Private pensions and policy responses to the crisis

Pablo Antolin, Fiona Stewart 01 May 2009



The dire performance of financial markets has prompted some analysts, such as Monika Butler (2009), to argue that pension system reforms have exposed individuals to too much risk. But how big has the effect been?

The current economic and financial crisis has reduced the value of assets accumulated to finance retirement by around 20-25%, on average, according to the latest OECD figures. However, this has varied significantly across countries; some countries have seen positive but small returns, while others, such as Ireland and the US, have seen reductions of over 30%. This variability is explained in part by differences in portfolio compositions, as well as by the regulatory environment (OECD Private Pension Outlook, 2008). Additionally, the current increase in unemployment will reduce the amount of pension savings, which will negatively affect future retirement incomes.

Pension asset reallocation

The crisis is also causing a shift in asset allocation patterns. Investors have moved into more conservative investments, a trend which has been noted by pension regulators in OECD countries, such as Norway, Slovakia, Spain, and Turkey, and elsewhere (e.g. Kenya, Bulgaria, and Costa Rica, where domestic investments have increased). Such moves risk locking in portfolio losses and could also reduce the potential of funds to generate retirement incomes in the future. For the longer term, regulators expect conservative investment strategies to set in as “bad outcomes”, such as those experienced in 2008, will weigh more heavily on portfolio allocation decisions than in the recent past.

On the one hand, the fall in the value of retirement assets impairs the solvency of pension plan sponsors and the funding levels of defined benefit (DB) plans. On the other hand, it reduces the amount of money that individuals have accumulated in defined contribution (DC) pension plans.

Lagging pension funding by defined benefits programmes

The funding levels of defined benefit pension plans have fallen well below 90% in most OECD countries. As a result, the value of their assets fails to cover their pension liabilities. For example, many US companies whose 2007 funding levels were close to 100% were required (under the Pension Protection Act) to bring the plans to at least 92% by 2008. However, as a result of the crisis, companies have fallen behind this target.

The Dutch regulator (DNB) and the Dutch Association of Industry-Wide Pension Funds (VB) report that the coverage ratio in most pensions funds in the Netherlands has dropped below 95% – against the legal minimum of 105%. Funding levels in the UK have dropped from around 94% at the end of 2007 to 85% in March 2008. Whilst funding in countries such as Belgium and Finland remains in positive territory, levels have nonetheless declined over the last year (to around 115% from 130%). For the longer term, there is an expectation that the crisis will accelerate the trend for plan sponsors to end their defined benefit arrangements, and there is a risk that individuals in countries where benefit guarantee schemes do not operate could lose their retirement income should their employers be unable to meet their obligations.

The loss of value of assets accumulated in defined contribution pension plans is mainly a concern for older workers who will have to retire soon and retirees who are currently financing their retirement using their accumulated balances. These groups may be unable to wait for asset values to recover, and may be forced to realise some of their losses, finding themselves with much lower incomes in retirement compared with just a few months ago.1 Their situation is compounded if their exposure to equities is relatively high. In this regard, the crisis has severely dented the confidence of investors in many countries in defined contribution systems, with some countries suggesting a decline in contributions to voluntary schemes.

Policy responses

The policy responses to the crisis have been quite diverse across countries. Our recent research (Antolín and Stewart 2009) examines these responses in the light of international guidelines, best practices, and recommendations to improve the design of private pensions. The main conclusions are:

  • Stay the course; Complementary private provision for retirement remains a necessity. Some governments are being pressured to retreat from private pension provisioning (e.g. Argentina, Central and Eastern Europe). However, public pay-as-you-go systems face sustainability problems given ageing populations and are also affected by the crisis as unemployment increases. Consequently, private pensions still have a major role to play to maintain balanced sources of retirement income.
  • Saving for retirement is for the long-term. Some flexibility in pre-retirement access to pension assets may be necessary in difficult economic times, with both household and government balance sheets increasingly stretched. However, such withdrawals should be strictly controlled to avoid too much “leakage” from the system. Reducing contributions – whether by governments (as in Estonia) or employers (as with some 401k plans in the US) –risks creating a long-term shortage of pension assets.
  • Supervisory oversight should be proportionate, flexible, and risk-based. Most authorities have strengthened the monitoring of pension funds globally (via stricter stress testing, more frequent on-site visits and increased reporting). Coordination – with industry, government ministries and other regulators – has also been stepped up. Going forward, supervisory oversight should be risk-based, focusing on the main threats facing pension fund beneficiaries and the pension system as a whole.
  • Funding and solvency rules for defined benefit plans should be counter-cyclical. Authorities have allowed flexibility in meeting funding requirements (for example allowing more time to make up funding deficits in the Netherlands and Ireland), thereby avoiding ‘pro-cyclical policies’ and allowing pension plans to act as long-term investors and potentially stabilising forces within the global financial system. The debate has also reopened over whether mark-to-market accounting rules should be suspended.
  • Use the safety net to address issues of insufficient income at retirement. Public provisioning should provide adequate pensions for low-income workers (with social safety nets being improved in countries such as Chile and Finland). Some argue that pension funds – as with other financial actors such as banking or insurance – should receive ‘bailouts’. But ‘top ups’ for defined contribution accounts would be hard to administer affordably or fairly, and would risk introducing moral hazards and adverse incentives. Incentives to keep working and to increase contributions would be helpful for rebuilding pension assets.
  • Improve the design of defined contribution plans, including default investment strategies. Default life-cycle funds can help protect those close to retirement. Guarantees for defined contribution accounts could also provide protection, but it is unclear what level is necessary or who would pay for these. Flexibility should be allowed in the timing of annuity purchases to avoid locking in low annuity rates.
  • Improve the governance and risk management of pension funds. Though most of the impact of the crisis on pension funds has come from macroeconomic factors, some funds appear to have been investing in instruments they did not fully understand. Pension fund governance consequently needs to be improved, and risk management strengthened to reduce exposure to unduly risky investments. Improved governance may also lead institutional investors to behave as more act and responsible shareholders, which could provide needed stability in the global financial system over the long term.
  • Step up disclosure and communication and improve financial education. National campaigns to explain the long-term nature of pension assets are required to rebuild confidence in pension systems, whilst financial education can help beneficiaries improve the understanding of investing, risk and return, etc. Better disclosure of performance and costs is also required.


Antolín, P. and F. Stewart (2009), "Private Pensions and Policy Responses to the Financial and Economic Crisis", OECD Working Papers on Insurance and Private Pensions, No. 36, OECD.
Boeri, T, A.L. Bovenberg, B. Coeuré & A. Roberts (2006). Dealing with the New Giants: Rethinking the Role of Pension Funds, International Center for Monetary and Banking Studies and CEPR.
Bütler, Monika (2009). “Have social security reforms shifted too much risk to individuals? The financial crisis suggests they might have,”, 13 February 2009,
OECD (2008). “OECD Private Pension Outlook 2008”, OECD, Paris.

1 Preliminary results on the impact of the timing of retirement on defined contribution pensions show that replacement rates from defined contribution plans can be quite volatile (OECD 2009, annex). Moreover, those retiring at the end of 2008 would have a much lower replacement rate than those retiring a year before even though they have the same labour histories.




Topics:  Financial markets

Tags:  financial crisis, private pensions

Principal Economist, Private Pension Unit, OECD Financial Affairs Division

OECD's Financial Affairs Division


CEPR Policy Research