Contractual Savings
and
Financial Markets
Alberto R. Musalem and Gregorio Impavido
Financial Sector Development Department
Financial Sector Vice Presidency
The World Bank
Definition and importance of
contractual savings
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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
% GDP
Switzerland
United Kingdom
Netherlands
United States
Chile
Malaysia*
Singapore*
South Africa
1970
51.00
43.00
45.00
40.00
1980
70.00
38.81
66.90
43.01
1990
88.51
86.90
108.11
69.20
1993
106.82
137.36
130.46
82.07
1996
131.38
141.72
148.19
94.80
18.00
17.00
40.00
1.00
20.08
41.00
39.27
29.28
47.18
115.13
78.13
45.61
50.25
102.39
111.87
50.61
51.02
93.50
126.01
* Prior to 1990, the data do not include the funds invested directly by individual workers in housing and other approved assets.
Source: 1970 data from Davis (1995) and national central banks, as quoted by Vittas (1998); all other data from World Bank database
Source: OECD Yearbook of institutional investors and WB database
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
Capital market effects
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Increase demand for shares, hence market
capitalization and volume traded: increase depth
and liquidity
Increase demand for long term bonds and loans
Improve regulations and transparency
Foster financial innovation, competition and
efficiency
Improve corporate governance
5
Market capitalization and contractual savings assets, 1996 (% GDP)
MC/GDP
2
ZAF
SGP
GBR
1.5
CHE
AUS
USA
SWE
CHL
1
NLD
CAN
JPN
THA
.5
NZL
ESP BEL
NOR FRA
KOR
DEU
PRT
ITA
GRC
AUT
HUN
FIN
DNK
ISL
0
0
.5
1
1.5
CS/GDP
6
Value traded and contractual savings assets, 1996 (% GDP)
VT/GDP
1.5
CHE
1
USA
NLD
AUS
SWE
.5
CAN
ESP
KOR
DEU
THA
JPN
NOR
FRA
HUN
NZL
AUTBEL
ITA
GRC
PRT
ZAF
FINDNK
CHL
ISL
0
0
GBR
SGP
.5
1
1.5
CS/GDP
7
Causality
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In countries with developed capital markets, direction of
causality between contractual savings and either market
capitalization or value traded is not clear.
In countries with underdeveloped capital markets,
contractual savings causes market capitalization and value
traded.
In developing countries, pension funds cause market
capitalization while life and non-life insurance cause value
traded.
8
Market capitalization
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Estimator: Error Components 2 Stage Least Square
(EC2SLS), N=281, 26 unbalanced panels (21 OECD and 5
non-OECD countries, 1975-97)
Positive impact: contractual savings, non-life ins., value
traded, real return on stocks
Negative Impact: real return on money, real interest rate,
book reserves, stock price index volatility
Step dummy: developing countries with positive coefficient
Endogenous variables: asset returns
Exogenous variables: all other
Diagnostics: various specification tests passed
9
Value traded
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■
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■
Estimator: EC, N=233, 26 unbalanced panels (21 OECD
and 5 non-OECD countries, 1975-97)
Positive impact: contractual savings share portfolio, nonlife insurance share portfolio, real return on money
Negative impact: real interest rate
Step dummy: developing countries with positive coefficient
Diagnostics: various specification tests passed
10
Social and financial risk mitigation
effects
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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)
Reduce capital markets volatility
11
Government long-term to total debt ratio
and contractual savings assets, 1996 (% GDP)
DEU
.9 7
ZA F
G BR N LD
SGP
AUT
JP N
F IN
AUS
IS L
SW E DNK
KOR
NOR
USA
CHE
N ZL
FR A
HUN
CAN
GRC
.3 2
TUR
.0 0 3
F in a n cia l A sse ts o f C S o ve r G D P
1 .4 8 2
12
Debt-equity ratios of listed companies
and contractual savings assets, 1997 (% GDP)
Total Debt over Equity
4.14341
THAILAND
KOREA (S
FRANCE
ITALY
BRAZIL
SRI LANK
UNITED K
NETHERLA
GERMANY
SPAIN
PORTUGAL
MEXICO
ARGENTIN
NEW ZEAL
CHILE
CANADA
AUSTRALI
UNITED S
SOUTH AF
.230171
INDIA
.013976
1.9
CS Financial Assets, % GDP
13
Long-term to total debt ratio of listed companies
and contractual savings assets, 1997 (% GDP)
UNITED S
.805603
NEW ZEAL
LT Debt over Total Debt
CANADA
AUSTRALI
MEXICO
NETHERL
CHILE
UNITED K
INDIA GERMANY
PORTUGAL
BRAZIL
FRANCE
SOUTH AF
ITALYKOREA (S
SPAIN
THAILAND
ARGENTIN
.305507
SRI LANK
1.69436
.013976
CS Financial Assets, % GDP
14
Leverage (TDTE) vs Contractual Savings: Conditional
Correlation - Market-based Financial Structure
Residual = -1.16 * (CS Fin. Assets, % Sec. Market) (t-stat = -2.47) Pooled reg., 82 obs.
Unexplained Residual ( TDTE )
6.70387
-2.30492
1.14333
.122694
CS Financial Assets, % Sec. Mark
15
Leverage (TDTE) vs Contractual Savings: Conditional
Correlation - Bank-based Financial Structure
Residual = 4.0 * (CS Fin. Assets, % Sec. Market) (t-stat = 2.37) Pooled regression, 74 obs.
Unexplained Residual ( TDTE )
5.48049
-1.6972
.608034
.029634
CS Financial Assets, % Sec. Mark
16
Debt Maturity vs Contractual Savings: Conditional
Correlation - Market-based Financial Structure
Residual = -0.09 * (CS Fin. Assets, % Sec Mkt) (t-stat = -3.84) Pooled regression, 82 obs.
Unexplained Residual ( LTDTD )
.11524
-.18621
.122694
1.14333
CS Financial Assets, % Sec. Mark
17
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 Residual (LTDTD)
.180361
-.156052
.029634
.608034
CS Financial Assets, % Sec. Mark
18
National saving effects
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Mandatory plan and credit constraints increase
household saving but watch welfare effects
Non-captive funding for public sector promotes its
saving
Significant shift to funding promotes saving
Transition cost financed by cutting the non-pension
public sector deficit increases Government saving
System coverage and retirement ages are increased
Uncertain effect from voluntary plan (tax incentive)
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Contractual savings and growth
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Potential increase in saving
Decline in the cost of capital: equity and debt
Flatten the term structure of interest rates
Reduce the country risk premium
Promote efficiency gains
Virtuous cycle: higher growth increases saving thus
furthering growth
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ARG
AUS
AUT
BEL
BRA
CAN
CHE
CHL
DEU
DNK
ESP
FIN
FRA
GBR
GRC
HUN
IDN
Argentina
Australia
Austria
Belgium
Brazil
Canada
Switzerland
Chile
Germany
Denmark
Spain
Finland
France
United Kingdom
Greece
Hungary
India
ISL
ITA
JPN
KOR
LUX
MYS
NLD
NOR
NZL
PRT
SGP
SWE
THA
TUR
USA
ZAF
Iceland
Italy
Japan
Korea, Rep.
Luxembourg
Malaysia
Netherlands
Norway
New Zealand
Portugal
Singapore
Sweden
Thailand
Turkey
United States
South Africa
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