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Business Development
Global Pensions
2005
Pension models around the world
Global pensions is proud to present you a summary of various
pension models around the world. The document is split into three
parts:
I The World Bank pension model that is a framework to discuss the
different pension systems in the world
II A detailed overview of pension systems of countries that are
considered to be role models across the world. These systems can
provide best practices for countries that are considering reforming their
pension system.
III Main characteristics of pension systems in countries that reforms have
been recently launched, currently under reform or where changes are
expected.
This overview is based on the World Bank model.
We realize the study is not yet comprehensive and would appreciate
any additional comments or remarks. It will be further improved,
however it can be used as a working document.
2
Table of contents
I The World Bank model
Leading role pension models compared to the World Bank model:
II
• Chile I. Country pension system summary
• US II. System characteristics
• Poland** III. Investment guideline
• Netherlands IV. Regulation and supervision
• UK V. Macro economic impact *
• Sweden * VI. System pros and cons**
• Australia
III Main characteristics of other country’s pension systems
• Europe • Latin America • Asia
• Hungary • Mexico • China
• Czech Republic • Brazil • Korea
• Peru
• Slovak Republic
• Romania
• Greece
• Ukraine
• Russia
•* Only applicable to countries recently reformed
•**Only applicable to *marked countries 3
The World Bank model (classic definition)
Publicly funded Employer sponsored Additional voluntary
schemes, social schemes or private arrangements
security schemes mandatory programs
I II III
STATE MANDATORY VOLUNTARY
• Government is responsible for adequate safety net via Pillar I
• Private sector plays key role in building Pillars II and III
• Growth will mainly be in Pillars II and III
• Public/private partnership is essential
4
Pensions as economic growth engine
Advantages of multi pillar-system: I II III
• Proper financing of old age provision STATE MANDATORY VOLUNTARY
• Boosts economic growth
• Contributions are invested back into the economy
• Accelerated development of local capital markets
• Shared responsibility by government, employers and individuals
• Strongly recommended
• World Bank / OECD
• European Union / ILO
• Tax support
• EET
5
A new perspective on World Bank pension model
• New definition on pension model, by World Bank (according to the study in
February 2005
Zero I II III IV
Pillars
Social State Occupational or Occupational or Individual, informal
pension personal personal financial and non-
(Mandatory) (Voluntary) financial
Characte Basic social Public pension plan, Occupational or Occupational or Informal support (family),
ristics assistance, defined benefit or personal pension personal pension other formal social
universal or notional defined plans (fully funded plans (partially or fully program (health care),
means tested contribution defined benefit or funded defined benefit other individual financial
Also called defined contribution) or fully funded defined or non-financial assets
“demogrant” contribution) (homeowner)
• Social pension functions as basic income re-distribution, extremely important for lifetime
poor individuals as well as informal sector (income is not taxed)
• Role of private companies
• Only active in Pillar I, II & III
• Pillar I: institutional asset management (potentially)
• Pillar II: pension fund management
• Pillar III: same as pillar II
Please note this new pension model is for reference only. In the remaining of the document, only
the classic 3 pillars pension model will be discussed
6
Table of contents
I The World Bank model
Leading role pension models compared to the World Bank model:
II
• Chile I. Country pension system summary
• US II. System characteristics
• Poland** III. Investment guideline
• Netherlands IV. Regulation and supervision
• UK V. Macro economic impact *
• Sweden VI. System pros and cons**
• Australia
III Main characteristics of other country’s pension systems
• Europe • Latin America • Asia
• Hungary • Mexico • China
• Czech Republic • Brazil • Korea
• Peru
• Slovak Republic
• Romania
• Greece
• Ukraine
• Russia
•* Only applicable to countries recently reformed
•**Only applicable to *marked countries 7
CHILE
I. Chile Pension System compared to World Bank (summary)
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
CHILE VOLUNTARY
• Old State System (PAYG) • Private Pension System (AFPs) • Self employed and other groups
• Compulsory for the Armed Forces • Compulsory for new labor force • Voluntary retirement savings
and old labor force without Past (since 1.5.81): DC plan, employee‟s plans/products (APVs)
Service Bonus. contribute 10%, Past Service Bonus • Government subsidizes through
Pension • Contribution levels higher than new paid by the government at retirement tax reduction
age (if applicable since PSB being
private system
System phased out)
• Optional for self-employed and old
labor force: Past Service Bonus is
still paid to the old labor force at
retirement age
• Not applicable, pillar phasing out • Although fully funded, not sufficient • Lack of savings culture / high cash
mandatory coverage culture
Major • „Unnatural fit”: private companies with • Lack of tax incentives
profit incentive managing system that
Issues is mandatory by gov‟t (public interest)
• Mandatory disability coverage
burdens AFP profitability
• Not applicable, pillar phasing out • Increase the coverage and the • Introduce savings alternatives
investment range abroad (401Ks, APVs)
Recom • Mandatory contributions for self- • Increase awareness and
menda employed information available regarding
• Separate disability and pensions the private system
tions coverage
8
CHILE
II. System characteristics: reform in Chile
• On November 13th, 1980 the New Pension System was established by law.
