GLOBAL - The OECD is set to publish a policy paper outlining its views on the most sustainable path for defined contribution (DC) systems, with the organisation's head of private pensions research unit indicating that income adequacy will be a key concern.

Speaking at LCP's recent Global Pensions conference in London, Juan Yermo said it was important to address questions of financial literacy and pension adequacy as DC funds became the main source of retirement income in many countries around the world.

However, he acknowledged that the needs of every country would be different depending on the construction of its first-pillar system.

"The first thing to say is that a need for a complimentary DC system will depend on how sufficient the income stemming from the state-sponsored pay-as-you-go and the state-sponsored DC plan that countries have started to set up," he said.

"Secondly - and this is a critical point for employers - the cost and the performance of that state-owned scheme may determine whether a small, medium or large employer may wish to have an alternative to that state-sponsored scheme."

He added that policymakers were now gravitating towards DC systems that allowed for a long contribution period and minimal "leakage" - such as withdrawals for mortgages, as allowed under New Zealand's KiwiSaver - as well as protection from investment risk.

Despite this, he said some countries were gravitating towards an element of early access as a method of encouraging take-up, referencing  how Germany's Rieser Rente functioned.

"Similarly, some protection from longevity risk and finally, lower fees," he said. "This, to a large extent, is how policymakers see the solution of these state-sponsored DC schemes."

Yermo added that fees could be combated in a number of countries - notably Latin American states - through nominating default schemes as low-cost providers for workers.

He said that, due to these ongoing debates, the OECD would be publishing a set of principles in the coming weeks arguing for greater coherence in the design of DC schemes, as well as greater efficiency.

Topics