Pension Reform and Complementary Pension Funds in Brazil

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Pension Reform and Complementary Pension Funds in Brazil Colin Pugh, FCIA Funded Civil Service Pension Programs in Canada and the Netherlands Brasilia October 2003

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Pension Reform and Complementary Pension Funds in Brazil. Funded Civil Service Pension Programs in Canada and the Netherlands. Colin Pugh, FCIA. Brasilia October 2003. Introduction. Description and Analysis of Two Funded Defined Benefit Pension Plans for Civil Servants. Ontario. - PowerPoint PPT Presentation

Transcript of Pension Reform and Complementary Pension Funds in Brazil

Page 1: Pension Reform and Complementary Pension Funds in Brazil

Pension Reform and Complementary Pension

Funds in Brazil

Colin Pugh, FCIA

Funded Civil Service Pension Programs in Canada and the Netherlands

BrasiliaOctober 2003

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Introduction

Description and Analysis of TwoFunded

Defined BenefitPension Plans for Civil Servants.

Ontario Netherlands

OMERS ABP

INTRO

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OMERS - Background

Established in 1962.

A funded, defined benefit pension plan.For employees of: municipal governments; school boards; libraries; police and fire departments; children’s aid societies; and other local agencies.

HISTORY

OMERS

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Mission (governance issue no.1 for PIAC)

To provide fully funded pension benefits at reasonable and stable contribution rates.

To invest funds prudently, for long-term growth at acceptable risk levels.

To distribute timely and accurate information to employees and employers.

To provide high quality service to all stakeholders.

MISSION

OMERS

PIAC: Pension Investment Association of Canada

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Current membership

209,787 active members (municipalities=48%; school boards=25%; others = 27%)

89,157 retired members 906 employers

Note (applicable to all slides): all statistics at 31 December 2002 all amounts in Canadian dollars (C$1.00 = US$0.72)

MEMBERS

OMERS

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The Pension Plan

Normal retirement at age 65. Early retirement at age 55 (with 30 years’ service) 2% x Service x final 5-year average earnings

= 70% of final-average earnings after 35 years Pension indexation: 100% of CPI (max. 6%pa) Equal employee and employer contributions 2004 contribution rate? = 8.8% EE + 8.8% ER

THE PLAN

OMERS

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The Pension Fund

Third largest in Canada. Market value of assets = $29,952,000,000 Smoothed market value = $35,475,000,000 Investment objective = inflation + 4.25%

Actuarial valuation method: Projected Unit Credit

THE FUND

OMERS

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Progression of Fund ($ millions)

05,000

10,00015,00020,00025,00030,00035,00040,000

1993 1995 1997 1999 2001

OMERS

ASSETS

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Investment Returns (1993-2002)

-10.00%-5.00%0.00%5.00%

10.00%15.00%20.00%25.00%30.00%

Actual returns Investment objectiveOMERS

RETURNS

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Funded Positions (two tests)

Going concern valuation

Assets at smoothed market value

Actuarial liabilities(plan continuance)

FundedRatio

31 December 2002 $35,548 $33,120 107%

31 December 2001 $35,475 $31,019 114%

31 December 2000 $33,954 $28,150 121%

Plan discontinuance valuation

Assets at Market value

Actuarial liabilities (plan discontinuance)

Funded ratio

31 December 2002 $29,952 $36,980 81%

31 December 2001 $33,681 $34,866 97%

OMERS

FUNDEDRATIOS

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Underfunding and Overfunding

Underfunding – equal increases in contribution rates (employee and employer)

Overfunding – equal decreases in contribution rates

Contribution holidays – zero contributions from both employees and employers

Surplus withdrawals – cash shared equally

COSTSHARING

OMERS

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Asset allocations: strategic & tactical

Asset type Minimum Target Maximum

Equities 55% 60% 65%

Fixed income 20% 25% 30%

Real estate 10% 12.5% 15%

Real return bonds Nil 2.5% 5%

Cash Nil Nil Nil

OMERS

ASSETMIX

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Current Asset Mix

Equities Fixed incomeReal estate Real return bonds

Canada USA Europe OtherASSET

MIX

OMERS

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Management of the Fund

13 member board appointed by Ontario government 6 employee representatives 6 employer representatives 1 government representative 4 standing committees: executive, investment,

pension and management 4 sub-committees: governance, audit, appeals and

compensation

MGMT

OMERS

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Asset Management

In-house management for 95% of Canadian stock portfolio and large proportion of US investments.

More than 80 in-house investment professionals Otherwise, external management (e.g. Europe) Increased emphasis on “alternative assets”

(e.g. infrastructure projects and private equity) Ever-increasing use of derivatives.

ASSETMGMT

OMERS

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Corporate Governance - Internal

CEO is responsible for day-to-day management. CEO cannot be a member of the Board. Board appoints CEO, auditor, custodian, actuary. In 2002, audit and non-audit functions were separated. Mandatory orientation program for new board members

and ongoing education for all board members. Board seeks advice from outside experts. Independent consultants evaluate Board’s performance;

governance committee implements recommendations.

GOV 1

OMERS

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Corporate Governance - Communication

Board holds 2 meetings per year with plan members.

Maintains contact with plan participants through consultation with stakeholder groups on key issues.

Other communications through annual report, website, regular newsletters, presentations and correspondence.

Members are provided with comprehensive benefit statements on a regular basis.

GOV 2

OMERS

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Corporate Governance - Employees

All employees in the investment division are subject to: Code of Ethics; Standards of Professional Conduct; Conflict of Interest Policy.

GOV 3

OMERS

“Failure of an individual to maintain this Code of Ethicsand Standards of Professional Conduct shall result inreprimand, up to and including dismissal.”

