contribution ceiling and reduce their contributions.
Chapter 3 describes and compares the design of financial incentives for retirement savings across OECD countries. It also analyses recent trends in the design of financial incentives and assesses the extent to which countries follow OECD policy guidelines (OECD, 2018[7]). Overall, the design of financial incentives is in line with the OECD good practice.1 However, tax rules remain complex in many countries and the parameters for financial incentives are not always updated regularly.
Most OECD countries provide individuals with financial incentives to encourage savings for retirement in asset-backed pension plans. Nearly all OECD countries provide tax incentives by applying a different tax treatment to retirement savings compared to other forms of savings, with the “Exempt-Exempt-Taxed” (“EET”) tax regime being the most common (Figure 1.3). In most cases, the tax treatment of retirement savings is likely to provide most individuals with an incentive to save rather than to consume. Moreover, some countries provide non-tax financial incentives in the form of matching contributions and fixed nominal subsidies, either as a complement to or a substitute for tax incentives. Since 2015, many countries have increased the value of financial incentives for retirement savings to increase the role that asset-backed pension plans are expected to play in financing retirement income.
Note: Main asset-backed pension plan in each country. “E” stands for exempt and “T” for taxed for contributions, investment income and pension benefits, respectively. Countries offering tax credits on contributions are considered as taxing contributions when the tax credit does not cover the full amount of tax paid on those contributions for some individuals. The tax treatment of an annuity is assumed when different tax treatments apply to different types of retirement income payments.
Source: OECD (2023[8]), Annual survey on financial incentives for retirement savings, https://www.oecd.org/en/publications/annual-survey-on-financial-incentives-for-retirement-savings_2154cc08-en.html.
Yet, tax rules for retirement savings remain complex in many countries. Tax rules tend to vary depending on the type of pension plan, the voluntary or mandatory nature of the plan, and who pays the contributions. Even in countries where only one tax treatment generally applies to all retirement savings, differences may exist in tax-deductibility limits, tax rates or tax credit levels. Moreover, frequent changes to tax rules have occurred in some countries over the past decade, potentially deterring individuals from saving in asset-backed pension plans, as changes make people uncertain about the tax treatment that may apply to them in the future given the long-term nature of saving for retirement.
The tax treatment of retirement savings tends to favour middle and high-income earners in most OECD countries. Tax relief on contributions can take the form of a tax exemption, a tax deduction, a tax credit or a reduced tax rate. As most countries have progressive personal income tax systems, all these forms of tax relief, except tax credits, favour higher earners as they have higher marginal tax rates. By contrast, tax credits provide the same tax relief on contributions to all individuals and can even be set at a higher level for lower earners. In all OECD countries that use tax credits, these credits are non-refundable. This means individuals with a tax liability lower than the value of the tax credit can only partially benefit from it.
Matching contributions provide the same incentive to all individuals as a proportion of earnings. However, state matching contributions tend to be capped, thereby reducing the value of the incentive for higher earners. Additionally, some countries use matching contributions to target specific groups of workers, in particular low earners. Finally, fixed nominal subsidies favour low earners as the fixed amount represents a higher share of their income.
Countries generally tax pension benefits and apply the same tax treatment across all types of retirement income payments (e.g. annuities, drawdowns, lump sums). A minority of countries use the tax system to either encourage people to take their pension benefits in a certain form or to discourage early withdrawals. Among the countries exempting pension benefits from taxation, most restrict how and when individuals can take money out.
Many countries fail to update income thresholds and contribution limits for tax relief purposes in line with inflation or wages (e.g. average wage, minimum wage) on an annual basis. Moreover, countries offering government matching contributions or subsidies tend to update the maximum entitlements, at best, only discretionally. Failing to update limits and thresholds regularly reduces the attractiveness of financial incentives over time.
From an employer’s perspective, contributions to the asset-backed pension plans of their employees are always deductible from corporate income tax like any other business expenses and rarely benefit from additional tax incentives. However, in many countries, employer contributions are exempt from social security contributions or subject to reduced rates. This preferential treatment of employer contributions makes them a more cost-effective option for employers than paying the same amount as salary.
