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Pension Systems In A Changing Global Context: Ideas for Hong Kong? Yvonne Sin The World Bank September 14, 2005.

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Presentation on theme: "Pension Systems In A Changing Global Context: Ideas for Hong Kong? Yvonne Sin The World Bank September 14, 2005."— Presentation transcript:

1 Pension Systems In A Changing Global Context: Ideas for Hong Kong? Yvonne Sin The World Bank September 14, 2005

2 Joint session -- HKRSA and SOA2 Focus of presentation Foundations and evolution of World Banks Perspective on pension systems and reforms Issues with the HK retirement system and ideas for consideration

3 September 14, 2005Joint session -- HKRSA and SOA3 Why Pensions Are Now More Important Than Ever Traditional forms of old age security erode with urbanization and modernization Life expectancies are increasing – longer periods of economic inactivity/dependence Old age burden can make other social objectives unaffordable Economic development makes poverty alleviation among elderly possible Pension systems can impede or stimulate broader economic development

4 September 14, 2005Joint session -- HKRSA and SOA4 What Is Wrong With Existing Pension Systems Current pension systems do not deliver the expected coverage and benefit levels Uneven and unfair distribution of costs and benefits Unsustainable pension systems lead to the crowding-out of other social expenditures Unsustainable pension systems lead to macroeconomic instability (e.g. Brazil 1998) Most pension systems exhibit major labor market distortions Public management of assets has poor track record

5 September 14, 2005Joint session -- HKRSA and SOA5 Public pension spending vs. % of population over age 60

6 September 14, 2005Joint session -- HKRSA and SOA6 Evolution of Perspectives on Reform Experience with realities of the political economy of reform Increased understanding of challenges to reach the lifetime poor Recognition of importance of initial conditions and cultural context of reform Appreciation of interactions with capital market development and administrative costs Inclusion of non-financial aspects of old age security

7 September 14, 2005Joint session -- HKRSA and SOA7 Current Perspectives on Pension Reform Reforms to be evaluated primarily in the context of ability to achieve objectives and meet criteria and not structure of new system Initial conditions and path of reform are as important as the ultimate form of the system Flexibility and diversification of risks through multiple pillars more important than the number of pension elements Need to consider some form of social safety net in most circumstances Funding remains important benchmark

8 September 14, 2005Joint session -- HKRSA and SOA8 Goals of a Pension System Primary goals: provide adequate, affordable, sustainable and robust old-age income Adequacy – both in absolute and relative levels (i.e. poverty alleviation and income replacement) Affordability – financing capacity of individuals & society Sustainability – financial soundness of the scheme, current and future Robustness – capacity to withstand major shocks, including economic, demographic & political risks Secondary goals: create developmental effects minimizing negative impacts, e.g. labor market distortions leveraging on positive impacts, e.g. financial market development

9 September 14, 2005Joint session -- HKRSA and SOA9 Criteria for Evaluation of Reform Proposal Four primary content criteria Does the reform make sufficient progress toward the goals of a pension system, and meet distributive concerns? Is the macro and fiscal framework capable of supporting the reform? Can the administrative structure operate the new pension system? Have steps been taken to establish regulatory and supervisory arrangements and institutions to operate a funded pillar? Three primary process criteria Is there a credible commitment by government Is there local buy-in and leadership Does it include sufficient capacity building for implementation

10 September 14, 2005Joint session -- HKRSA and SOA10 Multi Pillar Pension Framework Zero Pillar – Non contributory social assistance for lifetime poor 1 st Pillar - Publicly financed and managed PAYGO system to provide basic income protection 2 nd Pillar - Mandatory funded individual account system creating direct linkage between contributions and benefits 3 rd Pillar - Voluntary retirement savings, individual or occupational 4 th Pillar – Family and inter-generational support for elderly (including co-habitation with family members, subsidies through medical insurance and Housing Authority)

11 September 14, 2005Joint session -- HKRSA and SOA11 A Flexible Model Appropriate combination of pillars depends on conditions and history Success depends on ability to align characteristics of elements with needs and objectives Strength of multi pillar approach is in diversification of risks and ability to align elements with specific policy objectives

