Business Development Global Pensions 2005. 2 Pension models around the world Global pensions is proud to present you a summary of various pension models.

Business Development

Global Pensions

2005

2

Pension models around the worldGlobal pensions is proud to present you a summary of various pension models around the world. The document is split into three parts:

I The World Bank pension model that is a framework to discuss the different pension systems in the world

II A detailed overview of pension systems of countries that are considered to be role models across the world. These systems can provide best practices for countries that are considering reforming their pension system.

III Main characteristics of pension systems in countries that reforms have been recently launched, currently under reform or where changes are expected.

This overview is based on the World Bank model.

We realize the study is not yet comprehensive and would appreciate any additional comments or remarks. It will be further improved, however it can be used as a working document.

3

Table of contents

• Europe• Hungary

• Czech Republic

• Slovak Republic

• Romania

• Greece

• Ukraine

• Russia

The World Bank model

Leading role pension models compared to the World Bank model:• Chile• US• Poland**• Netherlands • UK• Sweden *• Australia

Main characteristics of other country’s pension systems• Latin America

• Mexico• Brazil• Peru

• Asia • China• Korea

I

II

III

I. Country pension system summaryII. System characteristicsIII. Investment guidelineIV. Regulation and supervisionV. Macro economic impact *VI. System pros and cons**

•* Only applicable to countries recently reformed•**Only applicable to *marked countries

4

The World Bank model (classic definition)

Publicly funded schemes, social

security schemes

Employer sponsored schemes or private mandatory programs

Additional voluntary arrangements

STATE MANDATORY VOLUNTARY

I II III

• Government is responsible for adequate safety net via Pillar I• Private sector plays key role in building Pillars II and III• Growth will mainly be in Pillars II and III • Public/private partnership is essential

5

Pensions as economic growth engine

Advantages of multi pillar-system:

• Proper financing of old age provision

• Boosts economic growth

• Contributions are invested back into the economy

• Accelerated development of local capital markets

• Shared responsibility by government, employers and individuals

• Strongly recommended

• World Bank / OECD

• European Union / ILO

• Tax support

• EET

STATE MANDATORY VOLUNTARY

I II III

6

A new perspective on World Bank pension model• New definition on pension model, by World Bank (according to the study in

February 2005

• Social pension functions as basic income re-distribution, extremely important for lifetime poor individuals as well as informal sector (income is not taxed)

• Role of private companies• Only active in Pillar I, II & III • Pillar I: institutional asset management (potentially)• Pillar II: pension fund management• Pillar III: same as pillar II

PillarsZero I II III IV

Social pension

State Occupational or personal

(Mandatory)

Occupational or personal

(Voluntary)

Individual, informal financial and non-

financial

Characteristics

Basic social assistance, universal or means tested

Also called “demogrant”

Public pension plan, defined benefit or notional defined contribution

Occupational or personal pension plans (fully funded defined benefit or defined contribution)

Occupational or personal pension plans (partially or fully funded defined benefit or fully funded defined contribution)

Informal support (family), other formal social program (health care), other individual financial or non-financial assets (homeowner)

Please note this new pension model is for reference only. In the remaining of the document, only the classic 3 pillars pension model will be discussed

7

Table of contents


• Czech Republic

• Slovak Republic

• Romania

• Greece

• Ukraine

• Russia


Leading role pension models compared to the World Bank model:• Chile• US• Poland**• Netherlands • UK• Sweden • Australia




I

II

III



8

WB Publicly financed plans, social security plans

Employer sponsored plans or private mandatory programs

Additional voluntary arrangements (possibly sponsored by Employer)

Recommenda tions

• Not applicable, pillar phasing out • Increase the coverage and the investment range abroad

• Mandatory contributions for self-employed

• Separate disability and pensions coverage

• Introduce savings alternatives (401Ks, APVs)

• Increase awareness and information available regarding the private system

Major

Issues

• Not applicable, pillar phasing out • Although fully funded, not sufficient mandatory coverage

• ‘Unnatural fit”: private companies with profit incentive managing system that is mandatory by gov’t (public interest)

• Mandatory disability coverage burdens AFP profitability

• Lack of savings culture / high cash culture

• Lack of tax incentives

Pension

System

• Old State System (PAYG)• Compulsory for the Armed Forces

and old labor force without Past Service Bonus.

• Contribution levels higher than new private system

• Private Pension System (AFPs)• Compulsory for new labor force

(since 1.5.81): DC plan, employee’s contribute 10%, Past Service Bonus paid by the government at retirement age (if applicable since PSB being phased out)

• Optional for self-employed and old labor force: Past Service Bonus is still paid to the old labor force at retirement age

• Self employed and other groups• Voluntary retirement savings

plans/products (APVs)• Government subsidizes through

tax reduction

CHILE STATE I MANDATORY VOLUNTARYII III

I. Chile Pension System compared to World Bank (summary)CHILE

9

II. System characteristics: reform in Chile

• On November 13th, 1980 the New Pension System was established by law.• The New Pension System was launched in May 1981, replacing the old one (PAYG).• Main features of the new system:

• Compulsory for the new labor force and optional change for the old labor force.• The government assumes capitalization of contributions made in the old system through the issuance of

“Recognition Bonds”. • Many institutions, all private, manage pension funds, and compete on price, service levels and

investment performance.• Contribution-based funding of pensions, but complemented by a pay-as-you-go funding for disability

and survival pensions.• Freedom of choice. Freedom to change institutions.• Same requirements for everyone. Benefits according to contributions paid and fund yield.• Government sets rules, enforces, guarantees minimum pension and return on funds.

• During the first month, 11 competitors joined the industry• At the end of 1981, there were 12 competitors• There are 3 types of competitors:

- National equity- National - Foreign equity- Trade union equity

CHILE

10

II. System characteristics: reform in Chile Simultaneously, other legal reforms were required for the success of the pension system reform:

1. Capital Market - new legal framework for:• Securities and financial market• Stock companies• Superintendence of Securities and Insurance• Custody of titles and securities• Introduction of fixed income securities able to compensate for inflation

2. Investment Alternatives:• State-issued securities for pension funds & insurance companies• Pension funds were entitled to purchase fixed income instruments issued by banks and financial institutions

and other private issuers• Pension funds were authorized to invest in stocks (1986)• Pension funds were authorized to invest abroad (1994)

3. Level of risk - prohibit investment in certain stocks and enforce diversification:• Issuer• Types of instruments• Terms• Risk level and categories• A Risk Assessment Commission was established

CHILE

11

II. System characteristics

Pillar I

• Old State System (PAYG)• Compulsory for the Armed Forces and old labor force without Past

Service Bonus.• Contribution levels higher than new private system

Key issues

• Not applicable, pillar phasing out

CHILE

12


Pillar II

• Mandatory pension funds (substituting Pillar I), which are privately managed and invested. AFPs in charge of underwriting and investing.

• Compulsory for new labor force (from 1.5.81): DC plan, employee’s contribute 10%, Past Service Bonus paid by the government at retirement age (if applicable since PSB being phased out)

• Optional for self-employed and old labor force: Past Service Bonus is still paid to old labor force at retirement age• Also coverage for Disability and Survivors Pensions

• LEGAL RETIREMENT: • 65 years for men and 60 years for women• The pension amount is calculated based on:

• Accumulated Savings: Pension Fund + Past Service Bonus + Voluntary Savings Acc’t• Life expectancy of the worker and of his family group

• EARLY RETIREMENT:• 110% Legal Minimum Pension • 50% Inflation-adjusted income of last 10 years (August 2004, > 70%)

Key issues

• Although fully funded, not sufficient mandatory coverage• ‘Unnatural fit”: private companies with profit incentive managing system that is mandatory by government (public interest)• Mandatory disability coverage burdens AFP profitability

CHILE

13


Pillar III

• Self employed and other groups• Voluntary retirement savings plans/products (APVs). Government

subsidizes through tax reduction

Key issues

• Lack of savings culture / high cash culture• Lack of tax incentives

CHILE

14

III. Investment guidelines for the Pension Funds (AFPs)

• Participants with less than 10 years until retirement (at legal age) can not invest in Fund A

• Pensioners can not choose Funds A and B• Default allocation (when no choice made by the

participant) will be as in table 3

CHILE

AFP’s can not:• Buy low liquidity assets• Manage other portfolios• Act or fail to act in a manner required by law• In general they cannot use, for themselves or on

a third party’s behalf, information about investments of the pension funds managed by them, nor can they provide such information to people other than those who participate in the investment decision-making process

Men: till 35Women: till 35

Men: 36-55Women: 36-50

Men: from 56Women:from 51 Pensioners

A

B

C

D

E

Men: till 35Women: till 35

Men: 36-55Women: 36-50

Men: from 56Women:from 51 Pensioners

A

B

C

D

E

• The AFPs must invest the pension funds’ resources as established by law (type of instruments and investment margins are regulated), and guarantee a minimum profitability and security for the participants

• AFPs are stock companies with a target to manage 5 pension funds with different risk-return combinations (table 1)

• In order to invest their obligatory savings, affiliates can freely choose among the different five funds, except: (table 2)

table 3

table 2

table 1

15

IV. Regulation and Supervision (1/2)

REGULATION:

Requirements of the pension funds:

• Minimum capital amounting to US $123,200 must be funded, subscribed and paid at the moment pension fund is granted a public deed of company formation

• Shareholders’ equity must match some minimum capital requirement. This requirement depends on the number of members and ranges between US $123,200 to US $492,800. In practice, the capital and shareholders’ equity are much higher than the minimum amounts required.

