Countries that have moved away from traditional defined benefit pension plans and those with many small pension funds have higher operating costs, which eat into plan returns, according to the Organisation for Economic Co-operation and Development.
The OECD’s latest report on pension funds shows a wide range in plan returns and costs across member nations.
The pension sectors of most industralised nations continued their recovery last year and by December 31 had recouped $3,000bn of the $3,400bn they lost during the 2008 financial crisis. But growth in plan assets slowed in 2010, along with financial markets, to an average of 2.7 per cent after inflation, down from 4.3 per cent the prior year. The OECD warned that full recovery could be jeopardised by a prolonged period of low interest rates.
The best performers were New Zealand (with investment returns of 10.3 per cent), Chile (10 per cent), Finland (8.9 per cent), Canada (8.5 per cent) and Poland (7.7 per cent). Pension funds in troubled economies such as Portugal and Greece had negative rates of return, at -8.1 per cent and -7.4 per cent, respectively. Public pensions typically outperformed private schemes, booking an average return of 4 per cent in 2010, down from 7.3 per cent the year before.
The OECD found the costs of running pension funds varied widely across developed nations, ranging from 0.1 per cent of plan assets in Denmark and Portugal to 1.3 per cent in Spain and 1.4 per cent in the Czech Republic. Costs ran higher on average in less-developed countries, reaching a high of 5.9 per cent of plan assets in Ukraine.
Costs are lower in traditional defined benefit plans since they are normally backed by an employer, which bears – and may not reveal – the full cost.