Chapter 5. Barriers to Integration for Pension Funds
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

Pension funds are becoming increasingly important in financial markets in the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay). The size of these pension funds has surpassed 17 percent of GDP in assets under management, largely driven by growing participation following legal changes in most of the region. Brazil dominates LA-7 pension fund assets in value terms, while the Chilean pension fund industry—whose framework has often been used as a model in the region—remains the largest in relation to the country’s size. Despite the rapid growth, total assets and participation rates within the LA-7 remain below those of advanced country averages, thus strengthening expectations that LA-7 pension fund growth will continue to outstrip that of regional GDP. Countries’ regulatory frameworks restrict most pension funds to largely domestic investments, although in many cases Latin American pension funds have outgrown domestic capital markets.

Pension funds are becoming increasingly important in financial markets in the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay). The size of these pension funds has surpassed 17 percent of GDP in assets under management, largely driven by growing participation following legal changes in most of the region. Brazil dominates LA-7 pension fund assets in value terms, while the Chilean pension fund industry—whose framework has often been used as a model in the region—remains the largest in relation to the country’s size. Despite the rapid growth, total assets and participation rates within the LA-7 remain below those of advanced country averages, thus strengthening expectations that LA-7 pension fund growth will continue to outstrip that of regional GDP. Countries’ regulatory frameworks restrict most pension funds to largely domestic investments, although in many cases Latin American pension funds have outgrown domestic capital markets.

Overview

For more than a decade, domestic pension funds have been among the largest institutional investors in many Latin American countries, increasingly expanding their importance in the capital markets. Pension fund participation in government securities markets increased significantly over the past decade; for example, pension funds’ share of the sovereign debt market almost doubled in Colombia and tripled in Peru. Brazilian Previ, Chilean AFP Provida, and Mexican Afore XXI Banorte are now ranked among the largest 100 pension funds in the world.1

Overall assets under management in LA-7 pension funds have reached almost $700 billion through the combination of healthy returns and rising contributions that reflect higher incomes and a growing participation base as younger, more urban population segments enter the formal workforce. Authorities have also promoted private pension participation as a means to build domestic savings and stem the growth of public pensions. As a result, pension fund asset accumulation has well outpaced regional economic growth, significantly increasing their importance in the regional financial systems and domestic capital markets. Between 2008 and 2015, LA-7 pension assets experienced growth rates that ranged between 40 percent and 110 percent, in many cases outpacing their counterparts in Organisation for Economic Co-operation and Development (OECD) member countries (Figure 5.1). Pension fund assets in many LA-7 countries now rank as the second largest among financial intermediaries, trailing only the banking system.

Figure 5.1
Figure 5.1

Pension Fund Assets

(Percent of GDP, index 2008 = 100)

Sources: Brazilian Association of Closed Pension Funds; Brazilian National Superintendent of Pension Funds; International Association of Bodies Supervision of Pension Funds; Organisation for Economic Cooperation and Development; and IMF staff estimates and calculations.Note: Data for some countries may include partial estimates depending on availability. Data for Panama are from the Superintendencia del Mercado Valores (Superintendency of Securities).1 Estimates for Brazil reflect total assets of the Brazilian closed pension funds system.

Given their relatively recent establishment, LA-7 pension funds have ample room for growth, as their size remains well below developed country averages. At the end of 2015, pension fund assets in LA-7 were well below the OECD average of 37 percent of GDP for every country except Chile (Figure 5.2).2 The majority of the current pension fund systems in the LA-7 countries trace their origin to the introduction of mandatory participation in defined contribution pension systems in the 1990s, following the example of Chile in 1981. Brazil has an organization-sponsored pension system that is largely of a defined benefit nature, but many organizations are transitioning to a defined contribution system. The public sector pension plan is also transitioning from defined benefit to defined contribution. Chile, Colombia, Mexico, Peru, and Uruguay have implemented various forms of a multifund system, in which younger participants are steered toward more aggressive funds while older contributors deposit into safer portfolios. Panama has retained its single-fund system. Another distinguishing characteristic of Latin American pension funds is the highly elevated levels of industry concentration. The two largest pension funds in Colombia, Peru, and Uruguay manage more than 70 percent of the industry accounts and assets; the total number of pension fund administrators in each country is four. In Chile, Mexico, and Brazil, by contrast, the two largest pension funds manage about 50 percent, 40 percent, and 30 percent of total assets, respectively. Historically, despite significant variations among the countries, pension fund performance in the LA-7 region largely remained on par with performance of other financial intermediaries. However, profitability in 2015 and early 2016 declined in real and nominal terms.