• The New Pension System was launched in May 1981, replacing the old one (PAYG).
• Main features of the new system:
• Compulsory for the new labor force and optional change for the old labor force.
• The government assumes capitalization of contributions made in the old system through the
issuance of “Recognition Bonds”.
• Many institutions, all private, manage pension funds, and compete on price, service levels and
investment performance.
• Contribution-based funding of pensions, but complemented by a pay-as-you-go funding for
disability and survival pensions.
• Freedom of choice. Freedom to change institutions.
• Same requirements for everyone. Benefits according to contributions paid and fund yield.
• Government sets rules, enforces, guarantees minimum pension and return on funds.
• During the first month, 11 competitors joined the industry
• At the end of 1981, there were 12 competitors
• There are 3 types of competitors:
- National equity
- National - Foreign equity
- Trade union equity
9
CHILE
II. System characteristics: reform in Chile
Simultaneously, other legal reforms were required for the success of the pension system
reform:
1. Capital Market - new legal framework for:
• Securities and financial market
• Stock companies
• Superintendence of Securities and Insurance
• Custody of titles and securities
• Introduction of fixed income securities able to compensate for inflation
2. Investment Alternatives:
• State-issued securities for pension funds & insurance companies
• Pension funds were entitled to purchase fixed income instruments issued by banks and
financial institutions and other private issuers
• Pension funds were authorized to invest in stocks (1986)
• Pension funds were authorized to invest abroad (1994)
3. Level of risk - prohibit investment in certain stocks and enforce diversification:
• Issuer
• Types of instruments
• Terms
• Risk level and categories
• A Risk Assessment Commission was established
10
CHILE
II. System characteristics
Pillar I
• Old State System (PAYG)
• Compulsory for the Armed Forces and old labor force without Past
Service Bonus.
• Contribution levels higher than new private system
Key issues
• Not applicable, pillar phasing out
11
CHILE
II. System characteristics
Pillar II
• Mandatory pension funds (substituting Pillar I), which are privately managed and invested. AFPs in
charge of underwriting and investing.
