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Ensuring a sustainable and adequate retirement income for pensioners is a key ingredient in any government’s ability to build and keep the trust of citizens in government and business. Yet, given the long-term nature of pensions planning and investment, protecting pensions and implementing pensions reform risk being pushed aside in times of crisis.
The 2022 OECD Pensions Outlook, launched on 1 December, finds that while the recent economic crisis has not had a significant impact on pensions outcomes, longer-term impacts may undermine the capacity of pension frameworks to deliver in the future. Pensions are a long-term investment in our future well-being; therefore governments, employers, and citizens must stay the course.
According to OECD data, there was a steady increase in pension assets contributed during 2021. Assets earmarked for retirement increased steadily with only a few, short-lived downturns. And these assets have more than tripled in value over this period.
To continue to provide financial security as people age—and to ensure that pensions investments remain resilient to future crises—governments must ensure their pensions systems are well-regulated and well-governed; that retirement systems combine a variety of pension schemes, depending on country-specific needs; and that pension assets are diversified and transparent.
Meeting these goals is easier said than done, particularly in tough economic or political times. This applies to governments as much as to employers, who play a key role in countries by offering asset-backed pensions (i.e. pension arrangements in which retirement savings are invested to accumulate assets that will finance pensions) as part of their pensions policy offering. In fact, employer contributions exceed 50% of total contributions to pensions savings in most OECD countries.
Beyond ensuring sustainable and adequate pensions, they also play an important role in supporting sustainable and inclusive economic growth—yet another motivation for ensuring governments continue to drive forward pension reforms and their implementation.
Given their long-term horizon, pensions are well-suited to invest in long-term but illiquid assets such as infrastructure, which are desperately needed to close the infrastructure investment gap. Notwithstanding recent challenges around their efficacy, as large institutional investors pension funds should integrate environment, social and governance (ESG) factors and risk in their investment strategies, thus “shifting the needle” towards sustainability considerations in financial markets.
Policy makers can facilitate this shift through the mobilisation of private capital—including from pension providers—to long-term investment through public-private partnerships, financial incentives or special vehicles for alternative assets.
These are some of the recommendations included in the 2022 edition of the OECD Pensions Outlook, which provides policy-makers advice on how to introduce, develop and strengthen asset-backed pension arrangements:
- Establishing a robust institutional, legal and regulatory framework for pensions, with safeguards and appropriate investment structures to ensure pension providers act in the best interest of their members. Strong governance and well-defined investment and risk-management strategies must prioritise the interest of members when engaging in new investment opportunities like ESG.
- Addressing governance shortcomings in existing pension arrangements to improve investment performance; foster competition to better align fees with the costs of the services provided; tackle challenges of low public trust and financial knowledge; and implement risk management processes.
- Leveraging digitalisation and innovation to help plan, implement and monitor the development of these arrangements. Digitalisation also fosters better record keeping and helps regulators, supervisors and providers better inform people of their options and choices. It also promotes better communication with people and thereby builds people’s trust in the management of their retirement savings.
- Engaging with and supporting employers to meet pensions objectives, given the key role they play in encouraging their employees to invest in asset-backed pensions. Their role to help their employees focus on longer-term financial security is all the more important at this moment, as people may be using their pensions too early to help cover the very high cost of living they are currently facing.
With these recommendations, and by working together, governments can and must ensure sustainable and adequate retirement outcomes for citizens—and in turn support sustainable and inclusive economic growth.