Architecture of national pension systems
Retirement-income regimes are diverse and often involve a number of different programmes. Classifying pension systems and different retirement-income schemes is consequently difficult. The taxonomy of pensions used here consists of two mandatory “tiers”: an adequacy part and an earnings-related part. Voluntary provision, be it individual or employer-provided, makes up a third tier.
The framework, shown in the chart, is based on the role and objective of each part of the system. The first tier comprises programmes designed to ensure pensioners achieve some absolute, minimum standard of living. The second-tier, earnings-related components, are designed to achieve some target standard of living in retirement compared with that when working. Within these tiers, schemes are classified further by provider (public or private) and the way benefits are determined. Pensions at a Glance focuses mainly on these mandatory components although information is also provided on some voluntary, private schemes.
Using this framework, the architecture of national schemes is shown in the table. Programmes aimed to prevent poverty in old age – first-tier schemes – are provided by the public sector and are of three main types.
Basic pensions can take two different forms: a benefit paid to everyone irrespective of any contributions made, although beneficiaries might have to meet some residence criteria. In some economies residence-based benefits are potentially offset against other pension income; or a benefit paid solely on the basis of the number of years of contributions, i.e. independently of earnings. Only two Asian economies have a basic pension scheme or other provisions with a similar effect.
Minimum pensions can refer to either the minimum of a specific contributory scheme or of all schemes combined. They are found in five Asian economies. The value of entitlements takes account only of pension income: unlike means-tested schemes, it is not affected by income from savings, etc.
Social assistance plans pay a higher benefit to poorer pensioners and reduced benefits to better-off retirees. In these plans, the value of the benefit depends either on income from other sources or on both income and assets. Most economies have general social safety-nets of this type.
Defined benefit (DB) plans are provided by the public sector in five economies. Retirement income depends on the number of years of contributions and individual earnings.
Defined contribution (DC) plans are compulsory in seven economies. In these schemes, contributions flow into an individual account. The accumulation of contributions and investment returns is usually converted into a pension-income stream at retirement.
Within the OECD countries shown there are two additional schemes. First, in points schemes workers earn pension points based on their earnings each year. At retirement, the sum of pension points is multiplied by a pension-point value to convert them into a regular pension payment. Second, notional-accounts schemes record contributions in an individual account and apply a rate of return to the balances. The accounts are “notional” in that the balances exist only on the books of the managing institution. At retirement, the accumulated notional capital is converted into a stream of pension payments using a formula based on life expectancy. Since this is designed to mimic DC schemes, they are often called notional defined contribution plans (NDC).
