The Organisation for Economic Co-operation and Development (OECD) has urged policymakers not to use the current economic uncertainty or cost-of-living crisis as a reason for delaying vital improvements to their pension systems.
“Strong retirement systems will be important to protect the living standards of our ageing population as demands on these systems continue to grow,” said Mathias Cormann, secretary-general at OECD.
“Jurisdictions all around the world are facing similar challenges in the context of lower growth, high inflation and financial market uncertainty while responding to the implications of population ageing. We will need to continue to develop and strengthen a multi-pillar system combining different types of pension schemes which supplement one another and diversify risks,” he said.
Cormann was presenting the latest edition of the biennial OECD Pensions Outlook 2022 report, which found that total assets earmarked for retirement represented just over 100% of the organisation’s GDP at the end of 2021.
The report, specifically covering asset-backed pension arrangements, includes recommendations on how to introduce, develop and strengthen these systems, both to improve the robustness of retirement savings and build public trust.
It said policymakers should make sure there is an adequate institutional and legal structure in place, with governance regulation and supervisory structures. They should also manage risks related to incomplete capital markets and inflation, with mechanisms in place to protect assets.
Regulators and supervisors should be given the right operations, powers and functions to regulate and oversee the new arrangements.
Once a system is in place, shortcomings in governance should be addressed where necessary, while policymakers should introduce measures to improve investment performance and foster competition to align fees better with the costs of providers’ services.
The report highlighted the importance of the employer’s role in delivering asset-backed pension arrangements. It said the share of employer contributions exceeds 50% of total contributions in most OECD countries, and 70% in 10 countries. But reinforcing the employer’s role means balancing the advantages of designing plans fitting employee needs with potential challenges such as cost, complexity and administrative burden, it cautioned.
The report said improving the design of these pension schemes also means promoting low-cost and cost-efficient arrangements reflected in the fees charged.
“However, policymakers and regulators need to consider the impact that different fee structures may have on individuals saving for retirement and on providers,” it observed.
The need for regulators and supervisors to ensure the appropriateness of mortality assumptions – crucial to ensure the sustainability of lifetime retirement income for pensioners – is also covered. And the report provides policy guidelines on how to design, introduce, and implement non-guaranteed lifetime retirement income arrangements, which protect members from the longevity risk of outliving their savings without requiring further contributions from the sponsor to maintain benefit levels.