1. Pension systems during the financial and economic crisis Edward Whitehouse Social Policy division, OECD

2. Pension funds’ real returns -30-25-20-15-10-50 Czech Republic Germany Slovak Republic Sweden Poland United Kingdom Finland Netherlands Hungary United States Lithuania Bulgaria Real investment return, 2008 Source: OECD

3. -40-30-20-100 0 25 50 75 Real investment return in 2008 (%) Equities, % of total portfolio United States Mexico CzechR SlovakR Hungary Iceland Australia Spain Germany Netherlands Poland Norway Portugal Switzerland Denmark, Sweden Austria United Kingdom Japan Explaining differences in 2008 returns Ireland Canada

4. Economic crisis -5 -4 -3 -2 0 1 200820092010 Falling output Change in GDP (%) OECD 30

5. Economic crisis -5 -4 -3 -2 0 1 200820092010 0 2.5 5 7.5 10 12.5 200920102011 Euro zone OECD 30 Falling output Change in GDP (%) Unemployment (% of labour force) Rising unemployment - - OECD 30

6. Economic crisis -5 -4 -3 -2 0 1 200820092010 0 2.5 5 7.5 10 12.5 200920102011 Euro zone OECD 30 Falling output Change in GDP (%) Unemployment (% of labour force) Rising unemployment Growing budget deficits -10 -7.5 -5 -2.5 0 2007200820092010 Budget balance (% of GDP) Source: OECD OECD 30

7. Impact on pensions Financial crisis – Defined-contribution plans – Private, defined-benefit plans – Public pension reserves Economic crisis – Countries with automatic adjustments But no country or pension scheme is immune

8. Detailed analysis Younger/prime-age workersPeople near to retirementRetirees Strongly affectedIndividuals in mature, private DC schemes (especially i) where exposure to riskier assets is greater and ii) where people are required to annuitise their balances at retirement) Retirees who did not annuitise their DC balances at retirement (especially those with greater exposure to riskier assets) Moderately affectedIndividuals in mature, private DB schemes Public, PAYG systems with deficits Retirees in plans with automatic benefit adjustments (e.g. conditional indexation, balancing mechanisms, sustainability adjustments) Less affectedMost individuals in this group Individuals with recently established private DC schemes Retirees who annuitised DC balances before the crisis Most retirees with DB private pensions or public, PAYG benefits

9. Role of private pensions for workers 0255075100 Czech Republic Norway New Zealand Germany Belgium Switzerland Hungary Canada Ireland Sweden United States Poland Australia United Kingdom Slovak Republic Netherlands Denmark Mexico Iceland Mandatory defined contribution Voluntary defined contribution Mandatory defined benefit Private pensions per cent of total retirement-income package

10. Capital income of today’s pensioners 01020304050 Czech Republic Slovak Republic Poland Austria Hungary Italy Spain Portugal Belgium France Luxembourg Greece Japan Iceland Germany Sweden New Zealand Norway Ireland Denmark United Kingdom Australia United States Netherlands Canada Percentage of total non-work retirement income from capital

11. Pension for full-career low earner 05101520253035404550 Germany United States United Kingdom Estonia Latvia Lithuania Slovenia Bulgaria Finland Sweden Czech Republic Romania Netherlands Pension level (% of economy-wide average earnings)

12. 5 years’ unemployment/early retirement Pension level (% of economy-wide average earnings) 05101520253035404550 Germany United States United Kingdom Estonia Latvia Lithuania Slovenia Bulgaria Finland Sweden Czech Republic Romania Netherlands

13. Policy responses: what to do Old-age payments as part of economic-stimulus packages (e.g. Australia, Greece, UK) Strengthen safety-nets (e.g. Finland, France, Spain) Ensure investment options for DC schemes with default switch to less risky assets with age (e.g. Poland) Temporarily relax regulations for private DB schemes (e.g. Netherlands) Flexible timing of annuity purchase (e.g. Ireland) Improve governance and risk-management of pension funds and focus on financial education

14. Investing for the long term

15. Policy responses: to do or not to do? Temporary access for individuals to DC accounts (e.g. Australia, Iceland, US) – But risk of lack of resources in retirement Temporary reduction in contribution by employers or governments (e.g. US –corporate, Estonia, Lativa, Lithuania) – But again risk of lack of resources in retirement Bail out of DC accounts (e.g. Israel) – But problems of cost, equity, moral hazard Guarantees for DC accounts (e.g. Switzerland, Slovakia) – What level? Who pays? Use public pension reserves for crisis mitigation (e.g. Ireland, Norway)

16. Policy responses: what not to do Resort to early retirement or other benefits (disability, unemployment) – negative and persistent effect on labour market Indeed, workers may wish to work longer in countries with more mature DC schemes (e.g. Australia, US) And other countries proposing to increase pension ages in response to crisis (e.g. Finland, Hungary, Netherlands) Abandon long-term goals for short-term expediency (e.g. Argentina, Slovak Republic)

17. Conclusions Financial crisis focused attention on investment risk and pensions – But all pension systems subject to risks Financial and economic crisis highlights and exacerbates the problems of pension systems Long-term strategy should remain diversification and balanced old-age provision

18. Further details and contact Edward Whitehouse edward.whitehouse@oecd.org www.oecd.org/els/social/pensions