Figure 5.2
Figure 5.2

Pension Fund Assets, 2015

(Percent of GDP)

Sources: Brazilian Association of Closed Pension Funds; Brazilian National Superintendent of Pension Funds; International Association of Bodies Supervision of Pension Funds; and IMF staff estimates and calculations.Note: Data are for year 2015 or latest available. Some countries may include partial estimates depending on availability. Data for Panama are from the Superintendencia del Mercado Valores (Superintendency of Securities); data for Brazil cover Entidades Fechadas de Previdência Complementar, segundo patrocínio predominante. 2014 simple average for Organisation for Economic Co-operation and Development (OECD).

State of Play

Regional integration of pension fund markets in the LA-7 remains quite limited. Financial integration of pension funds—regional and with the rest of the world—has historically occurred through two main channels: the internationalization of pension fund management firms and cross-border investments of pension fund assets. Although the first channel has seen some activity in recent years, the second continues to be limited by low regulatory investment limits. Cross-border management of pension fund assets has increased as a result of consolidation trends and the withdrawal of a number of global institutions, and regional asset managers are beginning to assert themselves. Currently, the largest pension funds and the majority of assets are controlled by domestic asset managers (except in Chile); however, foreign asset managers have sizable market shares in Chile, Mexico, Peru, and Uruguay (Figure 5.3). In recent years, there have been mergers and acquisitions in many LA-7 countries, involving both domestic and foreign asset management firms. Several foreign institutional investment groups (such as BBVA, ING, and HSBC, among others) have withdrawn from the pension fund industry in the region; they have been partially replaced by others, including Principal Financial Group and MetLife. At the same time, Latin American financial groups, such as Grupo Suramericana de Inversiones (Colombia) and its affiliates, have acquired interests or controlling positions in Chile, Colombia, Mexico, Peru, and Uruguay. This trend, largely accomplished through mergers and acquisitions, has resulted in higher industry concentrations, with Colombia and Mexico as the most prominent examples. The number of pension fund administrators in Mexico fell from 21 at the end of 2007 to 11 in early 2016, while the number in Colombia fell from six in 2012 to four in the first quarter of 2016.

Figure 5.3
Figure 5.3

Pension Fund Assets under Management

(Billions of U.S. dollars, 2014)

Sources: Bureau van Dijk; national authorities; and IMF staff calculations.Note: Data are as at year-end 2014 or latest available. Data for some countries may include partial estimates depending on availability. Data for Panama are from the Superintendencia del Mercado Valores (Superintendency of Securities). Estimates for Brazil reflect total assets of the Brazilian closed pension funds system.

International investments is an important asset class for regional pension funds, although regional exposure is small. The overwhelming share of foreign holdings is invested in advanced economies, such as the euro area, Japan, and the United States, with a somewhat smaller share invested in emerging markets. Investments in other Latin American countries are relatively low; for example, some Peruvian pension managers reported LA-7 investments of just 3.7 percent of assets (9.3 percent of foreign allocations), although this share increases marginally if indirect investments through American depository receipts and Latin America–focused exchange traded funds and mutual funds are taken into account. Foreign securities investments are often allocated to debt securities, as many countries place a regulatory limit on equities in both foreign and domestic markets. Pension funds have contributed greatly to the development of domestic debt securities markets, but their role in the expansion of equity markets has been rather limited (Figure 5.4). In addition to explicit caps on foreign asset holdings, many countries in the region have regulations that indirectly discourage financial integration. For example, Uruguay not only has a foreign asset cap of just 15 percent, it has rules that limit external investments to securities from multilateral institutions. In Chile, although the regulatory limit does not appear to be binding in aggregate, foreign asset holdings are effectively constrained by additional caps on risk tolerance, as measured by sovereign ratings.3

Figure 5.4
Figure 5.4

Pension Fund: Investments, 2005–15

(Percent of total investment)

Sources: International Association of Bodies Supervision of Pension Funds; and IMF staff estimates and calculations.Note: Data for Brazil and Panama are for 2010–14.1 Estimates for Brazil are from the Brazilian Association of Closed Pension Funds and the Brazilian National Superintendent of Pension Funds. Classification may vary from that of other countries. Government debt includes public bonds; other includes private loans and deposits, special purpose companies, structure investments, real estate, operations with participants, and others.