• Governmental authority to operate, which is granted by the AFP Superintendence (Supervisory body)

Responsibilities

• Enroll new workers and accept members transferred from other AFP’s

• Collect monthly contributions from employers

• Legally enforce payment of unpaid contributions

• Identify/keep record of contributions of each member

• Credit contributions to each member’s individual investment-based account

• Invest pension fund assets

• Inform members every four months - and upon request- about their individual account status and about commissions charged

CHILE

16

IV. Regulation and Supervision (2/2)

SUPERVISION:

• The AFP Superintendence supervises and controls the Fund Administration Companies (AFPs) as established by law

• Functions:

• Authorize AFP formation and keep record of them

• Oversee AFP’s operations and the granting of benefits and services given to its members

• Oversee pension funds’ investment of assets

• Set and provide interpretation of rules and regulations for the pension system

• Advise the executive power (via the Labor and Social Security Ministry) on pension-related issues and propose legal reforms leading to system enhancement

• Apply sanctions upon AFP’s which may range from:

- Censure (reprimand)

- Fines amounting up to UF 15,000 (US $ 370,000)

- Repeal of the AFP’s authorization to exist

- Settlement of the AFP and its funds, when applicable

CHILE

17

V. Macro-economic impact

Impact on the capital market:

• Initial estimates from industry said that in the mid-term, approx. US $3.5 billion would be transferred from fixed income to equity. (As of December 2003, the real increase in equity was US $11.8 billion )

• Higher amount invested in equity abroad.

• Local market receives investments depending on market conditions, liquidity and stock exchange performance. (ACD)

• Decrease in time deposit position (today 15% from pension funds)

Instrument US $ mln % of total Impact on the economyMortgage Bills 4,400 52 280,000 houses

Stocks 7,300Change in liabilities of corporations. Funding

of projects, both domestic and abroad

Debentures 4,500 45Change in liabilities of corporations. Funding of projects, (highways), both domestic and

abroadReal estate 400 81 Housing and other estates

Development funds 150 80 For medium size companiesCentral Bank Bonds 9,600 60 Balance of monetary policies

CHILE

Impact on the economy:

THE TOTAL ASSETS MANAGED BY PENSION FUNDS EQUALS:

• 52% OF GDP• 100% OF TOTAL EXTERNAL DEBT• 2 TIMES TOTAL ANNUAL EXPORTS

18




Major

Issues

• Funding issues under debate. New proposal under Bush reform looking at Individual Pension Accounts (similar to Chile/Lat Am)

• n/a

Pension

System

• State System (PAYG)• First and current law: 1935 (with

numerous amendments).Type of program: Social insurance system

• No mandatory system

US STATE I MANDATORY VOLUNTARYII III

I. US Pension System compared to World Bank (summary)US

• Employer related:• DB and hybrid plans• DC: 401K, 403B,457, SEP, Simple, Sarsep

• Personal savings:• IRA – traditional, roth• Annuties• Mutual Funds• Brokerage

• DB: Declining due to move to individual funding, regulatory complexity and cost

• DC: Continued expansion in competitive environment, with strong “takeover” element

• Exploding IRA market

• Improving tax incentives for long term savings and investments

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II. System characteristics: Pillar I• Coverage

• Gainfully occupied persons, including self-employed persons.Exclusions: Casual agricultural and domestic employment, and limited self-employment (when annual net income below $400), and some Federal employees hired before 1984.Voluntary coverage for employees of State and local governments, and clergy (mandatory coverage for employees of State and local governments not covered under a retirement system, effective July 1, 1991).Applies in U.S., Puerto Rico, Northern Mariana Islands, Virgin Islands, Guam, and American Samoa, and to citizens and residents employed abroad by U.S. employers.Special systems for railroad employees, Federal employees, and many employees of State and local governments.

• Source of Funds• Insured person: 6.2% of earnings. Self-employed, 12.4%.

Employer: 6.2% of payroll.Government: Cost of special monthly old-age benefit for persons aged 72 before 1968; whole cost of means-tested allowance.Maximum earnings for contribution and benefit purposes: $72,600 a year, automatically adjusted to wage levels.

• Qualifying Conditions• Age 65 (62-64 with reduction); gradually increasing to 67 over period 2000-27.

• Old-Age Benefits• Based on covered earnings averaged over period after 1950 (or age 21, if later), and indexed for past wage inflation, up to age 62 (or death,

if earlier) excluding 5 years with the lowest earnings. (Earnings in years outside this period may be substituted, if higher.) Available at age 62, but reduced for each month of receipt prior to age 65.No minimum benefit for workers reaching age 62 after 1981.Maximum $1,373 a month for workers retiring at age 65 in 1999.Increment for each month worker delays retirement at ages 65-69.Increment amount depends on the year the worker reached age 62, and is 5.5% per year for those age 62 in 1999.Adjustment: Automatic cost-of-living adjustment.

US

20

II. System characteristics: Pillar I – Reform proposal Current US system is not sustainable, i.e. the guarantee fund (PBGC) going into a deficit (September 30, 2004 growing from $11,2 bio to 23,3 bio). As

of 2004 the cost of doing nothing to fix the US Social Security system had hit an estimated $10,4 trillion, according to the Social Security Trustees.The proposal of President Bush to reform pension focuses on 2 main areas:1. Individual investment accounts:• Participation: benefits of anyone age 55 and older will not be changed. The accounts are voluntary. But participation would be phased in over three

years according to age: the first year - 2009 - workers born from 1950 to 1965; the second year, workers born from 1950 to 1978; the third year, anyone born after 1950 could opt for an account.

• Contribution: workers would be permitted to invest up to 1/3 of the 12.4 percent payroll tax that they and their employers pay on their wages, into the individual investment accounts (Workers pay 6.2 percent and employers the other 6.2 percent.)

• Annual contributions would be capped at $1,000 in 2009 and thereafter rise slightly more than $100 per year.• Investments: Workers would have a choice of five broadly diversified index funds and a lifecycle fund, in which the portfolio grows more

conservative as the investor nears retirement. (i.e. when a worker turns 47 the account will automatically be invested in the lifecycle fund unless the worker and his or her spouse sign a waiver opting out)

• Pay out: Money in the accounts could not be taken out before retirement. At retirement, it's likely workers would have to annuitize a portion and only take out a lump sum if doing so would not result in the worker moving below the poverty line. Any unused portion of the account could be left to heirs.

• Administration: The accounts would be modelled on the Thrift Savings Plan - a 401-k type program already available to government employees - and centrally administered by the government. The accounts should not be eaten by Wall Street fees; low costs. It is estimated that the administrative cost per account will be 0.3 percentage points.

2. Funding rules for defined pension plans will be strengthened.• Funding targets will be based on meaningful measures of liabilities• Market values will be used for assets• 7 year amortization period for funding shortfalls• Employer can make additional deductible contributions in good years• Disclosure to participants will be improved• Premiums will better reflect plans risks and restore the health of PBGC

Main concerns:• Transitional Cost: Payroll taxes are used to pay current retirees, so diverting a portion of them creates a shortfall in the ability to pay full benefits.

The transition costs of diverting a third of payroll taxes to individual investment accounts have been estimated at around $2 trillion over the next 10 years. That assumes, though, that a third of payroll tax is diverted for each of the 10 years.

US

21

II. System characteristics: Pillar II

• Currently no mandatory system in place

US

22

II. System characteristics: Pillar IIIUS

14% Annuity

7% Contributory IRA

16% Defined Benefit

20% Defined Contribution

18% Rollover IRA

17% State/Local Govt

8% Federal Government

1Estimates from Flow of Funds Accounts of the US

Distribution of Retirement-Oriented Assets¹1. Employment Based:- DB- DC:

- 401 (k)- 403 (b)- 457

2. Non Employment based:- IRA

23

Sponsors• Deductibility of contributions as an expense• Competitive advantage• Attracts quality employees• Cost savings - retention tool (vesting schedules)• Stimulate economic growth - promotes long term

savings• Socially responsible to encourage retirement

saving• Shifts responsibility for retirement to the

employee

Participants• Pre-tax contributions - lowers current taxable load• Tax deferred earnings• Diversification of assets• Ease investing and long-term savings• Potential matching employer contributions• Not taxable until distributed (normally at retirement

when at a lower tax bracket)• Portability• Ownership of their retirement savings• Catch up contributions

II. System characteristics: Pillar III - DC US

401(k) plan (as 403(b) and 457) allows employees to save for their own retirement. This type of plan was named for that section of the Internal Revenue Code, which permits employees of qualifying companies to set aside tax-deferred vehicle that offers a variety of investment options.

$ $ $

Fixed Investments, Mutual Funds, Employer Stock, Stocks/Bonds, Cash

Pillar III - DC

24

• IRAs are tax-favoured retirement vehicles that individuals or workers can establish themselves. Unlike DC or DB, which can only be sponsored by er’s, IRAs provide tax –advantaged retirement savings plans for many ordinary wage earners without an employment-based retirement plan; self-employed, part-time workers; or even some individuals who are not in the labour force (such as nonworking spouses).

• The growth of IRAs in recent years has not been drive by regular annual contributions by IRA owners; rather, stock market gains and rollovers from other plans have accounted for the lion’s share of IRA growth. The experience so far shows that stock market gins/losses have a larger impact on total IRA assets than rollovers. Today, IRAs are used primarily as a vehicle to store retirement wealth that has been accumulated elsewhere in the retirement system, and not as a vehicle through which current retirement saving occurs.

II. System characteristics: Pillar III - IRAUS

25

III. Investment guidelinesUS

Minimun diversification requirements

Self-investment/ conflict of

interest

Other quantitative rules

Ownwership concentration

limits

Currency matching

Direct limits on foreign

investments

General requirements for

diversification

Limited to 10% for DB plans

None No info available No explicit rule None

• US Regulation of pension fund assets

26

IV. Regulation and SupervisionUS

• The United States has several agencies in charge of the supervision of private pension occupational schemes:

• The US Department of Labor, Pension and Welfare Benefits Administration (PWBA) primarily supervises the protection of employee benefit rights and fiduciary obligations for corporate and multi-employer voluntary pension plans.

• The Pension Benefit Guaranty Corporation (PBGC) provides protection for the termination of defined benefit schemes.

• The Internal Revenue Service (IRS), overseen by the United States Department of Treasury, operates and supervises the tax treatment related to pensions and, in that role, is responsible for the registration (tax qualification) of pension plans.

• NASD

• SEC

• State Insurance Department

• State Attornies General

• Due to the large number of pension plans in the US, the voluntary nature of the pension plan system, the great variety of plans, and the limited amount of resources allocated to the governmental agencies charged with supervising pension plans, a significant emphasis on the part of government has been on voluntary compliance, through educational outreach programs and voluntary compliance programs for plan sponsors and plan fiduciaries who have discovered violations and want to correct them. Both the Department of Labor and the IRS have sophisticated programs for identifying likely areas of non-compliance with the law and targeting examinations at those areas. Through these programs, the agencies have made significant recoveries of money for plans and have imposed plans to correct deficiencies in their operations.

