The last two decades have seen significant growth in pension assets. In advanced economies, pension assets have nearly doubled as a share of GDP to an average of 55%, exceeding 100% of GDP in eight countries. This global trend is not limited to advanced economies. Many of today’s emerging and developing economies also have pension funds with hundreds of billions of US dollars in assets. The growth in pension assets has been supported by policy initiatives aimed at diversifying retirement financing sources to create more resilient pension systems and improving retirement outcomes for individuals. Over half of the working-age population participates in asset-backed pension systems in most OECD countries.

With total assets over USD 56 trillion, pension funds are also the largest investors in global capital markets, including public equity and debt markets as well as emerging private capital markets. At the end of 2023, they owned nearly one-fifth of global public equity market capitalisation.

Given their growing economic and financial importance, it is critical to understand how to improve the design of asset-backed pension systems, promote their inclusiveness and examine the role of equity investments in their growth and performance.

Asset-backed pension systems should be inclusive and not exclude employees not covered by collective agreements and the self-employed.

Pension arrangements pooling multiple employers can promote inclusiveness by encouraging and facilitating employer provision of asset-backed pension plans, especially among small employers. Combining multi-employer arrangements set up by employer and employees’ representatives through collective agreements with those set up by financial institutions will provide access to all types of employers and workers. The former can cover a wide range of employers, including small employers, and employees across sectors and industries, but they tend to exclude employees not covered by collective agreements and the self-employed. Those set up by financial institutions and by associations of self-employed workers may fill this gap.

Financial incentives have improved, but tax rules remain complex and the parameters for financial incentives are not always regularly updated.

With asset-backed pensions playing an increasingly important role in retirement, many OECD countries have in the last decade increased the value of financial incentives for retirement savings. However, tax rules remain complex in many countries, and tend to favour middle- and high-income earners. On the other hand, the importance of non-tax incentives such as matching contributions and subsidies favouring middle to low-income earners are gaining ground. Many countries fail to update income thresholds and contribution limits for tax relief, which may reduce the attractiveness of financial incentives over time.

Investments in equities lead to better retirement outcomes, although market volatility increases risks close to retirement.

Investments in equities represent a significant share of the portfolio of defined contribution (DC) pensions and have been rising steadily over the past 20 years. Equity investments account for more than 40% in 13 out of 38 countries, while they are less than 20% in only 7 countries. This positive trend, as investing in equities leads to better retirement outcomes, comes with more volatile outcomes for individuals and societies. It makes pension benefits sensitive to equity market downturns, potentially when individuals are close to retirement, and tends to work better over long investment periods. However, the regulatory framework should avoid default investment strategies that are too conservative, like fixed income only strategies, because of low returns. Moreover, it should allow providers to offer life-cycle investment strategies. The ideal level and profile of equity exposure is country specific.

The design of the retirement phase of defined contribution pensions should consider their role within the broader pension system, as well as the financial needs and risks they are intended to address in retirement.

Policy makers should ensure that essential spending needs are met, allow retirees to set aside a portion of their retirement savings to cover unexpected expenses and permit flexibility to meet discretionary spending needs, while encouraging options that provide a regular income.

Policy makers should establish default options carefully, ensuring that they are unlikely to cause undue harm. They should also promote awareness and education about the payout options available, and encourage the development and use of digital tools to help individuals understand and access these options at retirement. Additionally, policy makers should leverage behavioural insights to nudge individuals towards appropriate payout options, encourage and facilitate the provision and uptake of personalised guidance, and monitor and support the development of digital solutions for personalised advice.

Home equity release products can improve homeowners’ financial resources during retirement, but they require adequate consumer protection and must overcome numerous supply side challenges.

Home equity products allow retirees who own their homes to increase their financial resources in retirement. However, policy makers need to ensure that the regulatory framework for these products guarantees their suitability and provides controls for the potential risks to homeowners, while also considering the need for providers to manage their own risk exposures.

Communication to individuals can be improved using individual pension dashboards if they are carefully designed and operated.

Pension dashboards facilitate individuals’ access to information about their pensions and their expected future retirement income, especially when their purpose and functionality are clearly defined and coherent. Dashboards should include content relevant and useful for individuals to plan and should present information in a way that is easily understandable and effective in engaging users.

The development of dashboards should involve different stakeholders, ensure the accuracy and security of the data provided, and promote awareness and use of the platform. Their development is a long process that requires improvements over time, as well as regular monitoring of usage and retirement outcomes. This calls for clear objectives with a timeline of milestones, and measurable metrics to assess the impact of the dashboard given its objectives.