Pension providers that manage people’s savings for retirement should invest them in the best interest of members to achieve better retirement outcomes. Chapter 4 assesses whether investing in equity markets leads to better retirement income outcomes for members of defined contribution pension plans. First, it looks at the current practices and trends in equity investments in defined contribution schemes across a wide range of countries. Second, the chapter looks at whether investing in equities provides better outcomes using three complementary analyses. It assesses whether investing in equities provides higher average investment performance by examining the investment of actual pension funds, higher levels of assets accumulated at retirement using historical returns, and higher replacement rates considering capital, labour market and longevity risks using stochastic modelling.
Chapter 4 shows that equity investments represent a significant share of the portfolio of defined contribution pensions and that this share has been rising steadily over the past 20 years. In 2022, the total equity exposure of the schemes assessed including public and private equities, represented more than 40% of total investment in 13 out of 38 OECD countries. By contrast, total equity exposure represented less than 20% of total investment in only 7 countries. Average equity exposures tend to be lower in jurisdictions that cap equity investment. Moreover, there has been a general upward trend in the equity exposure of defined contribution pension schemes in many jurisdictions, with an increase of more than 20 percentage points between 2001 and 2022 in 5 OECD countries (Figure 1.4).
Note: 1. Equity exposure also includes investments in collective investment schemes as the look-through into different asset classes is not available.
Source: OECD Global Pension Statistics and US Federal Reserve.
Investing in equity markets leads to better retirement income outcomes for members of defined contribution pension plans. The analysis shows that higher investments in equity usually bring higher average performance when comparing defined contribution pension funds having different levels of equity exposure within countries or within pension entities. Still, diversification in terms of asset classes and geographical coverage plays a role in investment performance for a given equity exposure. Beyond investment returns, what matters to members is the total assets they will have accumulated by the time they retire and the pension benefits they will receive during retirement. Using historical returns on selected asset classes, the chapter shows that over 80% of cohorts across 19 OECD countries would have accumulated more assets at retirement had they invested at least part of their retirement savings for 40 years in a mix of domestic and foreign equities instead of only investing in domestic fixed income securities (government bonds plus cash and deposits). The analysis incorporating uncertainty using stochastic modelling shows a probability between 87% and 91% of getting a higher replacement rate when investing in equities compared to only investing in fixed income when considering a lifelong annuity for the payout phase (Table 1.2). The range depends on the investment strategy.
Note: The table compares the probabilities to obtain a higher replacement rate with each investment strategy compared to the others. For example, the second column shows that the equity portfolio would produce a higher replacement rate with a probability of 87% when compared to the fixed-income portfolio, 81% when compared to the 60/40 portfolio, and so on. In contrast, the first column shows that the fixed-income portfolio would produce a higher replacement rate than the other strategies with a probability of no more than 13%.
However, investing in equities comes with certain caveats. First, achieving better retirement income outcomes from investing in equities requires saving for retirement for long periods, either by starting early or delaying retirement. Cohorts saving for 20 years instead of 40 would accumulate less in all investment strategies, with a much larger difference for portfolios fully invested in diversified equities compared to other investment strategies. Over longer contribution periods, the effect of compounded returns becomes more pronounced. Still, even with only 20 years of contributions, at least 69% of cohorts across countries would have been better off investing in equities than in domestic fixed income.
