The Organization for Economic Cooperation and Development is advocating for the purchase of an annuity to provide income in retirement, and to alleviate the pressure on participants of managing longevity risk.
The organization made the recommendation in its latest Pensions Outlook 2016, launched Thursday, which focused in part on the increasing importance of defined contribution plans in OECD countries.
The OECD also recommended that DC plan design is simplified amid the growing importance of individual retirement arrangements.
“DC pensions are becoming increasingly prominent and are here to stay,” said Pablo Antolin, principal economist and head of the private pension unit at the OECD, in a statement accompanying the outlook publication. “In the current environment of population aging, low growth and low interest rates, they have useful features. However, as individuals bear more risks and responsibility for managing their retirement finances, we need to focus on improving and simplifying their design to assist them in doing so.”
Alongside partial annuitization, the OECD also advocated the use of financial advice. “Governments need to ensure they support the development and regulation of these services so people have adequate access to them. In addition, we view financial education as an essential component on retirement policies,” said Mr. Antolin.
The OECD outlook said alongside appropriate financial advice and “comprehensible product disclosures to ensure consumers purchase products suitable for their needs,” there is also a need for regulatory frameworks to adapt to innovations in plan design and to “encourage appropriate risk management for annuity products.”
Assets held in funded retirement plans, which the OECD defines as arrangements backed by assets, represented more than 50% of gross domestic product in 13 OECD countries by the end of 2015, up from 10 countries in the early 2000s. The number of countries where assets represent more than 100% of GDP also increased, to seven countries by the end of 2015 vs. four about 15 years ago.
The latest report is on the OECD's website.