outline - oecd.org - oecd · 2018. 3. 7. · 07/03/2018 2 old-age poverty old-age poverty rates are...
TRANSCRIPT
07/03/2018
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Maciej Lis and Stéphanie Payet Pension analysts
Directorate for Employment, Labour and Social Affairs and Directorate for Financial and Enterprise Affairs
OECD Reviews of Pension Systems Latvia
Riga, 07.03.2018
Outline
• How to reduce old-age poverty?
• How to improve the notional defined contribution (NDC) scheme?
• How to improve seperate schemes for selected occupations?
• How to improve the funded defined contribution (FDC) scheme?
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OLD-AGE POVERTY
Old-age poverty rates are very high in
Latvia…
0
5
10
15
20
25
30
35
40
45
%
76+ 66-75 Total population
For selected age groups, 2014 or latest
Source: OECD Income Distribution Database.
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.. even though old-age poverty rates
declined strongly during the crisis
Poverty rates among selected age groups in Latvia in 2004-2014
Source: OECD Income Distribution Database.
0%
10%
20%
30%
40%
50%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0-17 26-40 41-50 66-75 76+
Basic and minimum pensions have lagged
behind wages and average pension
Real term trends since 2000
Note: Numbers are normalised at their 2000 real value (=100). Source: OECD calculations based on data provided by the Latvian Ministry of Welfare and the OECD Labour Statistics.
0
50
100
150
200
250
300
350
400
450
0
50
100
150
200
250
300
350
400
450
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Average pension Basic and init ial minimum pensions Average wage Minimum wage
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First-tier benefits are substantially
below the OECD averages
First-tier benefits are low in Latvia compared to OECD countries As a percentage of average earnings, 2016
Source: OECD, 2017b and information provided by countries.
0
10
20
30
40
50
Full minimum Basic Safety-net
Basic and minimum pensions should
prevent old-age poverty
• Increase substantially the levels of basic and minimum pensions.
• Use the same indexation rule for the level of basic and minimum pensions as the one for NDC pensions.
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Working longer results in benefit
increases only at specific ages
Source: OECD calculations
Basic and minimum pensions could
provide work incentives (1)
• Lower the minimum contribution period of 15 years required for the minimum pension.
• On top of the safety net available for someone who never contributed, ensure that each additional year of contribution results in a higher minimum pension benefit.
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Basic and minimum pensions could
provide work incentives (1)
Source: OECD calculations
Benefits are lower among older
pensioners…
Source: OECD calculations based on data provided by the Latvian Ministry of Welfare.
Average pension by age and gender in 2016
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.. because pensions in payment have not
kept pace with newly granted pensions
Real term trends since 2000
Note: Numbers are normalised at their 2000 real value (=100). Source: OECD calculations based on data provided by the Latvian Ministry of Welfare and the OECD Labour Statistics.
0
50
100
150
200
250
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Indexation for pensions below the threshold Average wage Average newly granted pension
How to reduce the pension gender gap
and maintain the relative value of benefits with age?
• Index fully the NDC pensions in payment to the nominal growth of the contribution base.
• Introduce survivor pensions for spouses.
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Survivor pensions
Reasons:
• They reduce the age and gender gradients in old-age poverty.
• They ensure income smoothing after the death of a partner.
Options:
• Joint annuity?
• Increased contributions?
• Additional age and income eligibility conditions?
• Mandatory, default or voluntary?
In-depth analysis of survivor pensions in the OECD countries to come in Pensions Outlook 2018
IMPROVING THE NDC SCHEME
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The Latvian population is ageing at the
same pace as the OECD on average
Source: OECD calculations based on data provided by Latvian Ministry of Welfare, Department of Social Insurance.
Old-age dependency ratio (population 65+ divided by the population 20-64)
0
10
20
30
40
50
60
70
80
90
%
2055 2015 2035
The working-age population is shrinking
Projected change in the population size by age groups in OECD countries between 2015 and 2035
Panel A: 20-64
-30%
-20%
-10%
0%
10%
20%
30%
40%
Source: UN 2017 population projections.
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Automatic adjustment mechanisms transfer
the demographic shift into pension levels
• Life expectancy gains lower NDC/FDC
benefits.
• Decline in labour force lowers valorisation of notional accounts (NDC).
Future replacement rates
0
20
40
60
80
100
120
Gross theoretical replacement rates are below the OECD average Mandatory pension schemes for an average-wage full-career worker from age
20 in 2016, %
Source: OECD (2017).
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Automatic adjustments have strong
impact on future replacement rates
Source: OECD calculations.
0%
5%
10%
15%
20%
25%
30%
35%
NDC - contribution rate 14%
Baseline (PAG 2017)
Scenario 1: working-age population does not decline
Scenario 2: life expectancy increases to the OECD average (+ 4 years)
How to improve the adequacy of the
NDC benefits?
• Steadily increase contributions paid by employees of micro-enterprises and align pension contributions paid by the self-employed to those of dependent employment.
• The retirement age will increase from 63 years and 3 months in 2018 to 65 years in 2025. Afterwards, the official retirement age should be linked to future life expectancy gains.
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How to link retirement age with gains in
life expectancy?
• 1:1?
• Keeping the proportion of working life in lifespan constant on average?
• In line with the increases of life expectancy in good health?
