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The ongoing financial crisis has dealt a heavy blow to private pension systems. The latest issue of Pension Markets in Focus takes a close look at the impact of the crisis and discusses possible policy interventions, both immediate and longer term.
By October 2008, the total assets of private pension plans in OECD countries had declined by about USD 5 trillion, or nearly 20% of their value compared to December 2007 when their assets stood at USD 28 trillion. Two thirds of the losses are estimated to be in the
Pension funds, which account for most private pension assets, have been hit hardest in OECD countries where equities make up over a third of total assets invested. Irish pension funds experienced the worst investment performance, losing just over 30% of their value in nominal terms.
The losses to both defined benefit and defined contribution plans underline the urgent need for further reforms of private pension systems, according to this research. The fall in equity values of defined benefit pension plans, where benefits are linked to wages, has increased the number of funds in deficit, where their future liabilities exceed their assets. Many companies may have to pay more into their pension funds to make up this difference, adding to the financial pressure firms are facing in the current crisis and speeding up the trend of closing such schemes to new employees. Some OECD countries, including Germany, Sweden, the United Kingdom and the United States, have guarantee funds that insure benefits if a company goes bankrupt when the plan is underfunded. But there are concerns that if many firms do go bankrupt, these funds might need government bailouts.
OECD will release further analysis of the impact of the crisis on private pensions in the forthcoming publication “Private Pensions Outlook”. This will include lessons from the crisis for policy makers, regulators, pension fund administrators and employees. Guidelines for the governance of pension funds are currently being revised and will be released in January 2009.
Pension fund in focus – December 2008