PENSION REFORM AROUND THE WORLD Chris Daykin UK Government Actuary
Dec 21, 2015
THE PROGNOSIS FOR TRADITIONAL SOCIAL SECURITY
• demographic ageing and scheme maturity
• retirement ages too low
• coverage incomplete
• poor compliance
• economic considerations
• changing political fashion
• insufficient advanced funding
DEMOGRAPHIC AGEING
• low fertility
• increasing expectation of life
• baby boomer bulge in some countries
• deteriorating dependency ratios
• ageing working population
• increasing numbers of very elderly
TOTAL PERIOD FERTILITY RATES, 1960-2010
1
1.5
2
2.5
3
3.5
1960 1970 1980 1990 2000 2010
UKUSAGermanyFranceItalySpainJapanRussiaChinaSlovakia
TOTAL PERIOD FERTILITY RATES IN AFRICA, 1960-2010
0
1
2
3
4
5
6
7
8
1960 1970 1980 1990 2000 2010
Eastern Africa
Middle Africa
Northern Africa
Southern Africa
Western Africa
AVERAGE ACHIEVED FAMILY SIZE FOR UK COHORTS BORN 1945-1975
0
0.5
1
1.5
2
2.5
15 25 35 45
1945195019551960196519701975
PERCENTAGE OF PERSONS SURVIVING TO SUCCESSIVE AGES
UK LIFE TABLES, 1911-2031
0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100 110
1911193119511971199120112031
DISTRIBUTION OF DEATHS OVER AGE 15, ENGLAND & WALES
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
15 25 35 45 55 65 75 85 95 105
Age
% o
f d
eath
s o
ver
age
15
1860
1880
1900
1920
1940
1960
EXPECTATION OF LIFE FOR MALES, 1950-2010
35
40
45
50
55
60
65
70
75
80
1950 1970 1990 2010
UK
USA
Germany
France
Italy
Spain
Japan
Russia
China
Slovakia
EXPECTATION OF LIFE FOR AFRICAN MALES, 1950-2010
35
40
45
50
55
60
65
70
75
80
1950 1970 1990 2010
Eastern Africa
Middle Africa
Northern Africa
Southern Africa
Western Africa
EXPECTATION OF LIFE FOR FEMALES, 1950-2010
35
40
45
50
55
60
65
70
75
80
85
1950 1970 1990 2010
UKUSAGermanyFranceItalySpainJapanRussiaChinaSlovakia
EXPECTATION OF LIFE FOR AFRICAN FEMALES, 1950-2010
35
40
45
50
55
60
65
70
75
80
85
1950 1970 1990 2010
Eastern Africa
Middle Africa
Northern Africa
Southern Africa
Western Africa
DEPENDENCY RATIOS, 1970-2030(nos. 65 & over per 1000 aged 15-64)
0
50
100
150
200
250
300
350
400
450
500
1970 1990 2010 2030
UKUSAGermanyFranceItalySpainJapanRussiaChinaSlovakia
DEPENDENCY RATIOS, 1970-2030(nos. 65 & over per 1000 aged 15-64)
0
20
40
60
80
100
120
140
1970 1990 2010 2030
Eastern Africa
Middle Africa
Northern Africa
Southern Africa
Western Africa
% INCREASE IN NUMBERS AGED 65 & OVER, 1990-2010
0
50
100
150
200
250
300
350
Centr
al A
mer
ica
Wes
tern
Asia
North
ern A
frica
South
-eas
tern
Asia
South
Am
erica
South
-cen
tral A
sia
Easte
rn A
sia
Wes
tern
Afr
ica
Mid
dle Afri
ca
Carib
bean
% increase innos. aged 65 &over
PENSION REFORM TYPOLOGY
• contribution adjustment and reform
• benefit adjustment and reform
• structural reform
• reform of retirement age and structures
• new approaches to financing old schemes
• development of funded pensions
STRUCTURAL REFORM
• move to notional defined contributions
• introduce or increase flat-rate element
• make greater use of means-testing
• introduce element of pre-funding
• increase role of private pensions
NOTIONAL DEFINED CONTRIBUTION
• clear link between contributions and benefits
• still on a PAYG basis rather than funded
• different revaluation approaches
• possible demographic adjustment factor
• annuity conversion at pension age
• permits flexibility of retirement age
• passes on part of longevity risk
EXAMPLES OF NDC
• Sweden
• Italy
• Latvia
• Brazil
• China (2nd pillar)
• France (régimes complémentaires)
NEW APPROACHES TO FINANCING
• shift some of the cost to general revenue
• introduce additional ear-marked taxes
• pre-fund part of the future liability
• make investment process independent
• introduce funded component
DEVELOPMENT OF FUNDED SCHEMES
• increased level of investment
• possible economic benefits
• introduces market disciplines…..
• …..and in some cases competition
• may improve efficiency
• makes pensions less political
CHILE
• compulsory contributions to AFPs
• choice of AFP
• minimum pension guaranteed by state
• underpin on annual return
• recognition bonds for previous rights
• old scheme closed to new entrants
• high levels of transaction costs
SINGAPORE
• Central Provident Fund (from 1953)
• defined contribution
• deposit account style
• high contributions (varying from time to time)
• medical expenses, education, investment
• lump sum benefit
MEXICO
• future contributions into AFOREs
• ongoing costs paid from budget
• reinsurance of disability and survivorship
• index-linked annuities
• protected rights from old system
• guaranteed minimum pension
• pressures on annuity markets
AUSTRALIA
• Award Superannuation from 1986
• Superannuation Guarantee Levy from 1992
• Industry Funds and Master Trusts
• mandatory employer contribution of 6%
• 9% employer/3% employee from 2002/03
• administrative problems at start
• 90% of administration now with two providers
HONG KONG
• Mandatory Provident Fund from 2000
• contributions of 10% of salary plus allowances
• earnings floor and ceiling
• private schemes and master trust schemes
• alternative of occupational retirement schemes
• 63% of employed population in MPF(31.3.02)
CHINA
• flat-rate basic pension (20% of average wage)• NDC second pillar (11% contribution)• partially funded (in some provinces)• pension is 1/120 of accumulated amount• fully funded voluntary third pillar • Liaoning experiment
* basic pension at 30% of average wage* fully funded DC from employee contns.
ARGUMENTS IN FAVOUR OF FUNDING
• increases level of saving
• helps to develop capital markets
• provides needed investment capital
• helps to address ageing problems
• may reduce long-term cost
COUNTER-ARGUMENTS
• may substitute for other saving
• markets may not be able to cope
• may push up prices with excess demand
• ageing will still have an impact
• cost is only reduced in certain circumstances
DEMOGRAPHY AND FUNDED SCHEMES
• pension investment keeps market buoyant
• disinvestment may depress market
• international diversification may help
• ageing will produce mature pension schemes
• maturity requires more bond investment
• DC plans will be directly affected
DEFINED CONTRIBUTION PLANS
• transparent and easy to implement
• expose members to investment risk
• important to address issues of- solvency- expense levels- appropriate investment profile- guarantees, if any- annuitisation
PROBLEMS WITH PRIVATE MANAGEMENT
• higher costs of disaggregated system
• insolvency risk
• marketing costs
• possibility of mis-selling
• variable investment performance
• risk of fraud or mismanagement
PROBLEMS WITH ANNUITIES
• concentration of risk
• mortality uncertainty
• need for very long-dated bonds
• preferably index-linked
• permit programmed withdrawal?