Private Pensions and Policy Responses to the Financial and Economic Crisis
The financial turmoil and the ensuing economic crisis have had a major impact on private pension assets. The current economic and financial crisis has reduced the value of assets accumulated to finance retirement by around 20-25% on average according to the latest OECD figures. However, there is large variability across countries, varying from positive but small returns in some countries to falls over 30% in Ireland and the United States (Annex).
This variability is explained in part by differences in portfolio compositions, as well as the regulatory environment (OECD Private Pension Outlook, 2008). Additionally, the increase in unemployment stemming from current economic conditions will reduce the amount of pensions’ savings, which will negatively affect future retirement incomes.
The crisis is also causing a shift in asset allocation patterns, with investors moving into more conservative investments – a trend which has been noted by pension regulators in OECD countries such as Norway, Slovakia, Spain and Turkey and in other areas (e.g. Kenya, Bulgaria, and Costa Rica – where domestic investments have increased). Such moves risk locking in portfolio losses and could also reduce the potential of funds to generate retirement incomes in future. For the longer term, regulators expect conservative investment strategies to set in as “bad outcomes”, as the one experienced in 2008, will have more weight in long-term strategies than in the recent past.
The fall in the value of assets accumulated for retirement affects on one hand the solvency of pension plan sponsors and the funding levels of plans providing defined benefit (DB) pensions. On the other hand, it reduces the amount of money that individuals have accumulated in defined contribution (DC) pension plans to finance their retirement.