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Highlights1 Many Highlights and a few Messages. Highlights2 Summary Countries in ECA needed pension reform before the crisis Pension system balances in.

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Presentation on theme: "Highlights1 Many Highlights and a few Messages. Highlights2 Summary Countries in ECA needed pension reform before the crisis Pension system balances in."— Presentation transcript:

1 Highlights1 Many Highlights and a few Messages

2 Highlights2 Summary Countries in ECA needed pension reform before the crisis Pension system balances in ECA will deteriorate during the crisis Pension systems in ECA will need even deeper reforms after the crisis

3 Highlights3 Seeing red during the crisis

4 Highlights4 Longer term, the situation looks less dramatic 4

5 Highlights5 OPFs Rates of Return


7 Highlights7 Falling Pension Assets (Kazakhstan) Reimbursement of minimum nominal rate of return difference by pension fund Existing systemPotential problem Sustaining minimum rate of return by means of covering by a pension fund/pension assets management company of the difference in case nominal rate of return of the fund falls below the weighted average nominal rate of return of the pension system for the last 5 years. Absence of the unified methods to determine fair value of securities in investment portfolio of pension funds as a result of valuing assets in accordance with IFRS

8 Highlights8 Structure of SPFs Investment Portfolio (Bulgaria)

9 Highlights9 II pillar assets (Macedonia) Equity and investment funds21,74%9,18%6,44% foreign2,89%2,12%1,17% domestic 18,85%7,06%5,27% Fixed income 59,78%47,92%54,98% domestic government59,78%47,26%54,38% domestic corporate0,00%0,66%0,60% Deposits (domestic banks)18,46%41,90%36,82% Cash and receivables 0,02%1,00%1,76% Total assets 100,00% Net assets (in EURO) , , ,00

10 Highlights10 Contributions vs pension funds assets

11 Highlights11

12 Highlights12 Long term PS position (Czech)

13 Highlights13

14 Highlights14 Pension system critical points Pension expenditures / GDP: 8.5% Insured / pensioners: 1.38 Average age at retirement: 62.1 (m); 59.2 (w) Fertility rate: 1.25 Low rate-of-return & low replacement rate High % of employed are not contributing to the PS or are sub declaring

15 Highlights15 PAYG Imbalances Lots of jokes, but in Serbia... –Average pension / average wage ratio was 71% in March 2009 –Just like distribution of employees according to wages, distribution of pensioners according to pension benefits, isleft skewed – 60% of pensioners are receiving pension benefits below the average –The poverty rate of pensioners, according to the Living Standards Survey, is lower compared to the population as a whole (5.3% against 6.6%) –The net old-age pension/net wage ratio is 80%! Only 55% are old-age pensioners, 25% disability, 20% survivor and only 17% of pensioners have full-career service! –The net full career pension/net wage ratio is 90%! Although the pension contibution rate is 22% (11% on behalf of employees and 11% on behalf of employers), budget subsidies account for 40% of pension spending!

16 Highlights16 Projections Before the Crisis Figures assume that benefit levels and effective retirement ages do not change Countries were hoping to mitigate the problem with 2 nd pillars Next lets go to not so bad news: financial crisis…

17 Highlights17 Tapping the 2 nd pillar Pension levels change negligibly in this case (more generally this depends on the generosity of the PAYG) Pension fund industry destabilized Long term deficits deteriorate Similar outcomes from allowing switchback to PAYG, but switchback is harder to reverse than contribution rate reductions Can only be temporary solution until price indexation and retirement age increase start to substantially reduce expenditures

18 Highlights18 Switching to Price Indexation

19 Highlights19 Price Indexation and Retirement Age Increases Short term problem still remains. Ideally, money could be borrowed (even from pension funds), but some countries chose to tap 2 nd pillar…

20 Highlights20 Pension for full-career low earner Germany United States United Kingdom Estonia Latvia Lithuania Slovenia Bulgaria Finland Sweden Czech Republic Romania Netherlands Pension level (% of economy-wide average earnings)

21 Highlights21 Serbias Response to Financial Crisis Nominal freeze of public pensions for 2 years (2009 & 2010), inflation indexation afterwards Increased pension spending + decline in contribution revenue growth => pressure on public finances requiring additional budget subsidies

22 Highlights22 Planned Changes to Pension System in Serbia Further PAYG parametric reforms –Further increases in the retirement age –Tighten accelerated service and early retirement provisions –Introduce automatic stabilizers (automatic change in the contribution rate and/or in the retirement age as a reaction to the replacement rate – the financial position of the pension fund) –Develop an appropriate valorization and indexation formula that will be fiscally sustainable and socially acceptable Expansion of FF voluntary retirement saving –Possibly extending a tax-preferred treatment to a broader range of (less risky) saving vehicles, such as long-term bank savings and life insurance contracts

23 Highlights23 Some Donts During Lunch Dont try to shield pension systems from all risk –Economic crises will hurt first pillar, financial crises will hurt second, and political crises will hurt everything Dont do anything that will destroy trust –Trust is the most important ingredient of a system that depends on long-term promises Dont fix short-term problems with measures that compromise the long-term health of systems –A good principle for policymaking during this crisis, which goes beyond pension

24 Highlights24 In mature system, 18-month crisis of this magnitude would result in the fall of total pension of about 11 percent, of which 8 percentage points would be due to stock market shortfall. The impact of financial crisis on individual pensions (Poland)

25 Highlights25 Some Dos Raise and equalize retirement ages Curb early retirement Focus indexation on protecting the purchasing power of the elderly Publicize realistic expectations for future pensions Design and finance poverty alleviation for the non-covered future elderly Careful planning necessary if adopting second pillars

26 Highlights26 Pensions will be Lower from Both Pillars 2 nd pillar pensions will depend on asset prices – most of the adjustment has likely already happened Wages are in the process of adjusting New pensions in the 1 st pillar will adjust in the future as they will depend on lower future wages – adjustment hasnt begun yet

27 Highlights27 Some principles Security through diversity: –Preserve the current design of the pension model –recognize the importance of both PAYG and funded pensions Addressing demographic and gender issues: –Better incentives for working longer and retire later –tighten the access to the early-retirement regimes –expand protection to eliminate gender differences Sustainable financing for PAYG pensions: –sound financing of the PAYG pensions –strengthen the role of the public reserve funds Adequacy in retirement: –proper protection against poverty in old age –maintain the purchasing power of pensions Consensus-based management: –encourage social dialogue and participation –share information and consultations

28 Highlights28 Takeaways Dont be distracted by the financial crisis –Long-term problems in pension systems in ECA are much more serious Focus on fiscally feasible reforms –Index to inflation –Increase retirement age (and reduce early retirement) –Improve regulation of funded pensions Question I will leave with: Are pension systems in ECA too big and overdesigned?

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