International pension body, the World Pension Alliance (WPA), has warned of the dangers of governments allowing unrestricted withdrawal of pension savings in response to the COVID-19 pandemic.
The organisation represents pension plans and providers across Europe, the United States of America, Canada, Latin America, and Australia.
The WPA had called on all governments to consider the consequences of the early release of pension savings from defined contribution accounts as a pandemic response, especially unrestricted withdrawal amounts and unconditional access to defined contribution accounts.
While it did not mention Australia’s early release scheme, it was particularly concerned about COVID-19 withdrawal schemes in Chile and Peru.
Eva Scheerlinck, WPA president and Australian Institute of Superannuation Trustees (AIST) chief executive, said while the WPA appreciated the enormous impact of the COVID-19 pandemic on the personal finances of millions of individuals, allowing unrestricted and early withdrawals of pension savings would likely do more harm than good.
“Unrestricted withdrawal of pension savings intended to provide retirement income without repayment will undermine the retirement security those funds are intended to provide,” Scheerlinck said.
“This will only aggravate the situation of these workers in their old age, since they will suffer from greater financial fragility at the time of retirement.”
In its letter to the Organisation for Economic Co-operation and Development (OECD), the WPA said the success of pension systems was closely aligned to the prevalence of strong institutions and committed governments.
The letter outlined that so far in Chile, the three withdrawals to date (for up to 10% of the funds) had entailed the outflow of US $50 billion ($69.3 million), equivalent to 25% of the existing funds. This left a total of five million people without any retirement funds in their accounts.
In Peru, the different withdrawal mechanisms that had been approved would entail the withdrawal of more than US$28 billion in total (equivalent to 64% of existing funds).
As a result, almost six million fund members would be left with zero balance in their individual accounts, and pension amounts could drop by up to 25%.
“This is a time to strengthen private pension savings systems as a means to properly diversify the sources for pension financing, not disband them as is currently proposed in Chile and Peru,” it said.