Contractual Savings
and
Financial Markets
Gregorio Impavido, Alberto R. Musalem, and Thierry Tressel
Financial Sector Development Department
Financial Sector Vice Presidency
The World Bank
Definition and Importance of
Contractual Savings






Funded pensions plans: accumulation period
Annuities: pensions pay out
Life insurance
Funded unemployment benefits, gratuity, end of
service indemnity
Other contingencies - down payment for a house,
education, weddings, funerals
Supply long term savings
2
Financial assets of contractual savings, selected countries
(% of GDP)
Countries
Switzerland
1970
51.00
1980
70.00
life
pension
United Kingdom
43.00
life
pension
The Netherlands
45.00
life
pension
United States
40.00
life
pension
Chile
40.00
life
pension
Malaysia*
18.00
life
pension
Singapore*
17.00
life
pension
1993
106.82
1998
131.01 /1
32.29
56.22
39.81
67.01
49.44
81.57
38.81
86.91
137.36
167.85
17.77
21.04
36.87
50.04
65.22
72.14
87.79
80.06
66.90
108.11
130.46
166.45
21.13
45.77
36.06
72.05
47.25
83.21
60.34
106.11
43.01
69.20
82.07
113.59
17.72
25.29
25.85
43.35
31.10
50.97
31.85
81.74
1.00
29.28
45.61
54.12 /2
5.59
23.69
8.60
37.01
12.13
41.99
life
pension
South Africa
1990
88.51
39.27
78.13
111.87
109.31
17.20
22.07
43.94
34.19
72.25
39.62
63.49
45.82
20.08
47.18
50.25
59.82
3.26
16.82
7.02
40.16
9.04
41.21
9.17
50.65
41.00
115.13
102.39
116.58
8.44
106.69
12.00
90.39
14.36
102.22
Notes: * Prior to 1990, the data do not include the funds invested directly by individual workers in housing and other approved assets .
/1 1996; 2/ 1997.
Source: 1970 data from Davis (1995) and national central banks, as quoted by Vittas (1998); all other data from World Bank database
and OECD 2000 Institutional Investors Statistical Yearbook
3
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Contractual savings and M2 as percentage of financial assets (1996)
100%
90%
80%
70%
60%
50%
m2%
ctr%
40%
30%
20%
10%
0%
4
CONTRACTUAL SAVINGS % OF CAPITAL MARKETS (STOCKS AND BONDS)
Comparing Two Years During the 1990s
5
Social and Financial Risk Mitigation
Effects




Beneficiaries improve management of longevity, death
and other risks
Reduce debtors refinancing risks, including
governments, by lengthening the maturity of debts
Reduce pressure on banks to engage in excessive term
transformation risks
Reduce enterprise vulnerability to interest rate and
demand shocks due to improved financial structure
(higher equity/debt ratio)
6
Government long-term to total debt ratio
and contractual savings assets, 1996 (% GDP)
DEU
.97
ZAF
GBR NLD
SGP
AUT
JPN
FIN
AUS
ISL
SWE DNK
KOR
NOR
USA
CHE
NZL
FRA
HUN
CAN
GRC
.32
TUR
.003
Financial Assets of CS over GDP
1.482
7
Banks’ Short Term to Total Loans vs Contractual Savings:
Conditional Correlation
Regression Line: STL = -6.03 (4.58) * Log(Csfa,%GDP)+37.5 ( R2=0.18)
STL
Fitted values
96.0695
.00062
-7.48757
.517491
LogCSfa,%GDP(-1)
8
Banks’ Net Interest Margin (NIM) and Contractual Savings:
Conditional Correlation
Regression Line: NIM = -0.60 (-10.78) * Log(Csfa,%GDP)+1.47 (R2=0.35)
NIM
Fitted values
11.8842
.565787
-7.48757
.517491
LogCSfa,%GDP(-1)
9
Banks’ Credit Risk (Loan Loss Provisions to Total Assets) and
Contractual Savings: Conditional Correlation
Regression Line: LLTA = -2.8 E-3 (-3.23) * Csfa,%GDP + 0.6 ( R2 = 0.043)
LLTA
Fitted values
4.17727
.025104
.056
167.781
CSfa,%GDP(-1)
10
Debt-equity ratios of listed companies
and contractual savings assets, 1997 (% GDP)
T o ta l D e b t o v e r E q u it y
4 .1 4 34 1
TH A ILA N D
K O R E A (S
FR A NC E
ITA LY
B R A ZIL
S R I LA N K
U N ITE D K
G E R M AN Y
S P A IN
M
EG
X IC
O
R TU G A L
AR
EP
NO
TIN
N E W ZEA L
C H ILE
N E THE R LA
U N ITE D S
C A N AD A
A U S TR A LI
S O U TH A F
.2 3 0 17 1
IN D IA
.0 1 3 97 6
1 .9
C S F in a n cia l A sse ts, % G D P
11
U N IT E D S
.8 0 5 6 0 3
NEW ZEAL
CANAD A
AU STR ALI
M E X IC O
o v e r
T o ta l D e b t
Long-term to total debt ratio of listed companies
and contractual savings assets, 1997 (% GDP)
NE THE RLA
C H IL E
U N IT E D K
D e b t
IN D IA G E R M A N Y
B R A ZP
I LO R T U G A L
FR ANC E
SO U TH A F
L T
IT A L YK O R E A ( S
S P A IN
ATRHGAEILNATNIND
.3 0 5 5 0 7
SR I LAN K
.0 1 3 9 7 6
1 .6 9 4 3 6
C S F in a n c ia l A s s e ts , % G D P
12
Firms’ Leverage (TDTE) vs Contractual Savings:
Conditional Correlation - Market-based Financial
Structure
U n e x p la in e d R e s id u a l ( T D T E )
Residual = -1.16 * (CS Fin. Assets, % Sec. Market) (t-stat = -2.47) Pooled reg., 82 obs.
6.70387
-2.30492
.122694
1.14333
CS Financial Assets, % Sec. Mark
13
Firms’ Leverage (TDTE) vs Contractual Savings:
Conditional Correlation - Bank-based Financial Structure
U n e x p la in e d R e s id u a l ( T D T E )
Residual = 4.0 * (CS Fin. Assets, % Sec. Market) (t-stat = 2.37) Pooled regression, 74 obs.
5.48049
-1.6972
.029634
.608034
CS Financial Assets, % Sec. Mark
14
Firms’ Debt Maturity vs Contractual Savings: Conditional
Correlation - Market-based Financial Structure
U n e x p la in e d R e s id u a l ( L T D T D )
Residual = -0.09 * (CS Fin. Assets, % Sec Mkt) (t-stat = -3.84) Pooled regression, 82 obs.
.1 1 5 2 4
-.1 8 6 2 1
.1 2 2 6 9 4
1 .1 4 3 3 3
C S F in a n c ia l A s s e ts , % S e c . M a rk
15
Firms’ Debt Maturity vs Contractual Savings: Conditional
Correlation - Bank-based Financial Structure
Residual = 0.28 * (CS Fin. Assets, % Sec Mkt) (t-stat = 5.28) Pooled Regression, 74 obs.
Unexplained R esidual (LTD TD)
.180361
-.156052
.029634
.608034
CS Financial Assets, % Sec. Mark
16