Pension Reform and Complementary Pension
Funds in Brazil
Colin Pugh, FCIA
Funded Civil Service Pension Programs in Canada and the Netherlands
BrasiliaOctober 2003
Introduction
Description and Analysis of Two
Funded
Defined Benefit
Pension Plans for Civil Servants.
Ontario Netherlands
OMERS ABP
INTRO
OMERS - Background
Established in 1962.
A funded, defined benefit pension plan.For employees of: municipal governments; school boards; libraries; police and fire departments; children’s aid societies; and other local agencies.
HISTORY
OMERS
Mission (governance issue no.1 for PIAC)
To provide fully funded pension benefits at reasonable and stable contribution rates.
To invest funds prudently, for long-term growth at acceptable risk levels.
To distribute timely and accurate information to employees and employers.
To provide high quality service to all stakeholders.
MISSION
OMERS
PIAC: Pension Investment Association of Canada
Current membership
209,787 active members (municipalities=48%; school boards=25%; others = 27%)
89,157 retired members 906 employers
Note (applicable to all slides): all statistics at 31 December 2002
all amounts in Canadian dollars (C$1.00 = US$0.72)
MEMBERS
OMERS
The Pension Plan
Normal retirement at age 65. Early retirement at age 55 (with 30 years’ service) 2% x Service x final 5-year average earnings
= 70% of final-average earnings after 35 years Pension indexation: 100% of CPI (max. 6%pa) Equal employee and employer contributions 2004 contribution rate? = 8.8% EE + 8.8% ER
THE PLAN
OMERS
The Pension Fund
Third largest in Canada. Market value of assets = $29,952,000,000 Smoothed market value = $35,475,000,000 Investment objective = inflation + 4.25%
Actuarial valuation method: Projected Unit Credit
THE FUND
OMERS
Progression of Fund ($ millions)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1993 1995 1997 1999 2001
OMERS
ASSETS
Investment Returns (1993-2002)
-10.00%-5.00%
0.00%5.00%
10.00%
15.00%20.00%
25.00%30.00%
Actual returns Investment objectiveOMERS
RETURNS
Funded Positions (two tests)
Going concern valuation
Assets at smoothed market value
Actuarial liabilities
(plan continuance)
Funded
Ratio
31 December 2002 $35,548 $33,120 107%
31 December 2001 $35,475 $31,019 114%
31 December 2000 $33,954 $28,150 121%
Plan discontinuance valuation
Assets at Market value
Actuarial liabilities (plan discontinuance)
Funded ratio
31 December 2002 $29,952 $36,980 81%
31 December 2001 $33,681 $34,866 97%
OMERS
FUNDEDRATIOS
Underfunding and Overfunding
Underfunding – equal increases in contribution rates (employee and employer)
Overfunding – equal decreases in contribution rates
Contribution holidays – zero contributions from both employees and employers
Surplus withdrawals – cash shared equally
COSTSHARING
OMERS
Asset allocations: strategic & tactical
Asset type Minimum Target Maximum
Equities 55% 60% 65%
Fixed income 20% 25% 30%
Real estate 10% 12.5% 15%
Real return bonds Nil 2.5% 5%
Cash Nil Nil Nil
OMERS
ASSETMIX
Current Asset Mix
Equities Fixed income
Real estate Real return bonds
Canada USA Europe OtherASSET
MIX
OMERS
Management of the Fund
13 member board appointed by Ontario government 6 employee representatives 6 employer representatives 1 government representative 4 standing committees: executive, investment,
pension and management 4 sub-committees: governance, audit, appeals and
compensation
MGMT
OMERS
Asset Management
In-house management for 95% of Canadian stock portfolio and large proportion of US investments.
More than 80 in-house investment professionals
Otherwise, external management (e.g. Europe)
Increased emphasis on “alternative assets”(e.g. infrastructure projects and private equity)
Ever-increasing use of derivatives.
ASSETMGMT
OMERS
Corporate Governance - Internal
CEO is responsible for day-to-day management. CEO cannot be a member of the Board. Board appoints CEO, auditor, custodian, actuary. In 2002, audit and non-audit functions were separated. Mandatory orientation program for new board members
and ongoing education for all board members. Board seeks advice from outside experts. Independent consultants evaluate Board’s performance;
governance committee implements recommendations.
GOV 1
OMERS
Corporate Governance - Communication
Board holds 2 meetings per year with plan members.
Maintains contact with plan participants through consultation with stakeholder groups on key issues.
Other communications through annual report, website, regular newsletters, presentations and correspondence.
Members are provided with comprehensive benefit statements on a regular basis.
GOV 2
OMERS
Corporate Governance - Employees
All employees in the investment division are subject to: Code of Ethics; Standards of Professional Conduct; Conflict of Interest Policy.
GOV 3
OMERS
“Failure of an individual to maintain this Code of Ethicsand Standards of Professional Conduct shall result inreprimand, up to and including dismissal.”
Corporate Governance - external
Details of policy in Proxy Voting Guidelines
Social responsible investments – require transparent communication of companies’ policies/procedures
“Links” to OECD and ICGN websites.
