The OECD Pensions Outlook 2024 dives into pensions based on assets, encouraging higher reliance on equity markets, without adequately assessing the risks.
Pension assets have increased to USD 56 trillion globally, three times their volume two decades ago, now representing 55% of GDP in advanced economies. According to OECD estimates, 80% of pensioners in 19 OECD countries would have accumulated more at retirement if they had invested part of their savings over the past 40 years in domestic and foreign assets.
The OECD highlights that “representative models” for workers covered by collective agreements “should be inclusive and not exclude employees not covered by collective agreements and the self-employed.” The OECD fails to suggest that efforts should be made to extend collective bargaining coverage, which would benefit workers in accessing trade union benefits, including pension funds, as well as raising their bargaining power for fairer wages and better working conditions.
Looking forward, the Pensions Outlook 2024 finds a 90% higher probability of getting a higher replacement rate (the share of a worker’s pre-retirement income received as pension after retirement) by investing in equities rather than fixed-income schemes only. While the OECD introduces a number of caveats in their calculations, the key conclusion is that “pension regulators should avoid setting frameworks that lead to default investment strategies that are too conservative as equity investments tend to bring better retirement income outcomes”.
The OECD’s risk-seeking approach to equity investment for pensions is worrying because, in more than 200 pages, it completely neglects to mention climate change. This reinforces the idea that economists are downplaying the danger of global warming to the long-term sustainability of the planet, estimating future market outcomes on past experience and ignoring the current level of uncertainty.
Climate scientists agree that a 3ºC increase would prove catastrophic for life on the planet, with climate tipping points triggered at as low as 1ºC. On the other hand, economists ignoring climate science say that a global temperature increase of around 4ºC would simply cause a 10-23% decline in global GDP by 2100 (basically trimming average long-term annual growth estimates by 0.4%). Pension funds today base their market predictions on economic models that ignore the true cost of climate inaction. If markets do not assess correctly the impact of climate change on the economy, there is a risk that long-term expectations on returns on equity investment will be too optimistic. The more pensions are based on equity investments, the higher their exposure to financial exuberance that could lead to bubbles bursting and sudden market readjustments that wipe out pension fund assets and workers’ savings.
“Given the likelihood of climate change disrupting equity markets, the OECD should encourage a cautious approach to retirement investment to protect workers’ savings, rather than incentivising risk-seeking behaviour by individuals and institutions.”
