Outline How to reduce old-age poverty? How to improve the notional - - PDF document

▶
outline
SMART_READER_LITE
LIVE PREVIEW

Outline How to reduce old-age poverty? How to improve the notional - - PDF document

Nov 18, 2022 171 likes •379 views

07/03/2018 OECD Reviews of Pension Systems Latvia Riga, 07.03.2018 Maciej Lis and Stphanie Payet Pension analysts Directorate for Employment, Labour and Social Affairs and Directorate for Financial and Enterprise Affairs Outline How to

slide-1
SLIDE 1

07/03/2018 1

Maciej Lis and Stéphanie Payet Pension analysts Directorate for Employment, Labour and Social Affairs and Directorate for Financial and Enterprise Affairs

OECD Reviews of Pension Systems Latvia

Riga, 07.03.2018

Outline

  • How to reduce old-age poverty?
  • How to improve the notional defined

contribution (NDC) scheme?

  • How to improve seperate schemes for

selected occupations?

  • How to improve the funded defined

contribution (FDC) scheme?

slide-2
SLIDE 2

07/03/2018 2

OLD-AGE POVERTY

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: OECD Income Distribution Database.

slide-3
SLIDE 3

07/03/2018 3

.. even though old-age poverty rates declined strongly during the crisis

Poverty rates among selected age groups in Latvia in 2004-2014 Source: OECD Income Distribution Database.

0% 10% 20% 30% 40% 50% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0-17 26-40 41-50 66-75 76+

Basic and minimum pensions have lagged behind wages and average pension

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

slide-4
SLIDE 4

07/03/2018 4

First-tier benefits are substantially below the OECD averages

First-tier benefits are low in Latvia compared to OECD countries As a percentage of average earnings, 2016

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

Basic and minimum pensions should prevent old-age poverty

  • Increase substantially the levels of basic

and minimum pensions.

  • Use the same indexation rule for the level
  • f basic and minimum pensions as the one

for NDC pensions.

slide-5
SLIDE 5

07/03/2018 5

Working longer results in benefit increases only at specific ages

Source: OECD calculations

Basic and minimum pensions could provide work incentives (1)

  • Lower the minimum contribution period of 15

years required for the minimum pension.

  • On top of the safety net available for someone

who never contributed, ensure that each additional year of contribution results in a higher minimum pension benefit.

slide-6
SLIDE 6

07/03/2018 6

Basic and minimum pensions could provide work incentives (1)

Source: OECD calculations

Benefits are lower among older pensioners…

Source: OECD calculations based on data provided by the Latvian Ministry of Welfare.

Average pension by age and gender in 2016

slide-7
SLIDE 7

07/03/2018 7

.. because pensions in payment have not kept pace with newly granted 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 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Indexation for pensions below the threshold Average wage Average newly granted pension

How to reduce the pension gender gap and maintain the relative value of benefits with age?

  • Index fully the NDC pensions in payment to the

nominal growth of the contribution base.

  • Introduce survivor pensions for spouses.
slide-8
SLIDE 8

07/03/2018 8

Survivor pensions

Reasons:

  • They reduce the age and gender gradients in old-age poverty.
  • They ensure income smoothing after the death of a partner.

Options:

  • Joint annuity?
  • Increased contributions?
  • Additional age and income eligibility conditions?
  • Mandatory, default or voluntary?

In-depth analysis of survivor pensions in the OECD countries to come in Pensions Outlook 2018

IMPROVING THE NDC SCHEME

slide-9
SLIDE 9

07/03/2018 9

The Latvian population is ageing at the same pace as the OECD on average

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 working-age population is shrinking

Projected change in the population size by age groups in OECD countries between 2015 and 2035 Panel A: 20-64

  • 30%
  • 20%
  • 10%

0% 10% 20% 30% 40%

Source: UN 2017 population projections.

slide-10
SLIDE 10

07/03/2018 10

Automatic adjustment mechanisms transfer the demographic shift into pension levels

  • Life expectancy gains lower NDC/FDC

benefits.

  • Decline in labour force lowers valorisation
  • f notional accounts (NDC).

Future replacement rates

20 40 60 80 100 120

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

slide-11
SLIDE 11

07/03/2018 11

Automatic adjustments have strong impact on future replacement rates

Source: OECD calculations.

0% 5% 10% 15% 20% 25% 30% 35% NDC - contribution rate 14%

Baseline (PAG 2017) Scenario 1: working-age population does not decline Scenario 2: life expectancy increases to the OECD average (+ 4 years)

How to improve the adequacy of the NDC benefits?

  • Steadily increase contributions paid by

employees of micro-enterprises and align pension contributions paid by the self- employed to those of dependent employment.

  • The retirement age will increase from 63

years and 3 months in 2018 to 65 years in

  • 2025. Afterwards, the official retirement age

should be linked to future life expectancy gains.

slide-12
SLIDE 12

07/03/2018 12

How to link retirement age with gains in life expectancy?

  • 1:1?
  • Keeping the proportion of working life in

lifespan constant on average?

