GLOBAL TRENDS IN PENSION POLICIES AND REGULATIONS

Transcription

1 GLOBAL TRENDS IN PENSION POLICIES AND REGULATIONS Pablo Antolin Principal economist and Head OECD Private Pensions Unit, Deputy Head OECD Financial Affairs Division

2 Structure of the talk 1. A global snapshot of pensions Challenges facing pension systems Changing pension landscape Growth of DC pension arrangements (e.g. superannuation): strengths and weakness Need to introduce improvements: OECD Roadmap for the Good Design of DC Pension Plans 2. Financial incentives and retirement savings 3. Investment governance and ESG integration 2

3 Challenges facing pension systems Pension systems (PAYG DB, funded DB and DC, whether voluntary or mandatory) face many challenges Population ageing: financial sustainability, solvency and adequacy Financial and economic crisis Economic environment characterised by low interest rates, low returns, and low growth Less resources to finance retirement 3

4 Population ageing: implications Differentiate btw baby boom (temporary) and improvements in life expectancy (permanent?) Baby boom: costs already incurred Life expectancy: account for it, problem with uncertainty about future improvement (longevity risk) Higher dependency ratio means Intense fiscal pressures on PAYG DB pensions: sustainability problems More years in retirement to be financed (relative to years saving for retirement) Solvency problems for fund DB pensions Adequacy problems for DC pension 4

5 Economic environment low interest rates, low returns, and low growth Low internal returns in PAYG schemes (wage growth), which raises (compounds) financial sustainability issues Loss of confidence in private pensions, mistrust that public pensions will deliver promises Low financial returns generate retirementincome adequacy concerns, especially on DC Funded DB pensions and insurance companies providing promises (e.g. annuities) may be in trouble as their long-term promises cannot easily be adjusted and the assets backing those promises may lose value 5

6 Consequences and changes Changing pension landscape: more diversified and balanced Reforms of PAYG public pensions => lower role of PAYG public pensions in financing retirement A shift from DB pension arrangements (based on a promise) to DC pension arrangements (direct and straight-forward link between contributions and pension benefits) 6

7 Changing pensions landscape: more diverse and balanced Increased role of funded pensions: pension arrangements in which assets back pension benefits In line with OECD long standing policy messages: Diversification of the sources to finance retirement Encourage funded pensions to complement PAYG public pensions 7

8 Greece Lux Turkey Hungary Belgium Austria Germany Slovenia Czech Poland Italy France Norway Portugal Slovak Latvia Spain Estonia Mexico N Zealand Korea Japan Israel Ireland Finland Chile Sweden UK Australia Switzerland USA Iceland Canada Netherlands Denmark The growing importance of funded pension (assets as % GDP) Source: OECD, Global Pension Statistics 8

9 The growing importance of funded pension arrangements (assets as % GDP) 13 countries more than 50% of GDP, up from 10 in countries more than 100% of GDP, up from 4 in

10 Increased role of DC pension arrangements The growth in funded pension arrangements comes mainly from arrangements in which there is a direct and straightforward link between contributions, assets accumulated and pension benefits (DC pensions) Advantages: direct link, incentives and no generosity problems 10

11 DCs are here to stay, have advantages, but also disadvantages Disadvantages: Retirement income is uncertain Burden shifted to individuals They put more of the risks of saving for retirement (e.g. investment and longevity risk) onto individuals Individuals need to take decisions on how much to save and for how long, how to invest, and how to allocate the resources available to finance retirement They may not be the best prepared to take them Individuals have low financial knowledge They suffer from behavioural biases (present bias, loss aversion, procrastination, inertia, use simple heuristics, overconfidence, overextrapolation, use simple rules of thumb, framing) 11

12 DCs are here to stay, but we need to improve their design Challenges facing pensions have created a problem of adequacy (current contribution levels and contribution periods may not bring about as high retirement income as expected) The question is then, given all those problems: ageing, environment of low growth and returns, low financial knowledge, and behavioral biases How can pensions deliver pension income which it is up to people s expectations? 12

13 Improve design the design of DC pension arrangements OECD Roadmap Good Design of DC Pension Plans (leaflet) Issues we need to deal with Contribute more and for longer, How? Compulsion vs voluntary, Improve the functioning of financial incentives Use and design of defaults, as well as nudging Tackling the costs of running private pensions Improve design of the accumulation phase Improve structure retirement phase of DC plans 13

