The Organisation for Economic Co-operation and Development has warned of a potential “asset meltdown” in financial markets as more people retire, having just seen more than €1,000bn knocked off pension assets in a year.
Ahead of such a possible meltdown, which is only one of its potential scenarios, the OECD, in its Financial Markets Trends No.88 report released on Thursday, highlights the immediate need for investors to be able to switch into high quality, long-term fixed income securities as a recommendation for governments.
This is because the OECD’s Committee of Financial Markets said that over the next few decades, changes in the age structure of the population would probably affect the economy’s savings behaviour.
Under its Asset Meltdown Hypothesis, the committee said people born after 1945 might shortly become net sellers of their assets to fund their retirement.
The report added: “As subsequent generations are smaller in number [than the so-called baby_boomers,] other things being equal this would put downward pressure on financial asset prices with possible adverse effects on the adequacy of retirement income.
“Even if there were no generalised financial asset sell-off there might be a switch from equity to fixed-income instruments. To avoid losses from a future potential massive withdrawal from equity, prospective retirees or the institutions managing their savings would now need to be able to invest in high quality, long-term fixed income instruments that would ensure regular pay-outs during later retirement periods.”
But the OECD admits such instruments might not be available in sufficient quantities and calls on governments to examine how they provide these securities.
The UK and French governments, for example, have already announced plans to issue 50-year bonds.
The apocalyptic warning to the member governments of the organisation is seen as raising a red flag that they need to examine the structural issues behind the recent fall in pension values.
Fiona Stewart, administration on the OECD’s working part on private pensions, said: “The report is a wake-up call for regulators and governments to look at demographics and structural issues, such as funding rules. The problems are not just to do with the crash in equities.”
The OECD’s newly-formed Global Pension Statistics Project identifies the weight of pension funds in the economy and financial markets. It found using the latest data available that between 2001 and 2002 its 24 member countries lost more than €1,000bn in pension fund assets, mainly as the stockmarkets fell.
The 2003 data is to be released next month and the project is also trying to make the data more comparable between countries and include the unfunded pension promises, which are mainly made by government-backed bodies.
Jean-Marc Salou, administrator in the OECD’s Financial Affairs Division that is handling the project, said it was trying to monitor pensions as a tool for member governments to compare themselves to their peers rather than set out best practice on asset allocation or taxation.