OECD urges nations to improve asset-backed pension systems

The Organisation for Economic Co-operation and Development (OECD) has highlighted the growing importance of asset-backed pension systems in OECD countries and urged nations to make improvements to these systems.

As reported by our sister publication, European Pensions, its latest OECD Pensions Outlook report provided a series of recommendations on how to introduce, develop and strengthen asset-backed pension arrangements, and the role employers can play in their development.

The report also outlined how fees can be charged to protect retirement assets and align them with the costs of services, how to ensure the appropriateness of mortality assumptions, and the design and introduction of non-guaranteed lifetime retirement income arrangements.

Policy makers were urged to plan, implement and monitor the development of asset-backed pension arrangements in accordance with the OECD Core Principles of Private Pension Regulation.

In the planning phase, policy makers should ensure there is an adequate institutional legal structure in place, and that governance regulation and supervisory structures are set up.

It is imperative that regulators have the right operations, powers and functions in place to regulate and oversee asset-backed pension arrangements, the OECD added.

Policy makers also need to address shortcomings of governance as they appear, implement measures to improve investment performance, foster competition, address the potential loss of trust in the pension system and low financial knowledge of the population, and implement risk management processes, according to the OECD.

The report highlighted the important role that employers play in the provision of asset-backed pension arrangements, stating that they motivations need to be understood, as well as the advantages and potential challenges their involvement brings.

In most OECD countries, the share of employer contributions in asset-backed pension arrangements exceeds 50 per cent of total contributions, while it is more than 70 per cent in 10 countries.

The OECD noted that while employers can bear some of the costs, design schemes that match their employees’ preferences and implement strategies to increase employee savings, some employers (especially smaller ones) may be unwilling to establish pension schemes due to the costs, complexity and administrative burden.

Furthermore, workers in non-standard forms of work may have more limited access to employer-sponsored schemes.

Policy guidance to optimise employer involvement highlighted by the OECD included taking into account the structure of the labour market, ensuring good conditions in regulations and financial markets, and reducing barriers for employers setting up pension schemes.

Furthermore, the OECD outlined the important of providing flexibility for employers to tailor their pension schemes, promoting the use of strategies to improve participation and saving levels, facilitating financial education in the workplace, and providing a framework for good governance.

The report also encouraged policy makers to consider the distinct impacts that different fee structures can have on individuals and providers when setting or changing their fee structures.

It added that regulators need to ensure the appropriateness of mortality assumptions, as adequate assumptions were “crucial” to ensuring the sustainability of retirement income for pensioners.

Finally, the report stated that introducing non-guaranteed lifetime retirement income arrangements has the potential to overcome challenges relating to adequacy, sustainability, and longevity protection, but practical challenges still need to be overcome.

“Strong retirement systems will be important to protect the living standards of our aging population as demands on these systems continue to grow,” OECD secretary-general, Mathias Cormann, said.

“The challenges are global, with jurisdictions all around the world facing similar challenges in the context of lower growth, high inflation and financial market uncertainty while responding to the implications of population ageing.

“We will need to continue to develop and strengthen a multi-pillar system that combines different types of pension schemes which supplement one another and diversify risks.”

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