27




• ZUS, an effective, centralised administration system, however, room for improvement

•Delayed customer data retrieval as a result of slow and unorganised system (member data delay up to 2 months)

• System introduced in 2004 and initial sign up for IKE successful, but long term success still remains to be seen

Major

Issues

• PAYG scheme• However, benefit consists of 2

components: a. Notional accumulation of contributions in individual accounts b. The accrued DB pension right (at the time of reform) is converted into a notional lump sum value and “credited” to the individual

• Contribution is 19.52%, equally split by employers and employees

•Only 12.22% is contributed to Pillar I, if individual is eligible and elects to join a pillar II fund •Remaining 7.3% is contributed to pillar II

• Mandatory, open end pension funds• Managed by private pension fund

companies• At retirement, accumulated benefit will

be transferred to annuity• First benefit payout is expected to be in

2009• Members have free choice of pension

fund provider• Transfer between funds are permitted,

but only one pension fund at a time• A custodian bank has to be used, for

which 10 – 12 bps is paid• For self employed, a minimum

contribution required and can be split between pillar I and II

• Voluntary, additional employer contribution to corporate pension fund

• Limited take up rate as employers view this is an extra labour cost

• 7% payroll tax deduction• Market perception that tax incentive too low

• Individual retirement account (IKE)

• Tax qualified long term savings products

• Early withdraw tax penalty applied

• Life insurers, mutual fund managers, banks and brokerage firms

POLAND STATE I MANDATORY VOLUNTARYII III

I. Poland Pension System compared to World Bank (summary)POLAND

Pension

System

28

II. System characteristics: from mono to multi pillar systems in 1999• Mandatory, reformed PAYG, DC system

• PAYG: current pensions are financed by current contributions paid by employees and employers• Individual account, DC system: previously accrued defined benefit pension rights “credited” to a notional individual

defined contribution account

• Contribution is paid by employee• Old age pension contribution is part of the social security contribution, of which

• 19.52% of earnings paid to old age pensions – equal contribution from employer and employees• 13% for disability – equal contribution from employer and employees• 1.93% work injury, 100% paid by employer• 2.45% sickness, 100% paid by employee

• Old age pension contribution is split into 2 parts• 12.22% is paid to finance the current retirees • 7.3% is for individual account (II Pillar)

• Benefit 2 components• Pillar I: accrued DB benefits before reform + accrued DC benefits on 12.22% contribution, both are notional• Pillar II: accrued assets from individual account, DC

• Pension reform bill passed by parliament in 1998, scheduled for implementation in January 1999

• Actual implementation started 1 March 1999• Before pension reform, state pension liability is 462% of GDP• 2004, pension liability is 194% of GDP• 2010, system is projected to be in surplus

• Pension reform does not bring additional cost to employers nor to employees (Government made the social security system transparent)

• Employers aggregated contribution was reduced and employees, in the mean time, receive additional salary that equals the employer contribution reduction

POLAND

29

II. System characteristics - general • Mandatory, funded system

• Eligibility: • Compulsory to all employees born after 1969 • Born before 1949 had to remain in the old system• Born between 1949 – 1969, have a choice of joining pillar I or II

• Free member choice of fund• Employers were not allowed to influence the choice of fund (Partially the reason Tied Agents were a

successful distribution model)• Fund managers and agents are not allowed to offer inducement to customers to join a fund

• Effectively only 7.3% is contributed to the individual account

• Open-ended pension funds, managed by private pension fund managers• 16 private pension funds, top 3 has over 65% market share (PZU, ING, Commercial Unions)• 11.7 million members, however, approximately 2 million members are effectively non-contributory accounts• Total assets: +€ 11 billion, end June 2004

• Insurance companies, banks, security / brokerage firms can apply licence to set up pension fund entity

• Pension fund manages the assets, but needs a custodian bank to handle the asset administration (10 – 15bps commission fee)

• Insurance companies hold 88% of total assets (too concentrated)

POLAND

30

II. System characteristics - Administration

• One centralised administration body – ZUS• Employer pays both employee and employers contribution to ZUS• Individual account:

• ZUS allocates employee(er) contributions to Pillar I,• Pillar II, it matches contributions with employee fund choices and distributes

the money to the funds’ custodians and advises the funds• Collect information / money reconciliations a. pass money to custodians; b.

information to fund managers

• Key issues• Too short preparation time: legislation passed in 1998, actual

implementation 1 March 1999• Inaccurate form completion by employers resulted in unmatched

contributions• Education for employers took over a year

POLAND

31

III. Investment guidelines (1/2)• Majority of investments to domestic capital market

• Regulation sets maximum 5% limit on off shore investment• In practice, only 1% assets invested off shore, due to many hidden “obstacles”, ie., waiver on

custodian service fee, stamp duties etc.

• Maximum asset management fees: < 0.6%• Market players set the fee (ING, being 1 of top 3 players with approx. 20% market share, has

strong influence in fees)

• Asset management fees: upfront fees + management fees• Upfront fee – maximum for contribution based fees is 5.8% of annual contribution, includes

administration fees (0.8% to ZUS), supervision, custodian etc.• Average 50 bps per annum, if assets above Zloty 8 bln, management fees will be reduced

(sliding scale)

• An open pension fund can only offer one fund• For customer & agent, restriction simplified the choice and education process• However, from fund managers’ point of view, this restriction limits the investment return

• Fund managers keep record of accounts for each member, member information access through:

• Internet, call center, ATM or SMS

POLAND

32

III. Investment guidelines (2/2)• Investment restrictions (to protect the members’ rights):

• Up to 95% of assets in bonds or shares on domestic capital markets• < =5% off shore investment (limited to OECD countries)• Restriction applies to open end pension fund

• 40% in quoted stocks• 10% in secondary stock• 10% in treasury bills• 10% in NIFs• 15% in municipality bonds• 10% in close ended investment funds• 15% in open ended investment funds• 20% in banks and bank groups

• An industry guaranteed fund to recover losses from fund managers, in the event of bankruptcy• Effectively, the fund managers are paying for the industry losses

• No investment in real estate• Numerous diversification requirements, ie.,

• no more than 10% of assets to be invested in a single kind of securities• Investment in bonds, or stocks should be <=5% of assets in one issuer

• Asset allocation (June 31, 2004)• Bonds: 60%• Equity: 31%• Treasury bills: 4%• Bank, securities and deposits: 3%• Others: < 1%

• Key issues:• Pension funds hold about 25% domestic capital market• Increasing demand for IPO to increase the size of the market

POLAND

33

IV. Regulation and supervision• Insurance and Pension Funds Supervisory Commission supervise:

• Open pension funds• Employee pension fund (non-profit)

• The commission consists of 5 members:• Chairman of the commission appointed by Prime Minister• Deputy Chairman appointed by Ministry of Finance and Ministry of Labour• Member of the commission: chairman of the security and exchange commission or

his deputy• Member of the commission: chairman of the competition office or his deputy

• Government intended to amend the law in following aspects:• Cost of system development (remove limitation)• Competition (intensify)• Investment (increase effectiveness)• Finance burdens of funds and of members (liquidation)• (Reduce) power of big 3 pension funds

• New draft law yet to be sent to parliament

POLAND

34

IV. Regulation and supervision

• Clear division of rules • Custodian, administration and pension fund managers

• Member information clear and easy accessible published regularly in the newspapers as net of fees

• Pension fund manager is regulated to protect members:• If market average return is 8%, underperforming fund managers

have to make up the difference in order to equal half of the average (i.e. at least provide 4%)

• Effectively, it resulted in fund managers all investing in a similar way

POLAND

35

V. Macro economic impact• Reduced pension liabilities

• Until 2005: before reform, 462% of GDP vs. after reform, 150% of GDP

• 2050, pension expenditure will drop from one of the highest in Europe to one of the lowest

• Transfer of a portion of contributions to funded pension scheme is not a cost

• It reveals a portion of the implicit debt• It reduces future public finance obligations

• Increased funding requirements can be offset by higher debt, purchased by pension funds

• Pension funds assets invested into equities stimulate investment and economic growth

• It is better to turn a portion of pension liabilities into savings now than to have much greater problems with redeeming such obligations in the future

• Expenditure and revenue of the pension system

• 2049, pension system surplus

POLAND

Dependency ratio

(d)

GDPR/GDPPrimary surplus

needed to keep

pension debt at

2000 level

2000 2050 chan

ge

2000 2050 chan

ge

France 27.2 50.8 23.6 12.1 15.8 3.7 5.9

Germany 26.6 53.2 26.6 11.8 16.9 5.1 4.3

Spain 27.1 65.7 38.6 9.4 17.4 8.0 4.8

Sweden 29.4 46.3 25.9 9.2 10.8 1.6 1.0

Poland 20.4 55.2 34.8 10.8 8.3 -2.5 -1.0

10% 12% 14% 16% 18% 20% 22% 24% 26%

2002 20

04 2006 20

08 2010 20

12 2014 20

16 2018 20

20 2022 20

24 2026 20

28 2030 20

32 2034 20

36 2038 20

40 2042 20

44 2046 20

48 2050

204

surplus

expenditures

contribution

10% 12% 14% 16% 18% 20% 22% 24% 26%

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

2049 surplus

expenditure

contribution income

36

VI. Polish pension reform pro’s and con’s

• Mandatory, big bang pension reform

• Simple & transparent:• Individual account makes it easier to understand–

amount an retiree receives equals to accumulated contribution value, enhances personal interest and accountability

• Separate old age pension from other social security contribution – transparent and easy to understand for individual

• Defined contribution system makes it easier for people to understand increase the confidence level

• One investment fund per pension fund makes it easier to understand

• Few, but smart regulations to protect member rights• Maximum asset based fees, no contribution fee• Industry average investment return as a benchmark, low

performer has to pay penalty• Dis-encouraged to take high risk investment

• One centralised administration system allows efficient collection and administration, also saves cost

• Media attention and support helped people to understand

• Lack of investment options to sustain a long term high rate of return

• Limited solutions to channel pension fund assets into long term investment

• Pension fund investment over reliance on domestic capital market

• Limited investment option when the capital market is small (limited supply of financial instruments and resources) and illiquid

