Pension Markets in Focus 2023

2. Higher nominal wages and employment rates contributed to a rise in contributions

The amount of assets accumulated depends on the investment income earned as well as the amount of contributions paid into and outpayments from the pension plans. Developments in labour markets can influence the number of people participating in pension plans and the amount they contribute.

Labour markets have benefited from the economic recovery following the COVID-19 crisis. The proportion of the population employed continued to increase in 2022 globally after a robust employment growth in 2021. At the same time, nominal wages have picked up in a context of rising inflation, although at a slower pace than inflation and with a lag.

These developments in the labour markets explain the rise in nominal contributions. The improvements in employment rates contributed to an increase in the proportion of people participating in pension plans. This increase, in combination with rising nominal wages and various policy measures to encourage people to join and contribute to pension plans, led to a rise in nominal contributions. At the same time, high inflation and the rising cost of living may have discouraged some individuals to save for retirement in voluntary systems and lower the growth rate of contributions.

This section explains how labour market developments and other factors influenced the participation in and contributions to pension plans in 2022.

2.1. Improvements in employment rates contributed to an increase in the proportion of people participating in pension plans

Employment rates have improved since the shock of COVID-19 crisis on labour markets, and their recovery supported the increase in the proportion of the working-age population having a pension plan in 2022. The increase in the participation rate was widespread across jurisdictions and types of plans but was more systematic for plans mandating workers to participate (Figure ‎2.1).1 This increase was particularly important in countries that introduced mandatory plans recently (e.g. Armenia, the Dominican Republic, Georgia) and have not reached the entire target population yet.2 The only country with a decline in participation rate in 2022 among mandatory plans was Estonia, as members have been given the possibility to opt out of the second pension pillar since 2021. The increase in participation was also visible in most countries with automatic enrolment programmes – signing up employees to a plan while granting them the option to opt out – and many countries with voluntary occupational plans, although the increases in participation rates were more limited in these cases.

Figure ‎2.1. Change in the participation rate in pension plans between 2021 and 2022, by type of plan and by jurisdiction

In percentage point of the working-age population

 

Source: OECD Global Pension Statistics and other sources.

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The combination of elevated inflation and rising interest rates may have played an opposite effect to the one from the rise of employment rates, discouraging enrolment in a pension plan in some cases when members’ participation is voluntary. In the United Kingdom, the participation rate declined for the first time since the introduction of automatic enrolment in 2012, which may be due to an increase in the opt-out rate amid the cost-of-living crisis.3 At the same time, voluntary plans may have faced competition with other financial products, such as saving products offering higher guaranteed returns in a context of higher interest rates, as reported by the Portuguese pension supervisor. In Austria, the number of personal pension insurance contracts (PZV) continued to decline in 2022, losing popularity since 2012 following a cut in government subsidies for these contracts.

Overall, participation rates continued to increase in 2022, in line with the long-term trend over the past 10 to 20 years,4 resulting to some extent from the various measures that policy makers have implemented over the years to promote participation in pension plans and diversify the sources to finance retirement. These measures to boost participation rates include the loosening or removal of some eligibility criteria to participate in mandatory plans (e.g. Australia, Norway), the introduction of automatic enrolment programmes (e.g. Lithuania, New Zealand, Poland, Türkiye, the United Kingdom), the introduction of new plans (e.g. People’s Republic of China, hereafter ‘China’) sometimes targeting specific categories of the population through tailored plans (e.g. in several African countries for informal workers), the increase of financial incentives (OECD, 2022[6]), and financial education campaigns. Some of these measures were introduced in 2022 or very recently and had effects already visible by end-2022 (e.g. Norway, the Slovak Republic). In Norway, the coverage of mandatory occupational plans increased by more than 8 pp in 2022 after the expansion of access to all workers earning at least NOK 1 000 from age 13 (instead of 20), including seasonal workers and part-time workers who no longer need to fulfil a minimum of 20% of full-time employment from 1 January 2022. The Slovak Republic recorded the strongest increase in participation rate among voluntary personal plans (+1.6 pp), which may be the result of the recent financial education initiatives set up by the National Bank (5 peňazí), together with the communication by the industry on the positive investment returns in 2021.

