1 Funded Pensions Pension Reform in the European Union Organised by Cicero Foundation Paris, 10-11...

Funded Pensions

Pension Reform in the European UnionOrganised by Cicero Foundation

Paris, 10-11 May 2007

Pablo AntolinPrivate Pension Unit, OECD

The OECD Private Pension Unit

Part of the core mission of the Private Pensions Unit is to monitor and examine how funded pension systems contribute to delivering adequate retirement income and how they manage the risks involved.

Main issues:– Adequacy of income at retirement– Risk management

Challenges facing funded pensions

Broadening coverage.

Managing risks efficiently.

Improve governance.

Managing risks efficiently

Which risks to bear individually and which collectively? Which institutions are best for managing each type of risk? How best to manage risks (diversify, hedge, insure)?

The OECD has launched a project on assessing the impact of longevity, investment, interest rate and

inflation risks on funded pensions

The OECD has also lunched a project with the World Bank on pension fund performance

Improve governance

The OECD has produced guidelines on Governance, adopted by the OECD Council on 28 April 2005

(http://www.oecd.org/dataoecd/18/52/34799965.pdf)

(http://www.oecd.org/daf/pensions)

Broadening coverage

The OECD has launched a study with the support of the EC to better assess coverage and benefits by age, income and labour market status.

This presentation focuses on the coverage of funded pensions.

Structure of the presentation

1. What is the policy relevance of examining the coverage of funded pensions?

2. The challenges posed by the data available to estimate coverage

3. Some preliminary results

What is the policy relevance?

Recommendation (Maintaining Prosperity): diversify and broaden the sources of retirement income.

PAYG financed pension plans may not provide enough retirement income, people will need to have additional savings in funded pensions.

Funded pensions are less exposed to the impact of ageing populations that PAYG-financed pensions.

Definition of coverage

The number of people enrolled in funded pension plans as a share of the employed population.

Mandatory pensions Replacement rates– PAYG-financed (public pensions)– Funded (the Netherlands)

Voluntary funded pensions people enrolled in these plans

Gross replacement rates: PAYG

ark UK

Source: OECD, Pensions at a Glance

Gross replacement rates: Mandatory Funded Pensions

ark UK

Gross replacement rates: Mandatory plans

ark UK

Challenges posed by the data

Sources of data to calculate coverage on funded pensions:

– Administrative data

– Household survey data

Administrative data

Data from pension funds

Suffer problem of double counting– People enrolled in more than one pension plan:

occupational (401K USA) & personal (IRA USA).– Deferred members in occupational plans

Household survey data

People are interviewed directly

However, the type of questions are not always suitable– Variables indicating whether individuals receive income

from funded pension plans– Variables indicating participation, enrolment,

contributing or having assets in funded pensions.

The design of several surveys on retirement issues prevents estimating coverage

Some preliminary results

1. Coverage in occupational plans is larger than in personal plans

2. Coverage increases with age and with income

3. Full-time workers are more likely to be enrolled in funded pension plans than part-time workers

4. Coverage is much lower when considering the working age population.

TotalOccupational

plansPersonal

plansAustralia (2002) 75.0 64.6 27.8Canada (2004) 39.0 49.6

Germany1 67.9 9.5Ireland (2005Q4) 55.0 42.9 14.9United Kingdom (2004) 59.1 47.1 18.9United States (2004) 56.4 44.4 34.6

Table People participating in funded pension plans, selected OECD countries

(percentage of total employment)

Source : OECD calculations from the survey on Household, Income and Labour Dynamics in Australia (HILDA), the Canadian Survey of Labour and Income Dynamics (SLID), the German Socio-Economic Panel (GSOEP), the Irish Quarterly National Household Survey (QNHS), the British Household Panel (BHPS), and the United States Panel Study of Income Dynamics (PSID).

Notes: 1. The total includes life insurance an pension plans for the year 2002, while the number on occupational plans is the Riester pensions as of 2004.

Coverage in funded pensions by AGEC

8020-2

Source: OECD, Private Pension Unit

Coverage in funded pensions by INCOMEC

and Irel

1 2 3 4 5 6 7 8 9 10Income decilesSource: OECD, Private Pension Unit

Coverage in funded pensions by LMK Status

GermanyUnited Kingdom

United States

Part-time

Full-time

Part-time

Full-time

Part-time

Full-time

Source: OECD, Private Pension Unit

Summing up

It is important to examine the coverage in voluntary funded pensions in order to assess their complementary role to mandatory plans and to gauge the diversification of income at retirement.

Coverage in voluntary funded pension plans is non-negligible but it could be extended.

Coverage increase with age and with income.

Future work

Assess policy options to increase coverage:– Should it be increased? Yes for young and lower

income people

Is compulsion an option? UK and New Zealand have just introduced compulsion.

Assess replacement rates from voluntary funded pension plans.

THANK YOU!

pablo.antolin@oecd.orghttp://www.oecd.org/daf/pensions

1 Funded Pensions Pension Reform in the European Union Organised by Cicero Foundation Paris, 10-11...

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