• Over complicated regulations and international charges limited pension fund overseas investment

Pro’s Con’s

POLAND

37




Holland STATE I MANDATORY VOLUNTARYII III

I. Dutch Pension System compared to World Bank (summary 1/2)

Pension

System

• Basic old age pension (AOW)•PAYG •Universal: system applicable to all residents and flat rate benefit•Minimum guarantee to prevent poverty (70% of minimum wage)•Build up phase: 15 – 65 years

•In case of a person who resides outside Netherlands during the accumulation phase and the total retirement income is less than 70& of minimum wage, this person is entitled to receive social assistance

• Employer sponsor, occupational pension schemes, voluntary

•However, +90% employed participated in an occupational pension scheme•Including AOW benefit, the total replacement ratio is aimed at 70% of individual final, or average salary)

• Pension payout • Early retirement is possible• 4 types of pension funds

•Industry-wide•Company•Insurance contract•Pension funds for self employed professionals

• DB (88%) and DC plans

Major

Issues

• Ageing population created future pension deficit in Pillar I

•An AOW savings fund created to finance part of the (AOW) expenditure in future•Government deposits tax revenue to the fund on annual basis

• Over funding requirements (strict solvency) by regulatory commission puts pressure on industry players

• Current solvency margin still healthy (at 110%), however, is historically low compared to before crisis (at 150%)

Recommendations

• Allow pension funds time for recovery – short term underfunding, long term financial sustainability

Netherlands

38




Holland STATE I MANDATORY VOLUNTARYII III

I. Dutch Pension System compared to World Bank (summary 2/2)

Pension

System

• Basic old age pension (AOW)•PAYG •Universal: system applicable to all residents and flat rate benefit•Minimum guarantee to prevent poverty (70% of minimum wage)•Build up phase: 15 – 65 years

•In case of a person who resides outside Netherlands during the accumulation phase and the total retirement income is less than 70& of minimum wage, this person is entitled to receive social assistance

• Individual pension arrangement• Annuity and endowment insurance• Premium contribution tax deductible

•Annuity benefit tax incentive is caped at 70% of a person’s final pay (incl. benefits from AOW and Pillar II occupational scheme); contribution deduct from taxable income (€ 1,036 per annum)

•Endowment with 15+ years policy duration: interest tax free, principal tax free up to a ceiling

Major

Issues

• Ageing population created future pension deficit in Pillar I

•An AOW savings fund created to finance part of the (AOW) expenditure in future•Government deposits tax revenue to the fund on annual basis

• Tax legislation is very influential •Both Pillar II & III applies EET

Recommendations

Netherlands

39

II. System characteristicsHollandNetherlands

Source: OECD,

Please note: OECD definition is used in this table: 2 pillar reflects employer sponsored pension schemes

40

II. System characteristics: Pillar I old age pension (AOW) • Funding:

• Statutory pension contribution is set at 18.25%, in 2003, however, is set at 17.9% or up to €28,850 per annum• Contribution are collected through tax bureau for which the tax bureau will automatically transfer the money to

SVB • In case of funding deficits, government will grant tax revenue (to which pensioners contribute as well)• An AOW savings fund established. Funding source is government tax money. Expected to reach €135 billion

in 2020 & share 12% AOW expenditure in 2030

• Administration: Social Verzekerings Bank (SVB)• An central administrative body set by the government• Non-profit organisation• Day-to-day operation independent from the government

• Board of Directors manages SVB, in consultation with board of advisors• SVB responsibility: collect premiums and distribute to individual (amongst others, old age pension benefits)

• Supervisory body and process• Ministry of Social Affairs and Employment (SZW) appoints members of SVB Board of Directors & Board of

Advisors• SZW supervises SVB through regular inspections

• Investment: • Currently, minimum capital surplus, hence NO investment management

• However, AOW savings fund is managed by Ministry of Finance

HollandNetherlands

41

II. System characteristics: Pillar III Occupational pension scheme

• At this moment pension funds in the Netherlands are managing close to five million employees, the immense amount of around 390 billion euros.This means 120% of the yearly Dutch GNP. In 2040 the pension fund assets will be risen to 195% of GNP.

• 3 types of pension schemes:• Branch pension funds (Industry wide)

• 81 out of 103 funds are made mandatory• 14% of all the branch funds are fully re-insured• Usually insurance companies or large specific sector based

pension funds provide administration• Sector based pension funds refer to, for instance, civil servants

pension funds (ABP) or health sector (PGGM)

• Company pension funds• Larger enterprises usually administer own company pension fund• The company pension fund is not allowed to invest more than 5%

of the assets in the employer’s company• Presently, 44% of these funds are fully reinsured

• Insurance companies (direct insurance)• Through group or individual contract • Administered by life insurance companies

The Dutch pension market

Number of

funds/schemes

Number of active

participants

Total assents (billions of euro’s

Branch pension funds

103 4.300.000 300

Company funds

876 80.000 90

Directly insured schemes

+/- 40.000 350.000 30

HollandNetherlands

42

III. Investment • Follow prudent man rule – pension fund investment has to according to

prudent pension principal• Pension regulator (PVK) judges each pension individually on its investment policy• In case reserve shortage, PVK sets the rule to repair the shortage, See regulation

slide for further explanation

• No quantitative regulations on investment• Worries that it will penalise the providers’ profit• However, Financial Testing Framework applied to each pension fund to achieve

required security both affordably and efficiently

• Each fund being judged on individual basis• Free to invest in any asset class• Free to invest off shore• Traditionally very strict solvency rule (150%)

• However, due to recent stock market developments, the solvency ratio has been reduced to 119%

HollandNetherlands

43

IV. Regulation and supervision: applicable laws & main issues addressed by law (1/2)• Regulation and supervision framework:

• Ensure all employees have access to a supplementary pension scheme• +91% of all employees are covered

• Government safeguards accrual of supplementary pension entitlements and offer tax relief in both Pillar II and Pillar III pension schemes

• Regulatory framework• Pension and Savings Fund Act (PSW)• Act on Mandatory Participation in a branch pension fund 2000 (Act Bpf 2000)

• PSW: • Pension contributions must be placed outside the employer’s company by either joining a

branch pension fund, or establishing a company pension fund, or concluding an agreement with an insurance company

• Laid down institutional framework for pension schemes

• Act Bpf 2000• A branch pension fund may request the government to impose an obligation to its employers

and employees to participate in the branch fund• A branch pension fund is set up through employers’ organisations and trade unions

HollandNetherlands

44

IV. Regulation and supervision (2/2) • One super-regulatory power

• Recently merged supervision activities of banking, insurance and pension fund

• Former Pensions & Insurance Supervisory Board (PVK), currently a division under super-regulator, supervises / regulates pension funds and direct insurance

• Regulatory principal• Pension reserve adequacy level (Solvency) to ensure long term financial

sustainability• Minimum reserve required by law: 100% assets divided by value of pension commitments

discounted by a factor of 4%• However, regulatory requirement and industry standards: 119%

• Stock market shock wave 2001 – 20002 promoted new regulation:• Minimum level of guarantee for equity - at 40% below the highest point in the last 48

months • Minimum level of guarantee for bond - at 10% below the lowest in the last 10 months• Should a pension fund capital reserve is below the benchmark, the pension fund has 2 –

8 years to recover

HollandNetherlands

45




UK STATE I MANDATORY VOLUNTARYII III

I. UK Pension System compared to World Bank (summary 1/2)

* S2P previously is called State Earnings Related pension Scheme (SERPS)

Pension

System

• 3 components: basic state pension, State Second Pension (S2P)* & pension Credit

• Employees (not self-employed) may chose “contracted-out” SSP into private occupational pension scheme, or “opt out” into Approved Personal Pensions

• Minimum income guarantee, gross replacement only 37% of average earnings

• Pension age man: 65, woman 60. Equalise at 65 from 2010

Employer sponsored pension plan

• Occupational pension schemes, non mandatory for both employer and employee.

• However, it is very common, especially so in the larger companies

Major

issue

• 44 years in workforce needed for full basic pension

• Provide least income to prevent poverty at age of retirement

• Gross replacement rate very low: 37% at average earning in UK (same as the US), NL: 70%, Sweden: 76%, France: 71%

• In a shift towards international accounting standard, more pension plans move from DB to DC, likely result in a reduced level of premium contribution

• Earning related pension on top of being 20% of revaluated average earnings

• Contracted out because of occupational pensions

UK

46




UK STATE I MANDATORY VOLUNTARYII III

I. UK Pension System compared to World Bank (summary 1/2)

* S2P previously is called State Earnings Related pension Scheme (SERPS)

Pension

System

Individual pension plans• Traditional personal pensions,

defined contribution schemes• 25% can be taken as a lump sum

on retirement, rest as an annuity• Maximum contribution is € 5,450

a year• Voluntary contributions to private

pensions based on occupational schemes (stakeholder pensions scheme)

• Huge tax relief on voluntary pensions

Major

issue

• Very large privately funded pension sector is available so difference between different income groups is very big. Mostly DB

UK

47

II. System characteristics: general• Four tiers pension systems:

• State social security benefits for pensioners, which consist of a basic flat rate state retirement pension and a state earnings related pension scheme (SERPS)

• Occupational pension schemes, offered by employers • Third pillar pension schemes established by private insurance companies • Underpinning all the above, a state minimum guarantee, which any pensioner will be topped up to by the state if his or her pension income falls

below the minimum.

• Challenge:• Growth in income inequality among pensioners, due to

• Too many people have difficulty adding on to their flat rate basic state old age pension• SERPS does not fundamentally solve the problems that low wage earners ending up with small pensions• Occupational and private pensions have tended to benefit the better off most

• Government solution:• To making savings during the career more desirable and possible, and to protect those who cannot save because of low earnings or other

circumstances with a "State Second Pension" (S2P)• The S2P will provide more generous additional pensions for low and moderate earners, certain careers and people with a long-term illness or

disability. • 2003 the existing Minimum Income Guarantee (MIG) for pensioners, available to those whose total income falls below a level set each year by

Parliament, will be replaced by the "pension credit" which should provide extra help to the poorest pensioners and reward those with low or modest incomes (for example from occupational pension schemes).

