Policymakers need to consider reforms to help older workers find, and keep, jobs, in an environment where pension systems are under increasing stress, says the Organization for Economic Co-operation and Development (OECD).
In OECD Pensions Outlook 2014, the Paris-based group says that the economic environment is contributing to the pressure on pensions. It says that low growth, low interest rates, and low returns on investment, “are now compounding the problems of population aging” for both public and private pensions.
This, in turn, has pushed many countries to speed up reforms to make their pension systems more financially sustainable, it says. This includes raising taxes on pension income and pension contributions, reducing or deferring the indexation of pension benefits, and increasing the statutory retirement age. But, the report also finds that ensuring that people extend their careers “to ensure an adequate retirement and that the financial burden is more fairly shared across generations remain key challenges.”
“It’s encouraging to see the progress made in recent years to make pension systems more sustainable and adequate,” said OECD secretary-general, Angel Gurría. “But the ongoing rapid demographic shift and the slowdown in the global economy highlight the need for continuing reforms. We must communicate better the message that working longer and contributing more is the only way to get a decent income in retirement.”
The OECD says that increasing the effective retirement age can help, but that more efforts are needed to assist older workers find and retain jobs too. It recommends public policies to reduce age discrimination, improve working conditions, and increase training opportunities for older workers.
The report also calls for measures to increase coverage in countries where funded pensions are voluntary. For example, it says that auto-enrollment programs have been successful in raising coverage in voluntary savings programs.
And, it says that policymakers should strengthen their regulatory frameworks to help pension funds and annuity providers deal with the uncertainty around improving life expectancy. It argues that regulators should make sure that providers use regularly updated mortality tables, which incorporate future improvements in mortality and life expectancy.
Finally, the report calls for improvements to transparency, standardization and liquidity requirements for investment instruments that are being created to hedge longevity risk. “The regulatory framework will also need to reflect the reduction of risk exposure these instruments offer by ensuring they are appropriately valued by accounting standards and lowering the level of required capital for entities hedging their longevity risk,” it says.
“Issuing longevity bonds and publishing a longevity index to serve as a benchmark for the pricing and risk assessment of hedges would support the development of longevity instruments,” it adds.