OECD flags budget reform threat to longevity risk

The Organisation for Economic Co-operation and Development has questioned the UK government’s policy of freedom and choice in retirement, saying that a widespread reduction in annuitisation goes against its policy recommendations.

Speaking exclusively to Corporate Adviser, OECD principal economist, private pension unit Pablo Antolin said the freedom and choice in retirement policy would move the UK further away from the Paris-based body’s ideal system.

 In June 2012 the OECD published a roadmap for the good design of defined contribution pension plans, which called on nations to establish systems that ‘promote the supply of annuities and cost-efficient competition in the annuity market’.

In a diplomatic intervention into the debate on UK pension reform Antolin says the Treasury’s policy, to be introduced from April 2015, does not of itself conflict with the OECD’s roadmap, provided the government encourages annuity purchase by making it the default, and also providing there is no reduction in the rates of annuitisation amongst those exposed to longevity risk by virtue of low state pension. But he adds that the ideal system is one where people without high state pension and other guaranteed income that will protect them from longevity risk are encouraged.

Most annuity providers have already seen a significant fall in annuity purchases.

Antolin says: “The OECD’s roadmap for the good design of defined contribution pension plans recommends that, where state pension is not high, that part of a savers assets should be annuitised to protect them from longevity risk.

“If we follow what the UK government says and people will still annuitise then it does not move away from the roadmap. If you believe in the UK less people will now annuitise than before, then the policy moves the UK away from the roadmap. But the government argues that it will not.

“The guidance guarantee should have as a starting point that people should annuitise at least some of their pot, to make sure their longevity risk is covered.

“At the OECD we do not argue that annuitisation should be mandatory, but we should argue that annuitisation should be the default position where state pension is low, which is more the case in the UK for example than in France. So a proportion of assets should go towards an annuity, because being protected from longevity risk is one of the key threats to retirees.

“Our view is that the UK government’s recent policy announcement does not necessarily mean it deviates from the roadmap, but what the UK had before makes it easier to make sure people annuitise.

“The main OECD recommendation is that governments should recommend a combination of drawdown and annuities to overcome the risk of you outliving your resources.

“Originally, the UK said you need £20,000 income and then you can do what you want with the rest. That, for us, was on the roadmap. If the UK thinks £12,000 is enough not to fall into the safety net, then that too is on the roadmap. Now they are dropping the figure down to zero.”