23/03/2009

The TUAC welcomes the initiative by the WPPP to prepare a submission to the G20 on the impact of the crisis on pre-funded pension schemes, which regretfully was left unaddressed in the November 2008 statement of the G20 Summit in Washington. The paper which is for discussion at the meeting in Budapest (DAF/AS/PEN/WD(2009)1) addresses important issues which should be shared by the G20. On substance however, we do have concerns with the current version which we highlight in the following comments.

• The failures of DC schemes

The majority of the recommendations and issues contained in the paper are specific to DC schemes, which structural failures have been exposed by the crisis: “Improve the design of DC plans, including default investment strategies”, “avoid materializing losses by selling at the bottom of the market”, “step up disclosure and communication”, “Improve financial education”, etc. Yet the paper falls short of drawing the necessary conclusions from the crisis and the unintended consequences of the shift from DB to DC schemes as witnessed over the past decade in several OECD countries and as actively promoted by international financial institutions and the OECD. The WPPP should develop guidance on how OECD countries could reverse the trend toward evermore market and longevity risks onto workers, and promote DB and other fair risk-sharing pension regimes.

• Flexibility and counter-cyclicality of DB funding rules

Likewise banking prudential rules, pension funding rules applying to DB and hybrid DC schemes need to be counter-cyclical. In fact the TUAC has in the past repeatedly called for the WPPP to investigate further this issue and in particular the impact of employers taking ‘pension contribution holidays’ during growth times, leaving pension fund at risk of underfunding at any sign of downturn.

• Regulation of pension fund investment policy

Increasing monitoring by and cooperation between supervisors is self-justifying and is a priority of the G20. On the other hand, the paper is silent on the role that pension investment policy regulation may play in protecting pension funds against systemic risks and regulatory failures. It is noteworthy that, according to a recent IOPS paper circulated to the WPPP “countries which still use quantitative investment limits have also been sheltered to some extent. For example in Germany qualitative restrictions limit investment in securitized products has helped to contain the exposure of pension funds”. Risk diversification is needed and indeed pension funds should be allowed to invest in a relative large investment universe. However, several post-September 2008 initiatives have identified the need to reverse the light regulatory approach to global finance of the past and to prevent “highly regulated investment entities” – including pension funds – from investing in un-regulated products and assets . The Working Party should reconsider the use of quantitative investment restrictions and – alternatively – strengthening prudent person standard and risk management for alternative assets. For DC schemes more conservative portfolio compositions should be enforced for workers approaching retirement.

• Risk management of pension funds must be enhanced to ‘ESG’ investment policies

The current papers’ discussion on risk management should be enhanced to acknowledging the need for pension funds to exercise their shareholder responsibilities and have in-house shareholder activism and sustainability reporting expertise on environment, social and governance issues, in line with their fiduciary duties.

• Don’t attack PAYG systems

There is a case for protecting and improving sustainability of pre-funded schemes without recourse to unfounded attacks against public pay-as-you-go systems. PAYG systems have no relation to the current financial crisis, its causes and dynamics. Nevertheless, the OECD Secretariat believes appropriate to begin the draft discussion paper – which is meant to address the impact of the crisis on pre-funded pensions – by questioning PAYG funding model which sustainability problems are said to be “daunting”. Such statement is inaccurate and weakens the credibility of the whole paper. It is based on an article written in 2001 and which data and projections date back to the 90ies. We believe the paper should be focussed on the impact of the crisis on pre-funded schemes and should remain within the mandate of the Working Party.

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• Read the full contribution by the TUAC in the attached document, including country reports by the following affiliates: AFL-CIO (United States), CLC (Canada), CSN (Canada, Québec), TUC (United Kingdom), RENGO (Japan), FNV (Netherlands), CCOO (Spain), FTF (Denmark) and LO (Sweden).