Despite the general increases in plan participation during 2022, there were still wide differences in the proportion of people having a plan across jurisdictions and types of plans. Mandatory plans and those with an automatic enrolment mechanism are those covering the largest proportion of the working-age population, with a very high or quasi-universal participation rate (Figure ‎2.2). Participation rates tend to be lower in voluntary plans, with some exceptions such as in Czechia (64%), Ireland (59%), Japan (53%), Poland (65% for open pension funds, formerly mandatory) and the Slovak Republic (48%). Lower participation rates could reflect barriers that may have prevented individuals from joining a plan: eligibility criteria, informality (e.g. in Africa, Asia or Latin America (ILO, 2020[7])), lack of access to an occupational plan because employers are not willing to bear the related costs and administrative burden (OECD, 2022[8]), lack of awareness or appetite from the population.

Figure ‎2.2. Participation rate in pension plans, by type of plan and jurisdiction, in 2022

As a percentage of the working-age population

 

Note: For more details, please see the methodological notes in ‎Annex C.

Source: OECD Global Pension Statistics; Central Statistical Office (Ireland); Ministry of Health, Labour and Welfare (Japan); Finance Norway; DWP's Family Resources Survey (United Kingdom).

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2.2. Nominal contributions increased as a result of both higher participation and higher nominal wages

Contributions to pension plans increased in most jurisdictions in 2022. Figure ‎2.3 shows the extent of the increase in nominal contributions across jurisdictions. This increase continued the long-term trend of growing amounts paid into pension plans (OECD, 2023[4]). The increase in participation is one of the factors behind it. However, countries where participation increased the most in 2022 (i.e. Norway and Bulgaria) were not those with the largest rise in contributions, which were Türkiye (69%) and Estonia (64%). Also, contributions increased in 2022 even in some countries where the proportion of the working-age population having a plan stalled or declined (e.g. Estonia, Luxembourg, the United Kingdom), showing that other factors were at play.

Figure ‎2.3. Nominal growth rate of contributions into pension plans, 2022

In per cent

Note: For more details, please see the methodological notes in ‎Annex C.

Source: OECD Global Pension Statistics.

Statlink

The increase in nominal wages 2022 is also behind the increase in contributions. As inflation was rising in 2021 and most of 2022, nominal wages also rose with a lag, automatically increasing the amount of contributions paid when contributions are defined as a percentage of earnings. This effect was particularly visible on contributions paid in Türkiye where inflation was at 64% at end-2022 and nominal wages increased the most over the period 2019-22 in the OECD area (OECD, 2023[9]).

Some policy or supervisory measures may have reinforced the effect of wage growth on contribution levels in some countries. Some countries increased mandatory contributions rates (e.g. Australia from 10% to 10.5% in July 2022, the Slovak Republic from 5.25% to 5.5% in 2022), or simply returned to normal conditions after the suspension or reduction of mandatory contributions granted in the midst of the COVID-19 crisis (e.g. Estonia, Finland) (OECD, 2022[10]).5 Norway expanded the earning base used to calculate mandatory contributions in 2022, requiring all employers to contribute 2% of the salary of their employees from the first krone up to 12G since 1 January 2022,6 while there was often no contribution for salaries below 1G before.7 Some supervisory authorities, especially in Africa, endeavoured to boost compliance with existing mandatory contribution rates to increase contributions. For example, the supervisor in Ghana took legal action against employers who did not comply with the 5% mandatory contribution rate. In Malawi, a part of the 17% increase in contributions in 2022 comes from a reduction in contribution arrears, although there was reportedly still a large amount of outstanding contributions unremitted to pension funds.

