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Public Pensions Go More Private, OECD Finds

Reuters

World

November 8, 2005

London There is a growing trend to make public sector pension plans operate like those in the private sector, driven by the need to cut tax burdens and increase labor mobility, according to a study published on Monday by the Organization for Economic Cooperation and Development. 

Governments around the world are starting partly or fully financed arrangements for civil servants' pensions, which are among the world's biggest when measured by assets, said the OECD, which is based in Paris. 

Tax-financed pension plans, typically paying benefits linked to the salary earned in a year before retirement, are under pressure around the world, partly because of aging populations. This is a political problem for governments in Europe, the United States and Asia, the OECD said. 

There is a trend toward bringing public- and private-sector pensions into closer alignment, introducing the idea of partly or entirely financing public sector plans in advance rather than relying on pay-as-you-go inflows from the taxpayer, the OECD report said. 

Public retirement plans should be run and regulated as independent organizations, able to take members from different employers, while plans should also embrace the defined contribution financing model to cut costs of large liabilities, according to the report. 

Defined-contribution plans pay a benefit based on market returns; defined-benefit plans typically link benefits to length of service and salary. Public sector pensions have traditionally used the defined benefit method. 

Pension funds of public sector workers are among the world's largest. In 2003, seven of the 10 largest pension funds in terms of assets were run for civil servants. 

The OECD report laid out a number of problems in public sector pensions. It said they faced higher risks of investment mismanagement because these funds are often pressured to put money into government projects rather than aim to deliver the highest possible returns. 

In some countries, it said, pension investments are politically driven, as with the financing of hospitals in South Korea, and some portfolios are tightly regulated as to what kinds of assets they can hold. 

Deficits in some public sector pension plans are not disclosed, in contrast to financing shortfalls of company-run pensions, which have to be spelled out on balance sheets, according to the OECD report. 

The report looked at major public-sector pension funds in Australia, Canada, Japan, the Netherlands and the United States. The plans included the California Public Employees' Retirement System, or Calpers, and the Dutch pension fund ABP. 

There is also a need to improve the financial literacy of the general public so that citizens can understand complex financial services and the need to save for retirement, especially now that people are expected to live longer, the report added. 

In most countries, government workers were the first group to be covered by pension arrangements, some of which date from the early 19th century, it said. 


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