Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World...
-
Upload
rudolf-harper -
Category
Documents
-
view
214 -
download
2
Transcript of Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World...
![Page 1: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/1.jpg)
Pension Funds and Insurance Companies:Challenges and Lessons
Dimitri Vittas
Senior Adviser
World Bank
December 2003
![Page 2: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/2.jpg)
Pension Funds and Insurance Companies
NBFIs are a mixed bag of institutions. Pension funds and insurance companies are the most
important:– in terms of mobilization of long-term resources– potential impact on capital market development– acting as countervailing force to commercial banks.
They can help finance factoring and leasing companies and also promote housing finance and equity and debt market development.
![Page 3: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/3.jpg)
Development and Regulatory Challenges
They take a long time to develop. Magic of contractual saving and interest compounding. They start slow but they build large assets over time. Their success depends on stable macroeconomic
policies, low inflation, fiscal balance. They require prudent management and the offer of
affordable benefits. They require stable banking system, robust regulatory
framework and effective supervision.
![Page 4: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/4.jpg)
Private versus Public Management
Public sector ownership has caused poor performance in many developing countries.
Pervasive controls on insurance companies, covering premiums, investments, benefits, and reinsurance, have impeded the emergence of strong, efficient and well capitalized companies.
Public management of the assets of pension and provident funds, including social security institutions, has produced highly negative real returns.
Use of contractual savings as a captive source of funding large government deficits.
![Page 5: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/5.jpg)
Reform Agenda in Africa Downsize public pillar. Improve assets management of public pension funds by
building strong fund governance. Appoint executive board of trustees with clear mandate
and safeguards against political interference. Create room for private pension funds and promote
private sector presence in insurance sector. Eliminate captivity of contractual savings, encourage
modern efficient assets management, and allow investment overseas.
Build robust regulatory and supervisory capacity.
![Page 6: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/6.jpg)
Build Efficient Institutions The key to the success of the reform agenda is the
building of efficient institutions. Pension systems and insurance business are highly
complex. They cover long-term contracts and are faced with considerable risk and uncertainty. They need to be based on public trust.
Building efficient institutions that are able to adapt and respond to emerging new challenges is very important.
Mauritius offers a very good example of the dynamic and durable benefits of building efficient institutions in both pensions and insurance.
![Page 7: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/7.jpg)
Mauritius Pension System Multi-pillar structure. Both public and private. Basic Retirement Pensions. National Pension Funds. National Saving Funds. Occupational Pension Funds. Life Insurance Companies. Housing Assets. The system is generally well developed and managed.
![Page 8: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/8.jpg)
Large Contractual Savings Large accumulation of financial assets. NPF 17% of GDP. NSF 2%. Insurance companies 18%. Occupational pension funds 11%. Total 48% of GDP. However, double counting of 7%. Net assets: 54 billion MUR or 41% of GDP. Large potential impact on financial sector development,
economic growth and security of long-term benefits.
![Page 9: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/9.jpg)
Basic Retirement Pension Offers 20% of average wage to all elderly (more to the
very old). Current cost is low at 3% of GDP, but on unchanged
policies likely to grow in the future and reach 6% in 2020 and 11% in 2050.
Need to contain its future costs because of aging. Gradually raise retirement age. Offer means-tested benefits, either affluence test
(exclude those above specified level) or subsistence test (include only those below) or a combination of tests with gradual claw backs.
![Page 10: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/10.jpg)
National Pensions Fund Well run system: high coverage (60%); low contribution
rate (9%); low operating costs (39 bp); high returns (11.72%) in 2001.
But based on opaque points system. And failure to attain promised replacement rate of
33.3%. Possible move to NDC scheme. Appoint independent Board of Trustees and encourage
professional assets management.
![Page 11: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/11.jpg)
Occupational Pension Funds Several types and many schemes. Total coverage
between 80,000 and 100,000 employees. Schemes for civil servants and employees of local
government. Over 100 schemes for employees of statutory bodies. Over 1000 schemes for employees of private sector
firms. Need to reform civil service schemes but private funds
well managed.
![Page 12: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/12.jpg)
Performance of Occupational Pension Funds
Good overall performance with some exceptions. Generous benefits raising questions about long-term
affordability. High assets diversification but underweight in
government bonds and corporate debentures. Illiquid investments in equities and real estates. Large role in housing loans to members.
Low costs and high returns.
![Page 13: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/13.jpg)
Regulation and Supervision of OPFs
Reasonable rules on vesting and portability. Compliance of sponsors with actuarial and accounting
standards, especially MAS 25 (IAS 19). Though no requirement to hire qualified auditors and
publish audited accounts. Fragmented regulatory framework. Lack of supervision and transparency.
![Page 14: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/14.jpg)
Need for New Regulatory Framework
Consolidate legal framework into new, modern act. Emphasize:
– fund governance;
– appropriate funding levels;
– rules on vesting and portability;
– assets segregation and safe custody;
– assets diversification (with limits on self-investment);
– market valuations;
– actuarial, accounting and auditing standards; and
– “whistle blowing” duties.
![Page 15: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/15.jpg)
Need for Effective Supervision Strengthen supervision under FSC. Improve transparency, require quarterly financial
reporting in electronic form. Protect workers’ rights. Reform NPF. Bring under FSC. Provide choice to employers and employees.
![Page 16: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/16.jpg)
Development of Insurance Sector Free from pervasive premiums, products , investments &
reinsurance controls. Reliance on solvency monitoring. Use of international accounting & actuarial standards. General insurance makes good use of reinsurance. Motor insurance largest branch in general business. Reasonable loss ratios and claims settlement. Life insurance is well developed, benefiting from tax
incentives as well as pension funds and housing finance.
![Page 17: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/17.jpg)
Investments of Insurance Companies
Diversified portfolio. Underweight in government bonds but strong presence in
housing loans and corporate bonds and equities. Strong demand for long duration assets to cope with
reinvestment risk. Limited investments overseas despite high ceiling.
![Page 18: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/18.jpg)
Insurance Regulation and Supervision
Marked improvement in recent years. Need for greater emphasis on risk-based supervision and
risk management. Most companies are well managed but some small
companies appear weak with low earnings, high costs and slow claims processing.
Need to develop early warning systems and regulatory ladders to take early action against weak companies.
Growing reliance on actuaries and auditors to identify problems.
![Page 19: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/19.jpg)
Main Lessons for Africa Development of strong contractual savings sector is
feasible in a small economy. Need for economic and political stability. Respect of property rights. Good mix of public and private provisions. Robust regulatory framework and effective supervision. Focus on building efficient institutions that are able to
respond to emerging challenges in a dynamic environment.
![Page 20: Pension Funds and Insurance Companies: Challenges and Lessons Dimitri Vittas Senior Adviser World Bank December 2003.](https://reader036.fdocuments.net/reader036/viewer/2022072016/56649ee65503460f94bf6677/html5/thumbnails/20.jpg)
Implications for Capital Markets
Develop long-term government bonds. Avoid roll over risk and offer long duration assets to
institutional investors. Promote transparency of securities markets and efficient
trading, clearing and settlement facilities. Support financing of housing through direct loans,
mortgage bonds or mortgage securitization. Develop professional expertise in accounting and
auditing, actuarial science, assets management and other areas.