OECD Reviews of Pension Systems: Latvia Herv Boulhol Senior - - PDF document

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Hervé Boulhol Senior Economist, OECD Directorate for Employment, Labour and Social Affairs Riga, 7 March 2018

OECD Reviews of Pension Systems: Latvia NDC experience in Latvia

• First country to fully implement an NDC system
• Introduction of the NDC pension in 1996 and difficult

transitional issues involved in moving from the dysfunctional Soviet pension system were managed well

• Transparency and financial sustainability were significantly

improved

• OECD countries looking to establish individual accounts in a

financially sustainable way within PAYGO can learn a lot from the more than 20 years of Latvia’s experience

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Population ageing (1)

Source: OECD calculations based on data provided by Latvian Ministry of Welfare, Department of Social Insurance.

Old-age dependency ratio (population 65+ divided by the population 20-64)

10 20 30 40 50 60 70 80 90 % 2055 2015 2035

The pace of ageing is similar to that in the OECD on average

Population ageing (2)

Source: Figures 2.5 and 2.5 .

The determinants of ageing are very specific

Life expectancy is low

Remaining life expectancy at age 60, in years

Change in the population aged 20-64

Projected change between 2015 and 2035

,17 ,22 ,27 ,32 2015-2020 2060-2065

• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15%

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Old-age poverty rates are very high in Latvia

5 10 15 20 25 30 35 40 45 % 76+ 66-75 Total population

For selected age groups, 2014 or latest Source: Figure 2.8, OECD Income Distribution Database.

First-tier benefits are substantially below OECD averages

First-tier benefit levels, s a percentage of average earnings, 2016

Source: OECD, 2017b and information provided by countries. 10 20 30 40 50 Full minimum Basic Safety-net

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Basic and minimum pension have lagged behind wages and average pensions

Real term trends since 2000

Note: Numbers are normalised at their 2000 real value (=100). Source: OECD calculations based on data provided by the Latvian Ministry of Welfare and the OECD Labour Statistics. 50 100 150 200 250 300 350 400 450 50 100 150 200 250 300 350 400 450 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Average pension Basic and initial minimum pensions Average wage Minimum wage

Fighting old-age poverty

• Increase substantially the basic pension and use

the same indexation rule as for NDC pensions in payment

• Ensure that each additional year of contribution

results in a higher minimum pension benefit

• Introduce survivor pensions for spouses within

the mandatory earnings-related schemes

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Replacement rates are below the OECD average

20 40 60 80 100 120

Gross theoretical replacement rates Mandatory pension schemes for an average-wage full-career worker from age 20 in 2016, % Source: OECD (2017)

Improve the functioning of NDC

• Link the official retirement age to future life expectancy gains
• Stabilise the contribution rate going to NDC pension to 14%
• Use cohort life expectancy in the NDC annuity divisor and

index fully the NDC benefits in payment to the nominal growth of the contribution base

• Remove the option to convert the FDC accounts into an NDC
• annuity. The provision of annuities for the FDC should clearly

be separated from the management of the NDC scheme

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Investment regime in FDC: issues identified

• Low returns over past 10 years
• Default investment strategy is only appropriate for very

risk-averse individuals and those approaching the retirement age

• Conservative investment strategies compared to other

countries

• Administrative fees are high in international comparison
• Introduce a default life-cycle investment strategy so that the

amount of risky assets falls as people get closer to retirement

• Increase transparency requirements to foster competition
• Continue efforts to reduce fees in the pension industry

through fee disclosure and harmonise regulations between mandatory and voluntary schemes

• Make sure that individuals have access to complete and

comparable information about all asset managers’ pension plans when selecting a plan

Improve FDC pensions

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Further information: http://oe.cd/pensions-latvia-2018 Contact: herve.boulhol@oecd.org pablo.antolin@oecd.org stephanie.payet@oecd.org maciej.lis@oecd.org OE CD flagship pension publications: Pensions at a Glance http://dx.doi.org/10.1787/pension_glance-2017-en Pensions Outlook http://dx.doi.org/10.1787/pens_outlook-2016-en

Thank you