Analysis

Consolidation in the pension management industry has reduced the opportunities for regional firms to enter neighboring markets, which can restrain competition and prompt higher pension fund fees (see the discussion in Annex 5.1). In most cases, regulatory treatment of foreign and domestic companies is largely equivalent.4 However, a significant impediment to new entrants is that the market is highly concentrated, and the competitive advantages5 held by dominant, established asset managers are deemed too great for institutional investors to set up greenfield operations and grow organically. And, as with the banking industry, consolidation has increased corporate valuations beyond what foreigners are willing to pay to enter a market.

As assets under management continue to grow, pension systems in most countries of the region will have to increase their international exposures. Asset allocation strategies are likely to come under more strain as fund inflows continue to grow faster than net government borrowing, while excess allocations into bank deposits threaten to drag down returns. Issuance of corporate debt and equity can meet some of the pension fund demand for local currency investments, but in many countries these instruments can trigger volume, liquidity, and maturity concerns, as well as corporate risks. Alternative assets such as private equity and infrastructure have garnered attention in recent years—especially in Brazil, Peru, and Uruguay—but prudential limits are low and the class is generally considered too risky to expect caps to rise quickly. In the past two decades, regulators have been keener to raise caps on foreign asset holdings. While this asset class introduces foreign exchange risk, most funds have invested in highly liquid segments of advanced country markets for which currency hedging is less expensive.

The internationalization of pension assets is restrained by limits on some asset classes. Figure 5.5 shows that for LA-7 pension funds, share of investments in foreign assets is low by international standards, and is often curbed by regulatory limits. Regulatory limits and restrictions on investments vary by country and generally span multiple categories, including foreign securities, equity, foreign currency, commodities, derivatives, single issuance holdings, and debt securities of lower ratings (see Annex 5.2). Limits on variable rate instruments tend to be more restrictive. Countries with a multifund system—which allows risk profile differentiation—have been able to ease their regulatory restrictions over time, permitting larger shares of investments in variable rate instruments (Chile, Colombia, Mexico, and Peru).

Figure 5.5
Figure 5.5

Foreign Investments by Pension Funds Worldwide Compared with LA-7

Sources: International Association of Pension Funds Supervision; Organisation for Economic Co-operation and Development; Brazilian National Superintendent of Pension Funds; and IMF staff estimates and calculations.1 Data for the LA-7 countries are for March 2016; 2014 or latest available for others. Estimates may be based on partial data for some countries. Hong Kong SAR data only refer to mandatory provident fund (MPF) schemes and MPF-exempted schemes registered under the Occupational Retirement Schemes Ordinance. South Africa data refer only to the funds supervised by the Pension Funds Act.2 Data are as of March 2016. Data for some countries may include partial estimates depending on availability.3 Although the statutory limit on foreign assets in Peru is 50 percent, the pension fund supervisor raises the effective limit over a period of time; at the time of writing it was set at 42 percent.

Pension funds in the region have outpaced the growth of domestic capital markets, complicating the task of optimal portfolio diversification and making a case for the expansion of investment opportunities through financial integration. In addition to providing retirement funding, the development of the pension fund sector has generated a number of benefits. Pension funds have contributed to higher savings rates, broadening the domestic investor base and deepening of the local securities markets. However, their asset growth has long outpaced the supply of domestic securities, triggering an array of challenges. First, pension funds now find it more difficult to achieve optimal portfolio diversification. Second, equity markets may have become more prone to asset price bubbles as pension funds pursue a limited number of securities and may exhibit herd behavior as asset managers chase the same type of securities. Third, the large size and established investment behavior of pension funds, the latter of which is based largely on a buy-and-hold strategy, combine to further diminish financial market liquidity. Trading volumes in the financial markets have declined substantially as pension funds absorb significant portions of new and existing products. And finally, pension funds’ appetite for domestic instruments crowds out other financial intermediaries, such as insurance companies, from the domestic financial markets. Stronger regional integration could enable greater diversification by pension funds and enhance competition, and hence development, in financial markets.

