1. A reality check on Funded Pensions
This is the first step in a project approved by the WPPP at its last meeting in December
Pablo Antolin
Head of the Private Pension Unit
Deputy Head OECD Financial Affairs Division

2. Structure presentation
Challenges facing funded pensions and pension funds
Their mandate (OECD Core Principles of Private Pension Regulation)
The role of funded systems and pension funds in sustainable and ESG investment

3. Challenges facing funded pensions
Population ageing
Current economic environment of low interest rates, low returns, low growth and low wage growth

4. Population ageing
Increase average age population, higher life expectancy (lower mortality rates), low fertility rates
Differentiate between baby boom (temporary) and improvements in life expectancy (permanent?)
Baby boom: costs incurred
Life expectancy: account for it (proper mortality tables), problem with uncertainty about future improvements (longevity risk)

5. Population ageing Implications Solutions Higher dependency ratio
(1) intense fiscal pressures on PAYG DB pensions: sustainability problems
More years in retirement to be financed:
(2) solvency problems for DB funded pensions;
(3) adequacy problems for DC pensions
Solutions
Contribute more for longer
Automatic adjustment mechanisms (actuarial adjustments, mortality tables, NDC, DCs)

6. Economic environment low growth, returns, interest rates
Low internal rates of return in PAYG schemes, which increases the problem of fiscal sustainability
Loss of confidence in funded (private) pensions, mistrust PAYG public pensions will deliver on their promises
Low returns & interest rates in DB funded system increase problems of solvency, pension funds problems to deliver on promises, employers higher costs because of liabilities.
Low financial returns generate retirement income adequacy concerns for DC (same savings lower accumulated assets, lower annuity payments, lower retirement income)

7. Economic environment low growth, returns, interest rates
Solutions as before: contribute more and for longer, automatic adjustment mechanisms, appropriate and regularly updated mortality tables including future improvements (dynamic tables)
Risks:
Pension funds seek higher yields via higher risk investments to match the level of returns promised to beneficiaries
Regulatory framework plays an important role here to prevent excessive risk taking in search for yield.

8. Pensions Funds
The OECD Core Principles of Private Pension Regulation and the regulatory framework of OECD countries establishes that
The main mandate of pension funds is to manage people’s retirement savings in their best interest
Achieve higher retirement income possible, by balancing returns and risks:
higher risk adjusted net of costs real returns
Diversification
Assess all investment opportunities by using appropriate risk assessment techniques and
Have appropriate risk management

9. Pensions Funds, Sustainable Investment and ESG
Sustainable investment opportunities and ESG investment opportunities are part of pension fund investment policy and risk management
OECD work establishes that fiduciary duty does not prohibit ESG integration nor prevents it
Regulation permits but (generally) does not encourage ESG investing, beyond the fiduciary of best interest of members (best real risk adjusted returns net of costs)
Investors interpretation: prudent man, efficient market (everything is in the price), and lack of clarity on the rules by the regulator may discourage ESG integration

10. Pensions Funds, Sustainable Investment and ESG
Practical barriers:
Lack of standardised and homogenised data
Lack of standardised and appropriate disclosure
Lack of appropriate models, indicators, metrics, and approaches to assess ESG investment opportunities (future work of the OECD WPPP?)
Availability of ESG investment opportunities that provide good risk adjusted net returns
ESG no matter what (investment risk management)

11. Thank You!