Covid-19 pandemic has ‘compounded’ pension challenges - OECD

The Covid-19 pandemic has “compounded” the challenges facing retirement savings and old-age pension arrangements and added new ones, according to the OECD.

As reported by our sister title, European Pensions, the organisation's latest report, OECD Pensions Outlook 2020, concluded that pressures that existed before the pandemic such as ageing populations, low growth, low returns and low-interest rates will continue “long into the future” as a result of the pandemic.

This applies to pension systems across the world and all types such as funded and pay-as-you-go pension plans, defined benefit and defined contribution schemes, as well as private and public retirement provisions.

“The shocks from the global health and economic crisis will likely keep economic growth, interest rates and returns low long into the future, putting many people at risk of not being able to save enough for retirement,” the OECD warned.

The report acknowledged the range of measures taken by governments to improve the sustainability and resilience of pension arrangements in response to the pandemic.

These include extending job-retention schemes and unemployment benefits that allow workers to keep accruing retirement benefit entitlements, or providing flexibility around pension plans.

“Countries need to strike a balance between the short-term income support provided by measures like granting people access to their retirement savings before they reach retirement age, and the potential negative effect of such measures on future retirement incomes,” OECD secretary-general, Angel Gurría, said.

“Allowing access to retirement savings should be a measure of last resort, and based on hardship circumstances rather than being granted widely and unconditionally. The Covid-19 crisis has also underlined the importance of having long-term savings for emergencies,” he added. “Introducing long-term savings arrangements that combine a savings account earmarked for retirement and a savings account for emergencies could make retirement savings more resilient.”

As a result, the OECD has recommended several measures that policymakers can take. For example, ensuring people continue saving for retirement and avoid selling assets and materialising losses when markets suffer sharp declines.

It also recommends policymakers adopt a framework to assess retirement income adequacy and conduct assessments regularly, identifying groups at risk and responding to their specific adequacy shortfalls.

Policymakers are advised to consider targeted measures to make sure that workers in non-standard forms of work – part-time and temporary employees, self-employed workers and informal workers – have the opportunity to save for retirement.

They should also address the potential negative consequences of frequent switching of investment strategies on future retirement income and the stability of financial markets.

In addition, the OECD suggests having regulatory framework in place that ensures that risk sharing arrangements are sustainable and promote fairness among participants, allowing all to enjoy the benefits of risk sharing in terms of risk mitigation and higher expected retirement income.

It also wants policymakers to ensure communication about investment strategies, their associated risks, rewards and costs, is consistent and standardised, adapted to the target audience, and avoids jargon and complex metrics.

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