OECD reports shows half of developed countries are grappling with pension reforms

IF_Blog_older_worker_fruit_counterDavid Kingman looks at the some of the findings from the latest OECD “Pensions at a Glance” report, which analyses pension systems around the world

Many of the world’s developed countries have implemented a range of reforms which are designed to lower the cost of providing state pensions in response to the global financial crisis and ageing populations, according to the 2015 edition of Pensions at a Glance by the Organisation for Economic Cooperation and Development (OECD).

Rising retirement ages    

Pensions at a Glance 2015 is the latest instalment of the OECD’s long-running biennial analysis of pension systems around the world. It compares pensions systems from across all the OECD member states, and looks at a variety of issues, including benefit levels, the structure of pension systems and their financial sustainability.

Analysing what has been happening to national pension systems across the OECD since the previous edition of Pensions at a Glance in 2013, their overall summary is pessimistic:

“The economic recovery remains sluggish in most OECD countries and, as a consequence, pension contributions remain low while fiscal pressure adds urgency to reforming public pension systems. Going forward, the likely protracted uncertainty in financial markets, low returns and record‑low interest rates cast doubts on the ability of defined‑contribution systems and annuity schemes to deliver adequate pensions. These challenges are compounded by population ageing, which is accelerating in many countries.”

The one bright spot that they identify on the pensions landscape is the increasing trend for older people to carry on working at later ages; across the OECD, the rate of employment for people aged 55–64 rose by 7% between 2004 and 2014. However, even in this area there remains a significant degree of variation between different countries, with several still having an average age at which people stop working that is below the official retirement age; men finish working the earliest in France and Belgium, whereas for women it is Slovakia, Poland and Slovenia.

According to the report, around half of the OECD member countries have implemented measures designed to improve the financial sustainability of state pensions systems during the past two years. The two most common moves that have been taken are increasing the state pension age (which may partly explain the trend towards older working noted above) and changing the way pensions are indexed to maintain their value against inflation. It’s easy to see why the latter would be particularly popular with policy-makers, as it enables them to reduce the cost of providing pensions over time without the political difficulties that would accompany actually cutting pension levels.

Based on current legislation, the average state pension age across the OECD will rise from 64 in 2014 to 65.5 in the near future; and soon there will only be three OECD members in which women have a lower state pension age than men (Chile, Israel and Switzerland), whereas this was the norm in most countries until relatively recently. However, some countries will continue to allow people with an adequate contribution record to claim their state pension before 65, including Slovenia, Luxembourg, Korea, Greece and France.

How does Britain compare?

Looking at the pattern across the OECD, the British pension system stands out for having implemented one of these mechanisms to try and control costs – raising the retirement age – but it is not following the general trend towards less generous indexation arrangements.

Under the Pensions Act 2014, women and men are both supposed to have a state pension age of 65 by late 2018; a mechanism already exists for this to gradually rise to 67 over the subsequent years, although that may be open to further review depending on changes in life expectancy.

Although it has been proactive about raising the state pension age, under the Coalition the UK also brought in one of the most generous systems of pension indexation in the world. Under the so-called “triple lock” guarantee, the state pension has to increase each year in line with whichever is highest out of earnings growth, inflation or 2.5%. Seeing that inflation is currently below zero, and earnings growth remains depressed, this represents an extraordinarily good deal for current pensioners, which – as the Institute for Fiscal Studies and the Office for Budget Responsibility have both warned – comes at increasing cost to working-age taxpayers.

Given the pressure this will place on pension spending as a share of GDP in Britain, it remains to be seen if it will be feasible for the triple lock to continue – or whether the UK will follow the example of other countries in switching to an alternative.