Longevity remains the key factor affecting the sustainability of public and private pension systems around the world, according to an influential new report.
The Organisation for Economic Co-operation and Development (OECD) today published the latest iteration of its Pensions Outlook report, looking in detail at the issues affecting public and private pension provision in its 34 member countries. The OECD said pension policymakers had yet to fully confront the effects of demographic change, the economic crisis, and falling consumer confidence in pension provision.
Since the last report in February 2012, the OECD said there had been a surge in activity by policymakers to improve the sustainability of pension systems, including raising retirement ages and increasing contributions—but the report warned that “much work remains on the agenda”.
The OECD called for policymakers to strengthen their regulations to assist pension funds and annuity providers in dealing with longevity risk—failure to properly account for this risk could mean shortfalls of more than 10% of liabilities, the body warned. Improving the liquidity and transparency of capital markets could be an important step, the organisation said, as it would pave the way for the introduction of usable longevity bonds or indices to aid hedging of this risk.
Pablo Antolin, principal economist and head of the private pension unit at the OECD, said it would take “many years” to embed changes being made now, and added that “further measures will be required to strengthen private pensions, increase coverage and contributions, and reinstate public trust”.
The OECD’s report also highlighted a range of other factors for policymakers to improve, including communication campaigns and pension statements, introducing compulsion into auto-enrolment regimes, and improving conditions for older workers.
“Balancing sustainability and adequacy, diversification between public and private pensions, tackling the high costs of running funded private pensions, the conflicts of interest of pension advisers, and improving the structure of the pay-out phase of defined contribution pensions by encouraging annuity products, are yet to be addressed,” the OECD’s report stated.
Just as the OECD flagged up its longevity concerns, a UK research project has today published a new longevity methodology that its commissioners claim will allow index-based longevity swaps to be built and executed quicker and cheaper, opening up access to this hedge for smaller pensions.
The project was commissioned by the Institute and Faculty of Actuaries and Life and Longevity Markets Association, and carried out by Hymans Robertson and Cass Business School.
Andrew Gaches, partner at Hymans Robertson, said he hoped the new methodology would improve understanding and hedging of longevity risks, while potentially turning longevity swaps into a mainstream product.
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