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11
Pension FundsPension FundsGlobally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy GadburyJeremy Gadbury
The International Securities The International Securities Consultancy LimitedConsultancy Limited
22
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
Pension Funds and Retirement Fund Schemes – A Global View
Concepts and Practice, Structure, Role of Trustees and Investment Managers
33
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
Global population growth tending to stabilise, population mixes changing significantly in 1990’s
Lower birth rates, particularly in urban areas, developed countries
Improved healthcareDecline in smoking related diseases
Ageing population – more elderly people, fewer people to support themAnd liable to change more in the years to come
44
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
The ageing crisis…Ageing populationPeople living longer, working less4-2-1, 18-42-22, 15-50-10
… the pensions crisis – or income after employmentGovernments, companies afraid of future liabilitiesCompounded by lower interest rates, poor equity market returns since 1998, early retirement on full pensionsAnd increasing dependency ratios; The number of working age people “supporting” elderly.
55
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
And some remedies…
World Bank in 1994World Bank in 2005
The Chilean model
Encourage saving,
Change the benefit age
and the move to defined contribution
66
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
The World Bank’s advice in 1994
Three pillarsUsed 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.
77
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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.
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Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
The World Bank’s advice in 2005
Five pillarsTwo more pillarsZero -a noncontributory or “zero pillar” (in the form of a demogrant or social pension) that provides a minimal level of protection;, andFive -informal intrafamily or intergenerational sources of both financial and nonfinancial support to the elderly, including access to health care and housing.
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Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
The Chilean model
Born out of a crisis…State system in crisis, huge liabilities, no assetsSolution - 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.
1010
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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.
1111
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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
1212
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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
1313
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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.
1414
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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.
1515
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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.
1616
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
Roles spread across various parties, even where specific legislation doesn’t applyRegulated entities – Investment Managers
Insurance CompaniesSome Consultants
Legislation, regulation - TrusteesGenerally unregulated - Consultants
Additional requirements, such as record keeping and administration, accounting standards, auditing requirements, actuarial valuations.
1717
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
But still the need for
Pensions Ombudsman, in the United KingdomIndependent arbitratorsAppeals and complaints processes
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Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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.
1919
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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.
2020
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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
2121
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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?
2222
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
Increasing coverageEncouraging personal saving through occupational savings methods
Tax incentivesCaps on feesEducating people as to the importance of savingsMany pension products are sold not boughtBut still low penetration…
… leading to the idea of mandatory systems.
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Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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 MPFKorea, Malaysia,
Originally established as mandatory environment
Singapore’s CPF
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Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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 ofindividual loss and systemic risk.
2525
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
For investment managers
Definitive mandates on pension fund mandates, reference to benchmarksIncreasing number of unconstrained mandates
On member choiceLifestyle fundsSpecialist equity and bond funds, supporting their own and third party productsHigh level of transparency
2626
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
Some global population pyramids…
India, 2000 China, 2000A near standard pyramid One child policy
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Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
Some global population pyramids: Source UN
Italy, 2000 Iran, 2000Low birth rate
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Jeremy Gadbury The International Jeremy Gadbury The International Securities Consultancy Limited Securities Consultancy Limited August 2005August 2005
Some global population pyramids, how they are going to change
Over 652001 18.4%2015 22.3%
Impact of low birth rate, ageing population continues
ITALY
2000
2025
2050
2929
Jeremy Gadbury The International Jeremy Gadbury The International Securities Consultancy Limited Securities Consultancy Limited August 2005August 2005
Some global population pyramids how they are going to change
IRAN2000
2025
2050
3030
Jeremy Gadbury The International Jeremy Gadbury The International Securities Consultancy Limited Securities Consultancy Limited August 2005August 2005
Some global population pyramids how they are going to change
improving healthcare
INDIA2000
2025
2050
3131
Jeremy Gadbury The International Jeremy Gadbury The International Securities Consultancy Limited Securities Consultancy Limited August 2005August 2005
Some global population pyramids how they are going to change
low birth rate
CHINA2000
2025
2050
3232
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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?
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Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
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.
3434
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Pakistan’s population pyramids1985
2000
Jeremy Gadbury The International Securities Consultancy Limited August 2005Jeremy Gadbury The International Securities Consultancy Limited August 2005
3535
Jeremy Gadbury The International Jeremy Gadbury The International Securities Consultancy Limited Securities Consultancy Limited August 2005August 2005
20013.7% over 65 20154.0% over 65
falling mortality rates
PAKISTAN2000
2025
2050
3636
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
… some Pakistan demographics
Population growth rates Population Fertility
rates1970 2.59% 59.56 million 6.282000 2.47% 142.65 million 5.482015 1.98% 193.42 million 4.112050 0.84% 304.70 million 2.06
Source: UN see www.globalis.gvu.unu.edu for more details
3737
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
… and some international comparisonsLife expectancy at birth
India Iran Italy Pakistan Russia
1970 48.0 52.5 71.0 47.0 70.12000 62.1 68.6 78.2 59.0 66.12015 66.3 72.8 79.7 65.0 67.42050 73.8 79.1 82.5 74.7 74.2
3838
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
… and some international comparisonsPopulation aged 65 and above
India Iran Italy Pakistan Russia2001 5.0% 4.5% 18.4% 3.7% 12.8% 2015 6.3% 4.9% 22.3% 4.0% 14.3%
3939
Pension Funds Pension Funds Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan
Jeremy Gadbury The International Securities Consultancy Limited Jeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005
Thank you