The Organistion for Economic Co-operation and Development (OECD) is dropping the concept of annuitisation as a headline priority for quality DC plans.
In a consultation published today, the Paris-based thinktank has proposed 10 new policy guidelines for DC schemes in its ‘Roadmap for the Good Design of Defined Contribution Pension Plans’.
The consultation proposes dropping a recommendation that ‘For the payout phase, encourage annuitisation as a protection against longevity risk’ and replacing it with ‘Ensure protection against longevity risk in retirement’.
While the roadmap still refers to annuitisation, saying ‘lifetime income can be provided by annuities’, collective arrangements where longevity risk is pooled among participants are also promoted, possibly suggesting a future role for CDC.
While the old policy wording says ‘a certain level of annuitization of balances accumulated in DC pension plans should be set as the default mechanism for the payout phase, unless pay-as-you-go public pensions or the old-age safety net already provide for sufficient regular pension payments’, the new policy wording acknowledges the emergence of drawdown as a solution by saying ‘flexibility could be provided by allowing for partial, deferred or delayed lifetime income combined with programmed withdrawals’.
The consultation also recommends limiting or eliminating eligibility criteria based on salary, working hours, length of employment and type of contract. The consultation highlights that retirement savings systems in some countries need to adjust to the situation of workers in non-standard forms of work. Non-standard workers (i.e. part-time, temporary, self- employed and informal workers) have more limited access to, and lower pension income prospects from, funded pension arrangements than full-time permanent employees. Given that women are more likely to be in such forms of work, they are likely to have worse access to retirement savings plans than men. Countries willing to have a more inclusive retirement savings system should aim to prevent exclusion from plan participation for non-standard workers, it says.
The consultation adds allowing access to retirement savings should be a measure of last resort and based on individuals’ specific and exceptional circumstances. Accessing retirement savings could lead to materialising temporary asset values losses, liquidity and investment management problems for pension funds, and, more importantly, to retirement income adequacy shortfalls. Current regulatory frameworks already allow for tapping retirement savings in exceptional circumstances when substantial income losses occur, and should only be expanded further on a temporary and targeted manner, where needed, to address genuine financial hardship, says the OECD.
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