Covid-19 poses long-term threat to pension savings - OECD

Reports warns against allowing early access to retirement savings

The Covid-19 pandemic has increased the risk that people will not be able to save enough for their retirement, according to a new OECD study.

The Covid-19 pandemic has increased the risk that people will not be able to save enough for their retirement, according to a new OECD study.

 

The Covid-19 pandemic has increased the risk that people will not be able to save enough for their retirement, according to a new OECD study.

The economic impact of the crisis and the shutdowns that many countries have adopted in an effort to halt the spread of the virus has affected the ability of workers and their employers to contribute to private retirement plans, the the OECD Pensions Outlook 2020 says.

It also warns that the liabilities of defined benefit schemes, which guarantee a level of retirement benefits are likely to grow.

On the upside, wage and unemployment supports mean that people will not have lost out on their entitlement to a state pension when they retire, the report says. but the money governments have had to spend on such schemes will weigh on the State’s ability to fund state pensions, which are already under press as people live longer.

Significant challenges

The annual report looks at the impact of Covid on pension schemes across all OECD countries as well as a number of others.

Even before the outbreak of the pandemic, the report says that retirement savings and old-age pension systems were facing “significant challenges”.

“Population ageing, with longer lives to finance in retirement and smaller cohorts entering the labour market, as well as a low economic and wage growth environment, low returns in traditional asset classes and low interest rates, were already weighing heavily on funded and pay-as-you go, defined benefit and defined contribution, and private and public retirement provisions,” it says.

That has now been compounded by the prospect for lower economic growth, interest rates and returns on secure investments (like government bonds) into the future.

“The health and economic crisis is increasing the risk that people may be unable to save enough for retirement,” it says.

Early access

It lays out a number of recommendations and issues for policymaker. These include a warning that early access to retirement savings should be a measure of last resort.

“Well-intentioned measures to provide short-term relief by granting people access to their retirement savings before they reach retirement age are likely have a detrimental effect on future retirement incomes, particularly where access is granted widely and unconditionally,” the report warns.

There has been pressure in Ireland, especially from the small business sector, to allow such access during the crisis. So far, this has been resisted by Government although it has occurred in some other countries.

“Policymakers should communicate to members the importance of staying the course and keeping long-term investments plans,” the OECD report says.

It says that, for most countries, it took around two years for the value of assets in retirement savings accounts to recover from the hit to investments during the 2008 financial crisis.

“Preliminary OECD estimates based on market movements suggest that the value of assets in retirement savings accounts recovered their pre-Covid-19 levels by the end of the third quarter of 2020 thanks to the recovery of financial markets in the second and third quarters,” the report says..

“Therefore, as long as people do not sell their assets, they do not materialise the losses and their portfolios eventually could recover and resume their long-term trend upwards.”

Gig economy

The report also examines the issue of access to pension schemes for workers in what it calls “non-standard forms of work”.

“ This diverse population, including part-time and temporary employees, self-employed workers and informal workers, has more limited access to public and private retirement schemes and builds up lower retirement entitlements than do full-time permanent employees,” it says.

“Policymakers need to consider targeted measures, including facilitating access to retirement savings plans, offering dedicated or hybrid retirement savings products, allowing workers to keep the same plan upon job changes, allowing flexible contributions, and using nudges to remind people of the importance of saving for retirement.”

It also warns of the need for proper default schemes for pension savers and for limits to regular changes in investment strategy which might adversely affect retirement income.