The Impact of the Financial Crisis on Funded Pension Saving

Abstract

The authors describe the various ways in which the financial market crisis might affect workers, pension funds and governments. In 2008 the impact of the stock market decline on global pension assets was substantial (roughly 40 per cent, according to the authors’ estimates for the G20 countries). Some individuals, especially those near to retirement, may have been severely affected. However, the authors note that, in most countries, the richest part of the population was disproportionately affected by the losses. Moreover, they used a simulation to show that the performance of individual accounts over the past 45 years has been quite satisfactory, even if internal rates of return differ markedly across cohorts. DB pension plans were affected by the crisis as well, since their assets/liability ratio declined sharply; therefore they could be obliged to increase contributions and/or cut benefits in order to restore an adequate level of funding. Governments will also be affected by the fall in asset prices: indeed, they often provide guarantee schemes that offer insurance against the loss of assets in private DB plans due to employer insolvency; in addition, some governments also guarantee minimum benefits or minimum rates of return to defined-contribution pension plans. Finally, there is the possibility that governments will be forced by strong political pressures to compensate pension plans for at least a portion of the reductions in asset value they suffered. The authors warn that in no case should government responses compromise fiscal sustainability.