Remarks by Angel Gurría
4 December 2018 - Paris, France
(as prepared for delivery)
Ladies and Gentlemen,
It is a pleasure to be here today to launch the 2018 edition of the OECD Pensions Outlook. I am happy to see my good friends Nicolas Monckeberg, Minister of Labour of Chile and Preston Rutledge, US Assistant Secretary of Labor, along with many other friends and experts on this important issue.
Like much of our work, this report is the result of a collaborative effort across the OECD, in this case between the pension units in the Directorate for Financial and Enterprise Affairs and the Directorate for Employment, Labour and Social Affairs.
It is also the result of the collaboration between the OECD Secretariat and delegates to the OECD Working Party on Private Pensions; the ultimate outcome has benefited enormously from the inputs of the delegates, many of whom are here today.
The Pensions Outlook also owes a lot to the financial support from and collaboration with the European Commission, Principal International and the Government of Chile.
The Outlook’s main theme is that the reforms introduced in pension systems during the last decade have made them stronger and better placed to deliver pensions. People working today can have greater assurance than before that they will get their pensions.
These reforms have also made pension systems better able to deliver pensions in line with what people expect and need. However, in this respect there is still more work to do, and you can count on the OECD to contribute to the further improvement of pension systems in the years to come.
Let me briefly share with you some of the main messages coming out of the individual chapters of this Pensions Outlook.
The first chapter focuses on designing funded pensions.
It assesses how different pension arrangements (PAYG and funded, private and public) can be combined, taking into account various policy objectives and risks involved in saving for retirement.
Objectives include redistribution, sustainability, adequacy, and consumption smoothing, while risks may be demographic, macroeconomic and financial, among others.
Different countries have different mixes between pay-as-you-go and funded as well as between public and private provision, depending on their objectives and their assessment of the risks.
Most countries follow the OECD recommendation of diversifying sources to finance retirement and designing funded arrangements to complement pay-as-you-go public pensions.
The chapter suggests introducing funded arrangements gradually when diversifying pension systems, especially when contributions are diverted from an existing pay-as-you-go system, as the transition may put an additional strain on public finances and increase risks for individuals.
The second chapter looks at how countries can improve the design of financial incentives.
It shows that such incentives can promote saving for retirement by providing an overall tax advantage to individuals through a reduction in total lifetime tax paid, although this has a fiscal cost. Good design is therefore crucial.
In this context, the chapter argues that tax incentives should be straightforward, stable and consistent across retirement savings plans.
When designing financial incentives, policymakers should consider the retirement saving needs and capacities of all income groups and should provide for tax neutrality between consumption and saving: that is, the choice of consuming today or consuming tomorrow should be unaffected.
Most countries already have incentives in the form of deferred taxation, and in these cases the chapter recommends maintaining that structure, because the cost has already been incurred and in the future they will get more revenues as people get their pensions and pay the deferred taxes.
The third chapter presents policy guidelines on aligning charges and costs of providing funded pensions.
The costs of providing pension services can greatly affect the value of accumulated retirement savings. Charges of 0.75% of assets reduce the accumulated pension pot by 17%, while for charges of 1.5% the reduction of the pot is nearly 30%!
The chapter calls for better disclosure, pricing regulations (like caps on charges) and structural solutions. Policy-makers and regulators could also use measures such as benchmarking and tying investment expenses more closely to portfolio performance.
The fourth chapter focusses on how to strengthen the governance, investment policies and investment risk management of pension funds.
One message is that pension funds should be kept at arm’s length from government.
Pension funds should have clearly stated missions to guide investment policy, an oversight board that is accountable to the competent authorities and members; and transparency about governance arrangements and investment and risk management.
They should express their performance objectives in terms of their mission and monitor performance against this long-term goal rather than a market benchmark.
The fifth chapter provides guidelines on improving retirement incomes by taking better account of human behaviour and the limited levels of financial knowledge that most people have.
It argues that, apart from financial education and financial incentives, retirement outcomes can also be improved by automatic features, default options and ensuring that information and choices are presented in simple ways.
Mechanisms such as automatic enrolment and escalation of contributions can harness inertia to broaden pension coverage and increase contributions. People unable, or unwilling, to make informed choices about contribution rates, pension providers, investment strategies etc. may benefit from default options.
The sixth chapter discusses the implications of mortality differences on retirement incomes across different socioeconomic groups.
Since individuals in low socioeconomic groups have a lower life expectancy than others, they may receive a lower “return” on the contributions made towards their funded pension.
The chapter finds that progressivity of public pensions and tax rules can partially offset this disadvantage.
Therefore, as policy-makers seek to maintain the sustainability of pension systems in light of rising life expectancy, they should consider how different socioeconomic and gender groups may be affected.
The last chapter examines whether survivor pensions are still needed. It argues that survivor pensions still play an important role in smoothing living standards after a partner’s death.
However, they should be designed so that they do not redistribute from singles to couples or negatively affect work incentives.
There is, then, a wealth of content and advice in this Outlook. I would conclude by stressing the general and common-sense point that the surest and best way to achieve higher retirement income is by contributing more and for longer. The difficult context of population ageing, low returns and low growth make it all the more important that this is well understood. In your discussions today and beyond I encourage all of you to focus on how to achieve these two goals in order to improve retirement outcomes.