The second caveat is that investing in equities leads to volatile outcomes for individuals and societies. Case studies suggest that defined contribution pension schemes with higher equity exposures have usually faced more volatile annual investment returns over the past 7 to 21 years. Additionally, the volatility of replacement rates increases with equity investments, and, during the payout phase, yearly benefits are also more volatile when retirement savings remain invested in equities rather than in fixed income. Individuals therefore face more uncertainty regarding their level of pension benefits when investing in equities, complicating financial planning in retirement. Higher uncertainty and volatility also occur at societal level, as successive cohorts of individuals are more likely to accumulate different levels of assets at retirement when savings are invested in equities instead of domestic fixed income. Volatile equity returns imply that two individuals born just one year apart could end up with large differences in accumulated assets at retirement despite having the exact same earnings history, contribution rate and investment strategy. Even though such differences could be seen as unfair and hard to understand, they should be nuanced by the fact that both individuals would in general be better-off with a portfolio invested in equities than with any other investment strategy.
The final caveat is that investing in equities makes pension benefits sensitive to any equity market downturns that occur when people are close to retirement. For example, the stochastic model shows that if individuals buy a life annuity at retirement, the median replacement rate of the equity portfolio declines from 39% for all simulations to 31% for simulations with a fall in equity markets of at least 10% in the year just before retirement. Life-cycle investment strategies can mitigate that risk by maintaining a high exposure to equities during the first part of the accumulation phase and reducing it gradually as the retirement date approaches. The analysis from the stochastic model shows that, while the equity portfolio outperforms life-cycle strategies in terms of replacement rates in more than 75% of the cases, life-cycle strategies produce higher replacement rates than the equity portfolio with a probability between 40% and 50% when there is a fall in equity markets the year just before retirement. The attractiveness of the life-cycle strategies compared to the equity portfolio diminishes when the equity market fall happens further away from the year of retirement, as there is more time for a market rebound before retirement.
A common approach to address these caveats is to offer conservative investment strategies, but they provide only moderate protection to members of defined contribution pension plans. Chapter 4 shows that although retirement income outcomes are less volatile with a fixed-income portfolio than with investment strategies with some equity exposure, most people are likely to be worse-off with portfolios only invested in fixed income and would forego significant pension benefits.
There are important trade-offs when investing in equities during the payout phase. The level of equity investment in the payout phase affects the comparison between regular drawdowns and lifelong annuities. The analysis from the stochastic model shows that, when equity exposure does not exceed 20% during the payout phase, people would be better-off taking a lifelong annuity than taking regular drawdowns in at least 75% of the cases. By contrast, there is a 60% probability of getting higher replacement rates when staying invested fully in equities during the payout phase and taking regular drawdowns instead of buying a lifelong annuity at retirement. Therefore, if individuals value flexibility and take regular drawdowns, large investments in equities would increase expected benefits. However, this comes at the cost of higher volatility of benefits and the risk of outliving one’s resources, which are risks that lifelong annuities address. Moreover, if individuals take regular drawdowns and withdraw too little during the payout phase or pass away early, they may leave a bequest to their heirs.
Based on this analysis, Chapter 4 presents a set of recommendations for policy makers:
Pension regulators should avoid setting frameworks that lead to default investment strategies that are too conservative as equity investments tend to bring better retirement income outcomes. Individuals investing their retirement savings in the default option tend to stay in the default even though it may not match their level of risk tolerance (OECD, 2018[9]). While high exposures to government bonds and low equity investments in the default option may not penalise plan members in the short term in countries where government bonds provide high returns, lack of investment diversification may increase the concentration risk. Economic developments may also reduce future expected returns from government bonds, thereby affecting accumulated assets and pension benefits in the long run.
Countries where defined contribution schemes invest mostly in fixed income should assess the appropriateness of their investment regulations. Investment limits for equity investments may be binding for defined contribution schemes in some countries. Countries should ensure that their investment regulations are not constraining equity investments in a way that could reduce risk-adjusted returns.
Pension regulators should allow providers to offer life-cycle investment strategies to alleviate the risk of large falls in the level of assets accumulated when people lack the time to benefit from a market recovery. The regulatory framework should allow for innovation in designing the glide path to adapt to the needs of individuals. For example, the reduction in equity exposure may start in the last 10 years before retirement when participants are planning to take an annuity. However, if participants take regular drawdowns and remain invested during the payout phase, the reduction in equity exposure may be smoother and continue into the payout phase as the investment horizon is longer.