Although the minimum return requirements enforced in some countries inspire confidence in the systems, they can create incentives for a herd mentality among asset managers and reduce diversification efforts into new foreign markets. The minimum returns requirement compels pension funds to disclose their asset composition and portfolio returns, and requires asset managers to top up returns by injecting their own cash into the fund when the return deviates significantly (generally more than 2 to 4 percentage points) below the minimum required threshold over an extended period (usually about 36 months). Typically, the industry average serves as the minimum required rate. Thus, to avoid underperforming their peer group, pension fund asset managers tend to mimic the portfolio allocation schemes of the largest pension funds, which tend to drive the reference rate. Strong homogeneity of returns across funds in a system shifts competitive pressures to management fees and marketing savvy. In such an environment—where risk taking by asset managers can be substantially limited—as negative consequences of poor returns outweigh perceived rewards of stronger performance, initial cross-border activity by market leaders would likely be followed quickly by other market participants if sufficient cross-border opportunities are available.

Against this background, it appears that it may be easier for regulators in countries with age/risk-differentiated funds to introduce new limits on asset classes with higher risk/return profiles. Softer caps on foreign assets, corporate paper, and alternative assets can be introduced in funds with the highest risk tolerances—those designed for the youngest contributors. If, over time, the changes meet regulator expectations, similar reforms can be introduced into less aggressive funds.

In an effort to diversify investments, pension funds have turned their attention to infrastructure products. So far, investments in infrastructure are reported in the range of 3 percent to 5 percent of pension fund investments, well below regulatory limits. A number of barriers prevent higher infrastructure investments, including lack of expertise in the infrastructure sector, problems of scale of pension funds, lack of transparency in the infrastructure sector, shortage of data on the performance of infrastructure projects, and lack of a benchmark. Given the unique nature of each project, investments in infrastructure, either directly or through a fund, also require significant time to complete due diligence and establish the appropriate framework for investment and risk management.6 LA-7 pension funds see infrastructure vehicles as a promising instrument for diversification, especially as they align with the authorities’ strategies for public investment and implementation of structural reform. In Mexico, for example, the recent energy reform is expected to provide a boost to the development of energy products. The long-term investment horizon of pension funds makes them natural investors in less liquid infrastructure products. While prudential limits may have contributed to preventing pension funds from investing much in such infrastructure, own risk appetite also had a part to play. Such risk appetite and internal risk controls would also help ensure that pension funds do not hold too high a share of highly illiquid infrastructure assets.

Policy Recommendations

The LA-7 countries’ authorities could consider several options to fine-tune their pension (funds) regulations with a view to enhance regional integration. First, higher regulatory limits on foreign security investments would ease demand pressures in domestic financial markets. The fact that Latin American pension funds have outgrown domestic securities markets provides a strong argument for an increase in regulatory limits on foreign securities, perhaps to about 50 percent in countries where they are currently set lower. Low limits can lead to suboptimal portfolio holdings and asset bubble developments in the domestic markets and may be a source of instability as they fail to accommodate portfolio reallocations in response to changes in domestic financial conditions. Relaxing limits on foreign (particularly regional) investments—subject to risk safeguards around such investments abroad and the availability of hedging instruments, plus enhancements to transparency and improvements in data—would allow pension funds to invest more across borders, easing their demand for domestic securities and allowing other financial intermediaries, such as insurance companies, greater access to financial instruments.

Given regional labor mobility among the LA-7 countries, authorities should institute pension fund portability across the region. Currently, Chile and Peru have a bilateral agreement that allows their citizens to transfer balances accumulated in their individual accounts from one country to another. Not only does this facilitate the transfer of savings, it also encourages countries to adopt best practices and harmonize asset management processes.

Authorities should simplify the process of creating infrastructure products and allow pension funds to access these instruments in other LA countries. Unrestricted access to regional infrastructure projects would provide a boost to the development of regional infrastructure products and further contribute to the development of securities markets. It would be beneficial to pension funds, as it would allow them to ensure better diversification of portfolios, as infrastructure projects are long-term investments that can match the long-term duration of their liabilities. The benefit would extend to the regional economy by facilitating infrastructure financing overall.