SHARE VOTING
OMERS “We vote the shares we beneficially own on behalf of plan members on the basis of their
best financial interests”
ICGN: International Corporate Governance Network
Proxy Voting – Basic Principles
Stock options must be expensed
Strict standards on management stock options
“Majority” of board directors from outside
All directors must own shares of the company
Outside directors must chair all key committees
Audit committee responsible for audit functionand for retaining audit firms
Separation of Board Chair from CEO
PROXY VOTING
OMERS
Votes against Management
North America (2001-02) Motions Rejected
Inside directors on committees 360 100%
Audit-related issues 17 71%
Option programs, including repricing 647 71%
Takeover protection clauses 62 92%
Social, ethical and environmental 163 47%
Other issues 1456 22%
OMERS
PROXIES
In Summary
A well organized and effectively run
pension plan and pension fund
providing
generous benefits
on a cost-effective basis.
SUMMARY
OMERS
www.omers.com
Ontario NetherlandsOMERS
ABP
PART 2
ABP - Background
Established in 1922.
A funded, defined benefit pension plan.For employees of: central government; provincial and municipal governments; police and judiciary; defense; water boards and other utilities; school boards and culture and science agencies ABP and its subsidiaries.
ABP
HISTORY
Current membership
1,065,677 active participants (including 7,677 employees of ABP and associated companies)
692,000 former participants 42,000 early retirement pensions/salary continuation 330,000 in receipt of retirement pensions 331,000 in receipt of survivor, disability and flexible
early retirement pensions.
Note (applicable to all slides): all statistics at 31 December 2002
all amounts are in euro (€1.00 = $1.10-$1.14)
ABP
MEMBERS
The Pension Plan
Normal retirement at age 65. Early retirement at age 55. 1.75% x Service x (almost) final salary
= 70% of final salary after 40 years Pension indexation: under review. Employee pay 25% of the overall cost. 2003 contribution rates = 3.8% EE + 11.4% ER Social security integration: salary below the franchise is ignored for benefits and contributions.
ABP
THE PLAN
The Pension Fund
Largest or second largest fund in the World. Market value of assets = €135,564,000,000 Smoothed market value: not used. Investment objective = long bond yields + 2%pa.
Actuarial valuation methods: Current unit credit (discount rate of 4%pa) Current unit credit (current real interest rate)
No explicit allowance for salary increases, but…
No allowance for employee turnover, etc…
ABP
THE FUND
Progression of Fund (€ millions)
125,000
130,000
135,000
140,000
145,000
150,000
155,000
1998 1999 2000 2001 2002
ASSETS
ABP
Investment returns (1998-2002)
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
Total return Bonds Equities
RETURNS
ABP
Funded Positions (two tests)
Statutory
valuation
Assets at
market value
Actuarial liabilities
(4% discount rate)
Funded
Ratio
31 December 2002 €135,564 €131,680 103%
31 December 2001 €147,334 €121,039 122%
31 December 2000 €150,302 €112,347 134%
Real interest rate valuation
Assets at market value
Fully-indexed
liabilitiesFunded
ratio
31 December 2002 €135,564 €157,621 86%
31 December 2001 €147,334 €131,083 112%
31 December 2000 €150,302 €121,702 124%
FUNDEDRATIOS
ABP
Funding objective = 140% of fully-indexed liabilities
Asset allocations: strategic & actual
Asset type TargetActual
end-2002Actual
end-2001
Equities 40% 30% 36%
Bonds 40% 54% 51%
Real estate and alternative inv’ts
20% 16% 13%
ASSETMIX
ABP
Current Asset Mix
4%
31% 43%
22%
65%
Other USA
European bonds European equities…
ABP
ASSETMIX
Management of the Fund
Board of Governors (chair + 5 employer representatives+ 5 employee representatives).
Board of Directors: day-to-day responsibilities (3 members).
Investment committee advising board of directors.
Advisory Committee (36 employer representatives and 36 employee representatives): now to be split into participants’ council and employers’ council?
3,000 employees (including 365 employees at ABP Investments – Netherlands and New York).
In-house international staff of specialist managers (at ABP Investments) manages 85% of fund assets.
ABP
MGMT
ABP subsidiaries and affiliates
Loyalis: sells income-replacement products, provides financial advice and services related to disability prevention and re-integration.
Obvion (joint venture): residential mortgages.
ABP Investments: in-house asset management.
NIB Capital: asset management.
State Street Global Alliance (joint venture): asset management, focusing on creating high added value and pursuing innovative investment strategies.
ABP
OTHER
www.abp.nl
Governance
As a shareholder: “ABP will base its corporate governance policy on the principles established by ICGN and OECD.”
Setting Strategic Investment Plan: heavy emphasison Asset Liability Modeling (ALM) studies.
Other internal considerations: clear delineation of roles; checks and balances; reasoned behavior; prudent investment process; compliance monitoring; use of experts and third parties → “Code of Conduct”.
Basic objective: “first quartile customer service (as measured by CEM) on a cost-effective basis”.
ABP
GOV
CEM: Cost Effective Measurement (Toronto-based research bureau)
Conclusions and Questions
Two well-structured pension funds, with many common features and some distinct features.
OMERS – useful lessons on “governance”. ABP – emphasis on ALM and “prudent expert”. Pension regulation – heavy in both countries, but
slightly different emphasis (e.g. funding rules).
SUMMARY
Questions?
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