Pensions

in a Global Context
Catherine Martens-Malik
The International Securities
Consultancy Limited

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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

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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).

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Global Trends - Changing Demographics

Dramatically improved life expectancy

Life Expectancy at Birth

India Iran Italy Pakistan Russia

1975 48.0 52.5 71.0 47.0 70.1
2006 62.1 68.6 78.2 59.0 66.1
2022 66.3 72.8 79.7 65.0 67.4
2050 73.8 79.1 82.5 74.7 74.2

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Global Trends - Changing Demographics

Increase in the proportion of elderly and retired

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%

Italy is among the worst placed countries, but most of Western

Europe already has an ageing problem.

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 ITALY -
population pyramids:
how they are going
2000 to change

Over 65
2001 18.4%
2015 22.3%
2025
Impact of low birth
rate, and ageing
population continues.

2050

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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.

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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.

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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?

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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

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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.

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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.

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World Bank Pensions ‘Pillar’ Model
Pillar Characteristics Participation Funding
0 Basic or ‘social pension’ to ensure Universal or Govt tax/general
minimum level of pension income for means tested revenues
all retirees
1 Public pension plan, publicly Mandated Contributions
managed (defined benefit or notional (collected by taxing
defined contribution) income), with some
financial reserves
2 Occupational or personal pension Mandated Financial Assets
plans (fully defined benefit or fully
funded defined contribution)
3 Occupational or personal pension Voluntary Financial Assets
plans (partially or fully funded
defined benefit, or funded defined
contribution)
4 Informal intra-family or Voluntary Financial & non-
intergenerational sources of both financial assets
financial and non-financial support to
the elderly, including access to
healthcare and housing
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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.

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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.

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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 ContributionSchemes – 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.

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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

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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.

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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.

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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

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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.

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What is happening in Pakistan?

Population growth slowing…..

Population Fertility
growth rates Population rates
1970 2.59% 59.6 m 6.28
2005 2.47% 142.6 m 5.48
2021 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 details

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 What is happening in Pakistan?

Pakistan’s
population
pyramids

1985 Here the

demographics
are also
changing …..

2000

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2000

PAKISTAN

2001- 3.7% over 65

2015- 4.0% over 65

2025 ….mainly due to falling

mortality rates.

2050

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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 .

Year No of People over 65

2005 6.6 million
2025 11.8 million
2050 31.7 million

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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.

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Pensions In a Global Context

Thank you

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