The ideal level and profile of equity exposure is country-specific, and relevant stakeholders in each country should consider following a precise methodology to determine what would be the most appropriate equity exposure for default investment strategies. Default options are important for people unwilling or unable to select their own investment strategy. In some countries, policy makers may want to define a single default investment strategy for the whole population, while in others, policy makers may allow pension providers to define their own default option within a harmonised framework. Selecting an appropriate default investment strategy requires pension providers and policy makers to solve a trade-off between maximising the level of retirement income for plan members and minimising the risk that some plan members may get a retirement income that is deemed too low (OECD, 2020[10]). To solve this trade-off and select a default investment strategy, countries could follow the OECD framework, which involves five steps: i) pre-selecting the investment strategies to be assessed; ii) assessing these strategies using a stochastic model to reflect the uncertainty of possible outcomes; iii) calculating indicators reflecting their potential riskiness and performance; iv) defining thresholds for risk indicators that reflect the importance given to the downside risk relative to the upside potential; and v) selecting the investment strategy meeting the thresholds for the risk indicators and maximising the performance indicators (OECD, 2020[10]). In implementing this framework, pension providers and policy makers should also take into account the role of defined contribution schemes in the overall pension system, the population’s level of risk aversion and the characteristics of the target population for the default option, especially the length of the contribution period, the contribution level, and the payout options they tend to select.
The design of the retirement phase of asset-backed pensions should ensure that people are protected against longevity risk. It should also account for the overall structure of the pension system and the expected financial needs of different population groups.
Chapter 5 argues that a well-designed framework for the payout of retirement savings in defined contribution plans should consider the role of those plans in financing different needs in retirement (Figure 1.5) in the context of the pension system, as well as how individual and economic circumstances may influence the optimal solution for payout. It should also support individuals in accessing the most appropriate options for their situation at retirement.
The chapter provides policy guidelines for designing the framework for the payout of retirement savings in defined contribution pension plans:
Understand the role of defined contribution plans in financing retirement. Consumption benchmarks are useful to illustrate how much savings is needed to finance different living standards in retirement. Comparing expected retirement income from other sources with these benchmarks can provide an indication of whether savings in defined contribution plans will likely be used to finance essential, unexpected or discretionary spending needs.
Consider the financial solutions best suited to meeting different financial needs in retirement. The role of the retirement savings plans in financing retirement will inform the payout options that should be available to individuals. Optimal solutions to finance essential, unexpected and discretionary spending will differ in the risks they should mitigate (Figure 1.6). Essential spending needs are well served with a guaranteed lifetime income that also mitigates inflation risk. Unexpected spending needs will require liquidity while allowing for returns to at least keep up with inflation. Discretionary spending will require more flexibility, but lifetime incomes can also be useful for regular discretionary spending needs to allow individuals to optimise their spending budget over their retirement.
Ensure essential spending needs are met while considering individual and market circumstances. While guaranteed lifetime incomes are well suited to meeting essential spending needs in most cases, flexibility may be needed in certain circumstances. Individual circumstances may imply that alternative options would be better suited for their retirement, and unfavourable market conditions may be detrimental to people if they have to lock in losses to obtain a guaranteed lifetime income.
Allow retirees to set aside a portion of their retirement savings to cover unexpected expenses. Requiring that retirees convert their entire balance into an income may restrict their ability to adapt to unexpected events, particularly if that income is relatively low.
Allow for flexibility to meet discretionary spending needs while encouraging options that provide a regular income. Discretionary spending needs are likely to be more heterogenous across the population, and thereby require more flexibility as to the options available at retirement. Nevertheless, regular discretionary spending needs are well met by options providing a regular income, and these options should be available. Individuals having higher balances or savings in voluntary pension plans are more likely to use their savings for discretionary spending needs.
