Low growth, low interest rates and low returns on investmenst linked to the slow global economy are now compounding the problems of population aging for both public and private pension systems, says an Organisation for Economic Co-operation and Development (OECD) report.
The OECD Pensions Outlook 2014 says the crisis spurred most countries to speed up reforms to make their pension systems more financially sustainable. These included raising taxes on pension income and pension contributions, reducing or deferring the indexation of pension benefits, and increasing the statutory retirement age.
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But ensuring that people extend their careers to ensure an adequate retirement and that the financial burden is more fairly shared across generations remain key challenges.
“It’s encouraging to see the progress made in recent years to make pension systems more sustainable and adequate,” says OECD secretary-general Angel Gurría. “But the ongoing rapid demographic shift and the slowdown in the global economy highlight the need for continuing reforms. We must communicate better the message that working longer and contributing more is the only way to get a decent income in retirement.”
Increasing the effective retirement age can help, but more efforts are needed to assist older workers find and retain jobs. Public policies to reduce age discrimination, improve working conditions and increase training opportunities for older workers are essential.
Countries have also introduced reforms to strengthen funded private pensions. The report highlights the importance of increasing coverage rates in countries where funded pensions are voluntary. Auto-enrollment programs have been successful in raising coverage in the countries that have implemented them.
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The report also calls for strengthening the regulatory framework to help pension funds and annuity providers deal with the uncertainty around improving life expectancy. It argues that regulators should make sure that providers use regularly updated mortality tables, which incorporate future improvements in mortality and life expectancy. Failure to account for such improvements can result in a shortfall of provisions of well over 10% of the pension and annuity liabilities.
Capital markets could offer additional capacity for mitigating longevity risk, but the transparency, standardization and liquidity of instruments to hedge this risk need to be facilitated. The regulatory framework will also need to reflect the reduction of risk exposure these instruments offer by ensuring they are appropriately valued by accounting standards and lowering the level of required capital for entities hedging their longevity risk.
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Issuing longevity bonds and publishing a longevity index to serve as a benchmark for the pricing and risk assessment of hedges would support the development of longevity instruments.
Rebuilding trust is also an important challenge that policy-makers face, notes the OECD. Young people in particular need to trust the long-term stability of the pension system and the pension promise that is made to them. Communication campaigns and individual pension statements to explain the need for reform and facilitate choice by individuals are needed, says the OECD.