• Compulsory for new labor force (from 1.5.81): DC plan, employee‟s contribute 10%, Past
Service Bonus paid by the government at retirement age (if applicable since PSB being phased
out)
• Optional for self-employed and old labor force: Past Service Bonus is still paid to old labor force
at retirement age
• Also coverage for Disability and Survivors Pensions
• LEGAL RETIREMENT:
• 65 years for men and 60 years for women
• The pension amount is calculated based on:
• Accumulated Savings: Pension Fund + Past Service Bonus + Voluntary Savings Acc’t
• Life expectancy of the worker and of his family group
• EARLY RETIREMENT:
• 110% Legal Minimum Pension
• 50% Inflation-adjusted income of last 10 years (August 2004, > 70%)
Key issues
• Although fully funded, not sufficient mandatory coverage
• „Unnatural fit”: private companies with profit incentive managing system that is mandatory by
government (public interest)
• Mandatory disability coverage burdens AFP profitability
12
CHILE
II. System characteristics
Pillar III
• Self employed and other groups
• Voluntary retirement savings plans/products (APVs). Government
subsidizes through tax reduction
Key issues
• Lack of savings culture / high cash culture
• Lack of tax incentives
13
CHILE
III. Investment guidelines for the Pension Funds (AFPs)
• The AFPs must invest the pension funds‟ resources as established by law
(type of instruments and investment margins are regulated), and guarantee a
minimum profitability and security for the participants
• AFPs are stock companies with a target to manage 5 pension funds with
different risk-return combinations (table 1)
• In order to invest their obligatory savings, affiliates can freely choose
among the different five funds, except: (table 2)
• Participants with less than 10 years until
table 1
retirement (at legal age) can not invest in
Fund A Men: till 35 Men: 36-55 Men: f rom 56
Women: till 35 Women: 36-50 Women:f rom 51 Pensioners
• Pensioners can not choose Funds A and B
A
• Default allocation (when no choice made by the
participant) will be as in table 3 B
AFP’s can not: C
• Buy low liquidity assets D
• Manage other portfolios E
• Act or fail to act in a manner required by law table 2
• In general they cannot use, for themselves or on Men: till 35 Men: 36-55 Men: f rom 56
a third party‟s behalf, information about Women: till 35 Women: 36-50 Women:f rom 51 Pensioners
investments of the pension funds managed by A
them, nor can they provide such information to B
people other than those who participate in the
C
investment decision-making process
D
E
table 3
14
CHILE
IV. Regulation and Supervision (1/2)
REGULATION:
Requirements of the pension funds:
• Minimum capital amounting to US $123,200 must be funded, subscribed and paid at the moment
pension fund is granted a public deed of company formation
• Shareholders‟ equity must match some minimum capital requirement. This requirement depends on
the number of members and ranges between US $123,200 to US $492,800. In practice, the capital
and shareholders‟ equity are much higher than the minimum amounts required.
• Governmental authority to operate, which is granted by the AFP Superintendence (Supervisory body)
Responsibilities
• Enroll new workers and accept members transferred from other AFP‟s
• Collect monthly contributions from employers
• Legally enforce payment of unpaid contributions
• Identify/keep record of contributions of each member
• Credit contributions to each member‟s individual investment-based account
• Invest pension fund assets
• Inform members every four months - and upon request- about their individual account status and
about commissions charged
15
CHILE
IV. Regulation and Supervision (2/2)
SUPERVISION:
• The AFP Superintendence supervises and controls the Fund Administration Companies (AFPs) as
established by law
• Functions:
• Authorize AFP formation and keep record of them
• Oversee AFP‟s operations and the granting of benefits and services given to its members
• Oversee pension funds‟ investment of assets
• Set and provide interpretation of rules and regulations for the pension system
• Advise the executive power (via the Labor and Social Security Ministry) on pension -related
issues and propose legal reforms leading to system enhancement
• Apply sanctions upon AFP‟s which may range from:
- Censure (reprimand)
- Fines amounting up to UF 15,000 (US $ 370,000)
- Repeal of the AFP‟s authorization to exist
- Settlement of the AFP and its funds, when applicable
16
CHILE
V. Macro-economic impact
Impact on the economy: Impact on the capital market:
• Initial estimates from industry said that in the mid-
term, approx. US $3.5 billion would be transferred
THE TOTAL ASSETS MANAGED BY PENSION from fixed income to equity. (As of December 2003,
FUNDS EQUALS:
• 52% OF GDP the real increase in equity was US $11.8 billion )
• 100% OF TOTAL EXTERNAL DEBT • Higher amount invested in equity abroad.
• 2 TIMES TOTAL ANNUAL EXPORTS
• Local market receives investments depending on
market conditions, liquidity and stock exchange
performance. (ACD)
• Decrease in time deposit position (today 15% from
pension funds)
17
US
I. US Pension System compared to World Bank (summary)
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
US I STATE II MANDATORY III VOLUNTARY
• State System (PAYG) • No mandatory system • Employer related:
• First and current law: 1935 (with • DB and hybrid plans
numerous amendments).Type of • DC: 401K, 403B,457, SEP,
program: Social insurance system Simple, Sarsep
Pension • Personal savings:
• IRA – traditional, roth
System • Annuties
• Mutual Funds
• Brokerage
• Funding issues under debate. New • n/a • DB: Declining due to move to
proposal under Bush reform individual funding, regulatory
looking at Individual Pension complexity and cost
Accounts (similar to Chile/Lat Am)
• DC: Continued expansion in
Major competitive environment, with
strong “takeover” element
Issues
• Exploding IRA market
• Improving tax incentives for long
term savings and investments
18
US
II. System characteristics: Pillar I
• Coverage
• Gainfully occupied persons, including self-employed persons.
