More countries need to implement asset-backed pension systems, OECD says

Policymakers must increase employer involvement in such pension arrangements, report recommends

Pension arrangements where assets accumulate to generate a pool of savings have been growing around the world, an OECD report said. Getty

Policymakers need to plan, implement and monitor the development of asset-backed pension arrangements to help countries improve pension systems and build people’s trust, according to the Organisation for Economic Co-operation and Development.

Pension arrangements where assets accumulate to generate a pool of savings earmarked to finance retirement have been growing around the world, the OECD's Pensions Outlook 2022 report said.

“Many countries have undertaken pension reforms to introduce, expand or strengthen these asset-backed pension arrangements in recent decades,” the Paris-based organisation said on Thursday.

“Countries’ experiences present important lessons for future reforms.”

The Covid-19 pandemic tipped the global economy into its worst recession since the 1930s' Great Depression. As countries went into lockdown to contain the virus, unemployment surged with millions of people losing their jobs.

Governments introduced a number of measures to boost the resilience of pension systems, such as extending job retention schemes and unemployment benefits, to allow workers to continue accruing retirement benefit entitlements.

The combined retirement savings gap is expected to reach $400 trillion by 2050 between eight major economies — Canada, Australia, the Netherlands, Japan, India, China, the UK and the US, according to a 2019 report by the World Economic Forum.

Policymakers need to make sure that there is an adequate institutional and legal structure in place before setting up asset-backed pension systems, the OECD report recommended. Governance regulation and supervisory structures must also be set up.

In most OECD countries, asset-backed pension providers are independent entities that retain ties to existing financial services providers, the agency said.

“Different aspects may be considered when deciding which type of entity to authorise. Cost to members can influence the choice of pension provider,” it said.

“Another important factor in determining whether the provider would deliver good value is whether they have a profit motive.”

Trust is also an important factor in determining which providers policymakers select, the OECD said.

Providers need to instill confidence in the public that they will protect members’ assets and transfer funds to the rightful owners.

Policymakers must also avoid situations of market concentration when selecting a pension provider.

They need to manage risks related to incomplete capital markets and inflation, the report suggested.

“The experience of OECD countries has shown that introducing asset-backed pension arrangements can come with risks when capital markets are incomplete or lack depth, or in situations of high inflation,” according to the research.

“There is a risk that pension providers may not have access to the range of financial instruments they need to diversify investments. While these are, by no means, the only risks facing newly established asset-backed arrangements, they warrant special attention,” it said.

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Developing asset-backed pension arrangements can take many forms. It could refer to introducing asset-backed arrangements where they are not already in place, such as by creating a defined contribution (DC) system or transforming an unfunded defined benefit (DB) system into an asset-backed arrangement, the OECD said.

It could also involve widening the population of an existing asset-backed pension system, such as introducing mandatory coverage or automatic enrolment, or creating schemes that cater to workers that are not already covered, such as the self-employed, the agency added.

Policymakers should ensure regulators have the right operations, powers and functions to oversee the new asset-backed pension arrangements, while clarifying to pension providers what their role will be.

They need to address shortcomings of governance, implement measures to improve investment performance, foster competition, address the potential loss of trust of people in the pension system and the low financial knowledge of the population, and implement risk management processes, the report recommended.

The research also stressed the role of employers in the provision of asset-backed pension arrangements.

“The share of employer contributions exceeds 50 per cent of total contributions in most OECD countries and 70 per cent in 10 countries,” the report said.

While employer involvement has many advantages, such as bearing some of the costs, designing plans that match the preferences of their employees and implementing behavioural strategies to increase employee savings, it is not without challenges.

Some employers, in particular smaller ones, may be unwilling to establish pension plans because of the costs, complexity and administrative burden involved. Moreover, workers in non-standard forms of work may have limited access to employer-sponsored plans, according to the OECD.

Policymakers must, therefore, offer guidance to optimise employer involvement in asset-backed pension arrangements.

For instance, they must reduce barriers preventing employers from establishing pension plans, provide flexibility to tailor the plan’s design within a regulatory framework that ensures non-discriminatory treatment and promote the use of behavioural strategies to foster participation and savings, among others.