Workers’ Capital News - Oct. 24

In this issue:

Pensions and Investments

OECD Working Papers on Defined Contribution Pensions and the Role of Pension Funds in Financing Green Growth

Two new papers, on “The Role of Pension Funds in Financing Green Growth Initiatives” and “The Role of Guarantees in Defined Contribution Pensions”, have recently been published in the OECD Working Paper Series on Finance, Insurance and Private Pensions. The Working Paper series highlights industry developments, structural issues and public policy in the financial sector, including insurance and private pensions.

Acknowledging that transitioning to a “green economy” over the next twenty years will require greater financing from private sources of capital, “The Role of Pension Funds in Financing Green Growth Initiatives” examines current initiatives to support and encourage pension funds in helping finance green growth projects. The paper also delineates the obstacles in green investing and potential solutions, as well as vehicles for green investing by pension funds. In addition, suggestions are outlined on the role of governments, and pension fund regulatory and supervisory authorities in assisting green investment by pension funds. Policy recommendations cited by the paper include: providing education and guidance to investors and improving pension fund governance.

“The Role of Guarantees in Defined Contribution Pensions” explores the role of guarantees in DC (defined contribution) pension plans, focusing on minimum investment return guarantees during the accumulation phase. Primarily, the paper looks to assess the costs and benefits of different return guarantees.  It also includes policy recommendations, the main one being that regulators and policy makers should carry out a cost-benefit analysis of capital guarantees, especially in mandatory DC plans, which make up a large part of retirement income.

UK Government Delays Increase in State Pension Age

The UK government has recently announced new legislation that will delay the planned extension in the state pension age. Investment & Pensions Europe reports that, amid criticisms particularly about the “raw deal” facing approximately quarter of a million women who have to wait an extra two years to retire, the government has decided to cap the increase in women’s working lives at 18 months. Secretary of State for Work and Pensions, Iain Duncan Smith, stated that the Pensions Bill, which is set to receive a third parliamentary hearing, will be amended, in order to ensure that it does not overburden those who are making their transition into retirement. Prior to the amendment, the Bill proposed increasing the state pension age for women to 65 by November 2018, and to 66, for men, by April 2020.

The delay in these expected rises was welcomed by the National Association of Pension Funds(NAPF), but NAPF chief executive, Joanne Segers, has also stated that this move has “not go(ne) far enough.” The NAPF has suggested that government make no future alterations to the state pension age before 2020, and that any changes should be accompanied by cultural, economic and legal factors that allow people to work longer. A generous state pension should be provided, according to the NAPF, if working lives are lengthened.

Netherlands tops Global Pensions Index, but Pension Reforms Worldwide Still Required

According to the 2011 Melbourne Mercer Global Pensions Index, the Netherlands, Australia and Switzerland have been ranked as having the best pension systems in the world. However as reported by Global Pensions, Mercer’s research also highlights the need for pension reforms in all 16 of the countries surveyed to support rapidly aging populations.

The Index, in its third year, assessed countries on a weighted, quantified measure, according to adequacy, sustainability and integrity. Countries surveyed included the Netherlands, Australia, Switzerland, the US, Canada, Sweden, Poland, Brazil, Japan and Germany, as well as new entrants to the index, India and China. With a score of 77.9 out of 100, the Netherlands topped the list for the third time in a row, while India and China, with scores in the low 40s rated below the average of 60.5. Australia leaped forward from a fourth place ranking last year to second this year, after heightening its net household savings rate and increasing the size of the age pension.

Disparities in scores reveal varied stages of development among countries’ social security systems, differing demographic factors, and the diverse effects of the global financial crisis. The volatility in equity markets due to the crisis did not have a uniform impact on countries, as those with higher exposure to equities were more acutely affected.

Though none of the countries attained an “A” grade according to the methodology, top ranking countries which garnered a “B+”, such as the Netherlands and Australia, feature pension systems with wide coverage, where long-term risks and costs are spread among governments, employers and individuals. Mercer senior partner and report author, David Knox, has stated that a main aim of the index is to offer a comparative understanding of pension systems worldwide, and a better insight into best practices.

Dutch Political Youth Launch “Pensions Rebellion”

According to Investment & Pensions Europe, five mainstream political youth branches have launched a “Pensions Rebellion” against the Netherlands’ recent Pensions  Agreement, claiming that overly liberal indexation and excessively optimistic assumptions on returns, have placed an unbalanced financial burden on younger generations.

Though social affairs minister, Henk Kamp, made assurances in September of a pension deal that would be equitable in dividing benefits and burdens between younger and older generations during the parliamentary debate on the Agreement, youth organizations from several political parties have argued that the pensions contract has failed in this respect. These organizations, which include the green party GroenLinks, the labour party PvdA, the liberal democrat party D66, the liberal party VVD and the conservative party SGP, have pointed to statistics that pensioners obtain about 85% of their last salary, while employees in their 30s and 40s currently receive benefits that do not exceed 55%.  Arguing for a  revision of the Pensions Agreement, youth protestors have issued a manifesto calling for pension funds to desist grant indexation, to cease discounting against predicted returns, and to cut benefits in accordance with their financial position. The protestors are also advocating for an end to average pension contributions, a quicker increase of the retirement age of the state pension, and a replacement of mandatory participation in a pension fund with a general responsibility to provide for a pension. Through these reforms, the “Pensions Rebellion” is seeking to secure a “generation-proof” pensions deal.



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