Pension schemes are facing a number of challenges due to the combined threats of the economy, the ageing population and a lack of confidence in private pensions, according to the Organisation for Economic Co-operation and Development (OECD).
Its Pensions outlook report 2014, which summarises the challenges that policymakers face around pension schemes, found that the problems create solvency issues for defined benefit (DB) schemes and challenge the adequacy of defined contribution (DC) pensions.
The report notes that the crisis has spurred policymakers to speed up reforms to make their pension systems more sustainable, while addressing adequacy concerns in ageing societies using a combination of measures, such as increasing coverage, encouraging higher contributions, especially in complementary funded private pensions, adjusting benefits, and extending contribution periods, particularly by postponing retirement.
It also found that failure to account for future improvements in life expectancy can result in a shortfall of provisions of more than 10% of the pension and annuity liabilities.
Its report highlights also include:
- Strengthening the regulatory framework could help pension funds and annuity providers deal with the uncertainty around future improvements in mortality and life expectancy.
- Contributing more and for longer periods partially addresses the challenge that population ageing poses to pension systems.
- Public policies to reduce age discrimination, improve working conditions and increase training opportunities for older workers are essential.
- Auto-enrolment programmes have been successful in raising coverage in countries where these have been implemented. However, the best approach to reaching high coverage rates is to compel individuals to save for retirement.
- Capital markets could offer additional capacity for mitigating longevity risk, but the transparency, standardisation and liquidity of instruments to hedge need to be facilitated.
- Rebuilding trust is also an important challenge that policy makers face. Pension statements and communication campaigns are key tools to convey the need for reform and ensure that individuals make optimal choices regarding their retirement savings.
Pablo Antolin (pictured), principal economist and head of the private pension unit at the OECD, said: “The compounding pressure governments’ finances and increased longevity is undermining the sustainability of pension systems across the OECD countries.
“Although many members have begun in-depth reforms, this is still work in progress. It will take many years to embed the changes and further measure will be required to strengthen private pensions, increase coverage and contributions, and reinstate public trust.”
The OECD report highlights the important role annuities have to play in eliminating the risk of outliving your savings. For many investors, the best answer is still going to be the security of a well-priced annuity contract, tailored to meet the individual’s needs, fully underwritten and enhanced where appropriate, plus the option of combining it with the flexibility a low-cost drawdown plan. Whilst it is undoubtedly true that some annuity investors in the UK have received poor value from some annuities in the past, this is absolutely not the same as concluding that all annuities are poor value; we believe provided sourced properly, annuities will continue to play an important and valuable role in providing secure retirement incomes to UK pension investors.