Retirement incomes will be slashed if the Government follows Australia’s lead in allowing pension withdrawals for those left without income as a result of the financial crisis caused by Covid-19, the Organisation for Economic Co-operation and Development (OECD) has warned.
Speaking to Corporate Adviser, OECD principal economist, private pensions unit Pablo Antolin said: “If any government establishes blanket access to pensions, they are storing up problems for tomorrow. The solution should not come from savers but from Government.”
Antolin’s words come as the OECD has put out a paper, authored by Antolin and OECD statistician Romain Despalins, summing up its concerns over the approaches being taken by certain countries around the world, where access to defined contribution (DC) pots has been granted, and taken up by millions of individuals.
The OECD fears that DC savings are already depressed by the market conditions, and will be under further pressure from reduced wages or lost jobs, as well as employers suffering financial distress.
In Australia more than 2.3 million people applied to withdraw up to AUS$10,000 from their DC pots when the government unveiled the hardship scheme in April. A second AUS$10,000 withdrawal is being permitted from July. The withdrawals have stoked fears of liquidity problems as providers cash in billions of dollars of assets to fund withdrawals.
Pension plans rules in several countries already allow members to withdraw some of their assets under exceptional circumstances, such as financial hardship.
Australia, Iceland, Peru, Portugal, Spain and the United States have lifted penalties or broadened the conditions to have access to savings to overcome the short-term challenges of Covid-19 on individuals’ finances.
Australia, Portugal and Spain have allowed members of some plans to withdraw assets if they become unemployed. Australia and Portugal also allow employees experiencing a reduction in working hours, by 20 per cent or more in Australia, to access their pension savings.
The United States gives DC plan members access to their savings if their spouse, dependents or themselves contract Covid-19 or if they suffer from the financial consequences of Covid-19. Iceland appears to be allowing early withdrawals from personal private pension plans without any condition on the situation of plan members.
To date the UK Government has been supportive of pensions, with furlough payments including pension contributions.
Antolin has warned of a range of consequences for pensions stemming from the pandemic, including an increase in liabilities as a result of falling interest rates, operational disruptions as a result of working remotely and cyber-attacks frauds and scams.