Mitigating the global pension crisis...Stochastic optimal asset allocation: • Total Return and...
Transcript of Mitigating the global pension crisis...Stochastic optimal asset allocation: • Total Return and...
Mitigating the global pension crisis: a compilation of actuarial innovative ideas
Abraham HernándezPBSS: Pensions and Social Security Section, IAA
Cape Town Colloquium, 2019
The information given herein has been gathered from different sources and completed by the Pensions and Social Security (PBSS) Section Board of the
International Actuarial Association (IAA). The material in this presentation may include general background information about the PBSS Section’s activities
current as at the date of this presentation. Such information is subject to change without notice and the IAA is not under any duty to update this information
nor responsible for it.
The views and opinions expressed in the given presentation are those of the speaker and do not necessarily reflect the official policy or position of the IAA nor
the PBSS Section.
DISCLAIMER
This compilation was possible thanks to the effort of many people. With the fear of leaving someone out, I want to make some special acknowledgements:
To my PBSS Board fellows, for supporting the idea and contributing with their comments and relevant material.
• Chris Daykin (Honorary Chairman)• Marius Du Toit (Immediate Past-Chairman)• Carl Hansen (Vice Chairman)• Nobuhiro Shimizu (Secretary)• Douglas Carey (Treasurer)• Ignacio Del Barco • Paulo Gouvea• Florian Leger • Krzysztof Ostaszewski• Allan Paldanius• Kenneth Buffin• Rodrigo Ibarra Jarrín• Brnic Van Wyk
Yours sincerely,Abraham (Abe) Hernández
Chairman, PBSS
To Yasuyuki Fuji and Charles Cowling (Past and Present Chairmen of the PEBC), and to all
the PEBC for their comments, review and for sharing with us their knowledge and wisdom.
To Barbara D’Ambrogli-Ola and Assia Billig (Chair and Vice Chairwoman of the SSC), and to
all SSC members for their support and very valued contributions and references.
ACKNOWLEDGEMENTS
Special thanks to Fernanda Salas (member of PBSS and Vice Chairwoman of AFIR-ERM) and
Rosemary Macedo for the original endevour and the effort to bringing these slides into life.
Worldwide association of professional actuarial associations, with a number of special interest sections for individual actuaries. The IAA exists to encourage the development of a global profession, acknowledged as technically competent and professionally reliable, which will ensure that the public interest is served.
PBSS
Established in 2003
+500 members from +50 countries
Serves actuaries and other professionals
around the world with interest in pensions and
social security
Promotes research and act as catalyst for
building intellectual capital and potential
solutions to global issues
Organizes colloquia and congresses to facilitate
an international exchange of research and
practical approach among PBSS matters
INTERNATIONAL ACTUARIAL ASSOCIATION (IAA)
Website: www.actuaries.org
SCALE OF THE GLOBAL CRISIS IN PENSION
FUNDING
CAUSES AND THE ROLE OF CHANGING DEMOGRAPHICS
SOME ACTUARIAL CREATIVE IDEAS TO ADDRESS THE
CRISIS
OVERVIEW
THE PENSION CRISIS: A GLOBAL ISSUE
Sources: The Telegraph; The Guardian; Radio New Zeland; MarketWatch
o WEF (2017): Published “We’ll Live to 100 – How Can We Afford It?”. Includes measures and possible reforms
o The World Social Protection Report 2017-19 of the ILO offers a broad range of global, regional and country data on social protection
coverage, benefits and public expenditures on social protection
o The Global Retirement Index (GRI) 2017 of Natixis considers economic development, policy and political reforms, demographic changes,
and environmental for retiree welfare
o The Allianz Pension Sustainability Index (PSI) 2016 provides an indication of a country’s need for reforms to maintain long-term financial
sustainability.
