OECD Reviews of Pension Systems: Latvia Herv Boulhol Senior - PDF document

07/03/2018 OECD Reviews of Pension Systems: Latvia Hervé Boulhol Senior Economist, OECD Directorate for Employment, Labour and Social Affairs Riga, 7 March 2018 NDC experience in Latvia First country to fully implement an NDC system • • Introduction of the NDC pension in 1996 and difficult transitional issues involved in moving from the dysfunctional Soviet pension system were managed well • Transparency and financial sustainability were significantly improved • OECD countries looking to establish individual accounts in a financially sustainable way within PAYGO can learn a lot from the more than 20 years of Latvia’s experience 1

07/03/2018 Population ageing (1) The pace of ageing is similar to that in the OECD on average Old-age dependency ratio (population 65+ divided by the population 20-64) 2055 2015 2035 % 90 80 70 60 50 40 30 20 10 0 Source : OECD calculations based on data provided by Latvian Ministry of Welfare, Department of Social Insurance. Population ageing (2) The determinants of ageing are very specific Life expectancy is low Change in the population aged 20-64 Remaining life expectancy at age 60, in years Projected change between 2015 and 2035 2015-2020 2060-2065 ,32 15% 10% 5% ,27 0% -5% -10% ,22 -15% -20% ,17 -25% Source : Figures 2.5 and 2.5 . 2

07/03/2018 Old-age poverty rates are very high in Latvia For selected age groups, 2014 or latest 76+ 66-75 Total population % 45 40 35 30 25 20 15 10 5 0 Source : Figure 2.8, OECD Income Distribution Database. First-tier benefits are substantially below OECD averages First-tier benefit levels, s a percentage of average earnings, 2016 Full minimum Basic Safety-net 50 40 30 20 10 0 Source : OECD, 2017b and information provided by countries. 3

07/03/2018 Basic and minimum pension have lagged behind wages and average pensions Real term trends since 2000 Average pension Basic and initial minimum pensions Average wage Minimum wage 450 450 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note : Numbers are normalised at their 2000 real value (=100). Source : OECD calculations based on data provided by the Latvian Ministry of Welfare and the OECD Labour Statistics. Fighting old-age poverty • Increase substantially the basic pension and use the same indexation rule as for NDC pensions in payment • Ensure that each additional year of contribution results in a higher minimum pension benefit • Introduce survivor pensions for spouses within the mandatory earnings-related schemes 4

07/03/2018 Replacement rates are below the OECD average Gross theoretical replacement rates Mandatory pension schemes for an average-wage full-career worker from age 20 in 2016, % 120 100 80 60 40 20 0 Source : OECD (2017) Improve the functioning of NDC • Link the official retirement age to future life expectancy gains • Stabilise the contribution rate going to NDC pension to 14% • Use cohort life expectancy in the NDC annuity divisor and index fully the NDC benefits in payment to the nominal growth of the contribution base • Remove the option to convert the FDC accounts into an NDC annuity. The provision of annuities for the FDC should clearly be separated from the management of the NDC scheme 5

07/03/2018 Investment regime in FDC: issues identified • Low returns over past 10 years • Default investment strategy is only appropriate for very risk-averse individuals and those approaching the retirement age • Conservative investment strategies compared to other countries • Administrative fees are high in international comparison Improve FDC pensions Introduce a default life-cycle investment strategy so that the • amount of risky assets falls as people get closer to retirement • Increase transparency requirements to foster competition • Continue efforts to reduce fees in the pension industry through fee disclosure and harmonise regulations between mandatory and voluntary schemes • Make sure that individuals have access to complete and comparable information about all asset managers’ pension plans when selecting a plan 6

07/03/2018 Thank you Further information: http://oe.cd/pensions-latvia-2018 Contact: herve.boulhol@oecd.org pablo.antolin@oecd.org stephanie.payet@oecd.org maciej.lis@oecd.org OE CD flagship pension publications: Pensions at a Glance http://dx.doi.org/10.1787/pension_glance-2017-en Pensions Outlook http://dx.doi.org/10.1787/pens_outlook-2016-en 7