  • In line with the increases of life expectancy

in good health? NDC expenditures are projected to exceed revenues

0% 5% 10% 15% 20% 25% 0% 5% 10% 15% 20% 25% 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 NDC (including transition rules) Pre 1996 costs NDC + Pre-1996 Costs FDC 14% line

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

Pension expenditures by scheme

slide-13
SLIDE 13

07/03/2018 13

What are the reasons for the future NDC deficit?

  • Calculation of initial notional capital was

based on the 20% contribution rate

  • Varying NDC contribution rate: on

average at 17.4 between 1996 and 2017

  • Calculation of pensions with period

instead of cohort life expectancy How to improve the NDC scheme?

  • Stabilise the contribution rate going to NDC

pension to 14%.

  • Use cohort life expectancy in the NDC annuity

divisor.

  • 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.

slide-14
SLIDE 14

07/03/2018 14

PENSION SCHEMES FOR SELECTED OCCUPATIONS

Service pension are high and granted at early ages

Figure 6.1. Recipients of service pensions by age in Latvia in 2016

Note: Per cent of all service pension recipients above the bars. The recipients of service pensions include recipients of service pensions transformed into old-age pensions. Source: OECD computations based on data provided by the Central Statistical Bureau of Latvia. 12 http://dx.doi.org/10.1787/888933657923

Figure 6.2. Distribution of service pensions and NDC-FDC pensions in Latvia in 2016

Note: The recipients of service pensions include recipients of service pensions transformed into old-age pensions. Source: OECD computations based on data provided by the Central Statistical Bureau of Latvia. 12 http://dx.doi.org/10.1787/888933657942 6% 32% 30% 33% 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 <44 45-54 55-59 60+ Age groups Number of people (in 1000) 0% 10% 20% 30% 40% 50% 60% <200 200-300 300-500 >500 EUR NDC-FDC pensions Service pensions

slide-15
SLIDE 15

07/03/2018 15

Limit the fragmentation of the pension system

  • Incorporate service pensions back to the

main pension scheme.

  • Maintain the commitment to eliminate

special pension rights for arduous and hazardous occupations.

IMPROVE THE DESIGN OF THE MANDATORY AND VOLUNTARY FUNDED PENSION SCHEMES

slide-16
SLIDE 16

07/03/2018 16

Investment regime: Issues identified

  • Low returns over past 10 years (including

GFC and European sovereign debt crisis)

  • Conservative investment strategies compared

to other countries

– Equity investment well below regulatory limits

  • Conservative default investment strategy:
  • nly appropriate for very risk-averse

individuals and those approaching retirement age

  • Introduce a default life-cycle investment strategy

– Reduces the amount of assets invested in risky assets as the plan member gets closer to retirement – Potentially enhance returns while still protecting people close to retirement against extreme market swings – Additional option to those already offered – SSIA to provide information to asset managers about the age structure of their clients

  • Gradually relax quantitative investment limits and

increase the skills of professionals in the investment teams of asset managers to allow for appropriate portfolio diversification

Investment regime: Policy options

slide-17
SLIDE 17

07/03/2018 17

  • The new fee structure, with a regressive scale,

lower caps and a tighter definition of the benchmark for the performance fee, goes in the right direction

  • Disclose fees paid by participants in nominal

amounts in the pension statement to increase people’s awareness and put further pressure down on fees

  • Harmonise the fee structure for voluntary

private pension funds to facilitate comparisons and increase confidence in the system

Continue efforts to reduce fees in the pension industry

  • High-water mark: It is the highest value that a

pension account has ever reached. The purpose is to make sure that any losses occurring after the last high-water mark will be compensated before the pension fund is paid a performance fee.

  • Symmetric performance fee: Underperformance

is penalised as much as outperformance is

  • rewarded. In case of underperformance

compared to the benchmark, the fund must compensate participants through lower fixed fees, cash refunds or credits against future fees.

The performance fee could include risk sharing features: 2 options

slide-18
SLIDE 18

07/03/2018 18

  • Make sure that individuals have access to

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

  • Introduce independent members in the governing

body of asset managers in a more systematic manner to help reinforce its commitment to act in the best interests of participants only (cf. OECD Core Principles of Private Pension Regulation)

  • Increase transparency requirements to foster

competition (e.g. detailed and granular information on administration and investment costs)

Balance market opportunities and increase competition

  • Eliminate the option to transfer assets to the NDC

scheme

  • Separate life annuity products and drawdown products

like the upfront-withdrawal annuity to avoid confusion about product features

  • Consider implementing an electronic platform where

participants about to retire could see the bids from all life insurance companies in one place

  • Strengthen the supervision of insurance companies

regarding the mortality tables used for reserving (include expected future improvements in mortality; regularly updated; based on the mortality experience

  • f the relevant population)

Streamline the design of the retirement phase

slide-19
SLIDE 19

07/03/2018 19

  • Between the SSIA and asset managers: Allow asset

managers to propose more varied investment

  • ptions to their members, including life-cycle

investment strategies

  • Between the SSIA and participants:

– Emphasize that the amount accumulated in their pension account is their money – Send the account statement – Include information on fees in nominal amounts – Include projections of future total pension benefits under different scenarios for the age of retirement and the level of voluntary contributions to prompt action

Improve communication within the system

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 OECD 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