• The cost associated with the new measures will have minimum increase on pension spendings

• Taxation of pensioners:• A progressive income tax structure applies to all pensioners.

• A single person under 65 has an income tax allowance of GBP 4,615 per year in 2002 – 03• Age 65 – 74 years old, GBP 6,100 income tax allowance per year • Age 75 plus, GBP 6,370 income tax allowance per year• If total income exceeds GBP 17,900, additional allowances are withdrawn at 50% of the expenses

UK

48

II. System characteristics – pillar I, state pension• 3 components:

• Basic State Pension:• Flat rate payment • Full benefits only applicable for 44 years contribution• Basic pension for a single person is GBP79.60 per week in 2004. The amount is set annually and

consumer price indexed.• State Second Pension (S2P):

• Introduced in 2002, to replace the old state earnings related pension scheme• Aim is to provide a more generous scheme for low and moderate income group• S2P is for employee only, a quasi-occupational system • Ability to contract out

• 87% scheme were contract out• If opt for contract out, employee national insurance contribution drop by 1.6%, for employer the

rate drop by 3.5%• Lower contribution to the national insurance means lower PAYG payment

• Pension credit:• Means tested benefit for pensioners , only meant for pensioners without other adequate sources of

income or assets. Guaranteed minimum level is GBP105.45 per week for a single person

• Key issue:• State pension become less generous:

• 1998 / 1999, replacement ratio for man is 34% for a full social security contributions and 37% for worman• It declined to 25 – 28% in 2030

• “Savings gap” is rising

UK

49

II. System characteristics: pillar III – occupational private sector pension (1/4)•Four type of schemes

• Occupational salary related (employer sponsored DB scheme)• Occupational money purchase (employer sponsored DC scheme)• Group personal pension • Individual personal pension

•Low participation • 11.3 million employees out of 25.6 million population in work did not contribute to any private pension

scheme (See following slide for reference)

•Shift from DB to DC • Active membership of DB scheme has fallen by 60% since 1995• In addition, a small but increasing % of scheme are now closed to benefit accruals for existing

members (DB)• Average level of pension provision on a continuous decline

• Contribution level at DB: 16 – 20% vs DC: 7 – 11%

•Pension protection fund established to provide guarantees retirement payment in an event of bankruptcy

Legal contract is in between individual and insurance pension providers

UK

50

II. System characteristics: pillar III – occupational private sector pension (2/4)• Characteristics of occupational pension schemes

• Non-mandatory contribution• However, most large companies have pension schemes• Membership in mid-2000 is: 10.1 million,

• 5.7 million in private sector• 4.5 million in public sector• The fall in private sector has been significant due to number of employees working in the

private sector has been increasing, but the membership has been declined from 6.2 million in 1995 to 5.7 million in 2002

• Since 2001, mandatory for employers with 5 or more employees to offer stakeholder pension scheme

• Employer contribution is not required• Take-up has been slow till now

• Traditional schemes have been DB, guaranteed level related to final pensionable salary• 90%, or 4.6 million out of 5.7 million members are in DB scheme in 2000

• However, a strong tendency shifting from DB to DC since 2000, as an effort from employer to:• Contain costs and risks• Funding difficulties after the downturn of the equity market• Accounting issues• Longevity risk no longer bearable

• To date, 36% DB plans are closed for new entrants, DC plans instead• If DC, contribution is much lowered (from 16% - 20% to 7% - 11%)

UK

51

II. System characteristics: pillar III – occupational private sector pension (3/4)• Tax rules (to be implemented in April 2006)

• A universal lifetime allowance on aggregate value of tax favourable benefits,• Plus a universal maximum accrual contribution in any year • The lifetime allowance at GBP 1.5 million and annual allowance at GBP 215,000• Any excess will be levied with 40% income tax• No limit on tax relief on employer contribution• Personal contributions will get tax relief up to 100% of earnings or on a gross contribution of up

to GBP 3,600 per year• Also, early withdraw can begin between age 50 and 75• Fund must be externally funded to gain maximum tax advantage

• Insurance or pension fund can administered the fund

UK

52

II. System characteristics: pillar III – occupational private sector pension (4/4)• Pension funds and insurance schemes are set up under trust law as separate legal entity

and the legislation for both is similar• Most large companies sponsor their own pension plans• Industry wide pension plans not common• Small employers favour insurance schemes• Large companies generally use self administered funds without using insurance, although lump sum death in

service benefits are usually insured

• Pension funds (self- administered plan)• Obligatory to appoint investment manager and a custodian• Investment manager is restricted that

• has to be authorised under the Financial Services Act 1986• Formally appointed by trustees• 6% manages pension fund fully in-house

• Tax treatment• Tax relief for employees are 15% of income, if the plan is tax qualified

• Insurance schemes• An employee can establish individually with an external providers a pension plan, in the form of annuity or

other type of insurance products• It can also be a vehicle to contract out S2P • Group contact is on the rise due to flexibility and cost effectiveness

UK

53

II. System characteristics – pillar III, individual private pensions• Personal pension plans, introduced in 1988

• Majority sold by insurance companies• Bank, building societies and other financial institutions can also provide the plans, but remain

small• More investment choice with personal pension plans• 25% male and 17% female fully time employees have personal pension plans• Benefits is based on DC principal• Upon retirement, 25% lump sum tax free withdraw, remaining balance is used to purchase an

annuity• Benefits are taxed as income

• Stakeholder pensions• Cheap, flexible and can be held as a company pension or personal pension• Charges are caped at 1% per annum of the value of each members’ fund• Member are able to transfer into and out of the scheme at any time and to stop and restart

contribution payments without additional costs or penalties• No guaranteed minimum benefits, entirely DC approach• Withdraw as of age 50• 25% tax free lump sum withdraw, the balance is to purchase annuity• The scheme is run by trustees or scheme managers who are responsible for determining the

investment options and are authorised by Financial Services Authority

UK

54

III. Investment guidelines•Trustee responsible for pension fund investment

•Trustee allow prudent man rule• “A fiduciary must discharge his / her duties with the care, skill, prudence and diligence that a prudent

person acting in a like capacity would use in the conduct of an enterprise of like character and aims”• Implication to the pension fund investment

• “Trust” function separates pension fund assets from “other monies”• Provide legal obligation to seek to minimize potential divergence of interest in relationships where one party is particularly

vulnerably to another• Prudent man rule is based on the UK common law• Trust is to perform due diligence when it comes to pension fund selection

•No restrictions on asset allocation or off shore investment • As a result, the traditional equity exposure close to 70% of total pension fund assets

•Minimum funding required for occupational DB plan, largely follow European Pension Fund Directive – statutory funding objective to cover technical provisions

•A pension bill is expected to pass:• Requires trustees and employers to agree on a funding strategy appropriate for their circumstance• However, this will subject to satisfying the European Pension Fund Directive

UK

55

IV. Regulation and supervision• Pension regulator formed on April 6, 2005, former regulatory body is Occupational Pension Regulatory Authority• Statutory objectives:

• To protect member benefits• To promote good administration• To reduce risk of situations that may lead to claims of compensation from pension protection fund

• Responsibility:Trustee, administrators, employers,

• Investing schemes through data collection• schemes, including details of membership, sponsoring employers, trustees, advisers, administration, funding

and investment. • provide practical guidelines for trustees, employers, administrators and others on complying with the

requirements of pensions law; and • set out the standards of conduct and practice that we expect.

• Proactive approach on risk management:• inadequate funding; • incomplete or inaccurate record-keeping; • lack of knowledge or understanding on the part of trustees about their role and duties; or • possible dishonesty or fraud.

UK

56




Major

Issues

• Payout is depending on years active in working force.

• Over 700 type of funds available for individual to chose for the investment of 2.5% contribution – too complicated

Pension

System

• Pension reform introduced in 1999, applies to people aged 45 or under at the time of reform

• 2 components: PAYG elements and pre-funded elements

• Total 18.5% contribution, mandatory.• 16% contribution to notional account• 2.5% to individual DC

• Notional account is indexed every year. Contribution is used to pay current retirees benefit (PAYG elements)

• Annuity payout is required upon retirement • Guarantee pension is provided by the

government at rate of 33% of average earnings.

Sweden STATE I MANDATORY VOLUNTARYII III

I. Sweden Pension System compared to World Bank (summary 1/2)Sweden

•Notional DC fund 16% of earnings, the concept of notional accounts means that the PAYGO character is retained, however the size of contributions is registered on individual account

• Voluntary contribution, but has universe coverage - pension plan based on collective agreement between employers and Unions.

• Two different schemes:• White collar workers (ITP),

mostly DB schemes• Complementary occupational

pension (ITPK) – DC plans above certain ceiling

• Part that is DC plan: 13,4% of salary

• Blue collar workers (AMF), DC scheme and offers employees some degree of investment choice

• DC plan: 3.5% of salary• Managed by banks and

insurance companies• Administered by AMF central

57




Major

Issues

• Payout is depending on years active in working force.

• Over 700 type of funds available for individual to chose for the investment of 2.5% contribution – too complicated

Pension

System

• Pension reform introduced in 1999, applies to people aged 45 or under at the time of reform

• 2 components: PAYG elements and pre-funded elements

• Total 18.5% contribution, mandatory.• 16% contribution to notional account• 2.5% to individual DC

• Notional account is indexed every year. Contribution is used to pay current retirees benefit (PAYG elements)

• Annuity payout is required upon retirement • Guarantee pension is provided by the

government at rate of 33% of average earnings.

Sweden STATE I MANDATORY VOLUNTARYII III

I. Sweden Pension System compared to World Bank (summary 2/2)Sweden

•Notional DC fund 16% of earnings, the concept of notional accounts means that the PAYGO character is retained, however the size of contributions is registered on individual account

• Private pension plan is provided by insurance, bank or a similar institution

• Tax incentive provided for pension contribution

• €2,178 per annum• Higher income group may

able to contribute up to 5% of salary, max €4,356 per annum

• Age 55 withdraw is possible• Salary reduction schemes gain

importance over the last years• Tax effective as no tax is

payable on contribution – regardless of the amount

58

II. System characteristics: the reform • Faced by largely the same demographic challenges as other OECD countries, Sweden opted in 1992/1994 for a radical reform of

its national old-age pension system, a process supported by five parties and some 85% of members of Parliament.

