Secure pension systems for all : what does research say?
AGE Platform is part of the European research project MoPAct, which looks at opportunities for active ageing in Europe. Some important results are becoming available on pensions. How to make first-pillar pension schemes future-proof? Are private pensions marketed in a language for all? How could pension plans better communicate the risks and opportunities related to investments? The project results deliver some answers to these questions.
Ageing challenge often overestimated – older people have economic potential
The research undertaken on the economic and financial consequences on ageing holds good and more challenging news: on the good news, the challenge of population ageing is less immense than often suggested. Statistics are often focussing on the ‘old-age dependency ratio’, mapping the share of over 65-year-olds against the total population of working age. This measure does not take into account that older people can work even beyond 65 years, and are increasingly doing so. The fiscal costs of ageing are also often overestimated, as a declining population in young people also means that less financial transfers will go to the young, even if benefit levels per young person stay the same. See the paper: Measuring ageing and the need for longer working lives in the EU
Sound pension systems needing adjustments of pension ages
Challenges are however that substantial increases of the length of working lives are necessary to keep track with longer life expectancy and demographic developments. Future pensioner’s consumption needs are likely to be higher, as more individuals tend to live alone, and to maintain economic dependency ratios, an increasing number of older people would need to work. The research provided by MoPAct however reveals that the distributional effects of working longer are not necessarily negative. As it is more often the healthy and better educated who are able to work longer, their contributions to pension systems can be redistributed to those who have acquired health conditions in more strenuous jobs and who are forced to stop working earlier. The research also makes a case for automatic adjustments of all pension ages (early and regular pension ages) and benefit ratios, to avoid that replacement rates rise indefinitely with longer working lives, and to de-politicise the question of retirement age changes. The research suggests to maintain the current ratios of working life vs. years in retirement. The results also come from the paper: Measuring ageing and the need for longer working lives in the EU
How to encourage private savings?
In pension reforms, it is often discussed that more private and occupational savings are needed to complement first-pillar pension schemes. MoPAct research has been looking at the most effective strategies to encourage people to save. In a meta-study, it finds that information campaigns and financial education are probably overstretched in their possibilities to make people save for retirement – they are not sufficient to lead to action. Relevant factors are however to offer a choice architecture that makes it easy for consumers to take action with appropriate decisions. Information should focus on the impact of chices and risk on the standard of living in old age, rather than on abstract numbers. A way forward can also consist of automatic enrolment of workers into pension schemes, from which they can opt out if they wish (and take up another pension scheme if they want to plan themselves). See the paper: Pension Awareness, Pension Communication and Choice Architecture.
Pension communication: male or female language?
Research from the MoPAct project analysed how this can be achieved by better communicating with (prospective) pension scheme members. A paper analysed the terms of language used to describe the investment world, and finds an over-presence of terms related to life domains that are seen as ‘male’. Adopting language that includes life domains seen as ‘female’ could be a way to encourage more women to save for retirement. See the paper: ‘Seven ways to knit your portfolio’
How to inform on future personal pensions?
Information on pension schemes is often too complex and technical, or, on the contrary, very elusive in terms of the prospective benefits of saving. A MoPAct research paper proposes pension communication in which all the possible scenarios of the development of an investment portfolio are portrayed, including management costs, risks to lose large amounts and chances for positive developments of the assets. The paper also proposes a benchmark based on a scenario where all investments are recovered at the end of the period, with compensation for inflation. Further proposals are to include a table outlining the expected average return, the maximum risk and the highest possible gain, as well as to calculate monthly payments if the assets are transformed into annuities. According to the researchers, this method would encourage savers to take more risk by investing in equities, have a realistic expectation towards their future assets and include all related costs and taxes very clearly. See the paper on reporting practices for pension funds.
The MoPAct project is a four-year project that aims to show how ageing can be transformed into an opportunity for European societies. It is interdisciplinary and looks into the following domains: economic consequences, pensions, extended working lives, health and well-being, biogerontology, social support and long-term care, the built and technological environment as well as active citizenship. The MoPAct project finishes in February 2016. The final conference takes place on 19 November 2016 in Brussels: http://mopact.group.shef.ac.uk/events/mopact-final-conference/
More information about the project: http://mopact.group.shef.ac.uk
The views expressed in this article are research results from MoPAct. AGE Platform Europe is a partner in the MoPAct project, but the views are not necessarily covering AGE Platform’s positions.
AGE work on adequate income: http://www.age-platform.eu/policy-work/adequate-income-old-age