The impacts of the Covid-19 pandemic on pensions could be relatively short-lived should the global economy continue to recover, but an ageing population presents long-term challenges with no simple solutions, according to a new report from the OECD.
The OECD’s ‘Pensions at a glance 2021’ report published on Wednesday found that, internationally, pension schemes had emerged relatively well from the pandemic, with pension benefits having been protected via a range of policy interventions and regulatory easements.
Though retirement systems worldwide had to cope with new financial pressures resulting from lower contributions, largely resulting from steps taken to protect companies and individuals, governments by and large found ways to make up for these revenue losses.
What lingering effects there may be from the pandemic could be short-lived if the global economy continues to recover, the report explained, and many countries “are now showing encouraging signs, and new hiring and a return to normal working hours will help replenish the coffers of public pension systems”.
Putting pension systems on a solid footing for the future will require painful policy decisions: either asking to pay more in contributions, work longer, or receive less pensions. But these decisions will also be painful because pension reforms are among the most contentious, least popular, and potentially perilous reforms
Stefano Scarpetta and Mathilde Mesnard, OECD
“If, however, public finance pressures intensify, for example with the increasing cost of debt, and sources of savings are sought, pension spending might also be affected. Currently, it is still early to assess the situation,” it stated.
The impact on future pensioners could be more significant, although young people were particularly likely to be adversely affected by the pandemic and government lockdown policies, it continued.
Younger workers are disproportionately found in sectors hardest hit by the pandemic, and so were more likely to lose their jobs, with lost earnings one factor that may lead to reduced pension benefits in future.
The ageing problem
Stefano Scarpetta, director at the OECD Directorate for Employment, Labour and Social Affairs, and Mathilde Mesnard, acting director at the Directorate for Financial and Enterprise Affairs, noted in their foreword that the challenges of Covid-19 pale in comparison to those presented by ageing populations.
“While it is natural that the pandemic has taken centre stage in people’s and policymakers’ minds, the biggest long-term challenge for pensions continues to be providing financially and socially sustainable pensions in the future,” they said.
“Putting pension systems on a solid footing for the future will require painful policy decisions: either asking [people] to pay more in contributions, work longer, or receive less pensions. But these decisions will also be painful because pension reforms are among the most contentious, least popular, and potentially perilous reforms.”
Though several countries around the world have taken steps to address the issue, they noted that in many cases, reform packages come with political trade-offs, such as relaxed rules around early retirement. In other countries, governments backtracked and opted for gradual change instead of ambitious reforms.
Scarpetta and Mesnard advocated the use of automatic adjustment mechanisms as one part of the solution, which “have the advantage of defining the direction the systems should be heading for; deviating from that path will at least require explanations and discussions and make the trade‑offs visible”.
“The OECD analysis of countries’ experiences shows that, indeed, over the years the automatic adjustment mechanisms were sometimes suspended or even eliminated in order to avoid pension benefit cuts and retirement age increases, laid down in automatic adjustment mechanisms,” they continued.
“While suspending automatic adjustments may be a necessary step to address concerns that such adjustments could generate harsh corrections at the lower end of the income distribution, governments should be sure to have a concrete alternative plan on how to finance pension expenditures in the longer term.”
Auto-enrolment leaves the self-employed behind
The OECD report took a favourable view of auto-enrolment, which has expanded coverage so much that it now classifies as a “quasi-mandatory” system, as in Denmark, the Netherlands, Norway and Sweden.
In the UK, the report noted that coverage of private sector employees rose to 88 per cent in 2019 from 40 per cent in 2012, according to official data. Coverage in the public sector is even higher, standing at 94 per cent.
Minimum contribution rates have also increased, increasing to 8 per cent in 2019 from 3 per cent in 2012.
“The 8 per cent contribution rate will add 27.4 points to the replacement rate of 21.6 per cent from the basic pension for a person with a full career from age 22 in 2020 until the future normal retirement age of 67, earning the average wage and contributing throughout career. Hence, future pension adequacy will substantially improve,” the report stated.
OECD: Pension systems facing increased challenges after Covid-19
The pandemic-led economic crisis has compounded the challenges faced by pension systems in different countries, while also bringing new problems for governments to deal with, a new report has found.
However, it noted that coverage of the self-employed has decreased in recent years, dropping to 16 per cent in 2020 from 20 per cent in 2012.
In countries where the self-employed are not required to contribute to earnings-related pension schemes, “the relative pension level is among the lowest as the old-age pension of the self-employed is limited to first-tier benefits”, the report explained.
As a result, the relative pension of the self-employed is significantly less than half that of employees, a problem the UK shares with Mexico, Japan, Germany and the Netherlands.