• In effect, Sweden moved from a traditional income related defined-benefit system, to two types of defined-contribution systems. The old system was financed more or less on a pay-as you-go basis. In the new system, an individual will put 2.5% contribution into an individual financial account under the financial defined-contribution system (FDC), another 16% of pensionable income is on a notional account and the real money will be channelled into the new pay-as-you-go system. Financial accounts are managed by a variety of private funds chosen by the individual.

• The equivalent of 16% of each individual’s annual pensionable income will be credited yearly to his or her notional account under the Notional Defined Contribution System (NIC). The corresponding amount is transferred on monthly installments to the system’s Buffer Fund, similar to the Trust Fund of the United States’ federal pension system, which finances pension payments. Recently significant liberalisation has been introduced in the investment rules for the funds, 70% of which can now be invested in equities.

• The new system has no formal age of retirement. Pension credits will always be earned and added to the notional (as well as financial) accounts if the individual has pensionable income, regardless of age. Pension credits are given for all social insurance benefits in the nature of income replacement, such as sickness, unemployment, disability, and maternity/paternity benefits. In addition pension credits will also be given for some "activities" such as childcare years, university studies and compulsory national service. Pensions from the pay-as-you go-system are calculated at the time of retirement by dividing the notional-account balance by a life expectancy at retirement. Those with insufficient contributions throughout their careers will be entitled to a minimum guaranteed pension, paid for by general taxes. The guaranteed-pension is indexed by the change in the Consumer Price Index.

• Because of the commitment to keep the contribution rate fixed, the new system will accommodate demographic and economic developments by adjusting the value of the pensions. The automatic balance mechanism legislation, the final piece of pension reform legislation adopted in May 2001, ensures this. The mechanism provides for a switch in indexation basis for pensions from growth in the average income to the internal rate of return of the NDC system if liabilities in the system should exceed assets. The pension level is automatically re-established, as is the growth in average income as the basis of indexation, as soon as this is possible without undermining the financial balance of the system.

Sweden

59

II. System characteristics: pillar III – occupational pension system • Occupational pension covers almost all employees in the country• Conditions are determined by nation wide collective labour agreement• 4 pension schemes

• ITP – white collar workers, 1.5 million employees, DB mainly, managed by insurance company Alecta• SAF-LO – blue collar workers, 1.8 million employees, DC mainly (established in 1996), managed by AMF• Civil servants plan: 700,000 employees, DB • Employees from municipalities: 1 million employees, DC mainly

• 3 funding methods:• Pension fund: DB, although risk benefits are fully insured (majority of ITP plans are using pension fund) • Book – reserves: DB, same as pension fund, risk benefits are insured• Pension insurance: mostly DC, common in small enterprises and dominating occupational pension plans for

blue collar workers

• Company segmentation:• Small enterprises uses pension insurance, hence DC scheme• Large companies participate in ITP plans, usually use book reserve in combination with credit insurance for

securing pension liabilities• Pension foundations are increasingly popular among large companies

• Tax• Employer contribution tax deductible up to 35% of the plan member’s salary

• A ceiling of 10 times the price base amount applies - € 43,556 in 2005• Employer contribution are not considered taxable income to the employee• Benefits paid from occupational pension schemes are taxed as ordinary income • Investment income is taxed – average interest on government loans in the preceding year to determine the

investment income

Sweden

60

II. System characteristics: pillar III - administration• Pension funds – commonly used in ITP plans and other DB plans

• Set up as a separate legal entity but are affiliated with the company• Pension funds have to participate in credit insurance which guarantees the pension payments

• Pension insurance – group insurance contracts• Insurance contracts can be used for all types of plans

• ITP, SAF-LO and voluntary plans• However, ITP and SAF-LO can only be administered by Alecta and AMF respectively

• Alecta responsible for the administration, collection, distribution and investment of the ITP plans• AMF administers, collects and distributes premium to investment vehicle like bank or insurance

company, chosen by the employees (if no decision made by employees, assets remain in AMF)• Endowment insurance contracts - can be used, seen as a legal form for securing a pension promise if

the contract is pledged to the employee. • Pension insurance is the most common form for small enterprises and is dominate form for blue-collar

workers

• Book reserves – only applicable to DB scheme• In case pension scheme under ITP plan is using book reserve method: -

• Mandatory to participate in credit insurance system - FPG (re-insurance)• Pension payment and calculation of pension liabilities is done by a special institution - PRI

• Insurance companies hold up to 60% of pension assets

Sweden

61

III. Investment guidelines

•NOT required by law to appoint investment manager

• External asset managers become increasingly a market practice

•No specific investment restrictions besides the Prudent Person Rule and solvency margin in case no re-insurance (FPG)

•Funds can invest up to 80% of assets in equities

Sweden

62

IV. Regulation and supervision• Finansinspektionen (FI) is the primary supervisory agency for all financial institutions, including friendly societies, but

excluding the pension foundations

• Objective of Finansinspektionen is

• “promotion of financial stability and efficiency in the financial sector and promotion of consumer protection goals.”

• Pension foundations are monitored by the parties to the agreements.

• Counties’ administrative boards may supervise pension foundations according to the region where they are located.

• Since there are twenty four counties in Sweden, the supervision rules and practices can be significantly different.

• A general legal framework is the Act: safeguarding of pension obligations • Legal framework to require the pension funds to buy credit insurance system

• Credit insurance is provided by FPG• FPG guarantees pension payment in case an employer become insolvent• 0.2% of pension liabilities is paid to FPG for insurance premium

• No legal requirements regarding minimum funding (solvency margin)• Pension liabilities are re-insured through FPG

Sweden

63

V. Macro economic impact - the reform helped the economy

• Budgetary savings. Partial privatization, combined with reform of the government-run, pay-as-you-go portion of the retirement system, is expected to result in a fiscally sustainable system. Future expenditures will be significantly lower, protecting Swedes from higher taxes, higher spending, and large deficits.

• Higher retirement income. The ability to invest privately over a working lifetime will allow Swedish workers to benefit from compounding returns. The average blue-collar worker, for instance, should enjoy 40 percent more old-age income. Swedish retirees will have a safer and more comfortable retirement.

• Economic growth. By reducing the payroll tax rate and creating a direct link between lifetime income and pension benefits, Swedish pension reform will increase incentives to work. Moreover, the shift to a funded system will boost national savings, thus providing capital for future growth.

Sweden

64

V. Macro economic impact: benefits of the new system • Greater incentive to work. In the new system, pensions are determined by lifetime income, which means that

each year of gainful employment will have a positive impact on future pension benefits. Because pension rights will be recorded in real and notional individual accounts, workers will have much less reason to hide, shelter, and underreport their income. The new system will also discourage workers from dropping out of the labor force.

• Increased national savings. Replacing a tax-and-transfer entitlement system with a partially funded pension system will increase national savings, particularly as the new system matures. Some recent empirical evidence from Swedish household sector data, for instance, indicates that reform will result in a net increase in savings.

• Flexible retirement age. The new system neither penalizes nor rewards early retirement. Workers can retire as early as age 61 or stay in the workforce as long as they choose. Early retirement no longer burdens taxpayers since workers who choose to retire early do so in exchange for a smaller pension. Moreover, the new system does not penalize workers who remain in the workforce since they receive a larger pension or, if they so choose, earn income and collect a smaller pension at the same time. These benefits are possible because a worker’s notional account becomes an annuity based on life expectancy at the time of retirement. Since the annuities do not reflect differences in life expectancies for men and women, however, women receive more from the new system than men.

• Lower taxes and less government spending. The new pension system will yield large fiscal benefits over time. The Swedish government calculated that the payroll tax rate necessary in order to perpetuate the old system would have reached 36 percent by 2025. This tax rate— and the level of government spending implied by such a tax burden—would have been an enormous weight on the Swedish economy. Even the 16 percent tax in the new system is too high, though the creation of notional accounts minimizes the adverse impact on labor supply.

Sweden

65

I. Australia Pension System compared to World Bank (summary)

WB

Key characteristics

Pension

System

• PAYG - “Age pension”, universal, means test benefit payment

•Means tested: in accordance with income or assets, whichever determines the lower pension rate

• Benefit payment from general revenue (government tax income)

• Retirement age: man – 65 years of age, woman – 61.5

• Compulsory, earnings related• Superannuation guarantee • Established since 1992• As of July 2002, minimum contribution

level 9%, paid by employer (phased approach from 1992 – 2002)

•Contribution tax deductible• Fully funded individual account, defined

contribution• Few investment restrictions• No early withdraw• Retirement age: 55 (60 by 2025)• Choice of lump sum, pension, annuity

with tax transfer incentive• All employees aged 18 – 65• Self employed not covered

• Voluntary member superannuation contributions

• Tax preferred• Contribution usually made by

members of superannuation funds, above the compulsory superannuation contribution or, a person is not eligible for compulsory superannuation

Australia STATE MANDATORY VOLUNTARYI II III

Publicly financed schemes, social security schemes


Additional voluntary arrangements + individual retirement income

• All superannuation funds accept both mandatory and voluntary contributions

• Fund income (contribution and earnings) and benefits taxed at concessionary rates

• Tax: employer contribution tax deductible, superannuation funds taxed at 15%, benefits are taxed depend on type of benefit and its size

Australia

66

II. System characteristics: introduction of superannuation guarantee

• Before reform• 2 pillars:

• Age pension, means tested• Voluntary retirement savings

• 1990: Superannuation guarantee introduced• Mandatory, employment related

Australia

67

II. System characteristics: Australia superannuation industry• Superannuation funds operate as trusts and managed by boards of trustees

• Corporate funds• Sponsored by a single or group of related employers• Membership is restricted to employees of the employer• If fund rules allowed, contribution may also be made on behalf of the employee’s spouse or partner• Represent 6% individual members• Approximately 13% of the assets in the market

• Industry funds• Members from a large number of employers across a single industry• Represent 30% of individual members• 10% of total assets

• Public sector fund• Employer sponsor is a government agency• Or, business enterprise that is majority government owned• Represent 12% individual members• Approx. 20% of total assets

• Retail funds• Public offered superannuation funds, include master trust*• Members are either self employed or additional voluntary contribution by members of other employment based

superannuation arrangements • Represent 50% of individual members• 34% of total assets

• Small funds • < 5 members, mostly family owned company with family members as trustee• Represent 2% of individual members • Approx. 20% of total assets

* Non related individuals or companies to operate superannuation under a single trust deed

Australia

68

II. System characteristics: Role of trusteeship and service providers• All plan assets must be held in trust

• “Trust” ensures pension scheme assets are separated from employer• Trustee can be a person or superannuation fund but are separated from

the pension scheme• Trustee may engage or authorise service providers to act on their behalf

• Service providers include: external fund administrator, actuaries, lawyers and investment managers

• Bank, life insurance and investment management companies may be appointed as service providers offering investment service, custodianship of assets, administration of records etc.

