OECD Pensions Outlook 2012 - OECD

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