The Organisation for Economic Co-operation and Development (OECD) has called for improved design and governance of asset-backed pension systems to promote inclusivity and resilience, deliver better outcomes for individuals, and support sustainable economic growth and innovation.

According to the second OECD report, ‘Pensions Outlook 2024’, pension assets in OECD countries had grown 10 per cent in 2023, reaching over $56 trillion, more than triple the level seen two decades ago. Total assets hit $63 trillion after adding pension reserve funds held by governments. The 2023 total is 5 per cent below the level seen in 2021.

Growth in 2023 was resulted from positive returns in equity markets and positive cashflows from contributions exceeding benefit payments. The new report analyses this growth and its underlying drivers, comparing it with long-term trends. 

New actions

Against the backdrop of ageing populations and other economic challenges, the report has called for new action to address coverage gaps. 

Stating that investing in equities provides better long-term financial outcomes, but market volatility can increase risks for those close to retirement, the report advocates for balanced investment strategies, such as life-cycle approaches, to manage risks while maximising long-term returns. Policymakers are urged to avoid overly cautious default strategies that could limit retirement income.

Access to retirement income

The report highlighted the importance of ensuring individuals have access to appropriate retirement income and of innovative approaches, such as options for pooling risks and leveraging home equity.

“Pension systems are a cornerstone of financial security and economic resilience for an ageing population in many countries. More inclusive, innovative, and sustainable asset-backed pension frameworks evolving with labour markets are essential to improve retirement outcomes for individuals and ensure the resilience of pension systems,” said Mathias Cormann, OECD Secretary-General. 

As per Pensions Outlook 2024, despite progress, significant gaps in pension coverage remain, particularly for self-employed workers and employees not covered by collective agreements. 

Multi-employer pension arrangements can address these challenges. By pooling resources across employers, especially small and medium-sized enterprises, these arrangements can improve accessibility.

To encourage retirement savings, financial incentives can also be enhanced. However, complex tax rules and irregular updates can undermine their effectiveness. Simplifying these systems and ensuring timely adjustments can ensure incentives remain impactful and equitable, especially for lower-income earners, the report read.

Flexible Solutions 

The report also called for a re-imagined approach to the payout phase of retirement. Flexible solutions that provide guaranteed lifetime incomes, liquidity for unexpected expenses and options for discretionary spending are essential. Investing in financial education is the key. Digital tools, such as pension dashboards, are important to empower savers and foster awareness.

Home equity release products can also be a valuable resource for retirees to bolster their financial resources. However, the report stresses the need for strong consumer protections and clear regulation, and well-designed regulatory frameworks, to ensure these products are accessible, transparent and suited to individual needs.

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