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14 December 2016

OECD calls for the alignment of public-sector and private-sector pension schemes

In a report published on 5 December entitled ‘Pensions Outlook 2016’, the Organisation for Economic Co-operation and Development (OECD) recommends that public-sector and private-sector pension schemes be aligned and calls for increased use of funded pension arrangements.

In half of OECD countries, civil servants’ future pension promises measured in terms of replacement rates are 20 percentage points higher for a full career than those of the private sector. The OECD believes that this situation is unfair.

According to the OECD, ‘It is difficult to argue today that civil servants/public sector workers require higher income replacement in retirement than their private sector counterparts’.

The OECD believes that a unified system would facilitate labour mobility across sectors, since many public-sector workers are reluctant to switch to the private sector for fear of losing benefits.

At present, 21 of the OECD countries have either unified pension schemes (Italy, Spain, Greece and Switzerland in particular) or separate schemes which are subject to the same rules (Sweden, the Netherlands, Luxembourg, etc.). Only four OECD members (France, Germany, Belgium and South Korea) still have separate private-sector and public-sector schemes.

The OECD encourages governments not only to eliminate special pension schemes for public-sector workers, but also to offer preferential tax treatment for retirement savings, thereby achieving at least partial privatisation of the system.

According to the report, assets held in funded pension schemes represented over 50% of GDP in 13 OECD countries in 2015, compared to 10 at the start of the millennium.

However, the OECD stresses that these schemes put more risks onto individual workers and make them more responsible for managing their retirement assets, and therefore calls on policy makers to ensure that consumers receive appropriate financial advice.

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