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Pension Funds Globally, in Asia and in Pakistan

Pension Funds Globally, in Asia and in Pakistan. Jeremy Gadbury The International Securities Consultancy Limited. Jeremy Gadbury The International Securities Consultancy Limited August 2005. Pension Funds Globally, in Asia and in Pakistan.

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Pension Funds Globally, in Asia and in Pakistan

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  1. Pension FundsGlobally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited

  2. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Pension Funds and Retirement Fund Schemes – A Global View Concepts and Practice, Structure, Role of Trustees and Investment Managers

  3. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Global population growth tending to stabilise, population mixes changing significantly in 1990’s Lower birth rates, particularly in urban areas, developed countries Improved healthcare Decline in smoking related diseases Ageing population – more elderly people, fewer people to support them And liable to change more in the years to come

  4. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan The ageing crisis… Ageing population People living longer, working less 4-2-1, 18-42-22, 15-50-10 … the pensions crisis – or income after employment Governments, companies afraid of future liabilities Compounded by lower interest rates, poor equity market returns since 1998, early retirement on full pensions And increasing dependency ratios; The number of working age people “supporting” elderly.

  5. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan And some remedies… World Bank in 1994 World Bank in 2005 The Chilean model Encourage saving, Change the benefit age and the move to defined contribution

  6. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan The World Bank’s advice in 1994 Three pillars Used as a reference point or adopted by a number of developing economies, including China. China had no securities market that anyone could confidently invest in for some time.

  7. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan The World Bank’s advice in 1994 :Three pillars (b) a “first-pillar” contributory system that is linked to varying degrees to earnings and seeks to replace some portion of income; (c) a mandatory “second pillar” that is essentially an individual savings account but can be constructed in a variety of ways; (d) voluntary “third-pillar” arrangements that can take many forms (individual, employer sponsored, defined benefit, defined contribution) but are essentially flexible and discretionary in nature.

  8. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan The World Bank’s advice in 2005 Five pillars Two more pillars Zero -a noncontributory or “zero pillar” (in the form of a demogrant or social pension) that provides a minimal level of protection;, and Five -informal intrafamily or intergenerational sources of both financial and nonfinancial support to the elderly, including access to health care and housing.

  9. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan The Chilean model Born out of a crisis… State system in crisis, huge liabilities, no assets Solution - move to defined contribution, early restrictions on investment with an emphasis on government securities, individuals built up savings. Well regulated products, some problems on marketing, but overall a success, developing assets for investment domestically.

  10. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan And a general trend to governments (for their own promised employee benefits) and employers wanting to replace promised benefits for all with defined contribution systems And now for some government social security and basic pensions to be reviewed, when benefits are payable and how much they might be.

  11. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan • Occupational savings schemes and their structures • Structures (such as 401(k)) determined by what the legislation allows • Legislation comes in Labour Laws and directives, Pension Laws and directives, Tax Legislation that encourages occupational savings schemes • Pension reform programmes needed to update legislation • Principle objectives are to increase coverage, protect members and their savings

  12. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Most schemes are voluntary, generally established by an employer, i.e. occupational savings. Legislation evolves, often through experience; regulation and supervision reactive. Schemes increasingly established separately to a company, assets ring fenced through a trust structure, policy or other separate legal identity. Legislation identifies roles, the company, the trust and trustees, and the various service providers

  13. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Defined benefit causes greatest concern, law usually needs them to be funded, with regular actuarial valuation; generally liberal investment policy with only few restrictions, need to matching liabilities, through asset liability structures. Defined contribution – single investment policy, increasingly replaced by member choice, the idea of offering a range of investment products, evolving into multi manager.

  14. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Occupational savings Decisions usually made by an employer as to what structure is offered. In member choice, pressure for a wide choice of funds in North America becoming more usual, and in Australia recent requirements to offer more products.

  15. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Structure, transparency and publicity produces their own safeguards, particularly since Maxwell crisis, which led to collective responsibilities of trustees. Trustees, seeking advice from Consultants, employing Investment Managers Employers/Plan Sponsors. Seeking advice from Consultants, seeking to control their own ongoing liabilities Regulator, legislation brings in marginal controls.

  16. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Roles spread across various parties, even where specific legislation doesn’t apply Regulated entities – Investment Managers Insurance Companies Some Consultants Legislation, regulation - Trustees Generally unregulated - Consultants Additional requirements, such as record keeping and administration, accounting standards, auditing requirements, actuarial valuations.

