Pension Funds
Globally, in Asia and in Pakistan
Jeremy Gadbury
The International Securities
Consultancy Limited
1
Pension Funds
Globally, in Asia and in Pakistan
Pension Funds and Retirement Fund
Schemes – A Global View
Concepts and Practice, Structure, Role of
Trustees and Investment Managers
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
2
Pension Funds
Globally, in Asia and in Pakistan
Global population growth tending to stabilise,
population mixes changing significantly in 1990’s
Lower birth rates, particularly in urban
areas, developed countries
Improved healthcare
Decline in smoking related diseases
Ageing population – more elderly people, fewer
people to support them
And liable to change more in the years to come
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
3
Pension Funds
Globally, in Asia and in Pakistan
The ageing crisis…
Ageing population
People living longer, working less
4-2-1, 18-42-22, 15-50-10
… the pensions crisis – or income after employment
Governments, companies afraid of future liabilities
Compounded by lower interest rates, poor equity
market returns since 1998, early retirement on full
pensions
And increasing dependency ratios; The number of
working age people “supporting” elderly.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
4
Pension Funds
Globally, in Asia and in Pakistan
And some remedies…
World Bank in 1994
World Bank in 2005
The Chilean model
Encourage saving,
Change the benefit age
and the move to defined contribution
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
5
Pension Funds
Globally, in Asia and in Pakistan
The World Bank’s advice in 1994
Three pillars
Used as a reference point or adopted by a number
of developing economies, including China. China
had no securities market that anyone could
confidently invest in for some time.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
6
Pension Funds
Globally, in Asia and in Pakistan
The World Bank’s advice in 1994 :Three pillars
(b) a “first-pillar” contributory system that is linked to
varying degrees to earnings and seeks to replace some
portion of income;
(c) a mandatory “second pillar” that is essentially an
individual savings account but can be constructed in a
variety of ways;
(d) voluntary “third-pillar” arrangements that can take
many forms (individual, employer sponsored, defined
benefit, defined contribution) but are essentially flexible
and discretionary in nature.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
7
Pension Funds
Globally, in Asia and in Pakistan
The World Bank’s advice in 2005
Five pillars
Two more pillars
Zero -a noncontributory or “zero pillar” (in the form
of a demogrant or social pension) that provides a
minimal level of protection;, and
Five -informal intrafamily or intergenerational
sources of both financial and nonfinancial support
to the elderly, including access to health care and
housing.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
8
Pension Funds
Globally, in Asia and in Pakistan
The Chilean model
Born out of a crisis…
State system in crisis, huge liabilities, no assets
Solution - move to defined contribution, early
restrictions on investment with an emphasis on
government securities, individuals built up
savings.
Well regulated products, some problems on
marketing, but overall a success, developing
assets for investment domestically.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
9
Pension Funds
Globally, in Asia and in Pakistan
And a general trend to governments (for their own
promised employee benefits) and employers
wanting to replace promised benefits for all with
defined contribution systems
And now for some government social security and
basic pensions to be reviewed, when benefits are
payable and how much they might be.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
10
Pension Funds
Globally, in Asia and in Pakistan
Occupational savings schemes and their structures
•Structures (such as 401(k)) determined by what the
legislation allows
•Legislation comes in Labour Laws and directives,
Pension Laws and directives, Tax Legislation that
encourages occupational savings schemes
•Pension reform programmes needed to update
legislation
Principle objectives are to increase coverage, protect
members and their savings
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
11
Pension Funds
Globally, in Asia and in Pakistan
Most schemes are voluntary, generally established by
an employer, i.e. occupational savings.
Legislation evolves, often through experience;
regulation and supervision reactive.
Schemes increasingly established separately to a
company, assets ring fenced through a trust structure,
policy or other separate legal identity.
Legislation identifies roles, the company, the trust and
trustees, and the various service providers
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
12
Pension Funds
Globally, in Asia and in Pakistan
Defined benefit causes greatest concern, law usually
needs them to be funded, with regular actuarial
valuation; generally liberal investment policy with
only few restrictions, need to matching liabilities,
through asset liability structures.
Defined contribution – single investment policy,
increasingly replaced by member choice, the idea of
offering a range of investment products, evolving into
multi manager.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
13
Pension Funds
Globally, in Asia and in Pakistan
Occupational savings
Decisions usually made by an employer as to what
structure is offered.
In member choice, pressure for a wide choice of funds
in North America becoming more usual, and in
Australia recent requirements to offer more products.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
14
Pension Funds
Globally, in Asia and in Pakistan
Structure, transparency and publicity produces their
own safeguards, particularly since Maxwell crisis,
which led to collective responsibilities of trustees.
Trustees, seeking advice from Consultants,
employing Investment Managers
Employers/Plan Sponsors. Seeking advice from
Consultants, seeking to control their own ongoing
liabilities
Regulator, legislation brings in marginal controls.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
15
Pension Funds
Globally, in Asia and in Pakistan
Roles spread across various parties, even where
specific legislation doesn’t apply
Regulated entities –
Investment Managers
Insurance Companies
Some Consultants
Legislation, regulation - Trustees
Generally unregulated - Consultants
Additional requirements, such as record keeping and
administration, accounting standards, auditing
requirements, actuarial valuations.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
16
Pension Funds
Globally, in Asia and in Pakistan
But still the need for
Pensions Ombudsman, in the United Kingdom
Independent arbitrators
Appeals and complaints processes
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
17
Pension Funds
Globally, in Asia and in Pakistan
Overregulation can discourage innovation and
product development. Pricing controls generally
don’t work – except for “high” limits.
Underregulation leads to abuse, mis investment.
Regulation on voluntary systems tends to be light,
with firm touch, but reactive.