14 One of the key messages for Australia Encourage annuitization as protection against longevity risk The main goal of saving for retirement and pensions is to have a stream of income during retirement that protects individuals against the risk of outliving their resources (LR) Life annuities provide protection against LR, but illiquid, rigid and individuals dislike them (use of framing?). Different products with different options (expensive, risk management) Drawdown programs (account based pensions) provide flexibility and liquidity, but lack protection from LR OECD recommends to combine account based pensions with deferred life annuities (e.g. age 85). This strikes a balance between flexibility, liquidity and protection from LR (tail risk). At least as a default. 14

15 FINANCIAL INCENTIVES AND RETIREMENT SAVINGS

16 Financial incentives and retirement savings OECD project: monograph publish next fall Stock-taking of the tax treatment of retirement savings across OECD countries, and assessment Does the tax treatment provides an advantage to individuals? Cost to the treasury Impact on participation and higher savings Policy issues: Use of matching contribution (focus). Cost efficient. 16

17 Tax treatment of retirement savings: EET is the most common, but not in Australia EEE Bulgaria, Slovak Republic ETE Cyprus TEE Czech Republic, Hungary, Lithuania, Luxembourg, Mexico EET Canada, Chile, Croatia, Estonia, Finland, Germany, Greece, Iceland, Ireland, Japan, Latvia, Netherlands, Norway, Poland, Romania, Slovenia, Spain, Switzerland, United Kingdom, United States ETT Denmark, Italy, Sweden TET Austria, Belgium, France, Israel, Korea, Malta, Portugal TTE Australia, New Zealand, Turkey 17

18 Taxation of contributions, returns and pension income Figure hides heterogeneity that exist within countries on the tax treatment of contributions, returns on investment and pension income Tax treatment contributions may change according to source of the contribution (employee or employer); their mandatory and voluntary nature ; and the type of plan (occupational, personal). In many countries people not paying income taxes do not get any relief on their contributions Most countries exempt from taxation returns on investment (not Australia). When returns are taxed, tax rates may vary according to the duration of investment (Australia), type of assets (Italy), or the income level of the plan member (New Zealand) The tax treatment of pension income is usually identical across different types of pay-outs. Annuities are incentivised in only 2 countries (Czech Rep., Estonia). Lump-sums are tax-free up to a certain amount or only partially taxed in many countries (goal is to reach a neutral tax treatment across different pay-outs). 18

19 Other forms of financial incentives Complexity of the tax system has led some countries to introduce more direct financial incentives to encourage participation and contributions, especially for lower income people: tax credits (USA), matching contributions from the State or from the employer (AUS, AUT, CHL, CRO, CZE, HUN, ISL, ITA, LTU, MEX, NZL, TUR, GBR, USA) and state flat-rate subsidies (Chile, Germany, Mexico) 19

20 Policy question 1 Does the tax treatment of retirement savings in different OECD countries provides an advantage when people save for retirement? (OECD Pensions Outlook 2016, Chapter 2) Tax advantage: the amount that an individual would save in taxes paid during their working and retirement years by contributing the same pre-tax amount to a private pension plan instead of to a benchmark savings vehicle Australia shows a generous tax treatment of retirement saving when compared wit other countries 20

21 Size of the overall tax advantage in OECD countries (average earner, main plan) Overall tax advantage Israel Mexico Iceland Hungary Australia Slovak Republic Ireland United Kingdom Netherlands Italy Switzerland Turkey Denmark Japan Czech Republic France United States Canada Estonia Luxembourg Germany Norway Poland Portugal Korea Greece Sweden Chile Austria New Zealand Spain Latvia Finland Belgium Slovenia 44% 39% 37% 36% 35% 34% 32% 32% 31% 30% 27% 26% 26% 25% 24% 24% 23% 23% 20% 20% 18% 15% 14% 14% 13% 11% 11% 11% 9% 9% 5% 3% 1% 51% 51% 0% 10% 20% 30% 40% 50% 60% Country-specific parameters Differences observed across countries due to: Tax regime applied to pension plans and benchmark savings vehicles Characteristics of the personal income tax system (i.e. the tax brackets and the tax rates) Amount saved Contribution period Benchmark 21