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Corporate Governance - external

Details of policy in Proxy Voting Guidelines Social responsible investments – require transparent

communication of companies’ policies/procedures “Links” to OECD and ICGN websites.

SHARE VOTING

OMERS “We vote the shares we beneficially own on behalf of plan members on the basis of their

best financial interests”

ICGN: International Corporate Governance Network

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Proxy Voting – Basic Principles

Stock options must be expensed Strict standards on management stock options “Majority” of board directors from outside All directors must own shares of the company Outside directors must chair all key committees Audit committee responsible for audit function

and for retaining audit firms Separation of Board Chair from CEO

PROXY VOTING

OMERS

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Votes against Management

North America (2001-02) Motions Rejected

Inside directors on committees 360 100%

Audit-related issues 17 71%

Option programs, including repricing 647 71%

Takeover protection clauses 62 92%

Social, ethical and environmental 163 47%

Other issues 1456 22%

OMERS

PROXIES

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In Summary

A well organized and effectively runpension plan and pension fund

providinggenerous benefits

on a cost-effective basis.

SUMMARY

OMERS

www.omers.com

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Ontario NetherlandsOMERS

ABP

PART 2

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ABP - Background

Established in 1922.

A funded, defined benefit pension plan.For employees of: central government; provincial and municipal governments; police and judiciary; defense; water boards and other utilities; school boards and culture and science agencies ABP and its subsidiaries.

ABP

HISTORY

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Current membership

1,065,677 active participants (including 7,677 employees of ABP and associated companies)

692,000 former participants 42,000 early retirement pensions/salary continuation 330,000 in receipt of retirement pensions 331,000 in receipt of survivor, disability and flexible

early retirement pensions.

Note (applicable to all slides): all statistics at 31 December 2002 all amounts are in euro (€1.00 = $1.10-$1.14)

ABP

MEMBERS

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The Pension Plan

Normal retirement at age 65. Early retirement at age 55. 1.75% x Service x (almost) final salary

= 70% of final salary after 40 years Pension indexation: under review. Employee pay 25% of the overall cost. 2003 contribution rates = 3.8% EE + 11.4% ER Social security integration: salary below the franchise is ignored for benefits and contributions.

ABP

THE PLAN

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The Pension Fund

Largest or second largest fund in the World. Market value of assets = €135,564,000,000 Smoothed market value: not used. Investment objective = long bond yields + 2%pa.

Actuarial valuation methods: Current unit credit (discount rate of 4%pa) Current unit credit (current real interest rate)No explicit allowance for salary increases, but…No allowance for employee turnover, etc…

ABP

THE FUND

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Progression of Fund (€ millions)

125,000

130,000

135,000

140,000

145,000

150,000

155,000

1998 1999 2000 2001 2002

ASSETS

ABP

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Investment returns (1998-2002)

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

Total return Bonds Equities

RETURNS

ABP

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Funded Positions (two tests)

Statutoryvaluation

Assets atmarket value

Actuarial liabilities(4% discount rate)

FundedRatio

31 December 2002 €135,564 €131,680 103%

31 December 2001 €147,334 €121,039 122%

31 December 2000 €150,302 €112,347 134%

Real interest rate valuation

Assets at market value

Fully-indexedliabilities

Funded ratio

31 December 2002 €135,564 €157,621 86%

31 December 2001 €147,334 €131,083 112%

31 December 2000 €150,302 €121,702 124%

FUNDEDRATIOS

ABP

Funding objective = 140% of fully-indexed liabilities

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Asset allocations: strategic & actual

Asset type TargetActual

end-2002Actual

end-2001

Equities 40% 30% 36%

Bonds 40% 54% 51%

Real estate and alternative inv’ts 20% 16% 13%

ASSETMIX

ABP

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Current Asset Mix

4%

31% 43%

22%65%

Other USAEuropean bonds European equities…

ABP

ASSETMIX

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Management of the Fund

Board of Governors (chair + 5 employer representatives+ 5 employee representatives).

Board of Directors: day-to-day responsibilities (3 members). Investment committee advising board of directors. Advisory Committee (36 employer representatives and 36

employee representatives): now to be split into participants’ council and employers’ council?

3,000 employees (including 365 employees at ABP Investments – Netherlands and New York).

In-house international staff of specialist managers (at ABP Investments) manages 85% of fund assets.

ABP

MGMT

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ABP subsidiaries and affiliates

Loyalis: sells income-replacement products, provides financial advice and services related to disability prevention and re-integration.

Obvion (joint venture): residential mortgages. ABP Investments: in-house asset management. NIB Capital: asset management. State Street Global Alliance (joint venture): asset

management, focusing on creating high added value and pursuing innovative investment strategies.

ABP

OTHER

www.abp.nl

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Governance

As a shareholder: “ABP will base its corporate governance policy on the principles established by ICGN and OECD.”

Setting Strategic Investment Plan: heavy emphasison Asset Liability Modeling (ALM) studies.

Other internal considerations: clear delineation of roles; checks and balances; reasoned behavior; prudent investment process; compliance monitoring; use of experts and third parties → “Code of Conduct”.

Basic objective: “first quartile customer service (as measured by CEM) on a cost-effective basis”.

ABP

GOV

CEM: Cost Effective Measurement (Toronto-based research bureau)

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Conclusions and Questions

Two well-structured pension funds, with many common features and some distinct features.

OMERS – useful lessons on “governance”. ABP – emphasis on ALM and “prudent expert”. Pension regulation – heavy in both countries, but

slightly different emphasis (e.g. funding rules).

SUMMARY

Questions?

[email protected]