Keith RETIREMENT WITH Jefferis INADEQUATE...
Transcript of Keith RETIREMENT WITH Jefferis INADEQUATE...
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Keith Jefferis
27 th February 2017
RETIREMENT WITH INADEQUATE PENSIONS: WHY, AND WHAT CAN BE
DONE?
BOTSWANA PENSIONS SOCIETY ANNUAL CONFERENCE
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Most pension fund members in Botswana belong to defined contribution (DC) funds
Inadequate pensions (for PF members) are therefore due to gaps in the operation of DC schemes
Most people of course are not members of pension funds, so we also need to consider these adults
INTRODUCTION
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LOW PENSIONS FOR PENSION FUND
MEMBERS
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THE PENSION PROCESS
Contributions
Investment returns
Pension pot
Cash withdrawal
Annuity purchase
Pension
Asset managers
Insurance co’s or
PFs
Early retirement
Accumulation Drawdown
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Insufficient Pensions
Insufficient Pensions
1. Inadequate Contribution
s
1. Inadequate Contribution
s
2. Poor Investment
Returns
2. Poor Investment
Returns
3. Early retirement
3. Early retirement
4. High Cash
Withdrawals
4. High Cash
Withdrawals
5. Low Annuity Rates
5. Low Annuity Rates
INADEQUATE PENSIONS MAY BE DUE TO…
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Which of these five factors contribute to low pensions in Botswana: Contributions? Investment returns? Early retirement? Cash withdrawals? Annuity Rates?
This presentation will not provide answers, but will highlight the issues that could cause problems in each of these areas
And will highlight possible resolutions
INADEQUATE PENSIONS
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Contribution rates Rates for most PF members are quite high E.g. 5% employee / 15% employer Probably not the main reason for low pensions Little scope for increase
Interrupted contributions Changes of employment (perhaps leading to fund withdrawals) Periods of no contributions Need to focus on preservation
Fee deductions Contributions are “net” after administration fees Management expenses Regulatory requirements Major problem for small funds
CONTRIBUTIONS
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Market performance Global/local markets (benchmarks)
Asset manager performance Under/over-performance (vs. benchmark)
Asset manager fees Fees can consume a high proportion of gross returns
Especially in a low-return world Especially for active managers Managers are rewarded, even if they under perform
Lack of low-fee, passive (e.g. index) products
Regulatory restrict ions Restrictions on portfolio composition, e.g. local asset requirements Investment portfolios must be diversified – which requires offshore assets
Lack of individual choice
INVESTMENT RETURNS
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This is one of the biggest “kil lers” of adequate pensionsThe main driver of pension pot value is cumulative
investment returns The size of the pension pot is driven more by investment returns
than by contributions – because of compounding
Early retirement reduces both the contribution period and the cumulation period of investment returns
Early retirement also reduces pension levels, because annuities have to be paid for longer (life expectancy at retirement)
“Early retirement” provisions – especially in the public service – are totally unhelpful
EARLY RETIREMENT
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Tax-free allowance Most people take full one-third cash allowance
Manipulation of rules Annuity quotes engineered to yield low pensions, below the limit at
which full encashment is allowed
May be attractive for people with high cash needsMay reflect unattractive annuity ratesThe effect is to reduce the size of the pot that can be used
to buy pensions
CASH WITHDRAWALS
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Low interest rates Local and global
Limited choice of annuity providers Small market
Lack of scale
Market structure Pension funds and insurance companies
Tax and regulatory restrictions Foreign providers not allowed
Lack of choice in annuity products Regulatory restrictions
Products allowed in other markets not allowed in Botswana Innovation discouraged
ANNUITY RATES
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Lack of matching (pula) assets Pula-only products Limited government bond issuance Foreign currency annuities would not face a matching asset problem
Annuity risks Different regulations for pension fund annuities and insurance