Exclusions: Casual agricultural and domestic employment, and limited self -employment (when annual net income
below $400), and some Federal employees hired before 1984.
Voluntary coverage for employees of State and local governments, and clergy (mandatory coverage for employees of
State and local governments not covered under a retirement system, effective July 1, 1991).
Applies in U.S., Puerto Rico, Northern Mariana Islands, Virgin Islands, Guam, and American Samoa, and to citizens
and residents employed abroad by U.S. employers.
Special systems for railroad employees, Federal employees, and many employees of State and local governments.
• Source of Funds
• Insured person: 6.2% of earnings. Self-employed, 12.4%.
Employer: 6.2% of payroll.
Government: Cost of special monthly old-age benefit for persons aged 72 before 1968; whole cost of means-tested
allowance.
Maximum earnings for contribution and benefit purposes: $72,600 a year, automatically adjusted to wage levels.
• Qualifying Conditions
• Age 65 (62-64 with reduction); gradually increasing to 67 over period 2000-27.
• Old-Age Benefits
• Based on covered earnings averaged over period after 1950 (or age 21, if later), and indexed for past wage inflation,
up to age 62 (or death, if earlier) excluding 5 years with the lowest earnings. (Earnings in years outside this period may
be substituted, if higher.) Available at age 62, but reduced for each month of receipt prior to age 65.
No minimum benefit for workers reaching age 62 after 1981.
Maximum $1,373 a month for workers retiring at age 65 in 1999.
Increment for each month worker delays retirement at ages 65-69.
Increment amount depends on the year the worker reached age 62, and is 5.5% per year for those age 62 in 1999.
Adjustment: Automatic cost-of-living adjustment.
19
US
II. System characteristics: Pillar I – Reform proposal
Current US system is not sustainable, i.e. the guarantee fund (PBGC) going into a deficit (September 30, 2004 growing from
$11,2 bio to 23,3 bio). As of 2004 the cost of doing nothing to fix the US Social Security system had hit an estimated $10,4
trillion, according to the Social Security Trustees.
The proposal of President Bush to reform pension focuses on 2 main areas:
1. Individual investment accounts:
• Participation: benefits of anyone age 55 and older will not be changed. The accounts are voluntary. But participation would
be phased in over three years according to age: the first year - 2009 - workers born from 1950 to 1965; the second year,
workers born from 1950 to 1978; the third year, anyone born after 1950 could opt for an account.
• Contribution: workers would be permitted to invest up to 1/3 of the 12.4 percent payroll tax that they and their employers pay
on their wages, into the individual investment accounts (Workers pay 6.2 percent and employers the other 6.2 percent.)
• Annual contributions would be capped at $1,000 in 2009 and thereafter rise slightly more than $100 per year.
• Investments: Workers would have a choice of five broadly diversified index funds and a lifecycle fund, in which the portfolio
grows more conservative as the investor nears retirement. (i.e. when a worker turns 47 the account will automatically be
invested in the lifecycle fund unless the worker and his or her spouse sign a waiver opting out)
• Pay out: Money in the accounts could not be taken out before retirement. At retirement, it's likely workers would have to
annuitize a portion and only take out a lump sum if doing so would not result in the worker moving below the poverty line.
Any unused portion of the account could be left to heirs.
• Administration: The accounts would be modelled on the Thrift Savings Plan - a 401-k type program already available to
government employees - and centrally administered by the government. The accounts should not be eaten by Wall Street
fees; low costs. It is estimated that the administrative cost per account will be 0.3 percentage points.
