Improvements to pension systems have made them better placed to deliver pensions

Pensioner 2018

(Unsplash, 2018)

This article is brought to you in association with OECD.


Improvements in the design of pension systems over the last decade in OECD countries have made them more financially sustainable and governments should now focus on ensuring they provide people with an adequate retirement income, according to a new OECD report.

The OECD Pensions Outlook 2018 says that governments face challenges including population ageing, low returns on retirement savings, low growth, less stable employment careers and insufficient pension coverage among some groups of workers. These issues have eroded the belief that pension systems, pay-as-you-go or funded, will deliver on their promises once workers reach retirement age.

“Pension reform remains a continuing challenge as countries need to ensure people get an adequate pension while remaining affordable,” said OECD Secretary-General Angel Gurría, launching the report in Paris.

Many countries have introduced automatic mechanisms to adjust pension benefits to economic and demographic developments, as well as default options to help people that do not want to or cannot make choices. Countries have also taken measures to strengthen safety nets to prevent old-age poverty, says the report.

Regulators and policy makers have also taken steps to make regulatory and supervisory frameworks for funded pension arrangements more robust to make sure they manage people’s savings in their best interest.

Report main messages

  • Combining funded and pay-as-you-go pensions, automatic mechanisms, and a strong safety net for pensioners improves retirement outcomes.
  • To improve the design of financial incentives to save for retirement, tax rules should be straightforward, stable and consistent across all retirement savings plans. Aligning charges levied by pension providers on scheme members with the cost of managing retirement savings requires better disclosure, pricing regulations and structural solutions.
  • The regulatory and legal frameworks of pension funds should be at arm’s length from government. Pension funds should have clearly stated missions to guide investment policy; an oversight board that is accountable to the competent authorities and to members; and transparency about their governance arrangements and their investment and risk management to keep them accountable to different stakeholders.
  • Automatic features, default options, simple information and choice, financial incentives and financial education can result in better retirement outcomes, given that low levels of financial knowledge and behavioural biases can lead people to make unsuitable decisions for retirement.
  • Increased flexibility around retirement age and progressive public pensions and tax rules partly address financial disadvantages in retirement of population groups with shorter life expectancy. Policies to improve the sustainability of pension systems in light of increases in life expectancy will need to consider how those in different socioeconomic and gender groups may be affected.
  • Survivor pensions still play an important role in smoothing living standards after a partner’s death. However, they should not redistribute from singles to couples or limit incentives to work.

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