Remarks by Angel Gurría,
Paris, France, Monday, 5 December 2016
(As prepared for delivery)
Good morning everyone. It is a pleasure for me to be here today to launch the 2016 OECD Pensions Outlook. I’m glad to see great friends and experts on one of the defining issues of our era. Good to see Phyllis Borzi and Ambrogio Rinaldi with us today.
Like much of our work here at the OECD, this report has been a collaborative effort between different OECD directorates, in this case between the pension units in the Directorate for Financial and Enterprise Affairs and the Directorate for Labour, Employment and Social Affairs. It is also the result of the collaboration between the Secretariat and delegates to the Working Party on Private Pensions. The issues covered in this report have been discussed and endorsed by your delegates and the end result has benefited enormously from your inputs.
The Outlook’s main theme is the change taking place in pension systems to address a series of simultaneous crucial challenges, including: ageing populations; the fallout from the financial and economic crisis; and the current environment of low economic growth and low returns, particularly on fixed-income assets.
These challenges are not independent. The ageing of our populations is one plausible factor behind the loss of dynamism in OECD economies over the last couple of decades, and this was compounded by the crisis and its after-effects. These two factors, together with the monetary policy response to slow growth and below-target inflation, are reflected in the current low level of real interest rates, which has depressed the return on assets in funded pension schemes. Taken together, these factors represent something of a “perfect storm” for both private and public pension systems.
For the private sector, the solvency of many defined benefit schemes is being severely stressed by the combination of unexpected longevity gains, low discount rates and slow growth, which impacts on equity returns. And low returns mean that retirement incomes from defined contribution schemes risk falling well short of expectations, weakening confidence in private pensions.
For governments, slow economic growth creates fiscal problems in pay-as-you-go systems as revenue fails to keep pace with the growth of pension obligations, while in funded systems low returns and rising longevity can leave pension promises underfunded. Governments may also eventually feel obliged to step in to ensure adequate retirement incomes for those relying on returns from private defined contribution schemes, which would imply further fiscal pressure.
These are serious challenges. Fortunately, policy makers, regulators and the pension industry are responding to them.
Many countries have accelerated the pace of pension reforms to safeguard fiscal sustainability, such as raising the statutory age of retirement and linking various parameters of the system to future improvements in life expectancy.
There have also been reforms to improve retirement income adequacy, especially for low-income socio-economic groups, although substantial gaps remain.
At the same time, there has been a shift away from defined benefit to defined contribution arrangements. In all but one country analysed in the report, assets in defined contribution plans grew faster than defined benefit assets over the last 15 years. This shift has helped to ease solvency pressures, although one consequence is that individuals now have to make more decisions and bear more risks associated with financing their retirement. Thus, the importance of financial education and financial services consumer protection, which the OECD has been addressing for many years now.
Another important change is the strengthening of the regulatory framework for funded private pensions undertaken by the OECD and pension regulators in response to the diminished trust of the public in private pensions. In this context, I would in particular highlight the recent publication of the OECD Core Principles of Private Pension Regulation.
These policy responses are game-changers, resulting in a new pension landscape where the sources to finance retirement are more diversified and pension arrangements in which assets back pension benefits are growing in importance, and are complementing public pensions. In 2015 there were 13 OECD countries in which assets in funded pensions represented more than 50% of GDP, up from 10 in the early 2000s. Over the same period, the number of OECD countries where assets in funded private pension arrangements represent more than 100% of GDP increased from 4 to 7 countries.
Successive editions of the Pensions Outlook have recognised that while defined contribution pensions present some advantages, there is a need to improve their design in order to improve retirement outcomes (following the OECD Roadmap for the Good Design of DC Pension Plans). Each edition of the Pensions Outlook has addressed different issues needed to improve the design of pension arrangements. The present edition continues this sequential approach. In particular:
The final chapter of this volume discusses the issue of differences in pension arrangements between public sector and private sector workers. In the four OECD countries with separate civil service pension arrangements, replacement rates for future pension promises are 20 percentage points higher for a full career in the public sector than in the private sector. Unifying the rules governing pension schemes for private-sector and public-sector workers would improve both equity and economic efficiency.
If the headwinds buffeting public and private pension schemes do not abate, it will only be possible to increase retirement incomes by ensuring that contributions are larger and/or made over longer periods. We should certainly be ready for such an eventuality, but we shouldn’t be fatalistic about it. As we noted in the latest Economic Outlook released last week, with the right policy mix in the major economies it is possible to envisage a pick-up in global growth rates and a normalisation of interest rates. This would have many welcome effects, but one of them would be to ease some of the pressures on pensions systems that many of you are struggling with.
Ladies and gentlemen, dear delegates to the Working Party on Private Pensions,
The ageing and pensions challenge we face is one of the defining characteristics of this millennium. But it is also one that can be solved with effective policy solutions such as the ones presented in this report. I encourage you to continue your work to design, develop, and deliver better pension policies for better lives. Thank you very much, and I wish you all the best with your meetings.