Posted: 2010-03-08 23:57 New Retirement Thinking  Presenter: Heather D’Alton Guest(s): Edward Whitehouse Summit TV speaks to Edward Whitehouse pensions expert at the Organisation for Economic Co-operation and Development (OECD) about the impact the global financial crisis has had on pension systems Heather D’Alton: Welcome to New Retirement Thinking. Edward Whitehouse is a pensions expert at the Organisation for Economic Co-operation and Development (OECD) - our topic is the impact the global financial crisis has had on pension systems and the lessons that South Africa can draw from the experience abroad. Edward, perhaps you can give us an idea of what the legacy is of the global financial crisis of 2008 on pension schemes? Edward Whitehouse: It did all start as a financial crisis and that’s obviously had a direct effect on people with private pensions that are dependent on the value of the assets underlying their private pension savings. Our estimate for the 30 member countries of the OECD is that $5.4trillon was wiped off the value of private pension funds in 2008 a fall of about one quarter in the value of those assets. That varied between countries - the worst hit country was Ireland where there was a 38% fall in the value of pensions. Some countries particularly continental Europe saw rather smaller falls in assets mainly because of the way that pension funds are invested. In Ireland there was a very strong portion invested in equities with a much smaller proportion in countries such the Czech and Slovak Republics, Germany and so on. That fed straight through to a lot of people’s retirement income where people were seeing the balances of their retirement savings accounts falling quite substantially... Heather D’Alton: Where does South Africa fit in that list that you’ve just mentioned? Edward Whitehouse: I don’t have the exact data for the private pension funds... Heather D’Alton: Surely we are not on the higher side - probably on the lower side? Edward Whitehouse: Probably on the lower side, yes. Certainly what started as a financial crisis became an economic crisis - for the 30 OECD member countries economic output national income fell by around 3.5% in 2009. We are expecting recovery and growth of 1.8% at the OECD in 2010 but countries such as South Africa have not seen such a huge impact on the wider economy of the financial crisis... Heather D’Alton: Therefore probably also a belaboured recovery presumably as well? Edward Whitehouse: Indeed, yes. If we look at something like unemployment for example we are expecting unemployment for the OECD countries to go up from around 5% or 6% of the workforce up to 10% and then to start falling back as economic output recovers. What started as a financial crisis for many countries - not South Africa or Australia for example - became an economic crisis but it’s also now for many countries a fiscal crisis where the public finances of many countries are very strained. We’ve seen what’s been happening in Greece with the public finances much of that driven by very high expenditure on pensions in Greece. Overall for the OCED countries we are expecting budget deficits to be about 8.5% of national income in 2008, 2009 and 2010 and moving forward. Some countries - not only Greece, Ireland, Spain and Portugal that are mentioned a lot in the financial press but also countries such as the United Kingdom and the United States are also faced with very big fiscal crises and the need for major fiscal adjustments. Heather D’Alton: Perhaps you can detail which pensions came under the most pressure? I’m presuming it’s going to be pensions for people in that old age bracket? Edward Whitehouse: If you look at the different age groups that are affected if you look at younger workers they probably don’t have very much in terms of account balances in their private pension schemes. Also, younger and prime age workers have got time to wait for the markets to recover which they’ve done to quite an extent. The group we are most worried about is the group who are immediately in the run up to retirement that may have seen a significant drop in their pension savings. Most people who are already in retirement are relatively immune from the effects of the crisis - they have public or private pensions that are guaranteed to pay out a fixed income. It’s that group in the run up to retirement. The other reason for worrying about them is when we’ve had this economic crisis in the past this group has been particularly subject to lose their jobs quite early in economic downturns and find it difficult to find a new job. Strangely this recession has been rather different where younger workers and prime age workers have been affected rather more significantly than have the older workers this time. It’s easy also to overstate the impact of the crisis. If we look at how much private pensions and other sorts of private savings form as a proportion of total income in retirement the country figure that’s the largest of the OCED countries is Canada where it’s 50%. Heather D’Alton: If we bring it back to South Africa for our viewers what would you say the main lessons are for South Africa? Edward Whitehouse: Some people have drawn out to the crisis that this is end of private pensions - that private pensions are just too risky, and that the public sector should step back in and provide all pensions. At the OCED we don’t subscribe to that view - we think that pensions systems are best able to cope with a range of different risks of economic, financial and demographic risks that are inherent in pension systems by diversification and by having a mix of public and private provision. In South Africa of course that mix is in place. There is the old age pension and social grant - publicly provided - and quite a substantial proportion of workers in the formal sector have private occupational pensions. Heather D’Alton: You mention that we don’t want to overstate the crisis - but we certainly would also look to make sure that we don’t fall into a similar situation going forward - what do you think the main lessons would be on a global scale? What perhaps would be the main crisis we could face going forward? What should pension schemes be looking out for? Edward Whitehouse: Clearly we do have to learn some lessons from this crisis and make sure that our pensions are more resilient against future crises. One thing that has been of great concern to us is that many people have their private pensions savings invested in quite risky assets - even in that crucial run-up period to the point where they are thinking about retiring. One of the suggestions we’ve made is that people should have a pension scheme that automatically shifts them as they get older away from risky assets such as equities and towards safer assets. Heather D’Alton: Not leaving it to the managers... Edward Whitehouse: Not leaving it to the individuals to make those changes. We know most individuals don’t want to make these complex financial decisions - even I don’t particularly don’t want to make these decisions on my own behalf. What we’ve been advocating is that somehow pension systems should have that automatic move. In countries such as Australia two-thirds of people stick with the default investment option of their pension fund - the default investment option is something like 60% in equities and 40% in other assets - what we would like to see is that proportion in equities falling as people get closer to retirement. That’s the first thought. The second thought is about annuities and income streams and this becomes a bit more a of a technical debate where many people in Australia and the US for example don’t convert their retirement savings into a guaranteed income stream at the point of retirement through buying an annuity. That’s left them very vulnerable because their assets are invested in the markets. Even people during retirement have seen significant falls in the amount of money they have to live on. Those are the two central messages of how we can be more resilient against the next crisis. www.summit.co.za Printing? 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