OECD Report: While Pension Assets Return to Pre-Crisis Levels, Full Recovery Remains Uncertain

(June 25, 2011) — Pension assets in Organisation for Economic Co-Operation and Development (OECD) countries have hit $19.13 trillion at the end of 2010, according to a new report.

Andre Laboul, head of the OECD’s financial affairs division, states: “Having weathered the financial crisis, pension fund asset levels in most countries continue to show strong growth and are on the way to returning to pre-crisis levels. During 2010, both economic and financial indicators showed signs of further recovery. However, the outlook for future economic growth in developed economies remains uncertain and sluggish.”

The report — titled Pension Markets in Focus — reveals that assets have returned to pre-2007 levels in local currency terms. Meanwhile, in US dollar terms, assets at the end of 2010 surpassed 2007 amounts. On average, pension funds returned 2.7% in real terms in 2010. The best performing funds were in New Zealand (10.3%), Chile (10%), Finland (8.9%), Canada (8.5%) and Poland (7.7%).

Furthermore, bonds proved to be the dominant asset. “In most of the OECD countries for which we received data, bonds – not equity – remain by far the dominant asset class, accounting for 50% of total assets on average, suggesting an overall conservative stance,” the paper explains. “Countries like the United States, Australia, Finland and Chile showed significant portfolio allocations to equities, in the range of 40% to 50%. In Austria, Finland, Poland and the Netherlands, the weight of equities in portfolios increased substantially from 2009 to 2010 (in the range 6 to 7 percentage points), while bond allocation fell by a similar amount.”

The OECD asserts that pension funds face numerous challenges and risks, such as recent accounting and regulatory changes. “While bringing further transparency, the adoption of the new rules within IAS19 over the coming years which eliminate the smoothing option will increase volatility in sponsoring companies’ financial statements. As a result, there will be added pressure to reduce risk in pension funds’ asset holding in order to mitigate volatility and to keep funding ratios more stable than in the past…The trend away from ‘pure’ defined-benefit plans, ‘pure’ (final-salary) DB schemes, which guarantee a certain replacement rate and specify pension benefits according to the employee‟s final pay, length of service and other factors, towards defined contribution arrangements is also likely to intensify.”

The report also shows that six OECD countries have not seen assets recover in local-currency terms. Those countries consist of Belgium, where assets are 10% lower than in 2007; Ireland, 13%; Japan, 8%; Portugal, 12%; and Spain and the US, which were both down by 3%.

A previous report by the OECD in July 2010 asserted that regulations on DB pension funding should be reformed to promote countercyclical funding policies, such as providing better tax ceilings for over-funded schemes.

From reducing reliance on market values of assets and liabilities in determining contribution levels to setting minimum funding levels, the authors of the report – Juan Yermo and Clara Severinson – suggested an array of funding reform measures for private pensions. The organization said such regulation and internationally coordinated policies are needed to support the continuation of DB plans in the wake of the financial crisis.