Pension System - OECD Wants Older Workers to Keep Working

All Africa

April 28, 2010

World

The Organisation for Economic Co-operation and Development (OECD) is recommending to governments of its member countries to encourage older workers to keep on working in order to make the pension systems more affordable.

In a report by the OECD entitled "Pensions in France and Abroad: Seven Key Indicators", the organisation stated that the cost of public pension systems keeps rising. In 2007, public spending on pensions accounted for 10 percent of Gross Domestic Product (GDP) in the European Union. By 2060 that figure will rise to 12.5 percent.

The OECD, therefore, advised that "Making it possible for older workers to keep on working is key to making pension systems more affordable. In Sweden and Switzerland seven out of 10 people aged over 50 work. In France the figure is one in two."

While explaining that the populations across the OECD countries are ageing, the organisation pointed out that in the 1950s there were around seven workers on average for every retiree in OECD countries. By 2010 this ratio had fallen to four to one. And by 2040, the ratio will be only 2.2 to 1.

Although the average legal age of retirement is between 63 and 64 in the OECD countries, the actual average age at which people stop working varies widely. In France, for example, most people stop working before they are 60.

On the amount of time people spend in retirement, the organisation informed that this varies widely between countries. The OECD average is just over 18 for men and just under 23 for women. French people have the longest retirement: 28 years for women and 24 for men.

When those starting work now retire, the pension benefits they will receive compared to when they were working will vary widely: low-earners on average will get around 70 percent of their earnings. In Germany and Japan they will get less than half of their previous earnings. Average earners will get around 60 percent of their previous salaries in most OECD countries. In the UK, they will get only 30 percent.

In most OECD countries, public pensions make up around 60 percent of people's retirement income.

In a related development, Italian pension schemes are increasingly reviewing their asset allocation and looking to offer lifestyling arrangements to their members in the wake of the losses incurred during the crisis, Towers Watson managing consultant for Italy Fabio Carniol said.

Speaking at the conference Salone della Gestione del Risparmio held in Milan, Italy, he added these two concerns were already clear priorities for the pension funds for employees of Italian banks, while for the other second pillar schemes they were becoming more and more important.

He also said first pillar schemes (Casse di previdenza) were lately looking to implement risk control systems as well as acting on their governance mechanisms in order to improve schemes' oversight on investments and risks.

In a session focused on the Italian pension system, he noted the number of companies offering a pension as part of the benefits' package was growing. However, Towers Watson data show Italian employees are less satisfied with their companies' benefits than their European peers. Carniol said a survey on companies with over 1,000 employees found only 33 percent of Italian respondents were satisfied with companies' benefits, while in Europe the same data stood at 45 percent.

Speaking at a different session, UBI Pramerica, head of institutional sales Maria Grazia Sonzogni said pension funds and institutional investors would benefit in the current market environment from a stock picking approach which privilege high dividend equities.

She said: "In times of market volatility, such as ours, we consider dividend as a safety net when there are negative market rebounds."

However, she said not all high dividend companies were necessarily a good pick. She explained: "For us, sustainable dividend, which is what investors need look for, equals to financial discipline. We invest in companies which will pay a dividend but which have good cash flows, are not too indebted and which operate in sectors broadly uncorrelated to the markets."

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