Governments Urged to Bolster Pensions to Adapt to Aging World

OECD warns that countries may not deliver on adopted pension reforms.

The risks are mounting that countries will not make good on recently adopted pension reforms, despite the urgency created by the accelerated aging of the world’s population, according to the Organization for Economic Cooperation and Development (OECD).

A recent OECD report said population aging is accelerating in most of the 36 OECD countries, and pressure is mounting to maintain adequate and financially sustainable levels of pensions. For example, in 1980 for every 10 people of working age in OECD countries there were only two people older than 65. The report said that number is expected to rise to just over three in 2020, and to nearly six by 2060. Meanwhile, the working-age population is projected to decrease by more than one-third over the next 40 years in several countries.

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The OECD report cited recent reforms, such as relaxed age requirements to receive a pension, increased benefits, and expanded coverage.  Examples include contribution rate changes in Hungary, Iceland and Lithuania; increased old-age safety nets and minimum pensions in Austria, France, Italy, Mexico and Slovenia; and benefits for low earners in Germany. Spain suspended certain measures to deal with financial pressures due to aging. Only Estonia raised the retirement age. Italy, the Netherlands and the Slovak Republic expanded early-retirement options or limited previously announced increases in the retirement age.

As economic conditions have improved in recent years, the OECD cautioned against the urge to ease unpopular measures that were introduced during more difficult financial times.

“While financial pressures on pension systems were exacerbated by the crisis, they often also reflected structural weaknesses,” said the report. “Backtracking on reforms that address long-term needs may leave pension systems less resilient to economic shocks in the future and unprepared to face population aging.”

Based on currently legislated measures, a little more than half of OECD countries are increasing the retirement age to 65.9 years on average by about 2060 from the current average of 63.8. But this will not be enough, said the report, as the increase represents half of expected gains in life expectancy at age 65 over the same period.

“By themselves,” said the report, “these changes will be insufficient to stabilize the balance between working life and retirement.”

Despite the improved financial conditions, the report said real investment rates of return (net of investment expenses) of funded and private pension plans were down 3.2% on average in 2018 in the OECD. In 26 out of 31 reporting OECD countries pension plans suffered investment losses, with the largest losses recorded in Poland (-11.1%) and Turkey (-9.4%).  The report said that in several OECD countries 2018 was the worst year on record in terms of financial performance for funded and private pension plans since the 2008 financial crisis.

The investment performance of pension plans over the last 15 years, however, was positive in real terms in 15 out of 18 reporting countries, with Canada seeing the highest average annual return at 4.8%, followed by Australia at 4.7%. By contrast, the annual average return of funded and private pension plans was close to 0% in the Czech Republic and slightly negative in Estonia (-0.7%) and Latvia (-1.0%) in real terms.  Average annual returns also were positive in nominal terms over the last five, 10 and 15 years among reporting countries and remained positive in most of them after adjusting for inflation.

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CalPERS CIO: No Divestment of Fossil Fuel Companies

Addressing climate change advocates directly, Ben Meng says divestment is not the fiscally sound path.

California Public Employees’ Retirement System (CalPERS) Chief Investment Officer Ben Meng has made a forceful rebuke to advocates wanting the pension plan to divest of fossil fuel stocks, stating that the pension plan cannot “constrain itself to a limited set of investment opportunities.”

Pension plan officials of the $380 billion fund have for years resisted divestment, but Meng’s direct statement on the matter at a CalPERS investment committee meeting November 18 was unusual.

At CalPERS, normally sustainability officials of the pension plan deal with the issue, but advocates have been sending dozens of representatives to meetings, many of them CalPERS retirees, to demand the system take action.

The Nov. 18 meeting was no exception, but Meng spoke before any of the environmental advocates got their turn. The argument he laid out is that CalPERS is only 70% funded and needs to pay out $24 billion in retirement benefits each year.

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Meng said that 60 cents of every dollar to pay the retiree benefits comes from investment returns. “We need those investment returns now and in the future,” he said. “If the market fails us, or we miss our targets, the hard-working people of California and the employers take on the financial burden.”

Meng said that outside groups, referring to the environmental advocates, need to be mindful of CalPERS’s financial condition and challenges.

“For non-stakeholders, such as outside parties, who do not bear the financial risk of our fund, but advocate using our fund to take actions beyond the scope of our fiduciary duty, and advocate using our fund to advance their agenda, we ask that they respect our fiduciary duty,” he said.

Meng’s statement comes as CalPERS is expected to issue, as soon as today, a report on climate-related risks in its investments and how the pension plan’s engagement activities are altering those risks.

The new report is required to be released by CalPERS by Jan. 1 under legislation signed into law by former California Gov. Jerry Brown in 2018.

The environmental advocates say CalPERS is losing money by remaining invested in fossil fuels holdings. They cite a report last month by environmental groups that found CalPERS would have generated an estimated additional $11.9 billion in investment returns had the fund divested of fossil fuel stocks a decade ago.

The report by a coalition of environmental groups, which includes Fossil Free California, Fossil Free PERA, and Corporate Knights, a media and research organization with an environmental bent, highlighted  the fact that energy stocks have seen the worst performance of any of the S&P 500 sectors for more than 10 years.

The report also looked at the California State Teachers’ Retirement System (CalSTRS)—as well as the Colorado Public Employees’ Retirement Association,  and said combined with CalPERS, the three pension plans combined missed out on $19 billion in investment returns over the last decade by investing in fossil fuel stocks.

Meng did not address publicly at the meeting why he thinks investing in a broad range of fossil fuel companies will bring better investment returns in the future, but many investors argue that the energy stocks will perform better in an inflationary period.

“Cherry-picking selective time periods to analyze investments and then making broad, sweeping conclusions about how those investments will perform in the future does little to inform the discussion or address the issue of climate risk,” said CalPERS spokeswoman Megan White in an emailed statement after the report by the environmental groups was released.

Meng touted CalPERS’s efforts on addressing climate change before ending his remarks Nov. 18.

Meng said even with “our constraints and unique challenges, we continue to lead on climate change initiatives on a global scale.”

In specific, Meng mentioned Climate Action 100+, an organization founded by CalPERS and other institutional investors in late 2007, to pressure corporations around the world to address climate change issues.

“We are also staunch supporters for the Paris Agreement and carbon pricing,” he said. “The least of our accomplishments and examples of our global leadership do not stop here and will continue our work in engaging and advocating. But given our fiduciary duty and unique challenges we face, we cannot, and we do not compromise on our investment underwriting.”

The environmental advocates have argued that work by Climate Action 100+ does not put enough pressure on large carbon emitters to change their way and more drastic action like divestment is needed.

In a progress report three months ago, Climate Change 100 + officials said they have reached agreement with some of the 161 focus companies to decarbonize including; Heidelberg Cement, Duke Energy, Nestle, Daimler, VW, Thyssenkrupp, ArcelorMittal, BHP Billiton, Centrica, and Saint-Gobain.

The group, however, acknowledged that “Despite these examples of first-wave leadership, analysis shows a significant step change is still required from the majority of focus companies in addressing climate change as a strategic business risk.”

No major state pension system in the US has divested of fossil fuel stocks,  although CalPERS and several other systems have sold stock from a smaller subsection of coal companies.

Advocates have had better luck with foundations and endowments. The largest endowment to divest of fossil fuel stocks is the University of California Regents, with more than $13 billion in assets under management. The approximate $70 billion UC pension system is also in the process of divesting of fossil fuel stocks over a five-year period.

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