Tuesday, June 23, 2009

Decades of Social Crisis?


The FT reports that the OECD warns on pension crisis:

Strains in pensions systems, in both private and public provision, threaten to turn the financial crisis of the past two years into a social crisis lasting for decades, the Organisation for Economic Co-operation and Development warned on Tuesday.

In its annual analysis of the health of pensions systems globally, the Paris-based organisation found private pension plans lost 23 per cent of their value last year, while higher unemployment “leaves little room for more generous public pensions.

Angel Gurría, the OECD secretary-general said: “Reforming pension systems now to make them both affordable and strong enough to provide protection against market swings will save governments a lot of financial and political pain in the future”.

Pensioners hit hardest include those heavily dependent on defined contributions, where people save to build up a personal fund, those near retirement and those heavily invested in equities. This applies to many US citizens who have large pension pots, known as 401(k) retirement plans.

For these individuals and for the recently retired who have not bought an annuity, losses will be greatest, the OECD said, exacerbating the sense of a looming pensions crisis worldwide. Those with defined-benefit private pensions are not immune from potential losses, as companies are increasingly restricting the amounts paid.

By contrast, younger workers have time to repair the damage to their pensions. Their losses are also smaller compared with their annual contributions than for those near retirement who have already built up a big pension pot.

Losses in private pension schemes were highest – at over 25 per cent – in countries such as Ireland, Australia and the US, where the greatest proportion was invested in equities. Losses in Germany, Mexico and the Czech Republic, however, were under 10 per cent as private pensions there were heavily invested in bonds. Future incomes from public pensions are not immune from the financial crisis, the OECD warned, because stretched public finances will prevent countries augmenting public provision and might lead to cuts.

Canada, Germany and Sweden, for example, already adjust public pensions in payment according to their schemes’ performance.

The OECD said this form of adjustment “needs a rethink” to prevent cuts in pensions exacerbating the recession. But it does not suggest reversing the proposed cuts, suggesting they are merely postponed until economies recover.

Some countries provide extremely low incomes for poor pensioners with a history of low-income employment.

The OECD singles out Germany, Japan and the US as countries where deficiencies in “old-age safety nets are a concern”.

For private pensions, the recommendation is that governments should ensure most members of defined-contribution pensions gradually reduce the proportion of equities and other risky investments in their portfolios as retirement nears.

Ageing strategy

Planned increases in pensionable age, restricting the generosity of early retirement schemes, less generous public pensions, even cuts in pay for Irish public officials. These are all examples of strategies advanced countries are using to reduce the financial burden of pensions as their population ages.

The financial crisis will focus policymakers’ attention on the short term, warns the Organisation for Economic Co-operation and Development, threatening to postpone long-term strategic planning. Officials in the Paris-based organisation are most concerned about a repetition of the mistakes of the 1980s, encouraging early retirement, which improves unemployment figures today at the cost of fewer workers and a greater pensions burden tomorrow.

The OECD describes these changes over the past five years as “one of evolution rather than revolution in pension systems”.

Over the next 40 years it still expects population ageing, which will create a demographic transformation and increase the burden of pensions on the public purse.

Consider this, the world's 65-and-older population will triple by mid-century to 1 in 6 people, leaving the U.S. and other nations struggling to support the elderly.

IPE reports that the OECD fears pensions backtrack in economic pressure:

The Organisation for Economic Cooperation and Development (OECD) has warned governments should not to try and deal with short-term challenges in economic conditions by postponing pension reforms as the longer-term impact could be more damaging further down the road.

Authors of a biennial report published today, entitled Pensions At A Glance 2009, said a review of OECD countries and their retirement regimes noted planned pension reforms in some countries have either stalled or been postponed, while other nations, such as the Slovak Republic, have attempted to undo earlier reforms – a move which the OECD fears could happen elsewhere should finance ministries feel too much pressure.

The 280-page report warned “the financial and economic crisis means that governments’ attention is focused, more than ever, on the short term” and said the concern is, based on the actions of countries such as Italy – which has now postponed planned reforms to the retirement age and benefits paid – that “governments may be tempted by short-term expediency to backtrack on earlier reforms by…relaxing rules for early retirement as labour-market conditions worsen”.

At the same time, authors warned long-term, strategic planning, which is vital to retirement income policy, is being “set aside”.

“The short-term political pressures on governments to respond are huge. But it is important to resist expedient reactions that threaten the long-term stability and sustainability of retirement income provision.”

It continued: “The crisis may lead to further changes that are not consistent with the long-term strategy needed for a sustainable pension policy.”

The OECD also argued that governments should consider a diversified approach to delivering pensions benefits overall, as it believes this would better protect people.

“The best approach to pension provision is to use a mixture of sources of retirement income, including both public and private, as well as the two main forms of financing (pay-as-you-go and funded pensions). Relying solely or largely on one source in the face of different kinds of risk is imprudent,” suggested the report.

The document provides a complete review of OECD countries’ pension regimes, the reforms and updates on poverty levels among pensioners, the likely impact poverty and earning brackets have on retirement benefits as well as comments about the potential costs to government coffers.

It noted, for example, that Germany's pension system has been less affected by the recent crisis so far than many other OECD countries, though the replacement rate of pensions income to earnings is also one of the lowest at 43% - the average net income of people aged over 65 within OECD countries being 82% by the mid-2000s.

Interestingly, however, the OECD noted the speed of pension reform slowed considerably between 2004 and 2008, compared with earlier years – in only five countries there was little or no change - and the process was described as being “one of evolution rather revolution”.

We are evolving towards a pension revolution - and not the good kind of revolution. It's only a matter of time before we hit a major brick wall, placing enormous pressure on already stretched public finances.

What amazes me is how incredibly silent politicians are when it comes to the pension crisis. It's as if they are hoping that a new super bull market, and inflation, will magically cure the pension pandemic and ease global pension tension.

While some pension experts advise governments to do nothing on pensions, I advise them to have a global pension summit as soon as possible and figure out ways to bolster retirement plans all over the world before it's too late.

***Update***

The Independent reports that a group of pensioners has been accused of kidnapping and torturing a financial adviser who lost over €2m of their savings:

The pensioners, nicknamed the "Geritol Gang" by police after an arthritis drug, face up to 15 years in jail if found guilty of subjecting German-American James Amburn to the alleged four-day ordeal.

Two of them are said to have hit him with a Zimmer frame outside his home in Speyer, western Germany, before he was driven 300 miles to a home on the shores of a lake in Bavaria.

Mr Amburn (56) says he was burned with cigarettes, beaten, had ribs broken, was hit with a chair leg and chained up "like an animal".

The incident began on Tuesday last week after Mr Amburn, the head of an investment firm called Digitalglobalnet, was allegedly attacked by two men aged 74 and 60.

Another couple, retired doctors aged 63 and 66, later arrived to join in the alleged torture.

"I was struck. Again and again they threatened to kill me. The fear of death was indescribable," he said.

He told them he could pay them back if he sold some securities in Switzerland and they agreed to let him send a fax to a bank there.

He scribbled a plea for help on the fax. Armed commandos stormed the house on Saturday.

Is this an omen of what lies ahead? Let's hope not.

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