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The value of pension savings has fallen
Social security savings and old-age pensions have suffered a strong impact from the coronavirus. Business disruptions, declining economic activity, rising unemployment, and rising debt caused by monetary and fiscal policies have had a negative impact on public pension systems and other pension savings pillars.
The numbers show that the value of pension savings fell dramatically in the first quarter of this year Due to the deep flight in the capital market, it is projected in OECD countries about 10%However, at the end of September, with the markets rebounding, it may have already exceeded the level of late last year:
According to the report, in some countries, membership fees fell in the second quarter compared to the same period last year. At the same time Member contributions increased in Hungary, the Czech Republic and the Netherlands, this is presumably related to the fact that many have managed to accumulate greater savings during the coronavirus period.
According to an OECD report, the following main challenges have emerged in pension systems due to the coronavirus:
- Due to the spring crisis and the market recession, the value of pension savings has also fallen.
- Due to the continued decline in returns, the pension liability of defined benefit (DB) plans and annuity-based plans has increased.
- On the part of employees and employers, the level of membership fees decreased in the difficult economic and labor market situation caused by the coronavirus.
- The number of cyberattacks and fraud against individuals, supervisory bodies and pension providers has increased.
- People tend to prioritize their immediate needs over long-term interests.
- The fact that more and more pension providers are investing in their own country markets and companies increases the risk of pension portfolios due to concentrated exposure.
The coronavirus crisis has thus highlighted the solvency problems of pension plans and pension funds in several countries: the following graph shows that in particular, pension schemes in countries where the scheme was already underfunded before 2020 could have problems:
By further addressing the above challenges, the report also draws attention to the fact that Some measures could jeopardize future retirement income., as many service providers have allowed their members to pause their payments or access them earlier
The figure below shows how each country responded across six main measures. As you can see, in many countries around the world, it has become possible for retirees to access their savings prematurely and pause their payments, which will accelerate as they approach their retirement years.
The numbers show that Withdrawals from pension savings were higher in countries where it was not possible to access these savings before the coronavirus. unlike countries where early access has already been allowed under certain conditions. In Mexico and New Zealand, for example, there has been the opportunity to access pension savings before, and people apparently did not rush their pension savings there, as they did in Peru, Chile or Iceland, where they had unconditional access to this money. this year:
What should the default portfolio be?
The report also looks at how best to define the core portfolio that clients should offer to providers in the case of defined contribution (CD) schemes. These retirement plans typically also offer a multi-portfolio option, such as cautious, conservative, balanced, dynamic, growth, or aggressive portfolios. But many fund members cannot decide between possible portfolios, so the OECD says they should be able to define a default portfolio for themselves. Currently, several countries use a life cycle model to determine each member’s default portfolio, but there are countries where conservative or diversified funds are the default option.
According to the report, factors such as how long people are retiring, the risks they may face, the assets the fund may invest in, or the macroeconomic environment should be taken into account when determining the default portfolio.
However, there is also the fact that public pensions lose value during economic recessions, as low economic growth tends to reduce revenues rather than expenditures on public pension plans.
The report makes a number of suggestions on how people can retire even in tough times like the coronavirus:
- Savings for people’s pensions need to be protected so that even states themselves can help maintain pension contributions in cases where wage subsidies are used to keep jobs anyway.
- Early access to pension savings should only be granted as a last resort, if the saver’s living conditions really justify it.
Extra death: a breather for the pension system?
Nor can we go beyond what caused the coronavirus on the side of excess death and therefore in the financing of pensions. The report states that the number of deaths due to the coronavirus has already been shown to exceed one million (according to Johns Hopkins University, it already exceeds 1.5 million as of early December), and Since these deaths mainly occur in the elderly, the duration of pension payments has been reduced in many cases compared to what could have been estimated before the spread of the coronavirus;.
Excess deaths in the 24 European countries surveyed by EuroMOMO Between January and September of this year, almost 220,000 people were reported, compared to 69 thousand people in the same period last year.
At the same time, expected pension liabilities have declined only slightly due to additional deaths, which will not have a significant impact on long-term pension spending.
For example, a 6% higher death rate would reduce the number of people aged 65 and over by about 0.2% by the end of this year and spending on pensions to a similar degree. Assuming that public spending on pensions is 8% of GDP, a 0.2% reduction in spending would correspond to 0.016% of GDP.
According to OECD analysis this effect on pension spending will disappear rapidly in most countries, While this year’s excess of deaths has mainly affected those who, presumably before the appearance of the coronavirus, probably had a lower life expectancy than their peers of the same age and group. However, it is more uncertain whether the long-term effects of the coronavirus on the health of those who have been infected will be unknown, as several studies suggest that the virus can cause significant damage to various human organs (heart, lungs, brain).
By the way, data recently came out in Hungary that 3,356 people died in Hungary between November 2 and 8, which represents an increase of 40% compared to the same periods in previous years. This means that the coronavirus epidemic is having an increasing impact on mortality:
Cover image: Shutterstock
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