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Pensionsin a Global Context

Catherine Martens-MalikThe International Securities

Consultancy Limited

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Pensions In a Global Context - Agenda

Global Trends – Changing Demographics

Global Trends – the Pensions Crisis

The Pensions Crisis – the Range of Solutions

The World Bank Pensions Pillar Model

Occupational Savings Schemes (OSS)

OSS - Regulation and Controls

The Current Situation in Pakistan

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Global Trends- Changing Demographics

Lower birth rates, particularly in developed countries and urban areas Increased life expectancy – driven by decline in infant mortality and smoking related diseases, and general improvements in healthcare Trend towards earlier retirement

RESULT – Changes in age profile of population. Higher proportion of elderly and retired people, and fewer young people of working age to support them (higher dependency ratios).

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Global Trends - Changing Demographics

Dramatically improved life expectancy

Life 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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Global Trends - Changing Demographics

Increase in the proportion of elderly and retired

Population 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%

Italy is among the worst placed countries, but most of Western Europe already has an ageing problem.

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ITALY -population pyramids: how they are going to change

Over 652001 18.4%2015 22.3%

Impact of low birth rate, and ageing population continues.

2000

2025

2050

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Global Trends – The Pensions Crisis

THE CAUSES

Higher dependency ratios

Beneficiaries living longer

Lower interest rates

Lower equity returns from many markets, and

Unrealistically generous pension promises made by governments – to their own employees in particular, and the population in general.

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Global Trends – The Pensions Crisis

THE RESULT

insufficient individual private savings, and either no state provision of post retirement income, or an over dependence on state provision of retirement

income, which it is (already) clear can’t be met.

The net result, nearly everywhere, is a serious risk of a large number of number of elderly and retired people with insufficient income to meet their needs.

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Global Trends – The Pensions Crisis

Every Government’s dilemma

What to 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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Global Pensions Crisis - Range of Solutions

Increasing taxes

Raising the pensionable age

Reducing the more generous benefits

Moving from defined benefit to defined contribution

Broadening coverage to include the most disadvantaged

Introducing mandatory pension schemes, in some instances (Australia, Korea, Hong Kong, Malaysia & historically Singapore)

Introducing measures to encourage both individual private provision for pensions, and savings more generally

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Global Pensions – Key Definitions (1)Pension Schemes can be:

Segregated – the pension scheme has been set up as a independent legal entity, separate from any other assets, and protected from any misfortune that befall the pension scheme sponsor.

Unsegregated – no separate legal entity; related funds/ assets mixed up with the other assets of pension scheme sponsor, and often used as part working capital.

Funded - The money has been put aside to meet actuarially estimated future liabilities.

Unfunded - No specific funds have been put aside to meet future obligations. Also known as ‘Pay As You Go’; the system operated by most state schemes. An ‘unfunded’ company scheme would show up as a liability in the balance sheet, but without any matching pool of assets.

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Global Pensions – Key Definitions (2)

Pension Schemes can be:

Contributory – requires some contribution from the employee.

Non-Contributory – requires no contributions form the employee; funded entirely by the employer/ scheme sponsor.

Defined Benefit – provides entitlement to a ‘fixed’ benefit – usually a proportion of salary in the last few years before retirement. Here the investment risk lies entirely with the employer/ scheme sponsor.

Defined Contribution – the benefits paid out of the scheme are directly related to the contributions made, and the returns earned on those investments during the pre-retirement period. An annuity or draw-dawn scheme is required on retirement. Here the investment risk lies entirely with the scheme beneficiary.

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World Bank Pensions ‘Pillar’ ModelPillar Characteristics Participation Funding 0 Basic or ‘social pension’ to ensure

minimum level of pension income for all retirees

Universal or means tested

Govt tax/general revenues

1 Public pension plan, publicly managed (defined benefit or notional defined contribution)

Mandated Contributions (collected by taxing income), with some financial reserves

2 Occupational or personal pension plans (fully defined benefit or fully funded defined contribution)

Mandated Financial Assets

3 Occupational or personal pension plans (partially or fully funded defined benefit, or funded defined contribution)

Voluntary Financial Assets

4 Informal intra-family or intergenerational sources of both financial and non-financial support to the elderly, including access to healthcare and housing

Voluntary Financial & non-financial assets

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Occupational Savings Schemes (OSS) - Introduction

OSS tend not emanate from Pensions Legislation per se

More often a product of Labour Laws and Directives and Tax Legislation that encourages OSS.