Doesn’t prevent effects of financial failure of
employer where ongoing contributions are needed
to fund liabilities.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
18
Pension Funds
Globally, in Asia and in Pakistan
Need to establish organisations such as Pension
Benefit Guaranty Agency in the United States,
Pension Protection Fund in United Kingdom.
Pension System is too big to protect from massive
financial shock, only able to protect small sample
in normal range of financial conditions.
Defined construction can only get structural
projection, limited investment protection.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
19
Pension Funds
Globally, in Asia and in Pakistan
Personal savings and pension plans, aimed at self
employed and those wanting to make additional
savings, such as IRAs in the United States.
Tax driven, often in markets where they are “sold” not
“bought”, with high commissions.
There have been problems of pension misselling,
coming out of attractive structures into inappropriate
high commission products
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
20
Pension Funds
Globally, in Asia and in Pakistan
Basic financial product dilemma –
Regulate the product? or the means of distribution, the
individual and the corporate?
How much knowledge does the Regulator have over
how products are distributed, who buys them and why.
What is that makes products attractive or unattractive?
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
21
Pension Funds
Globally, in Asia and in Pakistan
Increasing coverage
Encouraging personal saving through
occupational savings methods
Tax incentives
Caps on fees
Educating people as to the importance of savings
Many pension products are sold not bought
But still low penetration…
… leading to the idea of mandatory systems.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
22
Pension Funds
Globally, in Asia and in Pakistan
Where voluntary systems don’t achieve policy goals,
more voluntary systems, then filling in the gaps with
mandatory systems.
Mandatory or near mandatory systems,
Australia
Korea,
Hong Kong’s MPF
Malaysia,
Originally established as mandatory environment
Singapore’s CPF
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
23
Pension Funds
Globally, in Asia and in Pakistan
Mandatory Systems
Regulatory touch, generally heavier, more threats,
controls, investigations. Need to regulate and control
various service providers.
Prescriptive legislation on investment, participants
and their financial and other qualifications.
Regulator is in the public eye, driven by fear of
individual loss and systemic risk.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
24
Pension Funds
Globally, in Asia and in Pakistan
For investment managers
Definitive mandates on pension fund mandates,
reference to benchmarks
Increasing number of unconstrained mandates
On member choice
Lifestyle funds
Specialist equity and bond funds, supporting their
own and third party products
High level of transparency
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
25
Pension Funds
Globally, in Asia and in Pakistan
Some global population pyramids…
India, 2000
A near standard pyramid
China, 2000
One child policy
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
26
Pension Funds
Globally, in Asia and in Pakistan
Some global population pyramids: Source UN
Italy, 2000
Low birth rate
Jeremy Gadbury The International Securities Consultancy Limited
Iran, 2000
August 2005
27
ITALY
2000
2025
Some global
population
pyramids, how they
are going to
change
Over 65
2001 18.4%
2015 22.3%
Impact of low birth
rate, ageing
population
continues
2050
Jeremy Gadbury The International
Securities Consultancy Limited
28
August 2005
IRAN
2000
Some global
population
pyramids how
they are going
to change
2025
2050
Jeremy Gadbury The International
Securities Consultancy Limited
29
August 2005
INDIA
2000
2025
Some global
population
pyramids how
they are going
to change
improving
healthcare
2050
Jeremy Gadbury The International
Securities Consultancy Limited
30
August 2005
CHINA
2000
Some global
population
pyramids how
they are going
to change
low birth rate
2025
2050
Jeremy Gadbury The International
Securities Consultancy Limited
31
August 2005
Pension Funds
Globally, in Asia and in Pakistan
A government’s dilemma
What does it do about an ageing population?
Whether it is the role of the government merely to
prevent pensioner poverty, or should it pursue a
policy to produce at least some relation between
earnings before retirement and the eventual
pension, whether state or private?
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
32
Pension Funds
Globally, in Asia and in Pakistan
What is happening in Pakistan
An existing system of pensions, provident funds,
gratuities in both the public and private sectors.
A new Voluntary Pension System.
From a “policy” point of view, not an ageing
problem, but for many individuals it is.
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
33
Pension Funds
Globally, in Asia and in Pakistan
1985
Pakistan’s
population
pyramids
2000
Jeremy Gadbury The International Securities Consultancy Limited August 2005
34
PAKISTAN
2000
2001
3.7% over 65
2015
4.0% over 65
2025
2050
falling
mortality rates
Jeremy Gadbury The International
Securities Consultancy Limited
August 2005
35
Pension Funds
Globally, in Asia and in Pakistan
… some Pakistan demographics
Population growth rates Population
1970
2000
2015
2050
2.59%
2.47%
1.98%
0.84%
59.56 million
142.65 million
193.42 million
304.70 million
Fertility
rates
6.28
5.48
4.11
2.06
Source: UN see www.globalis.gvu.unu.edu for more details
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
36
Pension Funds
Globally, in Asia and in Pakistan
… and some international comparisons
Life expectancy at birth
India Iran Italy Pakistan
1970
48.0 52.5 71.0 47.0
2000
62.1 68.6 78.2 59.0
2015
66.3 72.8 79.7 65.0
2050
73.8 79.1 82.5 74.7
Jeremy Gadbury The International Securities Consultancy Limited
Russia
70.1
66.1
67.4
74.2
August 2005
37
Pension Funds
Globally, in Asia and in Pakistan
… and some international comparisons
Population aged 65 and above
India Iran Italy Pakistan Russia
2001
5.0% 4.5% 18.4% 3.7% 12.8%
2015
6.3% 4.9% 22.3% 4.0%
14.3%
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
38
Pension Funds
Globally, in Asia and in Pakistan
Thank you
Jeremy Gadbury The International Securities Consultancy Limited
August 2005
39