The design and governance of asset-backed pensions should be enhanced to foster more inclusive and resilient systems, secure better outcomes for individuals and contribute to sustainable economic growth and innovation, according to new analysis from the OECD.

Pension assets in OECD countries grew by 10% in 2023, reaching over USD 56 trillion, more than triple the level seen two decades ago. Total assets hit USD 63 trillion after adding pension reserve funds held by governments. The 2023 total is 5% below the level seen in 2021, according to Pension Markets in Focus 2024.

Growth in 2023 resulted from positive returns in equity markets and positive cashflows from contributions exceeding benefit payments. The new report analyses this growth and its underlying drivers, comparing it with long-term trends.

Against the backdrop of ageing populations and other economic challenges, a second OECD report, Pensions Outlook 2024, calls for new action to address coverage gaps. The report highlights the importance of ensuring individuals have access to appropriate retirement income and of innovative approaches, such as options for pooling risks and leveraging home equity.

“Pension systems are a cornerstone of financial security and economic resilience for an ageing population in many countries. More inclusive, innovative, and sustainable asset-backed pension frameworks evolving with labour markets are essential to improve retirement outcomes for individuals and ensure the resilience of pension systems,” OECD Secretary-General Mathias Cormann said.

Pensions Outlook 2024 shows that despite progress, significant gaps in pension coverage remain, particularly for self-employed workers and employees not covered by collective agreements. Multi-employer pension arrangements can address these challenges. By pooling resources across employers, especially small and medium-sized enterprises, these arrangements can improve accessibility.

To encourage retirement savings, financial incentives can also be enhanced. However, complex tax rules and irregular updates can undermine their effectiveness. Simplifying these systems and ensuring timely adjustments can ensure incentives remain impactful and equitable, especially for lower-income earners.

Investing in equities provides better long-term financial outcomes, but market volatility can increase risks for those close to retirement. The report advocates for balanced investment strategies, such as life-cycle approaches, to manage risks while maximising long-term returns. Policymakers are urged to avoid overly cautious default strategies that could limit retirement income.

The report also calls for a re-imagined approach to the payout phase of retirement. Flexible solutions that provide guaranteed lifetime incomes, liquidity for unexpected expenses and options for discretionary spending are essential. Investing in financial education is key. Digital tools, such as pension dashboards, are important to empower savers and foster awareness.

Home equity release products can also be a valuable resource for retirees to bolster their financial resources. However, the report stresses the need for strong consumer protections and clear regulation, and well-designed regulatory frameworks, to ensure these products are accessible, transparent and suited to individual needs.

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