PENSION REFORM AROUND THE WORLD Chris Daykin UK Government Actuary

THE PROGNOSIS FOR TRADITIONAL SOCIAL SECURITY demographic ageing and scheme maturity retirement ages too low coverage incomplete poor compliance economic considerations changing political fashion insufficient advanced funding

DEMOGRAPHIC AGEING low fertility increasing expectation of life baby boomer bulge in some countries deteriorating dependency ratios ageing working population increasing numbers of very elderly

TOTAL PERIOD FERTILITY RATES, 1960-2010

TOTAL PERIOD FERTILITY RATES IN AFRICA, 1960-2010

AVERAGE ACHIEVED FAMILY SIZE FOR UK COHORTS BORN 1945-1975

PERCENTAGE OF PERSONS SURVIVING TO SUCCESSIVE AGES UK LIFE TABLES, 1911-2031

DISTRIBUTION OF DEATHS OVER AGE 15, ENGLAND & WALES

EXPECTATION OF LIFE FOR MALES, 1950-2010

EXPECTATION OF LIFE FOR AFRICAN MALES, 1950-2010

EXPECTATION OF LIFE FOR FEMALES, 1950-2010

EXPECTATION OF LIFE FOR AFRICAN FEMALES, 1950-2010

DEPENDENCY RATIOS, 1970-2030 (nos. 65 & over per 1000 aged 15-64)

DEPENDENCY RATIOS, 1970-2030 (nos. 65 & over per 1000 aged 15-64)

% INCREASE IN NUMBERS AGED 65 & OVER, 1990-2010

PENSION REFORM TYPOLOGY contribution adjustment and reform benefit adjustment and reform structural reform reform of retirement age and structures new approaches to financing old schemes development of funded pensions

STRUCTURAL REFORM move to notional defined contributions introduce or increase flat-rate element make greater use of means-testing introduce element of pre-funding increase role of private pensions

NOTIONAL DEFINED CONTRIBUTION clear link between contributions and benefits still on a PAYG basis rather than funded different revaluation approaches possible demographic adjustment factor annuity conversion at pension age permits flexibility of retirement age passes on part of longevity risk

EXAMPLES OF NDC Sweden Italy Latvia Brazil China (2nd pillar) France (régimes complémentaires)

NEW APPROACHES TO FINANCING shift some of the cost to general revenue introduce additional ear-marked taxes pre-fund part of the future liability make investment process independent introduce funded component

DEVELOPMENT OF FUNDED SCHEMES increased level of investment possible economic benefits introduces market disciplines….. …..and in some cases competition may improve efficiency makes pensions less political

CHILE compulsory contributions to AFPs choice of AFP minimum pension guaranteed by state underpin on annual return recognition bonds for previous rights old scheme closed to new entrants high levels of transaction costs

SINGAPORE Central Provident Fund (from 1953) defined contribution deposit account style high contributions (varying from time to time) medical expenses, education, investment lump sum benefit

MEXICO future contributions into AFOREs ongoing costs paid from budget reinsurance of disability and survivorship index-linked annuities protected rights from old system guaranteed minimum pension pressures on annuity markets

AUSTRALIA Award Superannuation from 1986 Superannuation Guarantee Levy from 1992 Industry Funds and Master Trusts mandatory employer contribution of 6% 9% employer/3% employee from 2002/03 administrative problems at start 90% of administration now with two providers

HONG KONG Mandatory Provident Fund from 2000 contributions of 10% of salary plus allowances earnings floor and ceiling private schemes and master trust schemes alternative of occupational retirement schemes 63% of employed population in MPF(31.3.02)

CHINA flat-rate basic pension (20% of average wage) NDC second pillar (11% contribution) partially funded (in some provinces) pension is 1/120 of accumulated amount fully funded voluntary third pillar Liaoning experiment * basic pension at 30% of average wage * fully funded DC from employee contns.

ARGUMENTS IN FAVOUR OF FUNDING increases level of saving helps to develop capital markets provides needed investment capital helps to address ageing problems may reduce long-term cost

COUNTER-ARGUMENTS may substitute for other saving markets may not be able to cope may push up prices with excess demand ageing will still have an impact cost is only reduced in certain circumstances

DEMOGRAPHY AND FUNDED SCHEMES pension investment keeps market buoyant disinvestment may depress market international diversification may help ageing will produce mature pension schemes maturity requires more bond investment DC plans will be directly affected

DEFINED CONTRIBUTION PLANS transparent and easy to implement expose members to investment risk important to address issues of - solvency - expense levels - appropriate investment profile - guarantees, if any - annuitisation

PROBLEMS WITH PRIVATE MANAGEMENT higher costs of disaggregated system insolvency risk marketing costs possibility of mis-selling variable investment performance risk of fraud or mismanagement

PROBLEMS WITH ANNUITIES concentration of risk mortality uncertainty need for very long-dated bonds preferably index-linked permit programmed withdrawal?

CONCLUSIONS advantages of a mix of systems private funds are not a panacea problems of coverage and risk good regulation is essential need to keep transaction costs down risks of mis-selling need for functioning capital markets ... and annuity markets