In its Pensions Outlook 2014, the Organisation for Economic Co-operation and Development (OECD) warned that the slow growth of the economy will create problems for the UK’s ageing population.
The report highlights that low returns, low growth and low interest rates may “reduce the overall resources available to finance pension promises”.
Referring to the increased pension freedoms, which will be introduced from next April, it said: “While this measure might increase pensioners’ control over their accumulated funds, it could be detrimental to both retirement-income adequacy and incentives to work, due to individuals’ myopic behaviour and insufficient financial literacy.
“The overall outcome depends on how successful individuals are in assessing their needs over their remaining life expectancy. In any case, such withdrawals bear risk that retirees outlive their savings, especially those with low wealth.”
The OEDC argued that the regulatory framework needs to be strengthened “to help pension funds and annuity providers deal with the uncertainty around improving life expectancy”.
The report recommended providers use regularly updated mortality tables, and has suggested that capital markets should offer extra controls for modifying longevity risk.
In light of the financial crisis, the report said nearly all OECD countries have accelerated the reformation of their pension system by increasing taxes on pension income, reducing or deferring the indexation of pension benefits, and increasing the statutory retirement age.
Some of the countries have adopted automatic enrolment programs, which the OECD says are a “second best policy alternative” to encourage a higher number of people to save for retirement.
“Sustainable and adequate”
Angel Gurría, secretary general of OECD, said: “It’s encouraging to see the progress made in recent years to make pension systems more sustainable and adequate.
“But the ongoing rapid demographic shift and the slowdown in the global economy highlight the need for continuing reforms.
“We must communicate better the message that working longer and contributing more is the only way to get a decent income in retirement.”
The OECD also recommended the UK increases the statuary retirement age to help older workers find jobs.
It added public policies which combat age discrimination should be implemented, alongside communication campaigns to rebuild trust in the pensions industry and encourage more people – particularly young people – to put money into their pension pot and “share the financial burden” fairly across generations.