annuities Playing field not level
Unstable demographics Lack of local life tables Affects annuity pricing risk
Poor annuity purchase decisions Choosing an annuity without an escalation
ANNUITY RATES
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INCLUDING THE EXCLUDED – GAPS IN
THE PENSIONS SYSTEM
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The current system has two components: Universal state pension
Covers all citizen adults Pension level very low (poverty line)
“Voluntary” Occupational Pensions Membership determined by employer and occupational status
Where are the gaps? Most private sector employees not covered Informal sector Agricultural sector
Compare with World Bank “Pension Pillar” conceptual framework
BOTSWANA’S PENSION SYSTEM
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ZeroZero
Basic “social grant” pensionBasic “social
grant” pension
Non-contributory
Non-contributory
Tax fundedTax funded
Universal/means tested
Universal/means tested
OneOnePartial income replacement
Partial income replacement
MandatoryMandatory
ContributoryContributory
CollectiveCollective
PAYG, unfunded
PAYG, unfunded
TwoTwoPartial income replacement
Partial income replacement
MandatoryMandatory
ContributoryContributory
Individual accountsIndividual accounts
Funded, DCFunded, DC
Three
Three
Higher income replacement
Higher income replacement
VoluntoryVoluntory
ContributoryContributory
Occupational/individual
Occupational/individual
Funded, DC/DBFunded, DC/DB
FourFourNon-financial
(mainly)Non-financial
(mainly)
Social provision (e.g.
healthcare)
Social provision (e.g.
healthcare)
Informal/Family provision
Informal/Family provision
Home ownership
Home ownership
Tax or self-financed
Tax or self-financed
WORLD BANK PENSION PILLARS
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Zero (0)
Zero (0)
Basic “social grant” pensionBasic “social
grant” pension
Non-contributory
Non-contributory
Tax fundedTax funded
Universal/means tested
Universal/means tested
One (1a)One (1a)
Partial income replacement
Partial income replacement
MandatoryMandatory
ContributoryContributory
CollectiveCollective
PAYG, unfunded
PAYG, unfunded
Two (1b)Two (1b)
Partial income replacement
Partial income replacement
MandatoryMandatory
ContributoryContributory
Individual accountsIndividual accounts
Funded, DCFunded, DC
Three (3)Three (3)Higher income replacement
Higher income replacement
VoluntoryVoluntory
ContributoryContributory
Occupational/individual
Occupational/individual
Funded, DC/DBFunded, DC/DB
Four (4)
Four (4)
Non-financial (mainly)
Non-financial (mainly)
Social provision (e.g.
healthcare)
Social provision (e.g.
healthcare)
Informal/Family provision
Informal/Family provision
Home ownership
Home ownership
Tax or self-financed
Tax or self-financed
BOTSWANA PENSION PILLARS
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WHAT CAN BE DONE?
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AccumulationDrawdownNational pensions
HOW CAN PENSIONS BE IMPROVED?
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Raise early retirement age (in public service)Encourage more investment choices for pension fund
members (e.g. low fee products)Avoid well-intentioned but misguided policies, such as
restrictions on offshore investmentsMonitor asset manager feesConsider regulatory impact on administration and
compliance costs (and hence fees)Consolidation of small pension funds?The BPOPF is NOT a government fund
ACCUMULATION PHASE
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Encourage competition in the annuity marketAllow retirees to purchase foreign annuitiesAllow a greater range of pension annuity products Issue more long-term government bondsConsider more restrictions on encashmentMonitor annuity profits and fees – due to limited competitionBetter regulation of annuity providers, especially by pension
funds Clear separation of investment management and annuity provision Capital requirements as per insurance companies
DRAWDOWN PHASE
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Consider how best to fi l l that gap in the pension pil lars Between universal state pension and private occupational pensions
May be a need for a national pension fund, but many issues to consider Relationship to existing funds Voluntary/mandatory? Incentives for low income members Keeping costs low – administration and asset management Dealing with low value contributions and investments Replacement of existing gratuity/severance scheme Expensive for government Difficult to make it work financially Burden on firms
Raising the state pension
NATIONAL PENSION FUND?