6. Main policy guidelines to strengthen asset-backed pension systems in a post-COVID-19 world
This publication has examined the impact of COVID-19 on asset-backed pension arrangements. It has also looked at the different policies implemented and has examined their success and alignment with the main OECD policy messages. The analysis has also looked at the impact of the pandemic on mortality and the potential implication for future mortality improvements, as well as on how assets earmarked for retirement can support economies and benefit members in a post-COVID-19 world.
This final chapter presents the main policy guidelines learnt during the COVID-19 pandemic and its aftermath with a view to providing guidance to policy makers to move forward and to be able to face similar crises in the future.
Policy makers should make sure that people saving for retirement and pension providers stay the course
Maintain investments in retirement portfolios to avoid selling and materialising value losses when markets are low. Saving for retirement is for the long term.
Continue contributing to retirement plans. Governments may subsidise the income of people, as part of the many programmes to assist the populations facing the economic fallout from any widespread economic shock like COVID-19 and its associated economic downturn.
Act in accordance with investment objectives. Pension providers should adhere to their investment objectives and carefully assess new investment opportunities. Their investment decisions should be at arms-length from governments.
Policy makers, regulators, and supervisors1 should:
Allow in time of crisis for regulatory flexibility in recovery plans to address funding problems stemming from retirement promises (e.g. defined benefit pension arrangements, and lifetime income products). Measures providing flexibility should be removed once the emergency is over.
Make sure that funding and solvency rules for defined benefit plans are counter-cyclical. Introducing flexibility in meeting funding requirements avoids ‘pro-cyclical policies’ and allows pension funds to act as long-term investors and potentially stabilising forces within the global financial system.
Provide proportionate, flexible, pragmatic and risk-based supervisory oversight coupled with adequate communication to reduce frauds and facilitate efficient operations. Supervisory oversight should concentrate on prudential and market conduct regulation, including ensuring protection of members and beneficiaries against COVID-19 related scams, especially for the most vulnerable individuals. During times of crises, supervisors should communicate to market participants and individuals on their prudential expectations and recommendations as well as actions taken to facilitate pension funds’ operations and to ease administrative burden.
Allow access to retirement savings only as a measure of last resort and based on individual specific exceptional circumstances. Retirement pots are intended to finance retirement. Accessing retirement savings could lead to materialising temporary asset values losses, liquidity, and investment management problems to pension funds, and, more importantly to retirement income adequacy shortfalls.
Legislate and include in their regulatory framework early access, as well as the conditions of exceptional circumstances under which it would be allowed, to avoid legislative changes in the middle of a crisis that can have long-lasting negative impacts on retirement income adequacy. Those regulatory frameworks should only be expanded further on a temporary and targeted manner, where needed, to address genuine financial hardship.
Consider mechanism for individuals to build emergency savings. However, the savings in emergency accounts may need to come from new savings to avoid lower retirement savings that may affect retirement income adequacy.
Maintain projections on future improvements in mortality and life expectancy, disregarding the mortality experience during exceptional shocks like COVID-19, and step-up monitoring. Shocks like pandemics can significantly increase mortality, but mortality levels and improvements are likely to return to their previous trajectory following the shock. Therefore, any calibration of models used to establish mortality assumptions should exclude, or at least just adjust, the exceptional mortality experience in the years the shock occurred (e.g. 2020-22). Nevertheless, significant uncertainty remains regarding the long-term impacts of shocks like COVID-19 on health and mortality, which will require close monitoring to inform assumptions going forward.
Promote the use of assets earmarked for retirement to support the economy. Policy makers can enhance the quality of data to assess investments as well as pension providers’ capabilities to invest in different asset classes; adjust investment regulations; promote a favourable environment for long-term investment and suitable investment vehicles; and ensure appropriate alternative investments are available (like public-private partnerships or special vehicles for alternative assets) and financially attractive.
Make sure that safeguards are in place so that pension providers continue acting in the best interest of members when using assets earmarked for retirement to support the economy. Ensuring the accountability and suitability of the governing body of pension providers, defining an appropriate investment policy, designing a sound risk management strategy and having appropriate investment regulations can all contribute to safeguarding members’ assets while supporting the economy at the same time.
Develop close co-operation with stakeholders, regulators, and supervisors at the national and international levels, to share solutions and effective ways to deal with crises.
← 1. This is in line with the IOPS statement on pension supervisory actions to mitigate the consequences of the COVID-19 crisis: http://www.iopsweb.org/IOPS-statement-on-pension-supervisory-actions-COVID-19-crisis.pdf