Pension reform programs come later, and act to consolidate and update legislation relevant to OSS.

OSS tend to evolve over time.

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

Voluntary pension products, sold to individuals or institutions, tend to be more tightly regulated – in common with other financial products.

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OSS – Salient Features

Most schemes are voluntary, generally established by an employer.

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

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

Legislation identifies roles and responsibilities: the sponsoring company, the trust and trustees, and the various service providers.

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OSS – Defined Benefit v Defined Contribution

Defined Benefit Schemes - cause the greater concern; law usually requires them to be funded, with regular actuarial valuations; generally liberal investment policy with only few restrictions, but must ensure liabilities are met, through asset liability planning and structures.

Defined Contribution Schemes – single investment policy (regardless of age) is increasingly replaced by member choice. Also introducing a range of investment products, managed by a variety of asset managers.

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Controls on Operational Savings Schemes

There are three principle sources of control over OSS:

Controls inherent in the structure of the schemes

Controls emanating from the operation of the schemes

Controls resulting from the regulation of those providing services to the schemes

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OSS – Structural Controls

Trust structure – segregates the assets and puts them into a separate entity, which also has its own internal rules, subjects the entity to trust law and allocates ‘collective responsibility’ to trustees.

Transparency – which comes as a result of the accounting and disclosure standards applied.

Ownership by the Scheme Sponsor – who becomes vulnerable to reputational risk if the scheme fails.

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OSS – Operational Controls

Through Investment Managers There are often specific constraints on investment policy

Widespread reference to performance benchmarks

Applicable Generally Record keeping and administration requirements, auditing requirements, actuarial valuations.

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OSS – Controls on Service Providers

There are also legal and regulatory controls on most parties providing services to OSS:

Investment Managers and Insurance Companies – covered by financial services regulator

Trustees – subject to Trust and Common Law

Custodians – normally covered by banking or financial services law and regulation

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OSS – Role of the Regulator

Because of inherent structural and operational controls and regulation of most associated service providers, the Regulator can afford a ‘lighter touch’ with OSS than might be required in other areas.

Main area of focus for Regulator should be on protecting the interests of both the individual member and sponsor of the scheme – at the contribution, investment and benefit level.

Also, focus on measures to avoid systemic risk. This usually occurs when the scheme is forced to invest in assets which are not in the interests of the members, or when there is a concentration of business in the hands of a single provider.

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What is happening in Pakistan?

Population growth slowing…..

Population Fertility growth rates Population rates

1970 2.59% 59.6 m 6.282000 2.47% 142.6 m 5.482015 1.98% 193.4 m 4.112050 0.84% 304.7 m 2.06

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

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What is happening in Pakistan?

Pakistan’s population pyramids

1985

2000

Here the demographics are also changing …..

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2001- 3.7% over 65 2015- 4.0% over 65

….mainly due to falling mortality rates.

PAKISTAN

2000

2025

2050

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What is happening in Pakistan?

Pakistan does not have the ageing problem to the same extent as many other more developed countries.

But as the population as a whole continues to grow quite fast, and the effects of improved mortality rates are registered, the number of elderly will grow .

Year No of People over 65

2005 6.6 million2025 11.8 million2050 31.7 million

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What is happening in Pakistan?

There should continue to be plenty of young people of working age generating income to support the elderly.

Bur, this presupposes a healthy economy, relatively full employment, and the establishment of the institutions and mechanisms required for a much wider provision of post retirement income than is currently the case.

There is an existing system of pensions, provident funds, and gratuities in both the public and private sectors. But this is relatively undocumented, unregulated and covers only a small portion of the population.

It is hoped that the new Voluntary Pension System will start to redress this situation.

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Pensions In a Global Context

Thank you