The funding of occupational pension schemes remains a challenge in nearly every country where they form a portion of social security provision, despite the recovery of world stock markets whose dislocation in early 2000 is blamed for their woes.
That is why the Organisation for Economic Co-operation and Development will on Mondad unveil proposed guidelines to help member states create pension rules that encourage stability while in addition avoiding an undue burden on employers.
The guidelines, produced by the OECD’s working party on pensions, are intended to provoke member states to pass legislation in three key areas: funding rules, insurance arrangements for insolvent schemes and the rights of scheme members in bankruptcy.
Among its proposals are that member states should adopt rules for valuing pension schemes that are based on yields on high-quality corporate or government bonds, a methodology which gives rise to a larger calculation of liabilities that will need to be paid for.
Juan Yermo, adviser to the working party, said the OECD believed it was now necessary to encourage a legal framework for pensions because far too many schemes in the 30 member states remained severely underfunded. “What we’d like (governments) to do is to pay attention to the punch line of these proposals – the funding requirements,” Mr Yermo told the FT.
The guidelines say adequately funded pension schemes would have obviated the need for any insurance scheme or changes to the priority of creditors in bankruptcy, the latter of which is the most politically contentious of all the guidelines’ suggestions. “It could come as a shock to the bankruptcy market because for decades, banks have assumed that a pension scheme is not only an unsecured creditor but is one with no voice at all,” he said.
Among the suggested legal changes is one granting priority rights for due and unpaid contributions from plan sponsors. It suggests the pension scheme or the insurance company guaranteeing it should be represented in creditors’ committees following a corporate insolvency.
While many European and North American countries have put in place rules governing the funding of occupational pensions, schemes’ shortfall could put pressure on taxpayers to foot the bill.
While the proposed guidelines make no criticism of any member state, research papers accompanying them make pointed reference to the US system and the inadequacy of rules governing the pension insurer, the Pension Benefit Guaranty Corporation. Because the PBGC’s rules are determined by Congress, it is subject to political interference, the report argues, saying “the PBGC’s problem is that it does not have sufficient powers to protect itself”.
It says political objections from Japanese employers have prevented the extension of adequate insurance to private sector schemes in Japan. “Pressure for the introduction of such a fund may grow as the social security pension is scaled down and sooner or later corporate pensions have to assume a greater role in the retirement income.”
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