OECD Pensions Outlook 2012

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  Foreword

  This first edition of the OECD Pensions Outlook provides an analysis of pension policies in OECD countries, covering both public and private pension systems, as well as an assessment of trends in retirement income systems. Reference statistics are also included.

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  Editorial - Pensions: Past, Present and Future

  It may not feel like it, but today’s retirees are living through what might prove to have been a golden age for pensions and pensioners. Far fewer older people live in poverty than in the past: about a quarter fewer than in the mid-1980s. They can expect to live longer: 65 year olds today are projected to live 3.5 years longer than their parent’s generation.

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  Executive Summary

  This first edition of the OECD Pensions Outlook takes a close look at the two main trends in pension design observed over the last two decades: first, the introduction of reforms to pay-as-you-go (PAYG), public pension systems such as later retirement and automatic adjustment mechanisms to pension benefits to improve the financial sustainability of these systems; second, the growth of funded private pension arrangements complementing PAYG public pensions. These developments are interlinked, as many pension reforms have ultimately led to a reduction in the replacement rate offered by PAYG public pension systems, increasing the need for later retirement and complementary forms of pension provision.

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  Pension Reform During the Crisis and Beyond

  This chapter discusses trends in pension reform over 2007-11. This period has witnessed a major financial, economic and fiscal crisis, which accelerated the pace of pension reform. Policy initiatives include increases in pensionable ages, the introduction of automatic adjustment mechanisms in public pension systems and the strengthening of work incentives. The dismal financial market conditions of the last five years have also placed major stress on funded, private pension arrangements. Most countries’ pension funds are still in the red in terms of cumulative investment performance over this period. Policy makers’ reaction to the crisis have focused on regulatory flexibility and better risk management. They include an extension in the period to make up funding deficits in defined benefit pension plans, greater flexibility in the timing of annuity purchases (to avoid locking in unattractive rates), and new rules on default contribution rates and investment strategies to ensure better member protection.

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  Putting Pensions on Auto-pilot: Automatic-adjustment Mechanisms and Financial Sustainability of Retirement-income Systems

  This chapter analyses the automatic adjustment mechanisms introduced in public pension systems over the past 15 years. These mechanisms create automatic links between demographic or economic developments and the retirement-income system, particularly benefit levels. While these mechanisms generate greater sustainability of pension promises they normally worsen benefit adequacy. Old-age safety nets may need to be reinforced to address these concerns. Furthermore, automatic adjustment mechanisms are often complex, difficult to understand and create uncertainty over future benefits. In order for individuals to adjust to these new pension designs – by working longer or saving more in private pensions, there is a need for gradualism and transparency in the implementation. A fair and predictable burden-sharing across generations should help individuals to act pro-actively by adapting their saving and labour supply behaviour.

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  Reversals of Systemic Pension Reforms in Central and Eastern Europe

  Since the late 1990s, some central and eastern European countries reformed their pension systems structurally, partly replacing their PAYG-financed public pensions, with fully-funded, defined contribution plans. During the crisis, some of these have been partially reversed, with reductions in contributions to the funded, private pension system in countries such as Estonia (temporary) and Poland (permanent). In Hungary, the reversal has been complete. Even the accumulated assets in the mandatory pension funds were reverted to the state. The analysis of pension entitlements shows that the main cost of these reversals will be borne by individuals in the form of lower benefits in retirement. The effects on the public finances will be a short-term boost from additional contribution revenues but a long-term cost in extra public spending just as the fiscal pressure of population ageing will become severe. Overall, however, it is projected that the extra revenues would exceed the extra expenditure.

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  Coverage of Private Pension Systems

  To adapt pension systems to demographic trends, many countries are reducing pay-as-you-go public pension levels and lifting retirement ages. In this context, funded private pensions could play a major role to avoid adequacy gaps. Yet, as this chapter shows, the coverage of funded pensions, as measured by enrolment rates, is highly uneven across countries and between individuals, especially in voluntary systems.Some countries have made funded pensions compulsory (e.g. Australia, Chile) or quasi-mandatory (e.g. Denmark, the Netherlands) to ensure that most workers are covered and therefore have access to a sufficiently high complementary pension. However, in other countries with relatively low pay-as-you-go public pension benefits, funded private provision remains voluntary. The low level of funded pensions’ coverage in such countries should be a major policy concern. Recent policy initiatives in Germany and New Zealand, involving the introduction of financial incentives (and auto enrolment in New Zealand) have been effective in raising coverage to the highest levels among voluntary pension arrangements, but coverage gaps remain that need to be addressed.

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  The Role of Guarantees in Retirement Savings Plans

  This chapter examines the role of guarantees in retirement savings arrangements, in particular minimum investment return guarantees during the accumulation phase. The main goal is to assess the costs and benefits of different return guarantees. The analysis uses a stochastic financial market model where guarantee claims are calculated as a financial derivative in a financial market framework (like e.g. the valuation of a put option). In this context, the chapter highlights the value of capital guarantees that protect the nominal value of contributions in pension plans. However, such guarantees can only be introduced relatively easily in the very specific context considered in this chapter. Allowing plan members to vary contribution periods or investment strategies, or change providers, would raise major challenges for an effective and efficient implementation of return guarantees. It would increase the complexity and cost of administering the guarantee.

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  A Policy Roadmap for Defined Contribution Pensions

  This chapter discusses policy options for improving the design of defined contribution pension plans with the aim of strengthening their role in retirement income adequacy.

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