2. Funding rules for defined pension plans will be strengthened.
• Funding targets will be based on meaningful measures of liabilities
• Market values will be used for assets
• 7 year amortization period for funding shortfalls
• Employer can make additional deductible contributions in good years
• Disclosure to participants will be improved
• Premiums will better reflect plans risks and restore the health of PBGC
Main concerns:
• Transitional Cost: Payroll taxes are used to pay current retirees, so diverting a portion of them creates a shortfall in the
ability to pay full benefits. The transition costs of diverting a third of payroll taxes to individual investment accounts ha ve
been estimated at around $2 trillion over the next 10 years. That assumes, though, that a third of payroll tax is diverted fo r
each of the 10 years.
20
US
II. System characteristics: Pillar II
• Currently no mandatory system in place
21
US
II. System characteristics: Pillar III
Distribution of Retirement-Oriented Assets¹
1. Employment Based:
- DB 14% Annuity
- DC: 7% Contributory IRA
- 401 (k)
16% Defined Benefit
- 403 (b) 20% Defined Contribution
- 457 18% Rollover IRA
2. Non Employment based: 17% State/Local Govt
- IRA 8% Federal Government
1Estimates from Flow of Funds Accounts of the US
22
US
II. System characteristics: Pillar III - DC
401(k) plan (as 403(b) and 457) allows employees to save for their own retirement. This type of plan was
named for that section of the Internal Revenue Code, which permits employees of qualifying companies to
set aside tax-deferred vehicle that offers a variety of investment options.
$ $ $
Pillar III - DC
Fixed Investments, Mutual Funds, Employer Stock, Stocks/Bonds, Cash
Sponsors Participants
• Deductibility of contributions as an expense • Pre-tax contributions - lowers current taxable load
• Competitive advantage • Tax deferred earnings
• Attracts quality employees • Diversification of assets
• Cost savings - retention tool (vesting schedules) • Ease investing and long-term savings
• Stimulate economic growth - promotes long term • Potential matching employer contributions
savings • Not taxable until distributed (normally at retirement
• Socially responsible to encourage retirement when at a lower tax bracket)
saving • Portability
• Shifts responsibility for retirement to the • Ownership of their retirement savings
employee • Catch up contributions
23
US
II. System characteristics: Pillar III - IRA
• IRAs are tax-favoured retirement vehicles that individuals or workers can establish
themselves. Unlike DC or DB, which can only be sponsored by er‟s, IRAs provide tax –
advantaged retirement savings plans for many ordinary wage earners without an
employment-based retirement plan; self-employed, part-time workers; or even some
individuals who are not in the labour force (such as nonworking spouses).
• The growth of IRAs in recent years has not been drive by regular annual contributions
by IRA owners; rather, stock market gains and rollovers from other plans have
accounted for the lion‟s share of IRA growth. The experience so far shows that stock
market gins/losses have a larger impact on total IRA assets than rollovers. Today, IRAs
are used primarily as a vehicle to store retirement wealth that has been accumulated
elsewhere in the retirement system, and not as a vehicle through which current
retirement saving occurs.
24
US
III. Investment guidelines
• US Regulation of pension fund assets
Minimun Self-investment/ Other Ownwership Currency Direct limits on
diversification conflict of quantitative rules concentration matching foreign
requirements interest limits investments
General Limited to 10% for None No info available No explicit rule None
requirements for DB plans
diversification
25
US
IV. Regulation and Supervision
• The United States has several agencies in charge of the supervision of private pension occupational
schemes:
• The US Department of Labor, Pension and Welfare Benefits Administration (PWBA)
primarily supervises the protection of employee benefit rights and fiduciary obligations for
corporate and multi-employer voluntary pension plans.
• The Pension Benefit Guaranty Corporation (PBGC) provides protection for the termination of
defined benefit schemes.
• The Internal Revenue Service (IRS), overseen by the United States Department of Treasury,
operates and supervises the tax treatment related to pensions and, in that role, is responsible for
the registration (tax qualification) of pension plans.
• NASD
• SEC
• State Insurance Department
• State Attornies General
• Due to the large number of pension plans in the US, the voluntary nature of the pension plan system,
the great variety of plans, and the limited amount of resources allocated to the governmental agencies
charged with supervising pension plans, a significant emphasis on the part of government has been on
voluntary compliance, through educational outreach programs and voluntary compliance programs for
plan sponsors and plan fiduciaries who have discovered violations and want to correct them. Both the
Department of Labor and the IRS have sophisticated programs for identifying likely areas of non-
compliance with the law and targeting examinations at those areas. Through these programs, the
agencies have made significant recoveries of money for plans and have imposed plans to correct
deficiencies in their operations.