o The MMGPI (Melbourne Mercer Global Pension Index) 2017 intends to rate pension systems around the world based on adequacy (40%),
sustainability (35%), integrity (25%)
TRYING TO QUANTIFY THE GLOBAL PENSION CRISIS
Sources: The Melbourne Mercer Global Pension Index (MMGPI) 2017; WEF; NatixisGRI; Allianz PSI; PBSS
ADEQUACYBenefits provided, system design, savings and asset
allocation
Level of funding, demography, labor force participation, government debt
Regulation, governance, communication, costs, protection
SUSTAINABILITY INTEGRITY
SCALE OF THE GLOBAL CRISIS IN PENSION
FUNDING
CAUSES AND THE ROLE OF CHANGING
DEMOGRAPHICS
SOME ACTUARIAL CREATIVE IDEAS TO ADDRESS THE
CRISIS
OVERVIEW
Decliningbirthrate
(fewer children, later)
Increasinglongevity
Fewer pensions,underfunded or “guarantied” by
government debt as PAYG systems
Low interest rates
…yet heroic return assumptions
CAUSES
Sources: Pinterest; links-financial.com
LIFE EXPECTANCY
Sources: World Bank. The life expectancy is an approximatenumber for the mean of all countries with data
Since the middle of the last century, life expectancy has been increasing rapidly.
On average, it has been increasing by one year, every five years.
Source: https://esa.un.org/unpd/wpp/Download/Standard/Population/Projections are medium variant
FEWER WORKERS SUPPORTING MORE RETIREES
South Africa
India
Mexico
Brazil
Russia
USA
China
UK
Europe
Korea
Japan
Source: Bloomberg
HISTORICAL 10y TREASURY INTEREST RATES
Source: Gohdes, Alf. Low returns and the impact on an individual’s retirement provision (2018)
Expected cost of a 35-year-old pension of 1,000 € with attaching 60% contingent spouse’s pension.*
Example for Germany
* All annual amounts and linked to inflation
ADITIONAL CHALLENGES IN DEVELOPING NATIONS
Sources:The Economist; MediKeeper; SQ Leadership; Winner-mind
…
Informal Economies
Low participation,
Lack of knowledge
Lack of interest
Social Security, notwithstanding its deficiencies and challenges, is a PRIVILEGE of a lucky few
A LITTLE PROGRESS IN MOST COUNTRIES VIA STANDARD LEVERS
Sources: The Melbourne Mercer Global Pension Index (MMGPI) 2017; Imgflip
CONTRIBUTIONSRETIREMENT AGE BENEFITS INVESTMENT RETURNS
But:
Still woefully insufficient vs scale of crisis
Strong public, and hence legislative, resistance to any changes
We need better ideas that are easier to understand and implement
CHANGES IN RETIREMENT AGE
Sources:Finish Centre for Pensions; Daykin, Chris. Workshop on pensions and social security. Actuarial Association of Europe; PIWG
Sources:www.canada.ca,;The Guardian; Miles for Retirement; Pensumo, Kawaguchi
CHANGES IN CONTRIBUTIONS
Sources:www.actuaries.org/cancun2017
CHANGES IN BENEFITS
LOOKING FOR BETTER RETURNS
Sources:Sibson Consultants; VITALIS; www.reversemortgage.org
Diversified investment strategies: Stocks & bonds picking + Real Estate (REIT’s) + Private Equity + Passive investments (low cost ETF’s) + …
Stochastic optimal asset allocation: • Total Return and Asset Liability Models (to match assets with expected future liabilities)• Ruin Probability Models (being defined as “ruin” the probability of the portfolio of surpassing a
minimum fund level)• DB with better returns that DC plans (401k) due to different asset allocation. In 401k plans
participants choose their asset allocation, being generally more conservative
Reverse Mortgages:Loan available to homeowners, 60 years or older, that allows them to convert part of the equity in their homes into cash. Available now in Mexico, Germany, Belgium, Spain, US, Canada, Australia… (the PIWG is about to release a paper on “Interaction between Pensions and Housing”).
Returns net of fees:• Very high DC administrators record-keeping fees leads to a lower net of fee return • DC plans (401k) with lower net returns due to fees charges• Urges to transparency regulations such as MiFID II in Europe
FROM A 3-PILLAR TO A MULTI-PILLAR SYSTEM
Sources: Miles for Retirement, Wikipedia
1976
30 years later
2019
SCALE OF THE GLOBAL CRISIS IN PENSION
FUNDING
CAUSES AND THE ROLE OF CHANGING DEMOGRAPHICS
SOME ACTUARIAL CREATIVE IDEAS TO ADDRESS THE
CRISIS
OVERVIEW
NOTE: The following compilation of proposals are not intended to be presented as recommendations. We do not intend to make a judgement of what has been right orwrong, and rather expose all the proposals as solutions that are being implemented orenvisioned around the world and that have been exposed in PBSS Congresses and Colloquia.
