Poverty a serious risk for pensioners of the future - OECD

Demographics, low interest rates and volatile markets threaten to undermine governments’ attempts to reform pension sector

 

Pensions in the future may be much less generous than today, with many people at serious risk of pensioner poverty, according to an OECD assessment of coverage across member states and other developed economies.

The report says that recent reforms in a number of countries have made their pension systems more financially stable and today’s pensioners have higher standards of living than ever before.

Record low interest rates, low market returns and the “likely protracted uncertainty in financial markets ...cast doubts on the ability of defined contribution systems and annuity schemes to deliver adequate pensions”, say the authors of Pensions at a Glance 2015.

The challenge is compounded by demographics which mean populations are ageing at an accelerating rate in many countries, the report says.

“This could lead to pension funds and life insurers seeking higher yields and pursuing riskier investment strategies that could ultimately undermine their solvency,” the report states. “This would in turn jeopardise both current and future retirement income security for many people.”

“Most governments have made important efforts to bring public pension systems on a sustainable path; while these are steps in the right direction, there is now a growing risk in some countries that future pensions will not be sufficient,” said OECD secretary-general Angel Gurría.

“The long-term challenge is to design policies today that are flexible enough to adapt to the uncertainties of tomorrow’s world of work, while ensuring adequate living standards for retirees.”

The report notes that retirement age is rising in many countries, including Ireland, “with 67 becoming the new 65” as countries look to control pension spending.

It says that about half of OECD countries have taken measures in the past two years to make their systems more affordable in the long term. A third have made efforts to strengthen safety nets and help some vulnerable groups of pensioners.

The report notes recent reforms of the Irish system, including plans for the introduction of a mandatory occupational scheme for workers to improve pension coverage. However, the OECD is somewhat sceptical about the prospects for the introduction of the MySaver scheme, stating that it is “supposed to be introduced once the economic conditions become more favourable”.

Other reforms to the Irish regime include amending the benefit priority so that future pensioners are somewhat better protected in the event of a defined benefit, or final salary, plan collapsing.

Efforts to make final salary plans more secure also include the introduction of a risk reserve, requiring schemes to have additional assets from 2016 to cover potential liability shortfalls.

Other changes since the last pensions report from the OECD include a reduction in the Standard Fund Threshold in 2014 to €2 million (from €2.3 million), meaning that those with large pension funds will not be able to secure tax relief on anything above that threshold.

Benefits for current pensioners have been improved, the report notes, with the Household Benefits Package available to retirees also helping cover the cost of water, the OECD report states.

However, labour market trends – notably the end of the era of a “job for life” and growing youth unemployment – present significant challenges.

“A decline in jobs with open-ended contracts and the parallel rise in temporary and often precarious jobs are also reducing the continuity of contributions to pensions that workers can claim in retirement,” it says.

“Time out of work means time out of the pension system in some countries. As a result, many more people will receive lower pensions when they retire.”

That is a particular issue for women who take time out to raise a family. On average, the OECD says, a woman interrupting her career for five years would lose about 4 per cent of pension income.

The report covers the pension systems of the 34 OECD states as well as .Argentina, Brazil, China, India, Indonesia, Russian Federation, Saudi Arabia and South Africa.