We live in a world of integrated markets where co-operation and cohesion of our diverse regulatory approaches is key to understanding and mitigating the impact of the global financial turmoil. The Organisation for Economic Cooperation and Development (OECD) and the International Organisation of Pension Supervisors (IOPS), offer the forum for co-operation and exchange of ideas. Through these organisations, the international pensions community has been able to work together to draw up policy initiatives to mitigate the impact of the change and turmoil on pension schemes. Although methods diverge, there is agreement that it is important to focus on the need for sensible long-term investment choices while also understanding the impact of short-term fluctuations.
Impact of financial instability
The impact of financial instability is shown in the OECD publication ‘Pensions Market in Focus', published at the end of 2008. This estimates declines of $3.3trn (€2.2trn) in occupational pension assets, rising to $5.4trn in global scheme assets when including private schemes.
These losses are putting pressure on funding levels for defined benefit (DB) pension plans and on the returns to members of defined contribution (DC) plans close to retirement, potentially denting long-term confidence in pension provision. While the OECD data shows a significant global impact of the economic crisis on pension assets, it also indicates that these effects have not been felt to the same degree across the board. The return on assets has varied from small but positive returns to falls of more than 30% in Ireland and the US.
These outcomes risk having a longer-term impact if they lead to permanent changes in investment portfolios or a general decline in consumer confidence. This is why the OECD has continued to stress the long-term nature of policies affecting pension provision. OECD publications illustrate how an evaluation of pensions performance, based on long-term measures, shows a very different picture in which the returns are positive - a nominal rate of return of pension funds over the 15 years prior to publication at 9.2% in the UK (6.1% in real terms), 10.6% in the US (6.1% in real terms), and 11.8% in Sweden (8.5% in real terms).
The diversity in the rate of returns has been reflected in the varied policy responses adopted across OECD and non-OECD countries. It is for this reason that the forum provided by the IOPS and OECD has proved invaluable in understanding variations in reactions to the economic downturn.
The IOPS aims to set international standards on pension supervisory issues, while taking into account the variety of different pension systems in different countries. This is undertaken through its technical committee, in which I hold the position of vice-chair.
Co-operation and co-ordination
There are many interesting measures being undertaken by IOPS member countries in these areas. Australia has suspended the minimum payment required for account-based pensions in order to alleviate some of the economic pressures already being placed on employers and employees. Ireland has also introduced supportive policy measures, offering the option of deferring annuity purchases for members of DC occupational pension schemes. In Canada there have been efforts to provide relief in the current circumstances through providing temporary solvency funding relief measures while calling for a heightened review of all DB plans and for increased communication. The introduction of temporary funding relief measures in Canada has also helped provide a buffer against the effects of the financial downturn. The regulator in Mexico, CONSAR, has similarly introduced relief measures through the introduction of a ceiling to fees that pension funds can charge to workers. Nigeria's regulatory policies have also focused on security of assets. The Nigerian Regulator was quick to recognise the potential effects of the turmoil and advised funds on the possible impact. This helped to promote a flight from equity before the end of 2008, reducing actual exposure of retirement savings account (RSA) funds to about 12% of stock.
These examples demonstrate varying attempts to relieve the negative effects of the economic downturn across the globe, which have been facilitated by the communication prompted by organisations such as the IOPS and OECD. By enhancing and developing this communication between them, states can develop their respective pension policies. This proves particularly useful in countries with newly emerging pension systems. In this regard, IOPS organises regional forums that provide local workshops focusing on the issues involving the newest pension regulation systems. These workshops are supported by some of the most established regulatory authorities in the international community.
Current work programme
As already discussed, research by the OECD and IOPS has helped to crystallise discussions into policy drafts that have been submitted to the G20 to guide its discussions.
The key message is that we should stay the course. Occupational provision for retirement remains a necessity, as public pay-as-you-go systems face sustainability problems because of ageing populations and they are also affected by the crisis as unemployment increases. Occupational savings for retirement are for the long term, meaning supervisory oversight should be proportionate, flexible and risk-based, focusing on the main threats facing pension fund beneficiaries and the pension system as a whole.
In the UK we are striving to be flexible in the downturn. By retaining the ability to renegotiate recovery plans, the UK system enables a level of flexibility that minimises the effects of the financial downturn on relevant pension schemes. What is important to remember, however, is that whilst there is flexibility in the setting of recovery plans, flexibility does not extend to pension liabilities. Trustees cannot allow the current economic conditions to disguise the true cost of their scheme's liabilities.
In addition to this, the IOPS was careful to highlight the importance of security mechanisms designed to protect DB scheme assets and members. These include solvency buffers, employer covenant and guarantee schemes. Such diverse policies and flexibilities aim to avoid placing intense pressure on scheme sponsors that are facing difficult financial conditions.
Equally important was the need to look at the design of defined contribution plans, including default investment strategies, default and life-cycle funds and annuity purchases. In the UK we recently published a leaflet entitled ‘Making Your Retirement Choices'. This is designed for trustees to give to members in the six months before retirement and it makes it clear what the options are for buying an annuity and also that members have the right to shop around to get the best deal.
The importance of communication and improved financial education has been highlighted, with the aim of helping beneficiaries (and to some extent, pension funds) improve their understanding. In the UK we have a policy of ‘educate, enable, enforce' which stresses the value of knowledgeable trustees. An important aspect of this is the developing of a Trustee Toolkit, which identifies the good practices involved in running a trust-based scheme. It also helps trustees to identify and repair any gaps in their knowledge and understanding.
The international effects of the economic climate will continue to have an adverse impact on pension provision and IOPS will continue working to ensure that the appropriate supervisory measures are in place to cope with these effects. Aside from dealing with the financial turmoil, our current work programme focuses on risk-based supervision and also reflects the increased importance of DC provision with a forthcoming paper on supervising DC pension funds.
What is clear is that we must continue to work together as pension funds, not least as the assets that sit within them cross national borders. The IOPS offers an invaluable forum for member countries to exchange information, set standards and promote good practice in pensions supervision. This helps the international community increase its mutual understanding and assists in maintaining security within pension schemes through these turbulent times.