Compilation of proposals to help solve the crisis
o Behavioral economics working for pensions:• Automatic enrollment in Brazil• Planning objectives of Canadian retirees• Saving through consumption in Mexico• Japanese version of “Defined Ambition”
o Modelling and valuating pension schemes:• Changes in life expectancy in Finland• Pensions under ageing societies• Pensions and low interest rates policy• The Chinese Pay-As-You-Go System
o De-risking:• Risk-sharing and risk-transfer arrangements• Stochastic optimal control
o Responsible and sustainable investments:• Investment of Pension Funds in Reforestation
and Forestry Projects: Ecuatorian proposal• Holographic investments
o Reforms to Social Security and Pensions:• Impact of 2016 pension legislative revision in Japan• Forging a new, solid social security system for
Greece• 20 years after the Social Security Law Reform in
Mexico
o Workshop on pensions and social security (jointly withthe Actuarial Association of Europe)
o New formats of employment (AI, millenials, robots…)
+ New ideas from this Colloquium:
o Notional DC system based on risk sharingo Goals-based investment framework for DC fundso Pension systems as a variable of migrating decisionso Economic capital, markets and pensions
HELPING MIDDLE CLASS SAVING FOR RETIREMENT(in Canada)
Sources: Social Security Committee, IAA
Addressing pension undersaving for the middle class
o Issue: 60% of employees are not covered by occupational pension plans
o In 2016, it was estimated that 1.1M families close to retirement did not have sufficient savings
o Solution: modest and fully-funded enhancement of the employment related DB public second pillar
o Additional contributions are invested on the financial market
o Benefits accrue gradually over 40 years.
AUTOMATIC BALANCING MECHANISM(idea from Finland)
Life expectancy coefficient and automatic adjustments in retirement age
o An automatic balancing mechanism called the life expectancy coefficient was introduced in the reform of 2005 to combat increasing pension expenditure.
o If life expectancy increases, monthly pensions are decreased and if life expectancy decreases, monthly pensions are increased.
o In 2017, another reform was made: increasing the effective retirement age and lengthen working careers by introducing also a link of the general retirement age to life expectancy.
o Then, link between life expectancy and the general retirement age was also taken into account in the formula of life expectancy coefficient. This improves the adequacy of the future pensions and increases the wage sum of the economy.
Sources: http://actuaries.org/cancun2017/Papers/27.%20Mikko%20Sankala_Paper.pdf
SAVING FOR RETIREMENT VIA CONSUMPTION(idea from Mexico)
Sources: Saving for Tomorrow, tomorrow; Miles for Retirement
Miles for Retirement
o The general idea is “to flip behavioral challenges into behavioral solutions”
o Needs nothing extra to the already existing financial network that connects providers of financial services, retailers and consumers, only that in this case the network would help consumers to save for their retirement as they spend
o From the “Three Pillar System” to the “Multi-Pillar System”
SUSTAINABILITY FACTOR(idea from Germany)
Adverse development of old-age dependency ratio is offset by an adjustment to accruing pensions
Sustainability factor = % change to old-age dependency ratio
# of pensioners in year x-2 # of active contributors in year x-1= X
# of active contributors in year x-2 # of pensioners in year x-1
Sources: Daykin, Chris. Workshop on pensions and social security. Actuarial Association of Europe
SEQUENCING DC AND SOCIAL SECURITY (idea from Japan)
Vertical Combination
o Require that first “X” years of retirement be funded from JIDC/JCDC (akin to US IRA/401k) .Delay start of social securityto year “X+1”
o Some will die first, all will receive “X” years fewer benefits, hence social security benefit level can be sustained even as longevity and dependency ratio increase
o Individuals have a finite known horizon to save for (certain annuity vs lifetime annuity)
o This idea might be taken as a solution for individual beneficiaries. It is merely a proposal and not the common understanding in Japan.
Sources: http://www.actuaries.org/oslo2015/papers/PBSS-Kawaguchi.pdf
Sources: Ibarra, Rodrigo. Investment of Pension Funds in Reforestation and Forestry Projects: The Ecuatorian Case. PBSS Cancun Colloquium 2017
INVESTING PENSION FUNDS IN SUSTAINABLE PROJECTS(idea from Ecuador)
Reforestation and forestry
o Considering current social security problems, the IESS Pension Fund considers the possibility of mitigating them through reforestation and forestry investment programs
o The project is based on financing plantations of Teak, Bamboo and Pine Radiata
o In this way, governments are prevented from using liquid IESS funds for unrelated purposes.
o Jobs would be generated, not only in the plantation and reforestation, but also in different industries: timber export, furniture, handicrafts, among others.
