Balancing Sustainability and Adequacy of Pension...

© Copyright Allianz 2015 – International Pensions

Balancing Sustainability and Adequacy of Pension Systems: Explore the best designed pension systems in the world Michela Coppola Rovinj / October 2015


Pension reforms have been constantly on policy agendas

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Introduced pension reforms to achieve

sustainability

Nearly all

34 OECD countries

reformed their systems substantially

16 of them


Global shift towards funded pension schemes

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* Factual nationalization of DC pensions in 2010/ pension contributions are turned into taxes, the bulk of the country's HUF2.7trn (€9.6bn) in second pillar pension assets will be returned to the state treasury

New pension reserve funds -China - South Korea - France - Spain - Sweden - Norway - Ireland - …

Singapore (1955)

1950s 1980s 1990s 2000+

Brazil (1977)

Chile (1981)

UK (1986)

Australia (1992)

Peru (1993)

Thailand (1997)

Mexico (1997)

Hungary (1998)*

Poland (1999)

Hong Kong (2000)

Japan (2001) Bulgaria (2002)

Croatia (2002) China (2004)

India (2004)

Chin. Taipei (2005)

Slovakia (2005)

South Korea (2005)

Romania (2007)

Thailand (2010)

Austria (2003 & 2005)

Belgium (2004)

France (2003)

Germany (2001)

Ireland (2003)

UK (2001 & 2012)


Funding of pensions schemes is resulting in a total of USD 36 trn. in pension assets around the world

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© Copyright Allianz 2015 – International Pensions 5

Decrease in benef it levels

in public systems

up of funded pension systems

Built Shift from

DB to DC

…results in a new weighting

of retirement income sources


…But sustainability may not be enough…


To assess the long-term sustainability of a pension system the Pension Sustainability Index (PSI) uses a range of sub-indicators, which encompass parameters for the present status and the future outlook of the system.

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Pension Sustainability Index (PSI)

Public Finances

Demographics

Structure of the pension system

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Which countries struck the balance?

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Few countries manage to optimize their pension systems on both dimensions – Sustainability and Adequacy

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Learning from the best – NL, DK, NO, CH and – with reservations – the USA


The characteristics of sound and well-balanced pension systems

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Sustainability Adequacy

First Pillar Relatively moderate gross

replacement rates and wide coverage

Transition from work

Long working lives and short time spent in retirement:

High legal and effective retirement age

Second/third pillar

High level of pension assets Fiscal situation

Low current and future public pension payments

Low level of public debt

Spending needs

Low level of out-of-pocket expenses for health.

Private non-pension wealth

High level of home-ownership and/or high level of financial

assets

First Pillar Pension benefits adjusted according to wage growth

Second/third pillar

High coverage and mandatory/quasi mandatory

participation rule.

Mandatory annuitization


Where does Croatia stands?

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PSI ranking RIA ranking


Public expenditure for pensions

3 most important factors governments need to take care of

Initiate private retirement

savings Ensure high

participation and contribution rates

Environmental factors

TRUST

Well funded health and longterm care

Labor market for the 60+


• Compulsory enrollment, • Automatic enrollment, • Financial incentives, • Financial education, • Facilitating and simplifying provision/

access/ choice, • Possibility of (pre-mature)

withdrawals, accessibility in emergency situations

• Eliminating disincentives created by means-testing

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Framing private retirement savings…

Vulnerable groups:

Young people, low-to-mid income groups, workers in part-time and precarious work


Build and maintain trust

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NL

NO

SE

CH

AU DK

UK

FI NZ

HK

PT

IT

US

DE

AT

CA

SG

BE

GR

PL

KR

EE

LV

IE

ES CZ

JP

Lu

RO

TW CL

HR

BG

FR

LT

HU

SI

MX SK

CY MT

RF

MY

BR

TR

ID

TH

CN

IN

0

5

10

15

20

25

30

35

40

45

50

05101520253035404550

Ran

king

inst

itutio

n in

dex*

Ranking PSI sub-index “Pension system”

Hig

h pe

rcei

ved

qual

ity o

f in

stitu

tions

Lo

w p

erce

ived

qua

lity

of

inst

itutio

ns

Poor design of pension system and lagging reforms

Good design of pension system and advanced reforms

*World Economic Forum, Global Competitiveness Index 2014-2015, Sub Indicator “Institutions”.


Balancing Sustainability and Adequacy


Thank you!

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Thank you!

Michela Coppola Senior Economist Allianz Asset Management AG Seidlstr. 24-24a 80335 Munich, Germany

Phone +49 89 1220-7205 Fax +49 89 1220-7569 [email protected] www.projectm-online.com

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Pension Sustainability Index

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Retirement Income Adequacy Indicator

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How „trust“ and the „design of pension system“ are measured

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Trust

Countries have been ranked according to their score on the “Institutions” sub-indicator of the Global Competitiveness Index produced by the World Economic Forum

The sub-indicator provides a syntetic measure to capture the quality of the legal and administrative framework within which individuals firms and government interact

Data from a survey of top management business leaders are used to construct the index. Following aspects are considered:

Pension system design

Countries have been ranked according to their score on the sub-indicator “Pension design” of the Pension Sustainability index, produced by Allianz.

This sub-indicators addresses the parameters of national pension systems and their future design, this way capturing to what extent pension systems are able to meet the needs of an aging society

Data on the following aspects enter the sub-indicator:

Level of pension benefit from 1st pillar and coverage of workforce Legal / effective retirement age Strength of funded pillar and reserve fund (as % of GDP)

Change in level of

pension benefit

Reforms passed

PUBLIC INSITUTIONS

Property rights protection

Ethic and corruption

Undue Influence

Government efficiency

Security

PRIVATE INSTITUTIONS

Corporate ethics

Accountability

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Balancing Sustainability and Adequacy of Pension...

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