GLOBAL - The OECD has warned future pension provision could be undermined by giving early access to pension funds to aid people in “severe economic difficulties” alongside access to national pension reserves.
In a working paper on Private Pensions and Policy Responses to the Crisis, the OECD warned governments against retreating from private pension provision and reverting solely to public Pay-As-You-Go (PAYG) systems, as proposed in some central and eastern European countries.
It claimed “the crisis has not diminished the importance of private pension provision in a well balanced pension system”, and argued the “sustainability problems of public pensions will be compounded were these systems to take on more promises”.
In addition, the OECD warned against using public pension reserves for uses other than their objective of meeting future pension costs to national budgets as a result of the increasingly ageing population.
The report stated: “Therefore, the use of these accumulated funds for other purposes - even those driven by the current financial crisis, (e.g. the use of the Irish National Pension Reserve Fund (NPRF) to recapitalise banks) - does not meet the specified aims of these funds and risks undermining the sustainability of pension promises in future.”
The organisation also said while calls for some flexibility and access to pension assets in the face of severe economic difficulties is “understandable”, it claimed it could have unintended consequences in the future.
It said policies allowing temporary or early access to private pension savings for those in “dire financial difficulties” have already been introduced in countries such as Australia, Iceland and Spain, and are being considered in Turkey, but it warned these could “endanger the future adequacy of retirement income”.
Meanwhile, it suggested one way of improving protection in defined contribution (DC) schemes is the “careful design of default investments and payout options” including the use of ‘lifecycle’ funds, although it admitted these strategies “do still involve timing risk when moving from one asset allocation stage to the next”.
The working paper also argued questions over the use of guarantees in DC accounts need to be addressed, including who should provide them and whether they might encourage conservative investment strategies, as well as pointing out they would “not eliminate market fluctuations in replacement rates unless limits are quite high”.
Instead, it suggested individuals impacted by the decline in pension fund values may need to postpone retirement and continue contributions to rebuild their pot, and said governments should ensure there are no incentives for early retirement or disincentives for later retirement built into their pension system.
Elsewhere, the report noted the issues of pension scheme funding and solvency levels had “reopened” the debate on accounting rules, as the Czech Republic has postponed the adoption of full mark-to-market valuations over the “extreme volatility currently being experienced”, while the Spanish Ministry of Finance has “undertaken studies on using held-to-maturity valuations, using expiry dates instead of mark-to-market prices”.
The OECD added the discussion on discount rates had also been “heightened by the crisis” in countries including the Netherlands, UK and Sweden, as DB liabilities “have experienced much volatility as a result of falls in corporate triple-A bonds, government bonds or the swap curve”.
However, it said the OECD Guidelines on Pension Fund Asset Management state scheme assets “should be valued on a proper, transparent and disclosed basis”, and in terms of discount factors the Guidelines on Funding and Benefit Security state “these should be prudently chosen taking into account the plan liabilities‘ risk and maturity structure”.
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