On the go: Policymakers should allow for regulatory flexibility in their approach to recovery plans to make sure that people saving for retirement stay the course during the Covid-19 crisis, the OECD has recommended.
In a report published in June, the OECD warned that this flexibility is important to address “liability problems stemming from retirement promises”.
“Regulatory rules, including mark-to-market valuation principles and recovery plans, remain essential for the long term but need to be flexible during exceptional circumstances,” it stated.
Besides manifesting itself in looser compliance and oversight requirements, the OECD report stated that flexibility should include counter-cyclical defined benefit funding, as this would help to avoid “‘pro-cyclical policies’ and allow pension funds to act as long-term investors and potentially stabilising forces within the global financial system”.
In the UK, the response to the coronavirus crisis has mirrored the recommendations set out by the OECD. The Pensions Regulator has announced an easement of the time frame in which recovery plans must be submitted, as well as providing leeway for employers looking to reduce or temporarily suspend deficit repair contributions, a move designed to ease liquidity constraints.
In response to the pandemic, the watchdog also announced it would temporarily cease taking legal action against schemes that suspend cash equivalent transfer value quotations, in the hopes that limiting the number of transfers during volatile market conditions would protect both the liquidity of scheme providers and the interest of members, who might have been spooked into making unwise decisions.
“The main policy consideration when addressing the decline of asset values in retirement portfolios is to stay the course and to avoid materialising value losses by selling, given that saving for retirement is for the long haul,” the report added.
It noted that whatever the alarm many might feel about the decline in the value of their assets, selling low and buying high is “not good policy”.
The OECD cited the 2008 financial crash – from which it took just two years for the value of retirement assets to recover – to support its contention that calm and patience trumps selling in a panic.