Countries of the region should demonstrate their commitment to integration with an understanding that in the future their pension regulators will agree to treat each other’s securities as domestic. Critically, such an agreement would be preconditioned on countries’ adoption of the highest standards in pension and financial system regulation and regulatory collaboration. Additionally, countries would have to harmonize their accounting standards by adopting the International Financial Reporting Standards and sign the multilateral memorandum of observance of international principles and practices relating to governance, monitoring, and mitigating financial and operational risk. A token of this commitment could be the establishment of a special category for holding bonds issued in the region that would not count against foreign asset limits. This category could have a low limit, say 5 percent, but the limit could be relaxed if asset holdings grow to the point that it becomes binding.

Annex 5.1. LA-7 Pension Funds: Operating Costs and Pension Fees

Pension fund fees levied on contributors directly affect the size of their retirement incomes. In a pension fund system with defined contribution arrangements, the size of retirement benefits depends not only on the contributions and the investment returns earned by such contributions but also on the fees levied by pension fund providers. Although the size of the mandatory pension fund contribution is often determined by legislation, accruing sufficient retirement benefits requires a combination of high returns and low fees (Tapia and Yermo 2008).

Comparisons with other countries indicate that LA-7 pension fund fees are higher than the level suggested by their operating costs (Annex Figures 5.1.1 and 5.1.3).7 LA-7 pension funds on average charge higher fees than the average for Organisation for Economic Co-operation and Development (OECD) member countries as a percentage of total assets under management. Fee size is largely driven by operating costs, including fund administration expenses, marketing costs, and commissions for sales agents. Operating costs of LA-7 pension funds relative to total assets under management are comparable to the OECD country average, but average fees are higher in LA-7 countries. In fact, the fees levied on contributors by pension funds in some LA-7 countries are almost double what is needed to cover operating expenses.

Annex Figure 5.1.1
Annex Figure 5.1.1

Pension Fund Fees, 2015

(Percent of assets under management)

Sources: International Association of Latin American Pension Fund Supervisors; International Organization of Pension Supervisors; national authorities; World Bank; Organisation for Economic Co-operation and Development; and IMF staff estimates and calculations.Note: Data are for 2015 or latest available. Occupational category for Spain; 2nd pillar for Slovak Republic; and voluntary plan for FYR Macedonia. LA = Latin America; LA-7 = Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay.OECD = Organisation for Economic Co-operation and Development.1 Includes selected OECD (non-Latin America and the Caribbean [LAC]) countries for which data are available. Data may not be comparable owing to differences in definitions.
Annex Figure 5.1.2
Annex Figure 5.1.2

Pension Funds: Operating Costs and Fees, 2015

(Percent)

Sources: International Association of Latin American Pension Fund Supervisors; Organisation for Economic Co-operation and Development; and IMF staff estimates and calculations.1 Ratio of operating costs to total income from fees, implied estimate for some countries based on available data.2 Commission of sales agents costs for Peru may include promotion costs. Data for LA-7 cover the July-June period.
Annex Figure 5.1.3
Annex Figure 5.1.3

Pension Funds’ Operating Expenses1

(Percent of assets under management)

Sources: Organisation for Economic Co-operation and Development (OECD); International Association of Bodies Supervision of Pension Funds; and IMF staff estimates and calculations.1 For Latin and Caribbean: annual data include July 2013 to June 2014. Data for LAC countries may not be fully comparable to other economies.2 Includes selected OECD (non-LAC) countries for which data are available. Data may not be comparable due to differences in definition.

Pension funds in LA-7 countries vary structurally. For example, in both Mexico and Panama, operating costs constitute less than half of income collected from fees. However, in Panama the bulk of operating expenses is for administration purposes, while in Mexico more than half of the operating costs goes toward sales commissions (Annex Figure 5.1.2).

