Presentation on theme: "1 Pensions in a Global Context Catherine Martens-Malik The International Securities Consultancy Limited."— Presentation transcript:
1 Pensions in a Global Context Catherine Martens-Malik The International Securities Consultancy Limited
2 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
3 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).
4 Global Trends - Changing Demographics Dramatically improved life expectancy Life Expectancy at Birth IndiaIranItaly Pakistan Russia 1970 48.052.571.0 47.0 70.1 2000 62.168.678.2 59.0 66.1 2015 66.372.879.7 65.0 67.4 2050 73.879.182.5 74.7 74.2
5 Global Trends - Changing Demographics Increase in the proportion of elderly and retired Population aged 65 and above IndiaIranItaly Pakistan Russia 20015.0%4.5%18.4% 3.7% 12.8% 20156.3%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.
6 ITALY - population pyramids: how they are going to change Over 65 2001 18.4% 2015 22.3% Impact of low birth rate, and ageing population continues. 2000 2025 2050
7 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.
8 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.
9 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?
10 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
11 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.
12 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.
14 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.
15 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.
16 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.
17 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
18 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.
19 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.
20 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
21 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.
22 What is happening in Pakistan? Population growth slowing….. Population Fertility growth ratesPopulation rates 19702.59% 59.6 m 6.28 2000 2.47%142.6 m 5.48 2015 1.98%193.4 m 4.11 2050 0.84%304.7 m 2.06 Source: UN see www.globalis.gvu.unu.edu and www.census.gov for more detailswww.globalis.gvu.unu.edu
23 What is happening in Pakistan? Pakistan’s population pyramids 1985 2000 Here the demographics are also changing …..
24 2001- 3.7% over 65 2015- 4.0% over 65 ….mainly due to falling mortality rates. PAKISTAN 2000 2025 2050
25 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. YearNo of People over 65 20056.6 million 2025 11.8 million 2050 31.7 million
26 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.
Your consent to our cookies if you continue to use this website.