OECD Pensions Outlook 2012 - OECD

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Foreword......Page 5 Table of Contents......Page 7 Editorial......Page 13 Executive Summary......Page 17 Chapter 1. Pension Reform During the Crisis and Beyond......Page 21 1.1. Introduction......Page 22 1.2. Objectives of the pension system......Page 23 1.4. Coverage......Page 24 Table 1.1. Overview of pension-reform measures, September 2007-February 2012......Page 25 1.6. Indexation......Page 27 1.7. Pensionable ages......Page 28 Figure 1.3. Normal pension ages by sex, 1949-2050......Page 29 Figure 1.4. Life expectancy at age 65 by sex, 1960-2050......Page 30 1.8. Work incentives......Page 31 1.10. Administrative efficiency......Page 32 1.12. Other reform measures......Page 33 1.13. Conclusions......Page 34 References......Page 35 Table 1.A1.1. Details of pension-reform measures, September 2007-February 2012, by primary objective......Page 37 Chapter 2. Putting Pensions on Auto-pilot: Automatic-adjustment Mechanisms and Financial Sustainability of Retirement-income Systems......Page 47 2.2. Defining financial sustainability......Page 48 2.2.1. Sustainable rates of return on PAYG schemes......Page 49 Box 2.1. The Aaron-Samuelson framework in practice......Page 50 2.2.2. Pay-as-you-go equilibrium......Page 51 Figure 2.1. Difference between public pension contribution revenue and pension expenditure, percentage of GDP, 2007 and 2060......Page 52 Figure 2.2. Ratio of pension expenditure to pension contribution revenue, percentage of GDP, 2007-2060......Page 53 2.3. Targets, instruments and mechanisms for implementation of automatic adjustment mechanisms......Page 54 2.3.1. The adjustments of benefit levels......Page 55 Figure 2.3. Life expectancy at age 60 and 65 by sex, OECD average, 1960-2050......Page 56 Table 2.1. Different ways of linking pension benefits automatically to life expectancy......Page 57 Box 2.2. Linking pensions to life expectancy: notional defined contribution pension systems (NDC) in Italy, Sweden and Poland......Page 58 Box 2.3. Relations between different types of pension schemes......Page 61 Figure 2.4. Impact of indexation practice on real value of pensions in payment......Page 62 Table 2.2. Life expectancy and annuity factors: Baseline data for 2010 and alternative projections for 2050......Page 64 Figure 2.5. Pension entitlements under different life-expectancy scenarios: Man with average earnings......Page 65 2.3.2. Pensionable age and other eligibility criteria......Page 66 2.3.3. Contribution rates......Page 67 2.4. Automatic adjustment mechanisms and the use of a buffer fund......Page 68 Figure 2.6. Assets in public pension reserves, 2010, per cent of GDP......Page 69 2.5. Implications for financial sustainability......Page 70 2.6. Political economy of automatic adjustment mechanisms......Page 72 2.7. Summary and conclusions......Page 74 Notes......Page 75 References......Page 77 Chapter 3. Reversals of Systemic Pension Reforms in Central and Eastern Europe: Implications for Pension Benefits......Page 79 3.1. Introduction......Page 80 3.2.1. The defined-contribution component......Page 81 3.2.2. Publicly provided components......Page 82 3.2.3. Gross pension replacement rates......Page 83 Figure 3.1a. Gross replacement rates by earnings and component of the pension system, before reversal: OECD countries......Page 84 Figure 3.1b. Gross replacement rates by earnings and component of the pension system, before reversal: Non-OECD, EU countries......Page 85 3.2.5. Distributional impact of systemic pension reforms......Page 86 Figure 3.3. Impact of systemic reforms on pension entitlements by earnings......Page 87 Table 3.2. Structure of the retirement-income package after systemic pension reform......Page 88 3.3.1. Switching behaviour......Page 89 Figure 3.4. Switching behaviour: Percentage of employees choosing mixed public/private provision by age......Page 90 3.3.2. Implications......Page 91 Figure 3.5a. Total value of benefits from public and mandatory private pensions before reform reversals: OECD countries......Page 92 Figure 3.5b. Total value of benefits from public and mandatory private pensions before reform reversals: Non-OECD, EU countries......Page 93 Table 3.5. Switching and reform reversals: Gross pension replacement rates......Page 94 3.4.2. Potential impact on entitlements of actual reversal policies......Page 95 Table 3.6. Switching and reform reversals: Lifetime values of contributions and pension benefits......Page 