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OECD warns on pensions crisis

By Chris Giles, Economics Editor
Published: June 23 2009 13:13 | Last updated: June 23 2009 19:25

Strains in pensions systems, in both private and public provision, threaten to turn the financial crisis of the past
two years into a social crisis lasting for decades, the Organisation for Economic Co-operation and Development
warned on Tuesday.

In its annual analysis of the health of pensions systems globally, the Paris-based organisation found private
pension plans lost 23 per cent of their value last year, while higher unemployment “leaves little room for more
generous public pensions”.

Angel Gurría, the OECD secretary-general said: “Reforming pension systems now to make them both affordable
and strong enough to provide protection against market swings will save governments a lot of financial and
political pain in the future”.

Pensioners hit hardest include those heavily dependent on defined contributions, where people save to build up
a personal fund, those near retirement and those heavily invested in equities. This applies to many US citizens
who have large pension pots, known as 401(k) retirement plans.

For these individuals and for the recently retired who have not bought an annuity, losses will be greatest, the
OECD said, exacerbating the sense of a looming pensions crisis worldwide. Those with defined-benefit private
pensions are not immune from potential losses, as companies are increasingly restricting the amounts paid.

By contrast, younger workers have time to repair the damage to their pensions. Their losses are also smaller
compared with their annual contributions than for those near retirement who have already built up a big pension
pot.

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Losses in private pension schemes were highest – at over 25 per cent – in countries such as Ireland, Australia
and the US, where the greatest proportion was invested in equities. Losses in Germany, Mexico and the Czech
Republic, however, were under 10 per cent as private pensions there were heavily invested in bonds. Future
incomes from public pensions are not immune from the financial crisis, the OECD warned, because stretched
public finances will prevent countries augmenting public provision and might lead to cuts.

Canada, Germany and Sweden, for example, already adjust public pensions in payment according to their
schemes’ performance.

The OECD said this form of adjustment “needs a rethink” to prevent cuts in pensions exacerbating the recession.
But it does not suggest reversing the proposed cuts, suggesting they are merely postponed until economies
recover.

Some countries provide extremely low incomes for poor pensioners with a history of low-income employment.

The OECD singles out Germany, Japan and the US as countries where deficiencies in “old-age safety nets are a
concern”.

For private pensions, the recommendation is that governments should ensure most members of defined-
contribution pensions gradually reduce the proportion of equities and other risky investments in their portfolios as
retirement nears.

Ageing strategy

Planned increases in pensionable age, restricting the generosity of early retirement schemes, less generous
public pensions, even cuts in pay for Irish public officials. These are all examples of strategies advanced countries
are using to reduce the financial burden of pensions as their population ages.

The financial crisis will focus policymakers’ attention on the short term, warns the Organisation for Economic Co-
operation and Development, threatening to postpone long-term strategic planning. Officials in the Paris-based
organisation are most concerned about a repetition of the mistakes of the 1980s, encouraging early retirement,
which improves unemployment figures today at the cost of fewer workers and a greater pensions burden
tomorrow.

The OECD describes these changes over the past five years as “one of evolution rather than revolution in pension
systems”.

Over the next 40 years it still expects population ageing, which will create a demographic transformation and
increase the burden of pensions on the public purse.

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