12 September 14, 2005Joint session -- HKRSA and SOA12 Some Key Principles Most should consider a social safety net to address poverty among the elderly Challenge: who is most vulnerable, fiscal capacity, eligibility criteria and delivery mechanism If conditions are right, some pre-funding for economic and political reasons and can happen in any pillar Challenge: balancing benefits and costs, best organization and management A mandated and fully funded pillar provides a useful benchmark Challenge: evaluation of the proposed reform design

13 September 14, 2005Joint session -- HKRSA and SOA13 How to Tax Pension Schemes Pensions should not be tax free A consumption-type taxation is favored over a comprehensive income-type taxation A back-loaded approach (EET) is favored over a front-loaded approach (TEE) Voluntary and supplementary schemes may be tax favored, but within limits

14 September 14, 2005Joint session -- HKRSA and SOA14 Costs and fees: How to contain? Comparison of fee levels requires a life-cycle type approach in which all types of fees are considered Savings on administrative expenses through use of central clearing house (such as in Sweden) Limiting of marketing costs through blind accounts or switching constraints Limiting of asset management fees by restrictions on individual choice and, passively managed accounts, employers choice in provider, or competitive bidding of restricted number of asset managers

15 How does HK fare and what are some ideas for the next generation of reforms, if necessary?

16 September 14, 2005Joint session -- HKRSA and SOA16 Historical Perspective Prior to 2000, no mandatory retirement savings CSSA (the zero pillar) – a tax-financed, non- contributory, means-tested, social safety net for the old ORSO (the third pillar) – occupational retirement scheme sponsored voluntarily by employers covering only 30% of labor force Family support (the fourth pillar) – co- habitation with family members and subsidies through Housing Authority

17 September 14, 2005Joint session -- HKRSA and SOA17 The Path to Reform Rapid economic growth Aging population Declining fertility rates Rejected Singaporean CPF (centrally managed, low investment return, high risk for political manipulation) Rejected traditional PAYG (strong opposition by academia and financial sector) Desire to maintain laissez-faire approach

18 September 14, 2005Joint session -- HKRSA and SOA18 Guiding principles Relieve the fiscal pressures on CSSA Satisfy the rule of long term financial viability Aim at realistic pension goals with a modest level of contributions Cause minimal disruptions to existing ORSO

19 September 14, 2005Joint session -- HKRSA and SOA19 Projected cost of the SSA cum CSSA Source: Wang 2005 (Lingnan University) Assume no increase in proportion of claimants

20 September 14, 2005Joint session -- HKRSA and SOA20 Projected cost of the SSA cum CSSA Source: Wang 2005 (Lingnan University) Assume various levels of increase in proportion of claimants

21 September 14, 2005Joint session -- HKRSA and SOA21 Characteristics of HK Capital Markets Draconian regulations not required Asset allocation rules not a major concern Trustees and fund managers are given maximum flexibility based on the prudent man rule

22 September 14, 2005Joint session -- HKRSA and SOA22 Regulation, Supervision and Governance Regulation and supervision – MPFA is empowered to license, regulate, and monitor the system and the compliance of trustees Governance – MPFA may suspend, revoke or terminate a trust arrangement as well as prosecute in case of serious non-compliance

23 September 14, 2005Joint session -- HKRSA and SOA23 The HK retirement system Reasonable protection against risks of poverty for full career workers but probably not the lifetime poor Up to now, 85% of employed population have retirement protection (63% covered by MPF, 22% by other scheme) Modest contribution rate to deliver acceptable replacement rate under reasonable diversification and risk return expectation MPF is equitable to all members as the amount of benefits is directly linked to contributions made; also provides incentive for additional voluntary savings A system that respects the laissez-faire culture leaving most matters to the private sector with government responsible for prudential regulation and supervision

24 September 14, 2005Joint session -- HKRSA and SOA24 Looking forward Holistic review of old age income support – better integration with CSSA to ensure proper targeting and adequate retirement income for the most needy MPF as a pension scheme – need to provide proper incentives for annuitization More disclosure required – ongoing consultation to enhance transparency of fees and charges and improve disclosure of information Consolidation of some service providers – optimize efficiency and cost effectiveness Slow unification process – some occupational schemes are still operating separate schemes on an unfunded basis (e.g., the civil service)


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