The rise in inflation and cost-of-living may have led some people to delay retirement, making them contribute for longer. According to different studies, the rise in cost of living led 41% of pre-retirees in the United Kingdom and 20% to 40% of older workers in the United States to delay retirement.8 At the same time, it may have also led some people to stop or reduce voluntary contributions, due to the potential lower capacity to save for retirement and the higher priority they gave to other needs. The rise in interest rates following central banks’ attempt to contain inflationary pressures may have also improved the financial position of defined benefit plans in some countries,9 reducing the need for employers to make additional contributions to guarantee the promise, such as in Portugal (-32%).

Voluntary contributions to pension plans may also be sensitive to financial incentives. Many countries have financial incentives to encourage saving for retirement. Reducing financial incentives may affect behaviour and reduce contribution levels, such as in Spain where lowering the tax deductibility limit for contributions to personal plans from EUR 2 000 to EUR 1 500 may have contributed to the 17% fall in contributions in 2022, despite the increase in the limit for contributions to occupational plans from EUR 8 000 to EUR 8 500.

The macro-economic developments in 2022, with higher employment rates and nominal wages, but also higher inflation, may have also affected the revenues to finance public reserves. Reserves of the public PAYG pension arrangements are not financed in the same way as pension plans because they do not serve a specific group of members from whom they would receive contributions and to whom they would pay benefits. Public reserves can have multiple sources of revenues. Revenues are the result of the excess of contributions over benefit payments from the public PAYG scheme they support in most cases (e.g. Canada, Finland, Japan, Korea, Luxembourg, Sweden, Switzerland, the United Kingdom and the United States). The impact of macro-economic developments then depends on how the different factors played out on the PAYG contributions and benefit payments.10 Revenues can also come privatisation, earmarked contributions or tax, special or one-off contribution, and any other fiscal transfer (e.g. in Australia, Chile, France, Poland, New Zealand) (OECD, 2021[11]). In such cases, inflows depend on the willingness to build up reserves, which the economic situation may influence. For example, the contributions to the reserve fund were suspended in 2020 and 2021 in Chile during the pandemic but resumed in 2022 following the economic recovery.

Notes

← 1.  Mandatory pension plans include mandatory occupational plans (where employers are required by law to set up a pension plan for their employees who then have to join the plan, e.g. Finland, Norway, Switzerland), quasi-mandatory occupational plans (where participation levels are high because plans are established through collective agreements at the industry or sector level, e.g. Denmark, the Netherlands, Sweden) and mandatory personal plans (where workers are required to join a pension plan, e.g. Chile, Colombia, Denmark, Mexico).

← 2.  This is particularly the case when the obligation to participate only applies to the youngest generations (e.g. those born in or after 1974 in Armenia, those under 40 in Georgia). In Bulgaria, the participation rate increased by eight percentage points as the number of participants in the second pension pillar (the numerator) increased while the working-age population (the denominator) shrank because of emigration (OECD, 2023[16]).

← 3.  Rise in opt-out rates prompts concern despite AE successes - Pensions Age Magazine

← 4.  See statistical annex (‎Annex B).

← 5.  In Estonia, the 4% employer contribution to the second pension pillar was suspended between 1 July 2020 and 31 August 2021. Contributions increased in 2022, despite the possibility given to members of the second pension pillar to stop contributing since the pension reform in 2021. In Finland, employer contributions to earnings-related pension plans were lowered in 2020 due to the pandemic but this reduction is being fully compensated by an increase in contributions between 2022 and 2025.

← 6.  G is the National Base Amount.

← 7.  Norway extends pension scheme access - Lockton Global Benefits

← 8.  2.5 million plan to delay retirement due to cost-of-living crisis | Legal & General (legalandgeneral.com) and US. 5 Ways Inflation is Changing Retirement Planning - Pension Policy International

← 9.  See following section 4.

← 10.  The study of the impacts of the macro-economic and financial environment on contributions and benefits paid from public PAYG schemes goes beyond the scope of this report. Please see OECD Pensions at a Glance 2023 for more information on this topic.