• Universal licensing will be issued in 2 – 3 years • Current trustee licensing procedure expected to be changed

Australia

69

III. Investment guidelines• Investment strategy follows “prudent man” principal

• No limit on asset category / quantitative rules • Ie., asset allocation in bonds, deposits or equity

• No limit on minimum diversification requirement• No limit on foreign investments• No limit on ownership concentration

• Only restriction: loans or financial assistance to members not permitted

• Asset allocation, as % of total assets, reference Sep. 2004• Cash & deposits: 8%• Loans: 4%• Interest bearing securities: 16%• Equities and units in trusts: 49%• Land and buildings: 5%• Overseas: 17%• Other: 2%

Australia

70

IV. Regulation and supervision• Regulation principal: prudent man

• No rate of return or asset requirements

• Australian Prudential Regulation Authority (APRA)• Integrated financial sector regulatory body• Primary responsibility: prudential regulation of superannuation, insurance and banking• Administers superannuation industry supervision act (SIS Act)• SIS Act is principal legislation relating to prudent management of superannuation entities• Supervisory approach:

• Risk based (through internal risk rating), consultative and in line with international practices• Recognize management and boards are primary responsible for financial solutions

• Australian Securities and Investment Commission (ASIC)• Responsible for market integrity and consumer protection

• Responsibility across the financial system, including areas of superannuation

• Australian Tax Office (ATO)• Responsible for regulation of self-managed superannuation funds

• General: Information sharing among the parties APRA, ASIC and ATO is regulated through Memoranda of Understanding (MOU)

• Objective of the MOU is to reduce duplication and compliance costs for industry

Australia

71

Table of contents


• Czech Republic

• Slovak Republic

• Romania

• Greece

• Ukraine

• Russia






I

II

III



72

Hungary Pension System compared to World Bank

WB

Recommenda tions

• Lobby for legislation, supervision change: MPF investment portfolios, administration ease, ownership – on going along with the competitors

• Lobby for more public / private partnership: expect a raise in 8%/18.5% in favour of MPF. MPF is a more important market than VPF (faster growth, more stable income)

• Investment regime – not prohibiting at this stage

Major

Issues

• Strong degression in the system, including a cap on income forming basis of the pension rights (This will disapper until 2012 or 2020)

• Further decline of the average replacement ratio

II AND III

Alliance of major funds is lobbying for change:

• Funds legal structure (self governance) is not appropriate for funds with several hundred thousands members. Multinationals run reputation risk without formal controll and ownership.

• Clients can switch fund too frequently (6 months) following short term yield changes, supported by a very low cap on exit fees. We would prefer being able to tie the client to the fund (on a voluntary basis) e.g. by offerring lower fees.

Pension

System

• PAYG • Covers the entire labour force • 18% employer contribution to PAYG• 8.5% employee contribution to PAYG

(However, in certain circumstance, 0.5% ee contribution to PAYG; 8% to Pillar II)

• Benefit: replacement ratio: first pension/final pay may vary between 25%-80%

• Mandatory occupational pension, individual account. Free choice of the employee

• Half of the workforce is covered. Career starters are obliged to join

• Remark: • Single investment portfolio per fund; • Not really 2nd pillar, a recent study of

Pragma Consulting called this (along with the Polish system) 1st pillar bis.

• Voluntary pension funds, individual retirement savings

• Tax incentive paid either by the employee or the employee

• Employer should treat employees equal by providing equal amounts or equal percentage of the pay as a contribution.

• Employees are free to chose between funds, employer can not restrict, however informally does.

• One pension fund can offer different investment portfolios

HUNGARY STATE MANDATORY VOLUNTARYI II III

Publicly financed plans, social security plans



Hungary

73

Czech Pension System compared to World Bank

WB

Recommenda tions

• Advice government to establish mandatory pillar II business with meaningful tax incentive

• Increase contribution rate, possibly introduce mandatory scheme

• Acquire extra planholders (grow from 25% to40%) for additional contribution by employer

• Increase tax incentives for employers and direct subsidies for individuals

• Product / investment solution

Major

Issues

• No political consensus on future pension system

• Low fertility rate• Funding for transitional period

uncertain

Pension

System

• Two part system:•Flat rate basic amount for all•Earnings related portion related to employment

• PAYGO mechanism• Contribution 21,0% by employer 7,0%

by employee

• Non – existence in our definition • Voluntary DC pension funds by employer / ee and state (minimum sponsoring). AuM: € 3 bln

• Also voluntary pension arranged by insurance companies. AuM € 1.5 bln

• >50% workforce participated• 25% employee have additional

contribution by employer• Tax incentive

Czech STATE MANDATORY VOLUNTARYI II III




• Government election ahead, no major decision to be made prior election

• Highly consolidated market: 12 pension fund owned by 10 groups

• Too low contribution: benefit is less than3% of avg. gross wage

Czech

74

Slovak Pension System compared to World Bank

WB

Recommenda tions

• Develop the third pillar more extensively

Major

Issues

• Ageing population• Sustainability of quite generous

benefits of I. pillar after reform

Pension

System

• PAYG, DB• 28.5% mandatory contribution

•After reform, individual can chose contribution rate to be reduced to 19.5%

• Current pension expenditure: 7% of GDP

• Replacement ratio 45.2% (net pension / gross wage)

• Mandatory contribution for all new employees entering work force; Voluntary for people in current workforce

• Individual account with 9% contribution, with minimum 10 years commitment

• Voluntary pension plan (DDP) • AuM < 1% GDP

Slovak STATE MANDATORY VOLUNTARYI II III




• Good participation rate • To be transformed to align with second pillar

Slovak

75

Romania Pension System compared to World Bank

WB

Recommenda tions

• Use copies of other pension reforms• Use co operation between public and

private sector to arrange a optimal system

• Set fees at a rate that is acceptable for private parties to invest in Romania

• Increase the contribution, increase the potential eligible persons for the private system

• Tax incentives are key• Review the eligible companies

that can create occupational pension schemes;

• Leave it to the market forces the level of fees

Major

Issues

• Pensions unfundable• Looking into pension reform• Current drafts very unclear• High inflation and pension not

indexed according to the cost of living – retired persons most affected

Pension

System

• PAYG state pension • Currently already 10% of GDP

• Non existent in practice• Current new law approved in

2004 not sufficiently worked out yet; changes expected to be made by the new government

• Occupational pension law was issued in 2004, but not implemented yet

• Law in process of ammendment, to be implemented in 2006 with tax benefits;

• Very small at the moment, only pension products labeled like this and offered by life insurance co.

Romania STATE MANDATORY VOLUNTARYI II III




• Following Polish model but contributions are too low from 2% to 6% in 8 years

• The categories of eligible persons and the low contribution make it unattractive for business; changes expected

• Increase incentives, currently there are not deductible for the individuals and dis-incentivised for the employer;

• State sector institutions and companies not allowed to have pension schemes

Romania

76

Greece Pension System compared to World Bank

WB

Recommenda tions

• Huge reform needed• Inefficient systems should be

improved

• Improve benefits • Payout in annuities

Major

Issues

• Totally unaffordable and unsustainable system

• Unclear system

Pension

System

• Very diffuse first pillar, very fragmented and financially unbalanced

• Based on occupational lines• Three tiers all based on PAYGO• Total spending already 12,5% of

GDP• Very high replacement ratio of

107%

• Non existing • Very low number of AUM• Most payouts are in lump sum

Greece STATE MANDATORY VOLUNTARYI II III




• No big tax relief

Greece

77

Russian Pension System compared to World Bank

WB

Recommenda tions

• Higher pension age

Major

Issues

• Non sustainable• Very low pensions; non indexed• Flawed introduction of

monetization of pension benefits led to up rise amongst population

• Reforms needed

Pension

System

• PAYGO system• Large coverage

•Labor pensions•Social pensions

• 1996: individual personified accounts introduced in State PF

• 2003: Choice of opting out to Asset Management Company

• 2004: Choice of opting out to Non-state Pension Fund

• Non state pension funds; life insurance

• NSPF through employer, with possibility of joint financing and additional individual contributions

Russia STATE MANDATORY VOLUNTARYI II III




• Still relatively new concept and as a result lack of awareness

•So far only about 8-10% of eligible population has opted out•No awareness campaign; practical difficulties for opting out•Rules of the game constantly changing

•Unambiguous political support for pension reforms•Awareness campaign for population•Create level playing field for all providers

•Abolish social security tax on pension contributions•Introduce further tax incentives for individuals•More stable legal and fiscal environment; more predictable and professional supervision

Russia

78

Ukraine Pension System compared to World Bank

WB

Recommenda tions

• Make it attractive for private parties with international experience to enter the market

• Bring related effective laws in the line with current pension legislation

Major

Issues

• The pension level remains inadequate even after increase

• A lot of privileges in contributions payment to the PFU from different economy sectors

• PFU is non sustainable• Reforms needed

Pension

System

• PAYGO system effective since 2004

• Principles of solidarity and subsidization -everyone has to contribute to Pension Fund of Ukraine (PFU)

• 34% of wage fund• Old age pensions, disability

pensions, survivor’s pensions

• Active from January 1, 2007• Personal accounts• 7% of wage contribution• Payout lump sums or annuities• Between 2007/2018 managed by

PFU and asset management companies. In 2018 pension funds get access to management

• Effective since January 1, 2004• Open funds, corporate funds,

professional funds; voluntary participation - employers/ employees

• Tax benefits• The banks participation declared

via accumulation accounts

Ukraine STATE MANDATORY VOLUNTARYI II III




* Laws still have to be implemented by bylaws

• The issue of privileged pension is not resolved

• Criteria for the asset management companies is the focus for legislative controversy

• Higher pension age

• Reduce privileges in payment of contributions to PFU; set up allocations within State Budget expenditures to compensate for privileges; ensure complete separation of sources for funds

• Totally new concept: market just started up• Legislative contradictions exist• Problems with investments of pension assets

• Resolve legislative problems/contradictions

• Launch ad-hoc propaganda of Non State Pension System

• Develop reliable investment options for pension assets

Ukraine

79

Table of contents


• Czech Republic

• Slovak Republic

• Romania

• Greece

• Ukraine

• Russia






I

II

III



80




Recommenda tions

• Finally transfer of ISSTE employees to Afore system

• Enlarge the coverage and increase the investment range abroad

• Incentivise formal economy• Set retirement age • Mandatory contributions for

independent workers

Private sector employees• Termination indemnity should not be

retirement-termination• Incentivise via taxesIndividuals• Tax incentives• Product and investment options

Major

Issues

• Un-funded• If ISSTE civil servants are

transferred, PAYG will be completely facing out in due time

• Although fully funded, not sufficient mandatory coverage.

