Pension Funds Globally, in Asia and in Pakistan

Pension Funds
Globally, in Asia and in Pakistan
Jeremy Gadbury
The International Securities
Consultancy Limited
1
Pension Funds
Pension Funds and Retirement Fund

Schemes – A Global View
Concepts and Practice, Structure, Role of

Trustees and Investment Managers
Jeremy Gadbury The International Securities Consultancy Limited August 2005
2
Pension Funds
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
3
Pension Funds
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.
4
Pension Funds
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

5
Pension Funds
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.
6
Pension Funds
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.
7
Pension Funds
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.
8
Pension Funds
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.
9
Pension Funds
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.
10
Pension Funds
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
11
Pension Funds
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
12
Pension Funds
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.
13
Pension Funds
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.
14
Pension Funds
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.

15
Pension Funds
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.
16
Pension Funds
But still the need for
Pensions Ombudsman, in the United Kingdom

Independent arbitrators
Appeals and complaints processes
17
Pension Funds
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.
18
Pension Funds
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.
19
Pension Funds
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
20
Pension Funds
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?
21
Pension Funds
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.

22
Pension Funds
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
23
Pension Funds
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.
24
Pension Funds
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
25
Pension Funds
Some global population pyramids…
India, 2000 China, 2000

A near standard pyramid One child policy
26
Pension Funds
Some global population pyramids: Source UN
Italy, 2000 Iran, 2000

Low birth rate
27
Some global
ITALY population
2000 pyramids, how they
are going to
change
Over 65
2001 18.4%
2025 2015 22.3%
Impact of low birth

rate, ageing
population
continues
2050
Jeremy Gadbury The International

Securities Consultancy Limited
August 2005 28
Some global
IRAN population
2000 pyramids how
they are going
to change
2025
2050

August 2005 29
Some global
INDIA population
2000 pyramids how
they are going
to change
improving
2025 healthcare
2050
August 2005 30
Some global
CHINA population
2000 pyramids how
they are going
to change
low birth rate

2025
2050
August 2005 31
Pension Funds
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?
32
Pension Funds
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.
33
Pension Funds
Pakistan’s
population
1985 pyramids
2000
Jeremy Gadbury The International Securities Consultancy Limited August 2005 34

PAKISTAN
2000
2001
3.7% over 65
2015
4.0% over 65
falling
2025 mortality rates
2050
August 2005
35
Pension Funds
… some Pakistan demographics
Population growth rates Population Fertility

rates
1970 2.59% 59.56 million 6.28
2000 2.47% 142.65 million 5.48
2015 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
36
Pension Funds
… and some international comparisons
Life expectancy at birth
India Iran Italy Pakistan Russia
1970 48.0 52.5 71.0 47.0 70.1
2000 62.1 68.6 78.2 59.0 66.1
2015 66.3 72.8 79.7 65.0 67.4
2050 73.8 79.1 82.5 74.7 74.2
37
Pension Funds
… 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%
38
Pension Funds
Thank you
39

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Pension Funds

Globally, in Asia and in Pakistan

Pension Funds and Retirement Fund

Concepts and Practice, Structure, Role of

Jeremy Gadbury The International Securities Consultancy Limited August 2005

Jeremy Gadbury The International Securities Consultancy Limited August 2005

… the pensions crisis – or income after employment

World Bank in 1994

The Chilean model

Change the benefit age

and the move to defined contribution

Jeremy Gadbury The International Securities Consultancy Limited August 2005

(b) a “first-pillar” contributory system that is linked to

Born out of a crisis…

And now for some government social security and

Jeremy Gadbury The International Securities Consultancy Limited August 2005

•Structures (such as 401(k)) determined by what the

Principle objectives are to increase coverage, protect

Legislation evolves, often through experience;

Schemes increasingly established separately to a

Legislation identifies roles, the company, the trust and

Defined contribution – single investment policy,

Jeremy Gadbury The International Securities Consultancy Limited August 2005

Decisions usually made by an employer as to what

In member choice, pressure for a wide choice of

Jeremy Gadbury The International Securities Consultancy Limited August 2005

Trustees, seeking advice from Consultants,

Employers/Plan Sponsors. Seeking advice from

Regulator, legislation brings in marginal controls.

Additional requirements, such as record keeping and

Jeremy Gadbury The International Securities Consultancy Limited August 2005

Pensions Ombudsman, in the United Kingdom

Jeremy Gadbury The International Securities Consultancy Limited August 2005

Underregulation leads to abuse, mis investment.

Regulation on voluntary systems tends to be light,

Doesn’t prevent effects of financial failure of

Pension System is too big to protect from massive

Defined construction can only get structural

Jeremy Gadbury The International Securities Consultancy Limited August 2005

Tax driven, often in markets where they are “sold” not

There have been problems of pension misselling,

Jeremy Gadbury The International Securities Consultancy Limited August 2005

Regulate the product? or the means of distribution, the

How much knowledge does the Regulator have over

Jeremy Gadbury The International Securities Consultancy Limited August 2005

… leading to the idea of mandatory systems.

Mandatory or near mandatory systems,

Australia Hong Kong’s MPF

Originally established as mandatory environment

Regulatory touch, generally heavier, more threats,

Prescriptive legislation on investment, participants

Regulator is in the public eye, driven by fear of

Jeremy Gadbury The International Securities Consultancy Limited August 2005

Definitive mandates on pension fund mandates,

Jeremy Gadbury The International Securities Consultancy Limited August 2005

India, 2000 China, 2000

Italy, 2000 Iran, 2000