GLOBAL - The financial crisis wiped over $4trn (€3.2trn) from global pension assets between January and October, according to the Organisation for Economic Co-operation and Development (OECD) (Updates with more detail).

At a seminar in Paris yesterday, representatives from OECD governments, academia and the private sector, were told private pensions had been "severely affected by the financial crisis", with pension fund returns across the OECD falling by an average of more than 20%.  

It was claimed both defined benefit and defined contribution schemes have been affected, with negative returns resulting in smaller pension pots for members of DC schemes. For DB systems, the OECD claimed the main worry is the decline in funding levels which it placed at 5-15% decline - depending on the discount rate used. It warned "worse data is likely to be reported at year end".

The organisation revaled the proxy figure of $4trn in losses was obtained by applying "the variation of an index of cash, equities and bonds during 2008 to the asset allocations of pensions funds in several OECD countries at the end of 2007".

A presentation by the OECD Secretariat on the prospective losses of pension funds among member countries showed the least affected areas appear to be Korea and Luxembourg, while the biggest losses could hit Ireland, the USA and the Netherlands as these are the countries with the highest exposure to equities as a percentage of total assets.

In reaction to the crisis the OECD revealed pension funds in countries with "fair value and quantitative risk-based solvency rules" are selling parts of their equity portfolios, which puts further downward pressure on prices,

Meanwhile concerns over counter-party risk, means pension funds are "shunning derivatives and swaps for risk management purposes", although moves into alternative investments appear to be continuing.

Attendees discussed possible policy reactions to the financial crisis including reviewing funding requirements for DB plans for both the short and long term and implementing an "upgrade in risk management methods" of instruments such as derivatives and swaps.

It was suggested governments could play more of a role in managing risks associated with the payout phase of pensions and annuities, with the idea they could encourage the market for longevity hedging products by producing an official longevity index.

Other proposals included suggestions that governments should issue longevity bonds that "would set a benchmark for private issuers", while they "should also consider" issuing more long-term and inflation-indexed bonds, a move already taken by the Danish government with the release of a 30-year bond that was primarily bought by domestic pension funds and insurance companies. (See earlier IPE article: Schemes snap up Danish 30-year bond)

Professor David Blake, director of the Pensions Institute at Cass Business School, said in his presentation that the effects of the crisis would encourage investors to look for assets that are "uncorrelated with traditional financial asset classes", for example through longevity-linked instruments such as life settlements, while "the state will begin to recognise its role in hedging aggregate longevity risk". 

In addition the OECD highlighted the need to look at the adequacy of retirement income from DC plans, and suggested the provision of "default investment strategies that involve switching to less risky assets as people age" - such as life-styling or target date funds.  

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