Establish any default option with care and only when the solution is not likely to cause undue harm. Most individuals defaulted into a particular payout solution are likely to simply accept the default rather than consider whether other options may be more suitable for their situation. As such, the implementation of a default option for payout needs to consider whether harm is likely for any particular group, and ideally should allow individuals to later adapt if the solution is not appropriate for their needs.
Promote awareness and education about the payout options that individuals have at retirement. Increased awareness and knowledge can help individuals to better engage with and understand their options and consider which may be most appropriate for their situation.
Promote the development and use of digital tools to facilitate individuals’ comprehension of and access to different options at retirement. Such tools can show personalised information, facilitating communication and promoting engagement with decisions at retirement.
Leverage behavioural insights to nudge individuals towards appropriate payout options. Nudges, such as highlighting the consequences of different choices, can be effective at guiding individuals towards appropriate outcomes but should be accompanied by tools that promote awareness and engagement with financial decisions at retirement.
Encourage and facilitate the provision and uptake of personalised guidance. Such guidance can improve financial outcomes for individuals, but often people are not aware how to access it. Additionally, regulatory requirements do not always distinguish between guidance and advice in a sufficiently clear manner.
Monitor and support the development of digital solutions for personalised advice. Digital advice has the potential to improve the accessibility of financial advice by reducing the cost of providing it. Nevertheless, such solutions are not yet developed for the payout of pensions, and individuals remain reluctant to fully rely on technology-based solutions.
Homeowners could use home equity release products to improve financial outcomes in retirement. Retirees who own their homes can use these products to increase their available financial resources in retirement. However, policymakers need to ensure that the regulatory framework surrounding these products guarantees their suitability for homeowners, while also addressing potential risks to homeowners and considering the need for providers to manage their own risk exposures. The regulatory framework for these products should consider established good practices for product design and contractual terms, as well as the potential supply side challenges.
Chapter 6 looks at the different designs and features of home equity release products available across OECD countries. It highlights that adequate consumer protection measures need to be in place given the potential complexity of these products and discusses numerous supply side challenges for the provision of these products.
Home equity release products come in several forms, and are largely based on two models, a loan-type model, and a sale-type model. The loan-type is often referred to as a reverse mortgage, which is a loan backed by the home as collateral. There are two types of products that involve a full or partial sale of the home equity. One is a home reversion, which involves selling all or part of the home equity to another party while retaining the right to reside in the home. The other is a sell and rent back scheme, whereby the home is sold to a third party and rented back to retain occupancy. They can structure payments in different ways (Table 1.3).
Home equity release products can provide a valuable additional source of financing for individuals’ needs in retirement, but they are not suitable for every situation. These products should be targeted at individuals who are most likely to benefit from them.
Home equity release products are most beneficial for older individuals who would like to continue living in their current home for the rest of their life. As such, home equity release products are not likely to be suitable for those who plan to downsize at some point, as they can limit the flexibility to change homes and would reduce the value that people would get from the sale of their property. Younger retirees are more likely to have a change in circumstances that could require them to change homes, making the suitability of a home equity release product more uncertain. Additionally, reverse mortgages are relatively more costly for younger retirees because the debt accumulates over a longer period, reducing the amount of equity they are able to release with the product. Home equity release products can be particularly valuable for homeowners who need additional financial resources in retirement. Using home equity to pay off outstanding debt can reduce essential income needs in retirement. Home equity can also help retirees to absorb expenses that they may not be able to afford otherwise, such as home repairs. It can also provide individuals with a source of financing of last resort to support extraordinary expenses such as long-term care or divorce.
Home equity release products are better suited for those who do not prioritise leaving their home as a bequest to their heirs. These products reduce the home’s value that can be left to heirs, either by increasing the debt heirs will need to repay or by reducing the equity owned in the home, thereby reducing the value of the bequest.
The regulatory framework should include measures to ensure that these products are suitable for the homeowners accessing them. These include requirements for advice or guidance, mandatory disclosures of relevant information, and the opportunity for homeowners to reflect on whether their decision is the right one.
