Asian countries should reform their pension systems, says OECD

Many Asian countries will need to reform their pension systems in order to deliver sustainable and adequate retirement incomes for today’s workers, according to a new OECD report.

Pensions at a Glance: Asia/Pacific, a joint OECD/World Bank report, says that to prepare for the rapid population ageing forecast over the next two decades, it is vital to act now to avoid future problems and repeating many of the mistakes made in Europe and North America.

The report analyses the retirement income systems of 18 Asian countries, including Australia, China, India, Indonesia, Pakistan, the Philippines and Vietnam. It says that reform is needed because:

• Coverage of formal pension systems is relatively low;

• Withdrawal of savings before retirement is very common;

• Pension savings are often taken as lump sums and often do not provide people with adequate income over their lifetime;

• Pensions payments are not automatically adjusted to reflect changes in the cost of living.

In OECD countries, an average of 70% of the working-age population are eligible for a pension. However in South Asia, just 7.5% of the working-age population are eligible and in East Asia 18%.

Furthermore, few countries in Asia/Pacific have social pensions to provide safety-net retirement incomes for people who are not members of formal schemes. Only in India are social pensions significant, with around 10 to 15% of older people covered.

To improve their pension systems, the report makes three key recommendations:

• Asian countries with defined-benefit schemes based on workers’ final salaries should shift to calculating pension entitlements using lifetime average earnings, as most OECD countries do. This will make them more financially sustainable and fairer: final salary plans tend to favour the higher paid whose earnings tend to rise more rapidly with age compared to lower paid manual workers.

• Many countries allow people to withdraw their pension benefits before retirement or pay lump-sum benefits, rather than a regular retirement income. Allowing people to take out their savings only on retirement via regular payments, known as annuities, would reduce the risk of people’s savings running out in retirement.

• Countries should link pension payments to reflect changes in the cost of living. Of the countries covered, only China and the Philippines currently do so.

Par Ocde Date 14-01-2009