96 3.5. Conclusions......Page 97 Notes......Page 98 References......Page 100 Chapter 4. Coverage of Private Pension Systems: Evidence and Policy Options......Page 101 4.1. Introduction......Page 102 Figure 4.1. Net pension replacement rates from PAYG pension systems for average and low earners......Page 103 4.3. Coverage of funded/private pensions in OECD countries......Page 104 Box 4.1. Different measures of coverage......Page 105 Coverage rate of private pension plans in selected OECD countries using different reference populations......Page 106 Table 4.1. Coverage of private pension schemes by type of plan, 2010......Page 107 Figure 4.2. Net pension replacement rates from PAYG and mandatory private pension systems for average earners......Page 108 Figure 4.3. Slovak Republic: Coverage rate of private pension funds before and after the reform......Page 109 4.4. Assessment of the coverage of private pensions in 8 OECD countries......Page 110 4.4.1. Coverage rates of private pension plans by socio-economic characteristics......Page 111 Figure 4.4a. Coverage rate of private pension plans according to age......Page 112 Figure 4.4b. Coverage rate of private pension plans according to age......Page 113 Figure 4.5a. Coverage rate of private pension plans according to income......Page 114 Figure 4.5b. Coverage rate of private pension plans according to income......Page 115 Figure 4.7. Coverage rate of private pension plans according to the type of employment......Page 116 4.5.1. Compulsory enrolment......Page 117 4.5.2. Automatic enrolment......Page 118 Figure 4.9. Italy: Coverage rate of private pension funds before and after auto-enrolment......Page 119 4.5.3. Financial incentives......Page 120 Table 4.4. Most important motivations and barriers to membership......Page 121 Figure 4.10. Germany: Coverage rate of private pension plans according to the income of the household and the type of plan, December 2008......Page 122 4.5.4. Financial education......Page 123 4.5.5. Facilitating and simplifying provision, access and choice......Page 124 4.5.7. Disincentives created by means-testing......Page 125 4.6. Conclusions......Page 126 Notes......Page 128 References......Page 129 Chapter 5. The Role of Guarantees in Retirement Savings Plans......Page 131 5.1. Introduction......Page 132 5.2. Guarantees in pension systems......Page 133 5.2.1. Public pension automatic stabilisers and old-age safety nets......Page 134 5.2.2. Investment return guarantees......Page 136 5.3. Costs and benefits of minimum return guarantees in retirement savings plans......Page 138 5.3.1. Types of guarantees considered......Page 139 Table 5.1. Description of the minimum return guarantees analysed......Page 140 Table 5.2. Price of guarantees by type of guarantee and by approach considered to pay the guarantee fee......Page 142 Table 5.3. Median cost of the guarantee by type......Page 143 Figure 5.3. Shapes of the different life cycle investment strategies analysed (LC80, LC50, LC20)......Page 145 5.3.3. What is the impact of different guarantees on retirement income outcomes?......Page 146 Table 5.7. Probability distribution of replacement rates by type of guarantee......Page 147 Table 5.8. Impact of the investment strategy and of the length of the contribution period on the probability that the guarantee would be exercised and on the replacement rate at the 5th percentile......Page 148 5.3.4. Summary of cost-benefit analysis of return guarantees......Page 149 5.4.1. Are return guarantees and individual choice compatible?......Page 150 5.4.2. Who should provide the guarantee and how should providers be regulated?......Page 151 5.5. Conclusion and policy recommendations......Page 152 Notes......Page 154 References......Page 155 Annex 5.A1. Formal Description of the Different Types of Guarantees Analysed......Page 157 Chapter 6. A Policy Roadmap for Defined Contribution Pensions......Page 161 6.1. Introduction......Page 162 6.3. Policy messages for better DC pension plans......Page 163 Box 6.1. To what extent are DC contribution rates consistent with the size of public pension systems......Page 164 Public pension gross replacement rate vs. DC contribution rate......Page 165 6.3.2. Ensure effective communication and address financial illiteracy and lack of awareness......Page 168 6.3.3. Encourage people to contribute and contribute for long periods......Page 169 Figure 6.1. Contribution and replacement rates......Page 170 Table 6.1. Contribution rates needed to achieve a certain target