Several jurisdictions require the involvement of an independent professional for an individual to acquire a home equity release product to help to ensure that the product is suitable. The role of these professionals can be to ensure that the individual understands the product and its financial implications, to assess whether the product is suitable given the individual’s financial situation, or to verify the competence of the individual to make an informed decision in their own best interest. These professionals can also serve to flag any sign of potential elder abuse, where a family member or acquaintance may be pressuring the individual to take a home equity release product in order to take advantage of them.
Product disclosures should ensure that individuals are aware of the financial implications of taking a home equity release product and have the information needed to be able to assess whether the product is suitable for them. Good practice for reverse mortgage disclosures includes projections of the accumulated debt and home value, helping individuals understand how much home equity may remain in the future. Disclosures should also clearly highlight any potential tax owed on the proceeds of the home equity release product, as well as the impact it may have on other means-tested benefits that retirees receive.
Some jurisdictions require that home equity release products allow for a cooling-off period to give individuals the time to reflect on their decision and change their mind about taking the product if they decide the product is not right for them. These cooling-off periods are typically around 30 days.
While home equity release products have the potential to improve retirement outcomes for certain groups, they can also present significant risks to homeowners. The regulatory framework should aim to mitigate these risks and minimise any potential harm. Industry groups have already come up with numerous good practices in product design that regulatory frameworks can borrow from, and international experience provides additional examples of product features that can be beneficial for homeowners.
Home equity release products should provide tenancy protections that allow for individuals to remain in their homes for their remaining lifetime. Indeed, this is one of the main draws of home equity release products and prevents people from losing their home in old age. Ideally, declared spouses should also be granted the right to lifetime residency, even if they are not on the contract for the home equity release product or on the title of the home. If these protections are not granted, spouses could lose their home without having any means to relocate to a new home. Simply disclosing the consequences of not having tenancy protections for spouses is not always effective at getting people to understand them. A couple of jurisdictions take measures to allow for this protection, either through the use of trusts or through specific provisions in the regulation.
Other product features limit the debt that borrowers of reverse mortgages accumulate, including interest rate caps, limits on the debt owed, penalty-free repayments, and by allowing for multiple disbursements of funds. Where interest rates are variable, industry good practice is to introduce a cap on the interest rate to limit how much debt can accumulate over the borrower’s lifetime. An important product feature to protect borrowers is the no negative equity guarantee (NNEG), which makes the loan non-recourse by preventing the lender from requiring heirs to pay back debt in excess of the home value. An equity guarantee is a similar feature that is available in some jurisdictions and guarantees that the owner retains a minimum percentage of equity in their home. This feature is useful where home equity can be an important source of financing for long-term care needs and prevents borrowers from exhausting their available home equity and losing that source of financing of last resort for significant financial shocks. Industry standards also allow for penalty-free repayments if borrowers choose to reduce their debt levels by repaying all or part of their reverse mortgage. Finally, another useful feature is to allow individuals to receive their payments over time rather than only as a lump-sum. This prevents debt from accumulating on a sizable lump-sum that individuals may not need immediately, and instead allows for a disbursement of payments over time as income or as a line of credit for borrowers to use as needed.
The contractual terms of home equity release products should ensure that homeowners will have adequate protections and will be treated fairly regarding the receipt and repayment of funds. Some jurisdictions ensure that homeowners are guaranteed to receive the amounts they are contractually entitled to even if the provider goes insolvent. This is normally insured by a government-backed guarantee, and this protection can involve an explicit premium.
Individuals should also be treated fairly if the provider enforces any payments due to a breach of contractual terms. Before enforcing payments or foreclosure on the home, providers should engage with individuals and attempt to remedy the situation, and failing this, they should provide a notice period before commencing any enforcement proceedings.
When payment to the provider becomes due, either because of death or permanent departure from the home to a long-term care facility, providers should allow for sufficient time for the sale of the home and the fulfilment of contractual obligations. Family members managing the estate normally have around 12 months to manage selling the home, and the grace period can be extended in the event of departure due to long-term care needs to allow more time to sort out the financial situation of the occupant.
