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IPE special report May 2018

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OECD sees uncertain future for reserve funds

GLOBAL – The Organisation for Economic Cooperation and Development foresees an “uncertain” future for national pension reserve funds.

The OECD, in its latest twice-yearly Financial Market Trends report, noted the intensifying funding initiatives within pay-as-you-go pension systems worldwide.

It said: “Funding in these systems takes the form of reserve funds, which in most cases are institutions with their own governing board and resemble pension funds in many aspects.”

But it saw the “future evolution” of funds such as the Norwegian Petroleum Fund was uncertain.

“Unlike pension funds, however, the future evolution of reserve funds is subject to some uncertainty.

“In some countries, the recent build-up of assets is expected to be used primarily for meeting the cost of the baby-boom in the coming years.

“However, as some degree of funding seems advisable for social security systems, further government effort to promote the continuation of reserve funds may be expected.”

The report noted that the asset allocation of reserve funds varies significantly across countries. The Canadian Pension Plan invests nearly all its assets in equities while the US social security trust fund is almost completely in US government bonds.

“In between are countries like Norway, Finland, New Zealand and Sweden where the reserve funds invest between 30% and 60% of their portfolio in equities.”

The report also stated that the ageing of populations in the developed world wouldn’t lead to a substantial reduction in long-term interest rates.

"Ageing could bolster capital-labor ratios and lower interest rates in the future," the OECD said. "Nevertheless, the magnitude of these effects would not be very sizable in most cases."

The OECD also said Dutch civil service scheme ABP is a “reference” in promoting transparency regarding voting behaviour “given that it publishes all votes taken by the corporation on the website”.

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