NDC expenditures are projected to
exceed revenues
0%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%
25%
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
NDC (including transit ion rules) Pre 1996 costs NDC + Pre-1996 Costs FDC
14% line
Source: OECD calculations based on data provided by Latvian Ministry of Welfare, Department of Social Insurance.
Pension expenditures by scheme
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What are the reasons for the future
NDC deficit?
• Calculation of initial notional capital was based on the 20% contribution rate
• Varying NDC contribution rate: on average at 17.4 between 1996 and 2017
• Calculation of pensions with period instead of cohort life expectancy
How to improve the NDC scheme?
• Stabilise the contribution rate going to NDC pension to 14%.
• Use cohort life expectancy in the NDC annuity divisor.
• Index fully the NDC benefits in payment to the nominal growth of the contribution base.
• Remove the option to convert the FDC accounts into an NDC annuity.
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PENSION SCHEMES FOR SELECTED OCCUPATIONS
Service pension are high and granted at early
ages Figure 6.1. Recipients of service pensions by age
in Latvia in 2016
Note: Per cent of all service pension recipients above the bars. The recipients of service pensions include recipients of service pensions transformed into old-age pensions.
Source: OECD computations based on data provided by the Central Statistical Bureau of Latvia.
12 http://dx.doi.org/10.1787/888933657923
Figure 6.2. Distribution of service pensions and NDC-FDC pensions in Latvia in 2016
Note: The recipients of service pensions include recipients of service pensions transformed into old-age pensions.
Source: OECD computations based on data provided by the Central Statistical Bureau of Latvia.
12 http://dx.doi.org/10.1787/888933657942
6%
32%30%
33%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
<44 45-54 55-59 60+Age groups
Number of people (in 1000)
0%
10%
20%
30%
40%
50%
60%
<200 200-300 300-500 >500EUR
NDC-FDC pensions Service pensions
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Limit the fragmentation of the pension
system
• Incorporate service pensions back to the main pension scheme.
• Maintain the commitment to eliminate special pension rights for arduous and hazardous occupations.
IMPROVE THE DESIGN OF THE MANDATORY AND VOLUNTARY FUNDED PENSION SCHEMES
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Investment regime: Issues identified
• Low returns over past 10 years (including GFC and European sovereign debt crisis)
• Conservative investment strategies compared to other countries
– Equity investment well below regulatory limits
• Conservative default investment strategy: only appropriate for very risk-averse individuals and those approaching retirement age
• Introduce a default life-cycle investment strategy – Reduces the amount of assets invested in risky assets
as the plan member gets closer to retirement
– Potentially enhance returns while still protecting people close to retirement against extreme market swings
– Additional option to those already offered
– SSIA to provide information to asset managers about the age structure of their clients
• Gradually relax quantitative investment limits and increase the skills of professionals in the investment teams of asset managers to allow for appropriate portfolio diversification
Investment regime: Policy options
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• The new fee structure, with a regressive scale, lower caps and a tighter definition of the benchmark for the performance fee, goes in the right direction
• Disclose fees paid by participants in nominal amounts in the pension statement to increase people’s awareness and put further pressure down on fees
• Harmonise the fee structure for voluntary private pension funds to facilitate comparisons and increase confidence in the system
Continue efforts to reduce fees in the
pension industry
• High-water mark: It is the highest value that a pension account has ever reached. The purpose is to make sure that any losses occurring after the last high-water mark will be compensated before the pension fund is paid a performance fee.
• Symmetric performance fee: Underperformance is penalised as much as outperformance is rewarded. In case of underperformance compared to the benchmark, the fund must compensate participants through lower fixed fees, cash refunds or credits against future fees.
The performance fee could include risk
sharing features: 2 options
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• Make sure that individuals have access to complete and comparable information about all asset managers’ pension plans when selecting a plan
• Introduce independent members in the governing body of asset managers in a more systematic manner to help reinforce its commitment to act in the best interests of participants only (cf. OECD Core Principles of Private Pension Regulation)
• Increase transparency requirements to foster competition (e.g. detailed and granular information on administration and investment costs)
Balance market opportunities and
increase competition
• Eliminate the option to transfer assets to the NDC scheme
• Separate life annuity products and drawdown products like the upfront-withdrawal annuity to avoid confusion about product features
• Consider implementing an electronic platform where participants about to retire could see the bids from all life insurance companies in one place
• Strengthen the supervision of insurance companies regarding the mortality tables used for reserving (include expected future improvements in mortality; regularly updated; based on the mortality experience of the relevant population)
Streamline the design of the retirement
phase
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• Between the SSIA and asset managers: Allow asset managers to propose more varied investment options to their members, including life-cycle investment strategies
• Between the SSIA and participants: – Emphasize that the amount accumulated in their
pension account is their money
– Send the account statement
– Include information on fees in nominal amounts
– Include projections of future total pension benefits under different scenarios for the age of retirement and the level of voluntary contributions to prompt action
Improve communication within the
system
Further information:
http://oe.cd/pensions-latvia-2018
Contact:
OECD flagship pension publications:
Pensions at a Glance
http://dx.doi.org/10.1787/pension_glance-2017-en
Pensions Outlook
http://dx.doi.org/10.1787/pens_outlook-2016-en
Thank you