While product design needs to limit risks to consumers, measures also need to be in place to allow providers to effectively mitigate their own risk exposures such as moral hazard, crossover risk, and the length of time until the home is sold.
Providers are exposed to moral hazard because individuals have less incentive to ensure the upkeep and maintenance of their home if they will not benefit financially from doing so. This could lead to a deterioration in the home value, reducing the price at which it can be sold and thereby increasing the risk that providers incur a loss. One way to mitigate this risk is to ensure that homeowners have sufficient resources to finance required maintenance, insurance payments, and property tax. Approaches taken to mitigate moral hazard include requiring adequate financial resources for an individual to qualify for the equity release product, requiring that a certain amount of the funds be set aside for maintenance and upkeep, or requiring that home occupants allow for regular home inspections to ensure the home is adequately cared for.
A key risk exposure for providers of reverse mortgages is the crossover risk that the accumulated loan balance exceeds the market value of the home. For non-recourse loans with NNEGs, this would result in providers not getting full repayment of the loan. Some jurisdictions require an explicit premium for a third party to cover this risk. Another measure to limit risk exposure is to limit the amount that individuals can borrow as a function of their home value and their age. Limits are lower for younger borrowers, say 15% of the home value of someone aged 60, increasing up to around 50% for older borrowers aged 80 and over. Such limits reduce the risk that debt will accumulate to a level exceeding the value of the home.
Imposing a minimum age to access a home equity release product reduces somewhat the uncertainty around when the provider will be repaid by reducing the expected duration of the product. A minimum age of 60 to access home equity release products targeting the elderly is common.
Nevertheless, other risks to providers remain, and supply-side challenges can go beyond the regulatory framework around home equity release products. For example, financing and capital requirements are a major barrier to entry, which can result in a concentrated and uncompetitive market.
Authorities could consider the introduction of a government-backed programme to ensure the availability of and access to good-value products to homeowners where the supply of home equity release products is lacking and where authorities feel such products could improve financial outcomes in retirement. Several jurisdictions have taken this approach. However, uptake remains low and further consideration is needed to promote retirees’ awareness of and demand for home equity release products to capitalise on the assets they have available to them in retirement.
Communication to members when designing, promoting, and reforming asset-backed pensions should be effective, personalised, regular, consistent and unbiased. Chapter 7 examines individual pension dashboards as useful tools to assist individuals in planning for their retirement. It recommends to carefully considering various design and operational aspects in the development of individual pension dashboards to ensure their success.
Chapter 7 presents good practices and lessons for jurisdictions looking to develop an individual pension dashboard to facilitate individuals’ access to information about their pensions and their expected future retirement income to help planning. It looks at some of the individual pension dashboards that have been developed or are being developed to improve retirement planning and the delivery of pensions (Table 1.4).
Pension dashboards that provide individuals with information on their accumulated pensions are expanding globally and have the potential to greatly improve communication to individuals about the retirement incomes they can expect. These platforms can offer an accessible and user-friendly format to engage individuals with their retirement planning and provide a comprehensive picture of retirement preparedness across different sources of retirement income. In addition, they can serve to make the operations and management of pensions easier and more efficient, and potentially provide relevant stakeholders with information to monitor the system’s success in delivering adequate pensions.
Policy makers need to make sure that the purpose and functionality of the dashboard is clearly defined and coherent. Individual pension dashboards should provide functionalities in line with a clear purpose and objective.
They should also make sure that dashboards include content that is relevant and useful for individuals’ retirement planning and present information in a way that is easily understandable and effective in engaging users.
Dashboards should automatically include all sources of retirement income where possible and relevant.
Dashboards should provide an estimate of future retirement income in real terms.
Projections should convey the uncertainty around estimations.
Retirement income calculators are a useful tool to aid decision-making.
Retirement income should, where possible, be shown over time, not only at the point of retirement, and should reflect the different payout options available.
