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Funded Pensions

Funded Pensions. Pension Reform in the European Union Organised by Cicero Foundation Paris, 10-11 May 2007 Pablo Antolin Private Pension Unit, OECD. The OECD Private Pension Unit.

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Funded Pensions

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  1. Funded Pensions Pension Reform in the European Union Organised by Cicero Foundation Paris, 10-11 May 2007 Pablo Antolin Private Pension Unit, OECD

  2. 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

  3. Challenges facing funded pensions • Broadening coverage. • Managing risks efficiently. • Improve governance.

  4. 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

  5. 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)

  6. 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.

  7. Structure of the presentation • What is the policy relevance of examining the coverage of funded pensions? • The challenges posed by the data available to estimate coverage • Some preliminary results

  8. 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.

  9. 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

  10. Gross replacement rates: PAYG Source: OECD, Pensions at a Glance

  11. Gross replacement rates: Mandatory Funded Pensions Source: OECD, Pensions at a Glance

  12. Gross replacement rates: Mandatory plans Source: OECD, Pensions at a Glance

  13. Challenges posed by the data • Sources of data to calculate coverage on funded pensions: • Administrative data • Household survey data

  14. 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

  15. 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

  16. Some preliminary results • Coverage in occupational plans is larger than in personal plans • Coverage increases with age and with income • Full-time workers are more likely to be enrolled in funded pension plans than part-time workers • Coverage is much lower when considering the working age population.

  17. Coverage in funded pensions by AGE Source: OECD, Private Pension Unit

  18. Coverage in funded pensions by INCOME Source: OECD, Private Pension Unit

  19. Coverage in funded pensions by LMK Status Source: OECD, Private Pension Unit

  20. 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.

  21. 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.

  22. THANK YOU!pablo.antolin@oecd.orghttp://www.oecd.org/daf/pensions

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