Combination of reforms
o Raise retirement age
o Mandatory private pension plans
o Introduce auto-enrolment
o Abolish Second State Pension
o Replace by higher flat-rate pension
o Remove the need for means-tested pension credit
Sources: Daykin, Chris. Workshop on pensions and social security. Actuarial Association of Europe
TAKING THE BEST OF EACH(in UK)
OVERCOMING POLITICAL INERTIA(in Greece)
Sources: http://actuaries.org/cancun2017/Papers/37.%20Georgios%20Symeonidis_Paper.pdf; Wikipedia
Raising consensus in Greece
o The government used promises on “the best indexation on pensions” to win elections for many decades. Politicians that referred to lower pensions were ostracized.
o After 2010 and the Greek debt crisis, pensioners still voted for the only party that promised pension increases in 2015.
o As the system in Greece is PAYG, DB , three academics made a new proposal: the NTS (Nektarios, Tinios, Symeonidis) proposal.
o Raising consensus with main political parties of the opposition in Greece, main stakeholders, the Hellenic Actuarial Association, press and media, London School of Economics.
OVERCOMING POLITICAL INERTIA(in Australia)
Sources: Overview of key regulatory reforms in superannuation from the Royal Commission Australian Government Paper; https://www.abc.net.au/news/2018-09-05/scott-morrison-scraps-plans-to-raise-pension-age-to-70/10202678; Wikipedia
Pensions agenda vs current regulation in Australia
o There is a large reform agenda in Australia, at the moment most notably to establish a retirement income framework (“Comprehensive Income Product for Retirement”, CIPR).
o Internal changes in the government lead to lack of continuity of the reforms and proposals. New Minister intends to dump back the plan of raising the pension age to 70 years old as former treasurer stated.
o Ultimately, any changes need to pass through the political process, which brings whole new obstacles.
Become a PBSS member!www.actuaries.org→ Sections→ PBSS → Join Section
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WHERE TO LEARN MORE?
All this for 50 CAD per year!
• Allianz. Pension Sustainability Index 2016. • Daykin, Chris. Workshop on pensions and social security. Actuarial Association of Europe. • Financial Services Royal Comission. Australian Government. Overview of key regulatory reforms in superannuation, 2018• Gohdes, Alf. Low returns and the impact on an individual’s retirement provision, 2018• Haodong. Live longer, work longer? Evidence from Sweden’s Ageing Population. Lund University, 2016• Kawaguchi. 2016 Expected reform of Japanese DC Code and its implications for the future DC prevalence in Japan as
contrasted to US 401k, 2017• Natixis Investment Managers. 2017 Global Retirement Index. An in-depth assessment of retirement security in the
developed world• Symeonidis. Forging a new, solid security system for Greece: The NTS Proposal, 2017• Pennanen, Salas, Hernández. Stochastic optimization of asset class allocation based on ruin probability, 2017• Salas, Hernández, López, Galindo. Miles for Retirement: Saving through consumption, 2017• Sankala, Reipas. Adapting to changes in life expectancy in the Finnish earnings-related pension scheme, 2017• Sibson. Why every retirement committee needs a custom charter, 2014• WEF. 5 Things you need to know about the global pension crisis, 2016• WEF. We will live to 100, 2017
• ABC.net News: https://www.abc.net.au/news/2018-09-05/scott-morrison-scraps-plans-to-raise-pension-age-to-70/10202678
• ILO: https://www.ilo.org/global/publications/books/WCMS_604882/lang--en/index.htm• International Actuarial Association (IAA): www.actuaries.org• MMGPI: https://www.globalpensionindex.com/• The World Bank: www.data.worldbank.org• Miles for Retirement: www.millasparaelretiro.com.mx• Pensumo: www.pensumo.com• Saving for tomorrow, tomorrow: https://www.ted.com/talks/shlomo_benartzi_saving_more_tomorrow
REFERENCES
www.actuaries.org/iaa/IAA/Sections/[email protected]