22 Policy question 2 Long-term fiscal cost of the tax treatment of retirement savings Net tax expenditure: Revenue forgone method; cash-flow approach NTE in a given year = net amount of RFC, RFAI and RCW (NTE t =µ C C t + µ A i(1-µ C )A t-1 - µ B B t ) What is the influence of demographic changes? How the level of maturity of the pension system affects future costs? 22

23 Maturing pension system Introducing a pension system with tax advantages for saving for retirement creates a NTE that comes upfront It is only several decades later that the new pension system and its fiscal cost reach a stationary situation (steady-state) 23

24 Impact of the ageing of larger cohorts Larger cohorts entering the labour market than those retiring translates into higher contributions and higher assets until they retire This brings the NTE above its steadystate for a while and below it afterwards, until the larger cohorts pass away and the steady-state is reached 24

25 Net tax expenditure in selected OECD countries 10 countries: AUS, CAN, CHL, DNK, ISL, LVA, MEX, NZL, SVK, USA Systems are still maturing Recent introduction of the system (LVA, MEX and SVK) Changes in contribution rates (AUS, ISL, LVA and SVK) Past changes in coverage and contribution rates (DNK) Depending on how far back these changes have taken place, the net tax expenditure may have reached an increasing (AUS, ISL, LVA, SVK), or decreasing (DNK, MEX) trend The ageing of the baby-boom cohorts is the other main driving factor for changes in the net tax expenditure (CAN, DNK and USA )

26 Projected net tax expenditure, selected OECD countries, Australia Canada Denmark Iceland Latvia United States

27 INVESTMENT GOVERNANCE AND THE INTEGRATION OF ESG FACTORS

28 Investment governance and the integration of ESG factors Request by the French Presidency of the COP21 OECD WPPP discussed and approved a report last December ( Governance-Integration-ESG-Factors.pdf) Report provides a international stoke-taking of regulatory frameworks What do they say about ESG integration How this is interpreted by institutional investors Report tries to improve our understanding of Policy and business frameworks and ESG Institutional investors duties and ESG Practical implementation of ESG strategies 28

29 Key issues Institutional investors underweight (not enough account) ESG Are investment governance standards too restrictive? Regulator intention: regulation does not prohibit ESG integration Investor interpretation: prudent man, efficient market (everything is in the price) discourages ESG integration Other factors? Data availability, projections, cost. 29

30 Main findings Regulatory, practical and behavioural barriers Regulations permit but (generally) don t encourage ESG integration Lack of standardised methodologies and models Different interpretations of investors duties ESG factors do influence investment returns The financial and market performance of companies (e.g. profitability) reflects ESG Broader economic growth and financial market stability Meta studies confirm positive link with corporate and stock market performance, but not easy to distinguish between E, S and G Environmental factors may become an even more important performance driver: Transition risks Stranded assets 30

31 Main findings Technical solutions are increasingly available Need for models and methodologies necessary Practical barriers Implementation Cost Lack of standardised data and models Competing priorities Investment constraints Practical barriers are being resolved (investment products, data availability ) Growing awareness of bottom-up ESG factors Top-down/systemic risks and opportunities harder to integrate 31

32 Regulatory obstacles? Penalties for illiquid assets (e.g. investing in forestry), triennial valuations (short-terminism) Incentives to move away from equities (VaR, LDI) Non-financial : no pricing the externalities 32

33 Input into financial models Integration of ESG factors Dirves asset allocation Different interpretations (4 types of investor) UNIVERSAL BROADER GOALS MODERN TRADITIONAL Market value of assets and liabilities Vulnerability of assets and liabilities to ESG risks Investment policy focus 33

34 Conclusion Regulatory, practical and behavioural barriers exist to ESG integration More clarity on relationship between prudential regulation and ESG integration Models and methodologies to establish financial nature of ESG risks Transparency on activity of institutional investors 34

35 Main messages (takeaways) Policies responses to the challenges facing pension systems (ageing; lower growth and returns): Changing pension landscape with more diversification thanks to the growth of pension arrangements with assets backing pensions, in particular DCs Need for improvements on DCs: OECD Roadmap for the Good Design of DC Pension Plans Most countries EET financial incentives for retirement. Australia TTE, large advantage for individuals, and large fiscal cost. There are regulatory, practical and behavioural barriers to ESG integration. Need of models and methodologies to establish financial nature of ESG risks 35

36 THANK YOU VERY MUCH! OECD work on pensions