replacement rate – deterministic case......Page 171 Table 6.2. Distribution of retirement income relative to final wages......Page 172 Figure 6.3. Contribution rates linked to age......Page 173 6.3.4. Improve the design of incentives to save for retirement to increase contributions and coverage......Page 174 Figure 6.4. Incentives of tax deductions, tax credits and matching contributions by income......Page 175 Figure 6.5. Incentives of adding matching contributions to tax deductions by income......Page 176 Table 6.3. Comparison of fee levels and impact on benefits......Page 177 6.3.6. Consider the pros and cons of investment guarantees......Page 178 Table 6.4. Cost of minimum return guarantees for a 40-year contribution period......Page 179 6.3.7. Establish default investment strategies with appropriate risk exposure......Page 180 6.3.8. Establish life-cycle investment strategies as defaults......Page 181 Table 6.5. Estimated probability that pension benefits based on life-cycle strategies will be higher than those based on a fixed portfolio strategy for two different contribution periods......Page 182 6.3.9. Combine programmed withdrawals with deferred life annuities indexed to inflation as the default option for the pay-out phase......Page 183 Figure 6.7. Accumulated retirement income for different payout arrangements according to life expectancy at 65......Page 185 6.3.10. Promote cost-efficient competition in the annuity market......Page 186 6.3.11. Promote the demand for annuities......Page 187 6.3.12. Facilitate the supply of annuities by further developing risk-hedging instruments......Page 188 Figure 6.8. Longevity swaps......Page 190 6.4. Conclusion......Page 191 Notes......Page 192 References......Page 194 Statistical Annex......Page 197 Figure A.2. Private pension plan: Institutional perspective......Page 199 Table A1. Men’s pensionable age in OECD countries, 1949-2050......Page 200 Table A2. Women’s pensionable age in OECD countries, 1949-2050......Page 202 Table A3. Life expectancy at normal pension age in OECD countries, men, 1958-2050......Page 204 Table A4. Life expectancy at normal pension age in OECD countries, women, 1958-2050......Page 205 Table A5. Gross pension replacement rates from mandatory pensions (public and private) by earnings......Page 206 Table A6. Gross pension replacement rates from public, mandatory private and voluntary private pension schemes......Page 207 Table A7. Net pension replacement rates from mandatory pensions (public and private) by earnings......Page 208 Table A8. Net pension replacement rates from public, mandatory private and voluntary private pension schemes......Page 209 Table A9. Income poverty rates......Page 210 Table A10. Income sources, mid-2000s......Page 211 Table A11. Projections of public expenditure on pensions, 2010-2060......Page 212 Table A12. PAYG and funded (pension funds only) pension contributions and expenditures......Page 213 Table A13. Private pension assets by type of financing vehicle in selected OECD countries, 2001......Page 214 Table A14. Private pension assets by type of financing vehicle in selected OECD countries, 2010......Page 215 Table A15. Relative shares of DB, DC and hybrid pension fund assets in selected OECD countries, 2001......Page 216 Table A16. Relative shares of DB, DC and hybrid pension fund assets in selected OECD countries, 2010......Page 217 Table A17. Total investment of pension funds in OECD and selected non-OECD countries, 2001-2010......Page 218 Table A18. Total investment of pension funds in OECD and selected non-OECD countries, 2001-2010......Page 220 Table A19. Pension funds’ portfolio allocation in selected OECD countries, 2001......Page 222 Table A20. Pension funds’ portfolio allocation in selected OECD countries, 2010......Page 224 Table A21. Pension funds’ real net investment return in selected OECD countries, 2002-2010......Page 226 Table A22. Pension funds’ total contributions in selected OECD countries, 2002-2010......Page 227 Table A23. Pension funds’ total benefits in selected OECD countries, 2002-2010......Page 228 Table A24. Number of pension funds in selected OECD countries, 2001-2010......Page 229 Table A25. Assets in public pension reserve funds in OECD and selected non-OECD countries, 2001-2010......Page 230 Table A26. Assets in public pension reserve funds in OECD and selected non-OECD countries, 2001-2010......Page 231 Table A27. Public pension reserve funds’ portfolio allocation in selected OECD countries, 2010......Page 232