1 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities...

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1 Pension Funds Pension Funds Globally, in Asia and in Globally, in Asia and in Pakistan Pakistan Jeremy Gadbury Jeremy Gadbury The International The International Securities Consultancy Securities Consultancy Limited Limited

Transcript of 1 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities...

Page 1: 1 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited.

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Pension FundsPension FundsGlobally, in Asia and in PakistanGlobally, in Asia and in Pakistan

Jeremy GadburyJeremy Gadbury

The International Securities The International Securities Consultancy LimitedConsultancy Limited

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Pension Funds and Retirement Fund Schemes – A Global View

Concepts and Practice, Structure, Role of Trustees and Investment Managers

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Global population growth tending to stabilise, population mixes changing significantly in 1990’s

Lower birth rates, particularly in urban areas, developed countries

Improved healthcareDecline in smoking related diseases

Ageing population – more elderly people, fewer people to support themAnd liable to change more in the years to come

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The ageing crisis…Ageing populationPeople living longer, working less4-2-1, 18-42-22, 15-50-10

… the pensions crisis – or income after employmentGovernments, companies afraid of future liabilitiesCompounded by lower interest rates, poor equity market returns since 1998, early retirement on full pensionsAnd increasing dependency ratios; The number of working age people “supporting” elderly.

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And some remedies…

World Bank in 1994World Bank in 2005

The Chilean model

Encourage saving,

Change the benefit age

and the move to defined contribution

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Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005

The World Bank’s advice in 1994

Three pillarsUsed as a reference point or adopted by a number of developing economies, including China. China had no securities market that anyone could confidently invest in for some time.

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The World Bank’s advice in 1994 :Three pillars

(b) a “first-pillar” contributory system that is linked to varying degrees to earnings and seeks to replace some portion of income; (c) a mandatory “second pillar” that is essentially an individual savings account but can be constructed in a variety of ways; (d) voluntary “third-pillar” arrangements that can take many forms (individual, employer sponsored, defined benefit, defined contribution) but are essentially flexible and discretionary in nature.

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The World Bank’s advice in 2005

Five pillarsTwo more pillarsZero -a noncontributory or “zero pillar” (in the form of a demogrant or social pension) that provides a minimal level of protection;, andFive -informal intrafamily or intergenerational sources of both financial and nonfinancial support to the elderly, including access to health care and housing.

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The Chilean model

Born out of a crisis…State system in crisis, huge liabilities, no assetsSolution - move to defined contribution, early restrictions on investment with an emphasis on government securities, individuals built up savings.Well regulated products, some problems on marketing, but overall a success, developing assets for investment domestically.

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And a general trend to governments (for their own promised employee benefits) and employers wanting to replace promised benefits for all with defined contribution systems

And now for some government social security and basic pensions to be reviewed, when benefits are payable and how much they might be.

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Occupational savings schemes and their structures

•Structures (such as 401(k)) determined by what the legislation allows•Legislation comes in Labour Laws and directives, Pension Laws and directives, Tax Legislation that encourages occupational savings schemes•Pension reform programmes needed to update legislation

Principle objectives are to increase coverage, protect members and their savings

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Most schemes are voluntary, generally established by an employer, i.e. occupational savings.

Legislation evolves, often through experience; regulation and supervision reactive.

Schemes increasingly established separately to a company, assets ring fenced through a trust structure, policy or other separate legal identity.

Legislation identifies roles, the company, the trust and trustees, and the various service providers

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Defined benefit causes greatest concern, law usually needs them to be funded, with regular actuarial valuation; generally liberal investment policy with only few restrictions, need to matching liabilities, through asset liability structures.

Defined contribution – single investment policy, increasingly replaced by member choice, the idea of offering a range of investment products, evolving into multi manager.

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Occupational savings

Decisions usually made by an employer as to what structure is offered.

In member choice, pressure for a wide choice of funds in North America becoming more usual, and in Australia recent requirements to offer more products.

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Structure, transparency and publicity produces their own safeguards, particularly since Maxwell crisis, which led to collective responsibilities of trustees.

Trustees, seeking advice from Consultants, employing Investment Managers

Employers/Plan Sponsors. Seeking advice from Consultants, seeking to control their own ongoing liabilities

Regulator, legislation brings in marginal controls.

