Aging a bigger problem for pensions than Covid-19 – DB & Derisking


The OECD report “Pensions at a Glance 2021” published on Wednesday found that pension systems had come out of the pandemic relatively well internationally, with pension benefits being protected by a series of political interventions and regulatory easements.

While pension systems around the world have faced new financial pressures from lower contributions, largely as a result of measures to protect businesses and individuals, governments have by and large found ways to make up for these lost revenue.

The continued impact of the pandemic could be short-lived if the global economy continues to recover, the report said, and many countries “are now showing encouraging signs and new hires and a return to normal working hours will help keep public pension coffers” .

Painful political decisions are required to put pension systems on a solid footing for the future: either to pay more contributions, work longer, or receive fewer pensions. But these decisions will also be painful because pension reforms are among the most controversial, least popular, and potentially dangerous reforms

Stefano Scarpetta and Mathilde Mesnard, OECD

“However, if pressure on public finances, for example from rising debt costs, increases and savings opportunities are sought, pension expenditure could also be affected. At the moment it is still early to assess the situation, ”it said.

The impact on future retirees could be more significant, although young people are particularly likely to be affected by the pandemic and government lockdown policies, it said.

Younger workers are disproportionately found in sectors hardest hit by the pandemic and are therefore more likely to lose their jobs, with loss of income being a factor that could lead to lower pension benefits in the future.

The aging problem

Stefano Scarpetta, Director of the Directorate for Employment, Labor and Social Affairs of the OECD, and Mathilde Mesnard, Deputy Director of the Directorate for Finance and Enterprise, noted in their foreword that the challenges of Covid-19 pale in comparison to the challenges of aging populations .

“While it goes without saying that the pandemic should be at the center of people’s minds and politics, the biggest long-term challenge for pensions will continue to be to provide financially and socially viable pensions,” they said.

“In order to put pension systems on a solid footing for the future, painful political decisions will be required: Either ask [people] Pay more contributions, work longer or receive fewer pensions. But these decisions will also be painful because pension reforms are among the most controversial, least popular and potentially dangerous reforms. “

Although several countries around the world have taken steps to address the problem, they found that reform packages in many cases involve political compromises, such as relaxed rules on early retirement. In other countries, governments withdrew and opted for gradual change rather than ambitious reforms.

Scarpetta and Mesnard advocated the use of automatic adjustment mechanisms as part of the solution, which “have the advantage of defining the direction in which the systems should go; deviating from this path requires at least explanations and discussions and makes the compromises visible. ”

“The OECD analysis of countries’ experience shows that automatic adjustment mechanisms have in fact sometimes been suspended or even phased out over the years in order to avoid the reductions in pension benefits and increases in the retirement age provided for in automatic adjustment mechanisms,” they continued .

“While suspending automatic adjustments may be a necessary step in addressing concerns that such adjustments could lead to harsh corrections at the lower end of the income distribution, governments should be sure they have a concrete alternative plan to fund pension spending over the longer term. ”

Automatic enrollment leaves self-employed people behind

The OECD report gave a positive assessment of automatic registration, which has expanded its coverage to the point that it is now classified as a “quasi-compulsory” system, as in Denmark, the Netherlands, Norway and Sweden.

In the UK, the report found that private sector workforce coverage rose from 40 percent in 2012 to 88 percent in 2019, according to official figures. Coverage in the public sector is even higher at 94 percent.

The minimum contribution rates have also increased, from 3 percent in 2012 to 8 percent in 2019.

“The contribution rate of 8 percent increases the replacement rate of 21.6 percent of the basic pension for a person with full employment from the 22nd onwards during the entire career. Therefore, the future adequacy of pensions will improve significantly, ”the report said.

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However, it found that coverage of the self-employed has decreased in recent years, falling from 20 percent in 2012 to 16 percent in 2020.

In countries where the self-employed are not required to contribute to earnings-related pension systems, “the relative pension level is among the lowest as the self-employed’s old-age pension is limited to first tier benefits,” the report said.

As a result, the relative pension of the self-employed is significantly less than half that of the employed, a problem that the UK shares with Mexico, Japan, Germany and the Netherlands.

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