26
POLAND
I. Poland Pension System compared to World Bank (summary)
Publicly financed plans, social Employer sponsored plans or private Additional voluntary arrangements
WB security plans mandatory programs (possibly sponsored by Employer)
I II III
POLAND STATE MANDATORY VOLUNTARY
• PAYG scheme • Mandatory, open end pension funds • Voluntary, additional employer
• However, benefit consists of 2 • Managed by private pension fund contribution to corporate pension
components: companies fund
a. Notional accumulation of • At retirement, accumulated benefit will • Limited take up rate as employers
contributions in individual be transferred to annuity view this is an extra labour cost
accounts • First benefit payout is expected to be in
b. The accrued DB pension
• 7% payroll tax deduction
2009 • Market perception that tax
right (at the time of reform) • Members have free choice of pension
is converted into a notional incentive too low
Pension fund provider
lump sum value and • Individual retirement account
• Transfer between funds are permitted,
“credited” to the individual but only one pension fund at a time
(IKE)
System • Contribution is 19.52%, • Tax qualified long term
• A custodian bank has to be used, for
equally split by employers and savings products
which 10 – 12 bps is paid
employees
• For self employed, a minimum • Early withdraw tax penalty
•Only 12.22% is applied
contributed to Pillar I, if
contribution required and can be split
between pillar I and II • Life insurers, mutual fund
individual is eligible and
managers, banks and
elects to join a pillar II fund
•Remaining 7.3% is
brokerage firms
contributed to pillar II
• ZUS, an effective, centralised administration • System introduced in 2004 and initial
system, however, room for improvement sign up for IKE successful, but long
Major •Delayed customer data retrieval as a term success still remains to be seen
result of slow and unorganised system
Issues (member data delay up to 2 months)
27
II. System characteristics: from mono to multi pillar POLAND
systems in 1999
• Mandatory, reformed PAYG, DC system
• PAYG: current pensions are financed by current contributions paid by employees and employers
• Individual account, DC system: previously accrued defined benefit pension rights “credited” to a notional individual
defined contribution account
• Contribution is paid by employee
• Old age pension contribution is part of the social security contribution, of which
• 19.52% of earnings paid to old age pensions – equal contribution f rom employer and employees
• 13% f or disability – equal contribution f rom employer and employees
• 1.93% work injury, 100% paid by employer
• 2.45% sickness, 100% paid by employee
• Old age pension contribution is split into 2 parts
• 12.22% is paid to f inance the current retirees
• 7.3% is f or individual account (II Pillar)
• Benefit 2 components
• Pillar I: accrued DB benefits before reform + accrued DC benefits on 12.22% contribution, both are notional
• Pillar II: accrued assets from individual account, DC
• Pension reform bill passed by parliament in 1998, scheduled for implementation in January 1999
• Actual implementation started 1 March 1999
• Before pension reform, state pension liability is 462% of GDP
• 2004, pension liability is 194% of GDP
• 2010, system is projected to be in surplus
• Pension reform does not bring additional cost to employers nor to employees (Government
made the social security system transparent)
• Employers aggregated contribution was reduced and employees, in the mean time, receive additional salary that
equals the employer contribution reduction
28
POLAND
II. System characteristics - general
• Mandatory, funded system
• Eligibility:
• Compulsory to all employees born after 1969
• Born before 1949 had to remain in the old system
• Born between 1949 – 1969, have a choice of joining pillar I or II
• Free member choice of fund
• Employers were not allowed to influence the choice of fund (Partially the reason Tied Agents were a successful
distribution model)
• Fund managers and agents are not allowed to offer inducement to customers to join a fund
• Effectively only 7.3% is contributed to the individual account
• Open-ended pension funds, managed by private pension fund managers
• 16 private pension funds, top 3 has over 65% market share (PZU, ING, Commercial Unions)
• 11.7 million members, however, approximately 2 million members are effectively non -contributory accounts
• Total assets: +€ 11 billion, end June 2004
• Insurance companies, banks, security / brokerage firms can apply licence to set up pension
fund entity
• Pension fund manages the assets, but needs a custodian bank to handle the asset
administration (10 – 15bps commission fee)
• Insurance companies hold 88% of total assets (too concentrated)
29
POLAND
II. System characteristics - Administration
• One centralised administration body – ZUS
• Employer pays both employee and employers contribution to ZUS
• Individual account:
• ZUS allocates employee(er) contributions to Pillar I,
• Pillar II, it matches contributions with employee fund choices and distributes
the money to the funds‟ custodians and advises the funds
• Collect information / money reconciliations a. pass money to custodians; b.