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Roles spread across various parties, even where specific legislation doesn’t applyRegulated entities – Investment Managers

Insurance CompaniesSome Consultants

Legislation, regulation - TrusteesGenerally unregulated - Consultants

Additional requirements, such as record keeping and administration, accounting standards, auditing requirements, actuarial valuations.

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But still the need for

Pensions Ombudsman, in the United KingdomIndependent arbitratorsAppeals and complaints processes

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Overregulation can discourage innovation and product development. Pricing controls generally don’t work – except for “high” limits.

Underregulation leads to abuse, mis investment.

Regulation on voluntary systems tends to be light, with firm touch, but reactive.

Doesn’t prevent effects of financial failure of employer where ongoing contributions are needed to fund liabilities.

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Need to establish organisations such as Pension Benefit Guaranty Agency in the United States, Pension Protection Fund in United Kingdom.

Pension System is too big to protect from massive financial shock, only able to protect small sample in normal range of financial conditions.

Defined construction can only get structural projection, limited investment protection.

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Personal savings and pension plans, aimed at self employed and those wanting to make additional savings, such as IRAs in the United States.

Tax driven, often in markets where they are “sold” not “bought”, with high commissions.

There have been problems of pension misselling, coming out of attractive structures into inappropriate high commission products

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Basic financial product dilemma –

Regulate the product? or the means of distribution, the individual and the corporate?

How much knowledge does the Regulator have over how products are distributed, who buys them and why. What is that makes products attractive or unattractive?

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Increasing coverageEncouraging personal saving through occupational savings methods

Tax incentivesCaps on feesEducating people as to the importance of savingsMany pension products are sold not boughtBut still low penetration…

… leading to the idea of mandatory systems.

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Where voluntary systems don’t achieve policy goals, more voluntary systems, then filling in the gaps with mandatory systems.

Mandatory or near mandatory systems,

Australia Hong Kong’s MPFKorea, Malaysia,

Originally established as mandatory environment

Singapore’s CPF

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Mandatory Systems

Regulatory touch, generally heavier, more threats, controls, investigations. Need to regulate and control various service providers.

Prescriptive legislation on investment, participants and their financial and other qualifications.

Regulator is in the public eye, driven by fear ofindividual loss and systemic risk.

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For investment managers

Definitive mandates on pension fund mandates, reference to benchmarksIncreasing number of unconstrained mandates

On member choiceLifestyle fundsSpecialist equity and bond funds, supporting their own and third party productsHigh level of transparency

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Some global population pyramids…

India, 2000 China, 2000A near standard pyramid One child policy

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Some global population pyramids: Source UN

Italy, 2000 Iran, 2000Low birth rate

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Some global population pyramids, how they are going to change

Over 652001 18.4%2015 22.3%

Impact of low birth rate, ageing population continues

ITALY

2000

2025

2050

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Some global population pyramids how they are going to change

IRAN2000

2025

2050

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Some global population pyramids how they are going to change

improving healthcare

INDIA2000

2025

2050

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Some global population pyramids how they are going to change

low birth rate

CHINA2000

2025

2050

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A government’s dilemma

What does it do about an ageing population?

Whether it is the role of the government merely to prevent pensioner poverty, or should it pursue a policy to produce at least some relation between earnings before retirement and the eventual pension, whether state or private?

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What is happening in Pakistan

An existing system of pensions, provident funds, gratuities in both the public and private sectors.

A new Voluntary Pension System.

From a “policy” point of view, not an ageing problem, but for many individuals it is.

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Pakistan’s population pyramids1985

2000

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20013.7% over 65 20154.0% over 65

falling mortality rates

PAKISTAN2000

2025

2050

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… some Pakistan demographics

Population growth rates Population Fertility

rates1970 2.59% 59.56 million 6.282000 2.47% 142.65 million 5.482015 1.98% 193.42 million 4.112050 0.84% 304.70 million 2.06

Source: UN see www.globalis.gvu.unu.edu for more details

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… and some international comparisonsLife expectancy at birth

India Iran Italy Pakistan Russia

1970 48.0 52.5 71.0 47.0 70.12000 62.1 68.6 78.2 59.0 66.12015 66.3 72.8 79.7 65.0 67.42050 73.8 79.1 82.5 74.7 74.2

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… and some international comparisonsPopulation aged 65 and above

India Iran Italy Pakistan Russia2001 5.0% 4.5% 18.4% 3.7% 12.8% 2015 6.3% 4.9% 22.3% 4.0% 14.3%

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Thank you