LA-7 pension fund fees are also influenced by industry characteristics and regulatory frameworks, which largely exhibit a preference for fees levied on contributions rather than on asset balances. Pension fund fees collected from individual contributors depend on a number of factors, including the size and maturity of the system, market structure, competition, investment strategy, and regulatory framework. Less mature pension fund systems (typical in LA-7 countries) tend to have relatively higher fees. Asset allocation decisions and investment regulations also tend to influence fees, as investments in interest-bearing assets (such as debt instruments) are usually cheaper than active investments (such as equities). Thus, the higher fees in Peruvian pension funds could be partially explained by the relatively larger share of asset allocations toward equities. The structure of pension fund fees in general tends to be fairly complex. Unlike in central and eastern Europe, where preference is often given to fees levied on asset balances, Latin American pension funds tend to emphasize fees on contributions. Colombia, for example, levies a 16 percent fee on contributions, whereas Chile and Peru have a 10 percent fee. LA-7 pension funds also impose a fee on salary, which varies from about 1.2 percent in Peru to 3 percent in Uruguay. Mexican pension funds, on the other hand, rely on fees imposed on asset balances.

A more optimal fee structure in Latin America would cause a decline in pension fund fees without jeopardizing returns and their corresponding alignment with the managers’ cost strategies. Both contribution fees and those levied on asset balances have a number of disadvantages. While contribution fees generate revenues at the start, they may not be completely aligned with the continuously changing nature of the fund managers’ cost structure. On the other hand, asset management fees on balances (levied as a percentage), while responding quickly to fund costs, do not initially generate revenues. Meanwhile, performance fees tend to distort the funds’ long-term goals and objectives. Against this backdrop, it may be advisable to implement annual flat fees to cover transactions carried out during each period, combined with asset management fees to absorb portfolio management costs. Such a strategy may be better aligned with the cost structure of the manager and cause fewer distortions of long-term investment strategies of pension providers.

Greater regional financial integration in Latin America would encourage more competition in the pension fund industry while simultaneously relieving the burden of high pension fund fees levied on customers’ contributions. In some cases (such as Mexico), lower pension fund concentration might be accompanied by higher fees. This could possibly be explained by higher operating expenses incurred as a result of increased efforts by marketing and sales agents to encourage pension fund members to switch providers. Such efforts can drive up fees, as some contributors may be more responsive to marketing than to the size and structure of the fees. Increased regional integration—combined with ongoing efforts to promote financial education among contributors—would allow greater access of regional companies to domestic markets and increase competition in the pension fund industry, thus forcing managers to reduce the size of the fees they levy on their customers. Lower fees, in turn, would reinforce contributors’ efforts to accumulate sufficient funds for retirement.

Annex 5.2. Regulatory Limits on Foreign Investments by Pension Funds

Annex Table 5.2.1

Pension Funds in Latin America: Limits on Foreign Investments

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Source: Author’s compilation.Note: In addition to the global investment limits specified above, some countries also set limits by issuer and by issuance. Colombia, for example, sets a limit of 10 percent of the value of each fund for each issuer and a 30 percent limit for each issuance. Mexico adds a 5 percent limit of the total assets of the fund for each issuer and a 35 percent limit for each issuance.

References

1

Towers Watson (2014) ratings of the largest pension funds.

2

Based on simple average of OECD countries reported in OECD Global Pension Statistics.

3

Chilean pension funds may hold no more than 20 percent of assets in securities of countries with sovereign risk ratings lower than Chile’s own (AA). This could be a complicating restriction when encouraging regional holdings, as targeted partners would all fall below this threshold.

4

The absence of foreign asset managers in Brazil reflects regulatory limits on new investments in the Brazilian financial sector. Brazilian law allows individual residents to make investments abroad, provided that they declare the investments and the funds’ origins to the local authorities.

5

Recognized advantages include the fact that well-established institutions have greater access to securities brokers and have the first pick of the investment offerings, and the assessment among pension participants that the largest funds are the least risky.

6

Infrastructure investments of global pension funds vary greatly. Some Canadian and Australian pension funds register about 10 percent investment in infrastructure, for example, where the necessary knowledge, expertise, and resources to invest directly into infrastructure have been acquired. Other countries’ infrastructure investments remain limited, largely owing to the lingering perception of risk in the sector. (Based on OECD 2011.)

7

Coverage may vary by country and by definition. Data references are based on data from the International Association of Latin American Pension Fund Supervisors, the Organisation for Economic Co-operation and Development (OECD), and IMF staff estimates and calculations. OECD country averages may not be fully comparable owing to variations in country and time period samples.

A New Strategy for a New Normal