The Organisation for Economic Co-operation and Development (OECD) has called for policy changes after pension funds around the world lost one fifth of their assets – equivalent to $US 3.3 trillion – in 2008.
By October, pension assets of funds in OECD countries had plunged by nearly 20 per cent (22 per cent in real terms) relative to December 2007. Including other private pension assets, such as those held in Individual Retirement Accounts in the US and similar personal pension plans in other countries, the losses increased to about $US5 trillion.
“Most of the loss is accounted for by pension funds in the United States ($US2.2 trillion out of the total OECD loss of $US3.3 trillion) as they account for more than half of all OECD countries” pension fund assets and had the second worst investment performance,” the OECD noted in its latest issue of Pension Markets in Focus.
Irish pension funds, which performed the worst, were the most exposed to equities (see “No luck for Irish funds”, Top1000Funds.com), followed by the US, the UK and Australia. In absolute terms, the UK posted the second largest loss ($US0.3 trillion), followed by Australia ($0.2 trillion).
The OECD said that even before the crisis there had been warnings about the need to reform private pensions.
The organisation is now calling for greater expertise and knowledge on pension fund boards and the appointment of independent experts. Good governance has particularly been a problem for smaller funds, making a strong case for consolidation of the industry in some countries, it said.
The defined benefit (DB) pension plan policies have actually exacerbated the downward spiral in assets in many countries, the OECD said. Some funds have been forced to sell at inopportune times in order maintain asset to liability ratios, and because of the major role pension funds play in some markets, this has had the effect of driving down prices even further.
The organisation has also called for better policy design for the pay-out phase of defined contribution (DC) systems. “Some of the default and mandatory arrangements in place are far from safe,”Â the OECD said.
The OECD added that to keep up with pension funding requirements after disappointing investment returns, many companies may be forced to increase their contributions to DB pension funds, which were already quite high as a result of recovery plans implemented after the 2000-02 stock market declines.
Some regulators have considered giving pension funds and their sponsoring employers more time to allow funding to return to target levels in order to avoid further strain on employers when the general economic situation is deteriorating.
For defined DC plans, the OECD believes there is going to be greater policy focus on appropriate default mechanisms and the design of “autopilot”Â funds (such as target-date or lifestyle funds) that shift towards lower risk investments as retirement date approaches without the member having to intervene.
In the context of the financial crisis and the rapid growth of DC plans, effective financial education programmes will also become more important to the proper functioning of the private pension system, the OECD said.