Pension systems have improved but there’s more to be done

OECD report says focus must be on delivering returns

Pension systems have improved but there’s more to be done
Steve Randall

Pension systems across the OECD member nations including Canada have improved in their financial stability; but they now need to ensure people have an adequate retirement income.

The OECD said Monday that governments are facing growing challenges from an aging population, low returns on retirement savings, low growth, less stable employment careers and insufficient pension coverage among some groups of workers.

These challenges are eroding belief that pensions will provide enough income for comfortable living in retirement.

“Pension reform remains a continuing challenge as countries need to ensure people get an adequate pension while remaining affordable,” said OECD Secretary-General Angel Gurría, launching the report in Paris.

Canada ranks 6th among OECD nations for the share of earnings an individual average worker can expect to receive from the mandatory pension program. The average annual contribution is also among the lowest (around 10% in 2017 compared to more than 30% in Italy).

Canada is also among the top 5 for total assets in funded and private pension arrangements at around 150% of GDP.

The OECD Pensions Outlook 2018 calls for governments to consider some key issues:

  • Combining funded and pay-as-you-go pensions, automatic mechanisms, and a strong safety net for pensioners improves retirement outcomes.
  • To improve the design of financial incentives to save for retirement, tax rules should be straightforward, stable and consistent across all retirement savings plans. Aligning charges levied by pension providers on scheme members with the cost of managing retirement savings requires better disclosure, pricing regulations and structural solutions.
  • The regulatory and legal frameworks of pension funds should be at arm’s length from government. Pension funds should have clearly stated missions to guide investment policy; an oversight board that is accountable to the competent authorities and to members; and transparency about their governance arrangements and their investment and risk management to keep them accountable to different stakeholders.
  • Automatic features, default options, simple information and choice, financial incentives and financial education can result in better retirement outcomes, given that low levels of financial knowledge and behavioural biases can lead people to make unsuitable decisions for retirement.
  • Increased flexibility around retirement age and progressive public pensions and tax rules partly address financial disadvantages in retirement of population groups with shorter life expectancy. Policies to improve the sustainability of pension systems in light of increases in life expectancy will need to consider how those in different socioeconomic and gender groups may be affected.
  • Survivor pensions still play an important role in smoothing living standards after a partner’s death. However, they should not redistribute from singles to couples or limit incentives to work.