Additional variables affecting retirement outcomes (e.g. investment returns, fees) are also useful to include.
Allowing users to download a summary of the information presented can facilitate the use of the information for retirement planning.
Information should be presented using a layered approach.
Technical vocabulary and jargon should be avoided.
Visuals can aid user understanding and engagement.
Including information on what people can do to change outcomes is important to positively impact retirement planning.
User testing is essential to identify the most effective formats for engaging different types of individuals.
There are numerous practical aspects involved in the development of individual pension dashboards, including how to organise various stakeholders to support, develop and manage the platform, how to ensure the accuracy and security of data provided to the platform, and how to promote awareness and use of the platform.
Mandating pension providers to connect to the dashboard is effective in ensuring broad and timely coverage.
The management of publicly owned dashboards by independent public or semi-public entities can mitigate potential conflicts of interest and ensure the appropriate expertise.
Single access points can simplify the promotion of the dashboard but may not appeal to all potential users.
Multiple stakeholders should be involved in the dashboard’s governance.
Dashboards should have a clear source of financing and a dedicated budget.
Providers of data to the platform need to conform to a minimum set of common data standards.
Unique identifiers are required to link pension accounts to individual users.
Data protection measures are crucial to safeguard the security of individual data.
The choice between a centralised database and a live-access model needs to consider cost, security, service objectives and data needs.
Legislation should outline the authorised use of data stored in a centralised database by relevant stakeholders for policy developments.
Communication plans are crucial for the success of dashboards.
Pension providers can be useful to help promote dashboards.
Finally, policy makers should be aware that the development of individual pension dashboards is a long process that will likely require improvements over time as well as regular monitoring of usage and retirement outcomes to ensure dashboards are effective in achieving their objectives. Therefore, the development of a dashboard should establish clear objectives with a timeline of milestones to achieve them, and measurable metrics should be used to assess the impact of the dashboard given its objectives.
References
[8] OECD (2023), Annual survey on financial incentives for retirement savings: OECD country profiles 2023, OECD Publishing, Paris, https://doi.org/10.1787/2154cc08-en.
[1] OECD (2023), Pension Markets in Focus 2023, OECD Publishing, Paris, https://doi.org/10.1787/28970baf-en.
[6] OECD (2022), “How best to involve employers in the provision of asset-backed pension arrangements”, in OECD Pensions Outlook 2022, OECD Publishing, Paris, https://doi.org/10.1787/41f6fe2a-en.
[3] OECD (2022), “Policy guidance on developing asset-backed pension arrangements”, in OECD Pensions Outlook 2022, OECD Publishing, Paris, https://doi.org/10.1787/f2537a8b-en.
[5] OECD (2022), Recommendation of the Council for the Good Design of Defined Contribution Pension Plans, https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0467.
[10] OECD (2020), “Selecting default investment strategies”, in OECD Pensions Outlook 2020, OECD Publishing, Paris, https://doi.org/10.1787/1c7381db-en.
[9] OECD (2018), “Improving retirement incomes considering behavioural biases and limited financial knowledge”, in OECD Pensions Outlook 2018, OECD Publishing, Paris, https://doi.org/10.1787/pens_outlook-2018-8-en.
[7] OECD (2018), “Policy guidelines to improve the design of financial incentives to promote savings for retirement”, in Financial Incentives and Retirement Savings, OECD Publishing, Paris, https://doi.org/10.1787/9789264306929-9-en.
[4] OECD (2016), Recommendation of the Council on Core Principles of Private Pension Regulation, https://legalinstruments.oecd.org/en/instruments/344.
[2] OECD (2016), “The changing pensions landscape: The growing importance of pension arrangements in which assets back pension benefits”, in OECD Pensions Outlook 2016, OECD Publishing, Paris, https://doi.org/10.1787/pens_outlook-2016-4-en.
← 1. The OECD annually collects updated information on financial incentives for retirement savings across OECD countries (OECD, 2023[8]).