  17. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan But still the need for Pensions Ombudsman, in the United Kingdom Independent arbitrators Appeals and complaints processes

  18. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Overregulation can discourage innovation and product development. Pricing controls generally don’t work – except for “high” limits. Underregulation leads to abuse, mis investment. Regulation on voluntary systems tends to be light, with firm touch, but reactive. Doesn’t prevent effects of financial failure of employer where ongoing contributions are needed to fund liabilities.

  19. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Need to establish organisations such as Pension Benefit Guaranty Agency in the United States, Pension Protection Fund in United Kingdom. Pension System is too big to protect from massive financial shock, only able to protect small sample in normal range of financial conditions. Defined construction can only get structural projection, limited investment protection.

  20. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Personal savings and pension plans, aimed at self employed and those wanting to make additional savings, such as IRAs in the United States. Tax driven, often in markets where they are “sold” not “bought”, with high commissions. There have been problems of pension misselling, coming out of attractive structures into inappropriate high commission products

  21. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Basic financial product dilemma – Regulate the product? or the means of distribution, the individual and the corporate? How much knowledge does the Regulator have over how products are distributed, who buys them and why. What is that makes products attractive or unattractive?

  22. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Increasing coverage Encouraging personal saving through occupational savings methods Tax incentives Caps on fees Educating people as to the importance of savings Many pension products are sold not bought But still low penetration… … leading to the idea of mandatory systems.

  23. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Where voluntary systems don’t achieve policy goals, more voluntary systems, then filling in the gaps with mandatory systems. Mandatory or near mandatory systems, Australia Hong Kong’s MPF Korea, Malaysia, Originally established as mandatory environment Singapore’s CPF

  24. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Mandatory Systems Regulatory touch, generally heavier, more threats, controls, investigations. Need to regulate and control various service providers. Prescriptive legislation on investment, participants and their financial and other qualifications. Regulator is in the public eye, driven by fear of individual loss and systemic risk.

  25. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan For investment managers Definitive mandates on pension fund mandates, reference to benchmarks Increasing number of unconstrained mandates On member choice Lifestyle funds Specialist equity and bond funds, supporting their own and third party products High level of transparency

  26. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Some global population pyramids… India, 2000 China, 2000 A near standard pyramid One child policy

  27. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Some global population pyramids: Source UN Italy, 2000 Iran, 2000 Low birth rate

  28. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids, how they are going to change Over 65 2001 18.4% 2015 22.3% Impact of low birth rate, ageing population continues ITALY 2000 2025 2050

  29. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids how they are going to change IRAN 2000 2025 2050

  30. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids how they are going to change improving healthcare INDIA 2000 2025 2050

  31. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids how they are going to change low birth rate CHINA 2000 2025 2050

  32. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan A government’s dilemma What does it 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?

  33. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan What is happening in Pakistan An existing system of pensions, provident funds, gratuities in both the public and private sectors. A new Voluntary Pension System. From a “policy” point of view, not an ageing problem, but for many individuals it is.

  34. Pension Funds Globally, in Asia and in Pakistan Pakistan’s population pyramids 1985 2000 Jeremy Gadbury The International Securities Consultancy Limited August 2005

  35. Jeremy Gadbury The International Securities Consultancy Limited August 2005 2001 3.7% over 65 2015 4.0% over 65 falling mortality rates PAKISTAN 2000 2025 2050

  36. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan • … some Pakistan demographics • Population growth rates Population Fertility rates • 2.59% 59.56 million 6.28 • 2.47% 142.65 million 5.48 • 1.98% 193.42 million 4.11 • 2050 0.84% 304.70 million 2.06 • Source: UN see www.globalis.gvu.unu.edu for more details

  37. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan • … and some international comparisons • Life expectancy at birth • India Iran Italy Pakistan Russia • 48.0 52.5 71.0 47.0 70.1 • 62.1 68.6 78.2 59.0 66.1 • 66.3 72.8 79.7 65.0 67.4 • 2050 73.8 79.1 82.5 74.7 74.2

  38. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan … and some international comparisons Population aged 65 and above India Iran Italy Pakistan Russia 2001 5.0% 4.5% 18.4% 3.7% 12.8% 2015 6.3% 4.9% 22.3% 4.0% 14.3%

  39. Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds Globally, in Asia and in Pakistan Thank you

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