A higher productivity growth rate in the economy – which is one of our main economic policy challenges – has a stabilising impact on pension spending as a proportion of GDP, precisely through a reduction in the replacement rate, insofar as existing pensions are indexed below productivity growth. The sustainability factor, which will come into force in 2019, and the new pension revaluation index, introduced in the 2013 reform, also temper spending by reducing the replacement rate. In practice, the new pension revaluation method, in force since 2014, sets the annual growth of pensions according to past and future behaviour of revenue and expenditure in the system, which depends on factors such as the number of pensioners and average pensions, with ceilings and floors equal to the change in the CPI+0.50% and 0.25%, respectively. On the projections available, in macroeconomic scenarios that are fairly favourable in terms of employment and productivity developments, and in which inflation stands at close to 2%, the recent reforms (i.e. putting back the retirement age, a sustainability factor and a new revaluation mechanism) would manage to counter the effect of the expected increase in the dependency ratio on pension spending and, therefore, would succeed in restoring the system’s financial sustainability in the long term. Assuming no new revenue sources, the adjustment mechanism would operate through reductions in the replacement rate, which would need to be significant to stabilise the system’s spending.

From the perspective of the public authorities, concerns have been expressed in particular about the lack of transparency on the identity of the ultimate risk holders and about adequate risk management by the institutions dealing with these instruments. In particular, financial innovations may be subject to problems when their behaviour has not yet been tested in difficult market conditions. As for any new instruments, probability analysis on the basis of historical data cannot be used for the credit risk transfer instruments that have been around for a few years only, and, thus, an accurate pricing of risk is not always possible. Inadequate data was already a problem in the use of Value-at-Risk models for risk management purposes by hedge funds prior to the Russian and LTCM crises. This kind of experience could reflect a lack of full understanding by market participants of the nature of the risks they face. Turning back to the credit risk transfer instruments, these instruments allow banks to sell their credit risks, and in so doing the risk profiles of other financial institutions, particularly insurance companies, are also transformed. Hence, a major outcome of the financial innovation process is the transformation of the traditional risks faced by financial institutions. These developments also affect the effective supervision of financial institutions, as it is increasingly more difficult to obtain adequate information to monitor the complex and possibly fast-changing risk positions. The financial innovation process has, indeed, necessitated the revision of the traditional supervisory approach concerning banks and other financial institutions.