OECD PENSIONS OUTLOOK 2014 HIGHLIGHTS 1 OECD

The financial and economic crisis: – reduction in government revenues to finance retirement promises and – Loss of public confidence in private pensions Response loss confidence: OECD strengthening pension regulation – Updating in collaboration with pension regulators across OECD countries the Core Principle of Private Pension Regulation to promote sound and reliable operation of private pensions plans and thus protect member’s savings – OECD Roadmap for the Good Design of DC Pension Plans approved and endorsed by pension regulators in OECD countries, provides guidelines for the design of these plans to strengthen retirement income stemming from these plans 2 Challenges facing pension system

Demographic change: the ageing of population Economic stagnation: low returns, low interest rates, and low growth The OECD PO 2014 examines the responses to these challenges 3 Challenges facing pension system

4 Proportion population 65+ as a proportion working age population

5 Ratio of years in retirement over years contributing (35 yrs, 1 year per decade)

6 Change in annuity payments for a given accumulated amount when discount rates vary (i=2% 100)

Population ageing: baby boom (temporary), increases in life expectancy (permanent) Challenges for pensions: PAYG public pensions face financial sustainability problems; DB funded private pensions need to secure their continued solvency; DC funded private pensions need to address adequacy problems Contributing more and for longer periods, especially by postponing retirement as life expectancy increases, is the best approach to address these challenges 7 Chapter 1. Responding to the challenges posed by population ageing and longevity risk

Uncertainty on future improvements in mortality (longevity risk, LR) causes serious problems. Regulators and policy makers should ensure that pension funds and annuity providers use regularly updated mortality tables, which incorporate future improvements. Capital markets can offer additional capacity to mitigate LR by addressing the need for transparency, standardization and liquidity: Indexed-based financial instruments Governments could facilitate transparency, standardization and liquidity by issuing longevity indices to serve as a benchmark 8 Chapter 1. Responding to the challenges posed by population ageing and longevity risk

Pension reforms have been widespread and financial sustainability of pension systems has improved in the majority of OECD countries. But adequacy might be reduced in some as a result. Yet, about half OECD countries introduced measures improving adequacy for certain groups of people Raising taxes on pension income or contributions, reducing or deferring the indexation of pension benefits, and increasing the statutory retirement age were widely used measures. The trend under which the poverty risk has shifted away from the elderly to the young has been reinforced Ensuring longer effective working lives and better sharing the financial burden across generations are key challenges 9 Chapter 2: Post-crisis pension reforms

Private pensions do not generally represent the main source to finance retirement A combination of higher coverage rates, contribution levels, effective age of retirement and a positive economic environment would enhance the complementarity role of private pensions Coverage can be increased either by compulsion or automatic enrolment 10 Chapter 3. Role of private provision in retirement readiness

Available evidence shows that automatic enrolment has had a positive impact on coverage. However, coverage rates are not on par with those found in mandatory systems Main elements of a consistent policy strategy for AE: – Identify which population subgroups would need higher private pension coverage – Make sure that entry barriers (e.g., age or earnings level) do not prevent people from beginning to contribute early and do not exclude individuals who may benefit from a private pension – Define default contribution rates in coherence with the overall pension system – Assesse carefully complementarity with other existing incentives – Develop effective communication and education campaigns to accompany AE’s launch and implementation 11 Chapter 4. Increasing coverage in private pensions and automatic enrolment

Pension statements (PS) and National Pension Communication Campaigns (NPCC) are key tools to the success of pension systems addressing the challenges they face PS should provide clear and simplified info, and they should combine info from all pension sources. They should also set clear and measurable objectives. They should aim to engage and encourage members to take active actions to improve their retirement: increasing contribution and postponing retirement NPCC should be part of an overall national strategy Successful NPCC are driven by clear, realistic, and well- targeted objectives that produce outcomes that can be measured, evaluated and monitored against their goals and processes. 12 Chapter 5. Pension Communication: Pension statements & National campaigns

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