• ‘Unnatural fit” between privately run system (high profit), mandatory by Gov. (lowering costs) >overregulated

• Informal economy • Providers fee structure• Transfers war

Private sector employees• Lack of regulation enforcing

retirement age (DB driver = Termination Indemnity)

• Lump sum at pay outIndividuals• Low awareness and information• No tax incentives

Pension

System

• PAYG• Facing out:• Employees before ‘92 who did not

change to new individualized system (SAR & AFORE)

• Civil servants (ISSTE) -- although currently issuing law to transfer them to Afore (estimation 2 mln civil servants)

• AFORES & SAR System• Mandatory contribution of 6.5%

salary and possibility of voluntary contributions

• Offered via large agent network• AuM: 46 bln Euro• Participants: 32 mln

Private sector employees:• DB driver = Termination Indemnity

(11,6 bln Euro*)• Some additional DC plans (mainly

multinationals and corporate 500+). Mostly as hybrid system (1,45 bln E)

Individuals:• Voluntary contribution to AFORE• Other individually acquired plans /

savings

MEXICO STATE I MANDATORY VOLUNTARYII III

Mexico Pension System compared to World BankMexico

81

Brazil Pension System compared to World Bank

WB

Recommenda tions

• Step-by-step change to be started• Differentiate clearly the obligation

(now mixed in one social system)• Increase of transparency and move to

fully funded system in the long-term• Incentivise formal economy• Make the system less generous for

the state civil servants

• Introduce this pillar !• The Vision: “Mandatory scheme

ran by professional pension providers and asset mangers with long term commitment”

• Active participation in formulation of the second pillar

• Individual & Corporate• Introduce truly long-term products

while keeping tax incentives for individuals as well as for corporate sponsors

• Product options• Investment options

Major

Issues

• In-transparent system mixing different social&health payments together

• Informal economy• Not a feeling for acute changes at

the moment

• Not in place• Crucial for overall pension reform• Brings substantial assets for

boosting national economy

• Short-term products only• Heavily regulated including ban on

penalties for early withdrawal • Transformation of the closed

pension funds to the open plans• Outsource plans to professional

providers

Pension

System

• PAYG • Mandatory, minimum benefit

defined by constitution• Large deficit caused by imbalance

and ageing of population• Civil servants’ pension unified with

private sector employees and so capped recently

• Private sector employees• Non-existing, government not

interested in discussion so far

• Closed corporate pension funds, open corp. pension plans & individual plans

• Short-term saving so far (change to long-term products; recently proposed new product family should be in place as of 2005)

• Tax incentives available• Dominated by banks

BRAZIL STATE MANDATORY VOLUNTARYI II III

Publicly financed plans, social security plans



Brazil

82




Recommenda tions

• In the short run, reduce gap between different pension regimes (20530 and 19990)

• In the short run, reduce resources directed to pensions

• In the long run, close public system for < 45 years in order to switch from pay-as-you-go to define contribution and stop entrance of new labour force

• In the long run, commission should be based as percentage of AUM

• Tax incentives in order to increase contributions rates

•Tax incentives for companies •Tax incentives for individuals

• Spread private pension system benefits to all the labour force

• Increase awareness and information

• Product options• Investment options• Tax benefits (EET)

Major

Issues

• Un-funded • In Peru exist an elderly population which

misses social assistance benefits. (In 2003 only 26% of elderly were receiving pensions, WB recommends the establishment of a “Zero Pillar”

• Broken system• Unfair and bias pensions• High proportion of National Budget used in

pension payments

• Not sufficient coverage • Political pressure to reduce prices• Multiple Pensions Funds• New transfer regulation• Not tax benefits for employers and

employees• New player in system.

• Low awareness and information• No tax benefits

Pension

System

• National System competes with Private System

• Public system: PAYGO, mandatory (if you don’t enter to private system), 13% employees contribution, lump sum payment at retirement age.

• State guarantee minimum pension: S/ 415

• Private sector (AFP): new industry of pension fund managers, strictly regulated by State, mandatory (if don´t enter public system), 11.19% monthly fees contribution.

• Not maximum top-cap for contributions increase final pension for affiliate

• Fully funded• Only 3.5mln of the 12mln economically

active population is affiliated to an AFP

• Other voluntary pension arrangements

• Could be added as voluntary contributions to the AFP, although will imply restrictions on withdrawals

• Very small• No tax incentives• Lacks to complement benefits from

the mandatory pillars

PERU STATE I MANDATORY VOLUNTARYII III

Peru Pension System compared to World BankPeru

83

Table of contents


• Czech Republic

• Slovak Republic

• Romania

• Greece

• Ukraine

• Russia






I

II

III



84




Major

Issues

• Rapid aging population created a bigger pension gap as 15% of employer contribution was not enough to pay 20% at retirement

• Life expectancy increased from 49 years in 1949 to 71 years now. In urban area, the rate is even higher

• One child policy• Due to insufficient funding, some of the 1b

individual account asse.ts being used to pay off the social pool benefit. As a result, individual account is more of a notional account.

• Economic inequality (between the rural and urban, or costal and inland) resulted in differences in some regions have better pension funding than other. Hence, pension problem has to be dealt with on regional basis

• Lack of tax incentives (tax system is not yet in place) Voluntary contribution in a market where pension is still a new concept, this effectively lead to limited subscription

• Lack of long-term investment instruments complicates participation of commercial life companies (Bank deposit = 2%, max. 10-year duration bonds available, no international investments are allowed)

• Individual voluntary savings is almost non-existent

• Low individual awareness

Pension

System

• Basic old age pension consists of 2 components:

Ia. Social pool pension – Employer contributes 15% (in some cases 17%) to finance current retirees. Defined benefit at 20% of (local) average wage1b. Individual account – Employer contributes 5% (in some cases 3%) and employee contributes another 6% - 8% (8% applicable if employer contribution is 3%). Benefit based on 11% contribution

• • Corporate annuity is voluntary, but perceived as 2 pillar corporate pension.

• Legislation announced, implementation is scheduled in 2006

• 4 types of players: trustee, custodian, plan administrator and asset manager

• Employer receives 4% (up to 10%, depend on the region and provincial / municipality decision) tax benefit on pension contribution

• Individual receives no tax benefit• Voluntary Personal savings (life annuity)

small

CHINA STATE I MANDATORY VOLUNTARYIIIII

China Pension System compared to World BankChina

85




• However, demographic developments as well as low return lead to structural imbalance of the funds

• Unfavourable performance of the fund due to tight investment restrictions - currently part of funds outsourced to int’l fund managers (ING - Kookmin is one of the fund managers)

• Public lack of confidence in NPS• Self employed, account for a quarter of

working population, NOT covered by NPS

• Retirement allowance covers all employees work in companies with 4+ people. However, it represents only 30% of economically active population

• Benefits used as annual bonus or lump sum payment to meet cash flow needs -> insufficient income for retirement. Benefits NOT meaningful even for members with 35 years contribution and no early withdrawal before age of 55

• System severely under funded• Companies under funding lead to slow shift

to new RPS

• Premature withdrawal by many people as too favourable tax structure for individuals

• Fierce competition among financial institutions which erodes margins for service providers

• National pension scheme, compulsory for all employees (Civil servants, teachers and armed force arranged separately)

• 9% wage contribution, equally divided er/ee

• Benefits related to number of years employment and also earnings. Relative generous benefit with currently 60% replacement ratio

• Retirement age : 60, to be raised to 65• Current NPS funded with a surplus of 140

trillion won, approx. 15% of GDP

• Retirement allowance system equals to severance pay (ESP)

• Retirement insurance contract (RI) or trust structure (RT) used to externalise liabilities under ESP

• Insurance companies have over 90% market share in RI

• RI do not grow in recent years due to unfavourable accounting standards to employer and weak economic conditions

• Employer pays all contribution, contribution tax deductible

• Lump sum or pension benefit at age 55

• All financial institutions provide personal pension plans

• High tax incentive, plan can withdrawal as early as 5th year

KOREA STATE I MANDATORY VOLUNTARYII III

Korea 1.) Current Pension System compared to World Bank

Recommendations

Major

Issues

Pension

System

• Structured loan arrangements can help transition (from RAS to RPS)

Korea

86




• Too many options (old system remain)•Members (employers too) obliged to join a system, but it is up to the member to choose from new or old system

• Not clear incentive for individual and employer to switch to new retirement pension system

• Same as previous slide • 3 different sub-markets exist after ERISA•Retirement allowance system•Retirement pension system•IRA (for job switchers and companies with < 10 employees)

• Contribution: 8.3% annual salary• Benefit: pension payout or lump sum

payout (only applicable if member has <10 years contribution)

• Early withdrawal possible if meets certain criteria, ie., first time house purchasing

• Tax benefit unclear

• Same as previous slide

KOREA STATE I MANDATORY VOLUNTARYII III

Korea 2.) reformed Pension System compared to World Bank

Major

Issues

Pension

System

Korea

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