| OECD outlines likely adjustments to pension crisis |
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| 22.12.2008 | |
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The total assets of private pension plans in OECD countries declined by $5tr or nearly 20% through October from December 2007 when assets stood at $28tr. Two-thirds of the losses or $3.3tr are estimated to be in the Unites States alone, with the United Kingdom, Australia, Canada, the Netherlands and Japan accounting for a further $1.2tr drop in asset values, according to a December OECD report. Irish pension funds experienced the worst investment performance, losing more than 30% of their value.
To keep up with their pension funding requirements, companies will be forced to increase their contributions to defined benefit schemes, which were already quite high as a result of recovery plans implemented in the aftermath of the 2000-2002 stock market declines. Following the lead of Finland, regulators are considering giving pension funds and their sponsoring employers more time to allow funding levels to return to target levels in order to avoid further strain on companies at a time when the economic background continues to deteriorate.
Indexation on hold
The emergence of funding gaps is forcing pension funds and their sponsoring employers to establish a recovery plan to reduce their growing deficits. In most cases, plans will involve additional employer contributions. A number of Dutch pension funds, among them PME and ABP, have already taken such a step. In other instances, benefits will have to be reduced. The report anticipates that in the Netherlands, where conditional indexation of benefits is widespread, pension funds will most likely react to lower funding levels by stopping the indexation of benefits to wage inflation until funding levels recover.
Another possible consequence of the financial crisis is that policymakers may seize the opportunity to shrink the private components of their pension system as Argentina did in October 2008 via an outright nationalisation. In Eastern European countries there is discussion of allowing participants to opt back into the public pension system, notes the report.
One important driving factor is the implementation of standards governing how funds value assets and liabilities and what they have to do to bring the ratio between the two into line. If the value of assets is too low to meet legal requirements and the requited funding level rises with the pension fund’s exposure to equities, the fund may have to sell part of its equity holdings, even at a loss, during a market downturn. “This happened in Denmark in 2001-2002 and again in 2008, before regulators stepped in and relaxed funding standards.” Finland has also introduced temporary measures in the calculation of pension fund liabilities and solvency margins to reduce pressure on pension funds selling equities.
VB
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