The decline in pension savings gathering pace

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WORKERS across the developed world are not putting enough cash away to support them in retirement, according to a new report from the Organisation for Economic Co-operation and Development (OECD).

The study will raise fears that many people are heading towards an impoverished old age, which will place mounting pressure on global governments’ resources.

According to the research, the decline in pension savings is gathering pace, as defined contribution schemes replace final salary plans.

Workers contributing a total of 10 per cent to defined contribution pension schemes for 40 years only have a 53 per cent chance of targeting 70 per cent of their final salary, the OECD said.

This decreases to 14 per cent if only five per cent is contributed for the same period.

By comparison, there is an average contribution of 20 per cent into final salary pension plans, the OECD said.

Defined contribution pensions are schemes where the annual contribution amount is specified, but the future benefits are not guaranteed.

Weak financial markets have accelerated the trend of lower pension contribution levels.

Workers have little confidence in their ability to manage the risks of inflation, interest rate changes, investment and longevity themselves, the OECD said.

The OECD’s Working Party on Private Pensions set out recommendations for its 34 member countries.

Its suggestions included using schemes such as the auto-enrolment initiatives in New Zealand and Britain to increase contributions to pension schemes for at least 30 to 40 years.

The OECD believes these steps will help workers who want to retire on “adequate” private incomes and avoid further pressure on state benefits.

Auto-enrolment enrols eligible workers into a company or national pension scheme, but also gives them the opportunity to opt out.

If governments are looking to increase participation rates as much as possible, making pension saving compulsory is the “best way to go”, Pablo Antolin-Nicolas, principal economist, private pensions, at the OECD said.

In OECD countries, the difference in coverage rates between countries with mandatory solutions, such as Australia, and voluntary private pension systems is as much as 30 per cent, the report said.

Mr Antolin-Nicolas said that, in some cases, compulsory pension saving may not be politically possible and could be inefficient – in which case, “auto-enrolment is a good second best”.

Britain introduced auto-enrolment in October 2012 to combat its soaring pensions bill and encourage up to 11 million people into saving for their retirement, rather than relying on the state.

Before the Government introduced auto-enrolment, the average contributions in Britain to old defined contribution plans was around eight to 10 per cent, the OECD said.

Last year, Aviva estimated that the average pension pot in the UK was £28,000, which it said was not enough to secure a good income in retirement.

The OECD can trace its roots back to the Organisation for European Economic Cooperation (OEEC), which was established in 1947 to run the US-financed Marshall Plan, which had been established to rebuild Europe after the Second World War. Canada and the US joined OEEC members in signing the new OECD Convention in December 1960.

Today, 34 OECD member countries work together to identify problems, and promote policies to solve them.

Discussions at OECD committee level can lead to negotiations where OECD countries agree on rules for international co-operation.