Financial crisis has left scars on private and public pension systems

In certain cases, the reserves of pension funds have dropped to between 60% and 100% of national output. That, by way of comparison, is the ratio of the national debt to output in some advanced countries. The greatest shortfall noted was of about 45% in Japan, followed by about 35% in Sweden. Brazilian and South African companies were the only ones in overall surplus on this score, according to a recent report by the Organisation for Economic Co-operation and Development (OECD).

The financial crisis, then the economic crisis, now the threat of a debt crisis, alarmed people with savings in private pension funds.

The resulting strain on public finances has accelerated radical reforms by governments to ensure they can honour basic state pensions, which in some countries are the mainstay of pensioners’ payouts and in others are heavily complemented by private schemes.

The OECD, by studying in depth a wide sample of performance by private funds and those public schemes based on investments, has come up with a mass of facts and figures.

The data published by the OECD gives somewhat surprising insight into where money being paid month by month into pension systems went, and how it was performing as the global economy was pulling away from crisis.

Some of the main findings

The value of private pension fund assets in OECD countries dropped by US$3.5 trillion in 2008. At the end of last year, they had recovered about US$1.5 trillion of this, but still stood at 9.0% below the values two years earlier.

These funds were worth US$18.7 trillion in December 2007, US$15.3 trillion at the end of 2008, and US$16.8 trillion at the end of last year.

Private funds in general are well funded, owing to long-standing balance sheet regulations that have been further tightened in the light of the crisis, the OECD explained.

In some cases, these reserves represent between 60% and 100% of national output. By way of comparison, that is the ratio of the national debt to output in some advanced countries.

The greatest shortfall noted was of 45% in Japan, followed by about 35% in Sweden.

Brazilian and South African companies were the only ones in overall surplus on this score.

According to André Laboul, head of the OECD’s financial affairs division, last year saw substantial gains in investment performance and a slight recovery in funding levels in certain defined benefit systems after the investment losses suffered in 2008. But funds have not fully recovered yet.

Outside the OECD area, pension funds apparently suffered less in 2008 and have recovered quicker in 2009, with asset levels by December 2009 surpassing those at the end of 2007, Laboul wrote at the time of the release of the report.

Public pension reserve funds, which support social security systems, experienced positive returns in 2009 and, by the end of the year, many were close to the level of assets managed at the end of 2007.

In addition to performance indicators, this issue presents more detailed stock-and-flow data on investments.

The investment flow data shows that pension funds in some countries acted in countercyclical manner during 2008-09, engaging in large net equity purchases as markets tumbled, and reducing the intensity of net purchases as markets recovered. However, in some other countries, the opposite effect was found, which raises concerns over the funds’ long-term performance as well as their role as market stabilisers.

Preliminary results from a pilot date exercise on large pension funds shed further light on this phenomenon, wrote Laboul.

As pension funds recover from the financial crisis, new challenges are appearing: the onset of retirement of the baby-boom generation, uncertainty over the strength of the economic recovery, and weakness of public bond markets.

Regulatory changes are also on the horizon, with possible changes in solvency regulations and new accounting standards from plan sponsors.

Laboul added that the OECD will continue to monitor these developments and “contribute to the policy debate with the experience of our member countries and beyond.

“The high level of foreign investment by numerous pension funds (including public) will also deserve further monitoring.”

The highlights of the report indicate that while pension funds have strengthened with the financial market rebound, OECD data shows pension fund assets in most countries have yet to recover to pre-crisis levels. Public pension funds, however, have now fully made up for their crisis-related losses due to more conservative investment strategies.

Among the key data to come to light are:

• Despite the recovery between March and December 2009, total asset values in the OECD area were still 9% below the December 2007 levels on average. Some countries, however, already recuperated completely from the 2008 losses. This is the case for Australia, Chile, Hungary, Iceland, New Zealand, Norway and Poland;

• The OECD-weighted average asset to gross domestic product ratio for pension funds increased form 60.3% of GDP in 2008 to 67.1% of GDP in 2009, with the Netherlands improving by a record 17.1% jump in the value of its assets in the last year – equivalent to a gain of $48 billion, from $979bn to over $1 028bn;

• Despite these positive outcomes, funding levels for pension funds were still significantly lower at the end of 2009 than two years previously. The median funding deficit (the gap between assets and liabilities) was 26% at the end of last year, compared with 23% a year earlier and 13% in 2007. Decreasing bond yields (which are used to calculate liabilities) in many countries meant that liabilities went up, offsetting the investment
recovery; and

• While public pension reserve funds (PPRFs) in some countries were hit badly by the financial crisis during 2008, they experienced a strong recovery in performance in 2009, which largely made up for the losses suffered in the previous year. By the end of 2009, the total amount of PPRF assets was equivalent to $4.5 trillion – on average 7.3% higher than at the end of 2008, and 13.9% higher than in December 2007. The funds shielded from the crisis were those with conservative investment portfolios.

The report, under the title “Pension Markets in Focus”, can be downloaded from This e-mail address is being protected from spambots. You need JavaScript enabled to view it . meeting

Upcoming meeting

Hosted by the Australian Prudential Regulation Authority, the annual OECD/International Organisation of Pension Supervisors Global Forum on Private Pensions will be held in Sydney, Australia on 2 and 3 November 2010.

The main objective of the Global Forum will be to examine innovative governmental policies intended to enhance the security and adequacy of defined contribution retirement plans – which represent a growing share of retirement savings in the Asia-Pacific region and globally.

The recent financial crisis, which had a negative impact on the asset value and benefit adequacy of such plans, has further compelled governments around the world to take action to strengthen regulatory requirements and supervisory policies with respect to the operation of these plans.