Wednesday, June 24, 2009

Collapse in Private Pension Funds' Assets a key reason for a secular rise in the savings ratio?

The OECD has released its 'Pensions at a Glance 2009' report. The report itself costs money but some excerpts can be found here. Furthermore, today's FT contains a brief summary here. The report contains some very interesting findings. The chart below shows the pensions fundes' real investment returns for 2008. Across the OECD, on average pension funds lost 17.4% in real value (unweighted by size) and 23% if weighted by size. The losses have been worst in those countreis where the equity share has been highest (unsurprisingly). Irish pension funds held about two thirds of their assets in equities vs. an average of 36% in the 20 OECD countries where data is available. Such losses are enourmous and I think will have several consequences. For one, pension funds are likely to become more risk averse following such losses (unsurprisingly those pension fund systems with the lowest share in equities/highest in bonds performed the least bad: Germany, Czech Republic, Slovakia, Mexico). Furthermore, such huge losses will affect the behaviour of retirees and especially those near retirement in those countries where private funded pensions make up a significant contribution of retirees income. In 5 countries private financial sources make up more than 40% of retiree incomes: Australia, Canada, the Netherlands, the United Kingdom and the United States (closely followed by Denmark and Ireland).
In turn we should expect that especially people near retirement (and parts of the retirees) which have relied on private financial sources for their retirement are forced to save more. This can happen either via spending less or via working more (and retiring later). But clearly, this is an age group where we should expect savings ratio to rise significantly. It is therefore no surprise to see that savings ratios in the countries most affected by the loss in private pensions funds' wealth are increasing dramatically (from an albeit low level). The chart is from News N Economics, see here for post.
Finally, given such a reason for rising savings ratio, this rise in the savings ratio does not promise to be a short-term temporary affair but rather of a more longer term nature! Besides, limiting consumption growth, it also prevents parts of the people near retirement from dropping out of the workforce. Both, factors are rather disinflationary than inflationary.

1 comment:

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