BIS urges governments to limit investment options for DC

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  • BIS urges governments to limit investment options for DC

GLOBAL - Governments should limit the number of investment options offered to defined contribution (DC) scheme members so they do not take unintended risks, according to the Bank for International Settlements (BIS).

In a working paper looking at the sustainability of global pension systems - both occupational and state-run social security arrangements - Srichander Ramaswamy also said the advantages and disadvantages of offering guaranteed minimum annuities should be explored.

The author also examined the issues facing defined benefit (DB) plans in the near future.

Ramaswamy said increasing service costs, combined with changing international accounting standards, would accelerate the shift from occupational DB to DC and have "material implications" for many people's pension benefits.

He predicted the change in provision would necessarily go hand in hand with public policy developments in the annuity market and a potential limit on DC investment options.

"As more employers progressively shift towards DC schemes for providing post-employment benefits, regulatory policies might be needed to restrict the range of permissible investment options available for plan assets to avoid unintended risks being taken by the plan beneficiaries, and to set mandatory minimum contribution rates for participating in DC schemes," he said.

"Considering that plan beneficiaries in DC schemes are exposed to interest rate risk at the time of converting plan assets into an annuity, the pros and cons of providing insurance policies that guarantee a minimum real yield at which these assets can be converted into an annuity will have to be examined."

He calculated that contribution increases of 50% would be needed over the next 20 years in an effort to keep pay as you go (PAYG) schemes viable.

Ramaswamy estimated that contributions, if presently 20% of salary, would need to rise to 30% by 2030 as the dependency ratio increased, in line with the Western world's growing share of workers over 65.

However, he acknowledged that, due to the unreported liabilities of PAYG arrangements, it was a "challenge" to estimate any funding shortfalls the systems might face in future.

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