The COVID-19 crisis has compounded the challenges facing retirement savings and old-age pension arrangements and added new ones, according to a new OECD report.
The OECD Pensions Outlook 2020 says that population ageing, low growth, low returns and low interest rates were already weighing heavily on funded and pay-as-you-go pension plans, defined benefit and defined contribution schemes, as well as private and public retirement provisions before the outbreak of the pandemic. The shocks from the global health and economic crisis will likely keep economic growth, interest rates and returns low long into the future, putting many people at risk of not being able to save enough for retirement.
Governments have taken a range of swift measures to improve the sustainability and resilience of pension arrangements in response to COVID-19. These include extending job-retention schemes and unemployment benefits that allow workers to keep accruing retirement benefit entitlements, or providing flexibility around pension plans.
“Countries need to strike a balance between the short-term income support provided by measures like granting people access to their retirement savings before they reach retirement age, and the potential negative effect of such measures on future retirement incomes,” said OECD Secretary-General Angel Gurría. “Allowing access to retirement savings should be a measure of last resort, and based on hardship circumstances rather than being granted widely and unconditionally.”
“The COVID-19 crisis has also underlined the importance of having long-term savings for emergencies,” he added. “Introducing long-term savings arrangements that combine a savings account earmarked for retirement and a savings account for emergencies could make retirement savings more resilient.”
The report recommends that policy makers:
- Ensure people continue saving for retirement and avoid selling assets and materialising losses when markets suffer sharp declines.
- Adopt a framework to assess retirement income adequacy and conduct assessments regularly, identifying groups at risk and responding to their specific adequacy shortfalls.
- Consider targeted measures to make sure that workers in non-standard forms of work – part-time and temporary employees, self-employed workers and informal workers – have the opportunity to save for retirement.
- Address the potential negative consequences of frequent switching of investment strategies on future retirement income and the stability of financial markets.
- Have in place a regulatory framework that ensures that risk sharing arrangements are sustainable and promote fairness among participants, allowing all to enjoy the benefits of risk sharing in terms of risk mitigation and higher expected retirement income.
- Ensure communication about investment strategies, their associated risks, rewards and costs, is consistent and standardised, adapted to the target audience, and avoids jargon and complex metrics.