pension systems during the financial and economic crisis edward whitehouse social policy division,...
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Pension systems during thefinancial and economic crisis
Edward WhitehouseSocial Policy division, OECD
Pension funds’ real returns
-30 -25 -20 -15 -10 -5 0
Czech Republic
Germany
Slovak Republic
Sweden
Poland
United Kingdom
Finland
Netherlands
Hungary
United States
Lithuania
Bulgaria
Real investment return, 2008
Source: OECD
-40 -30 -20 -10 0
0
25
50
75
Real investmentreturn in 2008 (%)
Equities,% of total portfolio
United States
Mexico
Czech RSlovak R
Hungary
Iceland
Australia
Spain
Germany
Netherlands
Poland
Norway
Portugal Switzerland
Denmark, Sweden
Austria
United Kingdom
Japan
Explaining differences in 2008 returnsIreland
Canada
Economic crisis
-5
-4
-3
-2
-1
0
1
2008 2009 20100
2.5
5
7.5
10
12.5
2009 2010 2011
Euro zone
OECD 30
Falling output
Change in GDP(%)
Unemployment(% of labour force)
Rising unemployment
-
-
OECD 30
Economic crisis
-5
-4
-3
-2
-1
0
1
2008 2009 20100
2.5
5
7.5
10
12.5
2009 2010 2011
Euro zone
OECD 30
Falling output
Change in GDP(%)
Unemployment(% of labour force)
Rising unemployment
Growing budget deficits
-10
-7.5
-5
-2.5
0
2007 2008 2009 2010
Budget balance(% of GDP)
Source: OECD
OECD 30 OECD 30
Impact on pensions
• Financial crisis– Defined-contribution plans– Private, defined-benefit plans– Public pension reserves
• Economic crisis– Countries with automatic adjustments
• But no country or pension scheme is immune
Detailed analysisYounger/prime-age workers People near to retirement Retirees
Strongly affected Individuals in mature, private DC schemes (especially i) where exposure to riskier assets is greater and ii) where people are required to annuitise their balances at retirement)
Retirees who did not annuitise their DC balances at retirement (especially those with greater exposure to riskier assets)
Moderately affected Individuals in mature, private DB schemesPublic, PAYG systems with deficits
Retirees in plans with automatic benefit adjustments (e.g. conditional indexation, balancing mechanisms, sustainability adjustments)
Less affected Most individuals in this group
Individuals with recently established private DC schemes
Retirees who annuitised DC balances before the crisis Most retirees with DB private pensions or public, PAYG benefits
Role of private pensions for workers
0 25 50 75 100
Czech Republic
Norway
New Zealand
Germany
Belgium
Switzerland
Hungary
Canada
Ireland
Sweden
United States
Poland
Australia
United Kingdom
Slovak Republic
Netherlands
Denmark
Mexico
Iceland
Mandatory defined contribution
Voluntary defined contribution
Mandatory defined benefit
Private pensions
per cent of totalretirement-income package
Capital income of today’s pensioners
0 10 20 30 40 50
Czech RepublicSlovak Republic
PolandAustria
HungaryItaly
SpainPortugalBelgiumFrance
LuxembourgGreeceJapan
IcelandGermanySweden
New ZealandNorwayIreland
DenmarkUnited Kingdom
AustraliaUnited StatesNetherlands
Canada
Percentage of total non-workretirement income from capital
Pension for full-career low earner
0 5 10 15 20 25 30 35 40 45 50
Germany
United States
United Kingdom
Estonia
Latvia
Lithuania
Slovenia
Bulgaria
Finland
Sweden
Czech Republic
Romania
Netherlands
Pension level(% of economy-wide average earnings)
5 years’ unemployment/early retirement
Pension level(% of economy-wide average earnings)
0 5 10 15 20 25 30 35 40 45 50
Germany
United States
United Kingdom
Estonia
Latvia
Lithuania
Slovenia
Bulgaria
Finland
Sweden
Czech Republic
Romania
Netherlands
Policy responses: what to do
• Old-age payments as part of economic-stimulus packages (e.g. Australia, Greece, UK)
• Strengthen safety-nets (e.g. Finland, France, Spain)
• Ensure investment options for DC schemes with default switch to less risky assets with age (e.g. Poland)
• Temporarily relax regulations for private DB schemes (e.g. Netherlands)
• Flexible timing of annuity purchase (e.g. Ireland)
• Improve governance and risk-management of pension funds and focus on financial education
Investing for the long term
0
2.5
5
7.5
10
12.5
Bonds Conservative Balanced Risky Equities
90%
80%
70%
60%
Median
40%
30%
20%
10%
Simulated annual real rate of return(%)
Policy responses: to do or not to do?• Temporary access for individuals to DC accounts (e.g.
Australia, Iceland, US)– But risk of lack of resources in retirement
• Temporary reduction in contribution by employers or governments (e.g. US –corporate, Estonia, Lativa, Lithuania)– But again risk of lack of resources in retirement
• Bail out of DC accounts (e.g. Israel)– But problems of cost, equity, moral hazard
• Guarantees for DC accounts (e.g. Switzerland, Slovakia)– What level? Who pays?
• Use public pension reserves for crisis mitigation (e.g. Ireland, Norway)
Policy responses: what not to do
• Resort to early retirement or other benefits (disability, unemployment)– negative and persistent effect on labour market
• Indeed, workers may wish to work longer in countries with more mature DC schemes (e.g. Australia, US)
• And other countries proposing to increase pension ages in response to crisis (e.g. Finland, Hungary, Netherlands)
• Abandon long-term goals for short-term expediency (e.g. Argentina, Slovak Republic)
Conclusions
• Financial crisis focused attention on investment risk and pensions– But all pension systems subject to risks
• Financial and economic crisis highlights and exacerbates the problems of pension systems
• Long-term strategy should remain diversification and balanced old-age provision
Further details and contact
Edward [email protected]/els/social/pensions