Executive summary

The broadened coverage of job-retention schemes and unemployment benefits has lowered the transmission of the labour market slump to public pension entitlements, but the newly accumulated debt will add pressure on pension finances, already strained by demographic changes.

Policy makers should ensure that people continue saving for retirement and avoid selling assets and materialising value losses when markets fluctuate, and that pension providers act in accordance with their investment objectives. They should allow for regulatory flexibility in recovery plans to address funding problems, and ensure that funding and solvency rules are counter-cyclical. They should also provide proportionate, flexible and risk-based supervisory oversight coupled with adequate communication to reduce scams, and facilitate efficient operations.

Early access to retirement savings should be a measure of last resort based on individual exceptional circumstances.

Policy makers can promote the use of assets earmarked for retirement to support the economy, while ensuring that these investments are in the best interest of members.

Policy makers should have clear adequacy objectives and define what they intend for retirement income systems to achieve. They need to calculate adequacy indicators by projecting future retirement incomes. Comparing indicators to targets helps determine whether individuals are meeting adequacy standards and the extent of any shortfalls.

Policy makers should assess the performance of their retirement income system with reference to their policy goals. They should reflect on the arrangement’s role in retirement provision, their tolerance for risks of shortfalls, and competing objectives when determining policy goals. Finally, they should address findings of inadequate retirement income.

They should conduct adequacy assessments regularly, identifying groups at risk and responding to their specific adequacy shortfalls.

Non-standard workers tend to build up lower retirement income because they have more limited access to public and private retirement schemes. Policy makers need to align the regulatory framework with the OECD Core Principles of Private Pension Regulation by ensuring non-discriminatory access to retirement savings plans, minimising vesting periods and facilitating the portability of pension rights and assets.

Options to encourage non-standard workers to join retirement savings plans include applying the same enrolment rules as for full-time permanent employees; facilitating access to retirement savings plans in the workplace; and offering dedicated retirement savings products.

Options to encourage them to contribute regularly include allowing workers to keep the same plan when changing jobs; allowing flexible contributions; offering hybrid products combining different savings motives; simplifying the contribution process; and using nudges.

Understanding the constraints that may prevent these workers from saving for retirement sheds light on which approaches may be more successful for different categories of non-standard workers.

Solving the trade-off involves pre-selecting the candidate default investment strategies, assessing them using stochastic modelling to reflect uncertainty in outcomes, calculating indicators reflecting their potential riskiness and performance, and defining thresholds for risk indicators that reflect the importance given to the downside risk relative to the upside potential.

When designing the stochastic model, policy makers should carefully define parameters such as the simulation period, the types of risks to consider, the asset mix, the macro-economic scenario and the stochastic distribution of risk variables.

People often have flexibility to transfer their accumulated retirement savings to different investment strategies or providers. This allows individuals to invest according to their own risk tolerance and investment horizon.

Frequent trading typically results in worse investment outcomes. The possibility of frequent and large volume trading leads pension providers to hold more liquidity, preventing them from taking a long-term view, foregoing higher potential term and liquidity premiums. Frequent trading in high volumes can destabilise the market by affecting asset prices over the short term and increasing volatility.

Policy interventions to deter frequent switching may be needed to prevent harmful switching and preserve the stability of financial markets. Policies could target individuals, the design of the system, or potential external influences.

Risk sharing offers benefits in terms of risk mitigation and the level of expected retirement income as it increases the collective capacity to invest in higher risk assets that can provide a higher expected retirement income.

Designing risk sharing should promote fairness among participants and long-term continuity. Large value transfers can affect continuity by disadvantaging certain cohorts. Funding requirements limit the size of risk transfers, but reduce risk-bearing capacity. Funding requirements should reflect the strength of the benefit guarantees provided.

The regulatory framework needs to ensure the security of guarantees and reduce the risk of insolvency for participants. Guarantees provide additional certainty on benefits, but at the cost of lower capacity to invest in assets generating higher expected returns.

Communication about investment strategies, their associated risks, rewards and costs needs to be adapted to the target audience and avoid jargon and complex metrics. Standardisation helps people understand and compare different risk, return and cost profiles, and using default investment strategies as benchmarks can facilitate this comparison. The use of several risk indicators can create confusion rather than increase transparency. Visual aids are effective ways of communicating on the risk and return profile.

Associating qualitative characteristics to investment strategies may help individuals appreciate their risk and reward profile, but may also leave room for interpretation. Policy makers should provide a framework for providers to associate a qualitative assessment to the risk and return profile of investment strategies, based on the chosen indicators. They should also consider designing tools to assist people in determining their risk appetite when professional financial advice is not required.

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