information to fund managers
• Key issues
• Too short preparation time: legislation passed in 1998, actual
implementation 1 March 1999
• Inaccurate form completion by employers resulted in unmatched
contributions
• Education for employers took over a year
30
POLAND
III. Investment guidelines (1/2)
• Majority of investments to domestic capital market
• Regulation sets maximum 5% limit on off shore investment
• In practice, only 1% assets invested off shore, due to many hidden “obstacles”, ie., waiver on
custodian service fee, stamp duties etc.
• Maximum asset management fees: < 0.6%
• Market players set the fee (ING, being 1 of top 3 players with approx. 20% market share, has
strong influence in fees)
• Asset management fees: upfront fees + management fees
• Upfront fee – maximum for contribution based fees is 5.8% of annual contribution, includes
administration fees (0.8% to ZUS), supervision, custodian etc.
• Average 50 bps per annum, if assets above Zloty 8 bln, management fees will be reduced
(sliding scale)
• An open pension fund can only offer one fund
• For customer & agent, restriction simplified the choice and education process
• However, from fund managers‟ point of view, this restriction limits the investment return
• Fund managers keep record of accounts for each member, member information
access through:
• Internet, call center, ATM or SMS
31
POLAND
III. Investment guidelines (2/2)
• Investment restrictions (to protect the members’ rights):
• Up to 95% of assets in bonds or shares on domestic capital markets
• < =5% off shore investment (limited to OECD countries)
• Restriction applies to open end pension fund
• 40% in quoted stocks
• 10% in secondary stock
• 10% in treasury bills
• 10% in NIFs
• 15% in municipality bonds
• 10% in close ended investment funds
• 15% in open ended investment funds
• 20% in banks and bank groups
• An industry guaranteed fund to recover losses from fund managers, in the event of bankruptcy
• Effectively, the fund managers are paying for the industry losses
• No investment in real estate
• Numerous diversification requirements, ie.,
• no more than 10% of assets to be invested in a single kind of securities
• Investment in bonds, or stocks should be <=5% of assets in one issuer
• Asset allocation (June 31, 2004)
• Bonds: 60%
• Equity: 31%
• Treasury bills: 4%
• Bank, securities and deposits: 3%
• Others: < 1%
• Key issues:
• Pension funds hold about 25% domestic capital market
• Increasing demand for IPO to increase the size of the market
32
POLAND
IV. Regulation and supervision
• Insurance and Pension Funds Supervisory Commission supervise:
• Open pension funds
• Employee pension fund (non-profit)
• The commission consists of 5 members:
• Chairman of the commission appointed by Prime Minister
• Deputy Chairman appointed by Ministry of Finance and Ministry of Labour
• Member of the commission: chairman of the security and exchange commission or
his deputy
• Member of the commission: chairman of the competition office or his deputy
• Government intended to amend the law in following aspects:
• Cost of system development (remove limitation)
• Competition (intensify)
• Investment (increase effectiveness)
• Finance burdens of funds and of members (liquidation)
• (Reduce) power of big 3 pension funds
• New draft law yet to be sent to parliament
33
POLAND
IV. Regulation and supervision
• Clear division of rules
• Custodian, administration and pension fund managers
• Member information clear and easy accessible
published regularly in the newspapers as net of fees
• Pension fund manager is regulated to protect
members:
• If market average return is 8%, underperforming fund managers
have to make up the difference in order to equal half of the
average (i.e. at least provide 4%)
• Effectively, it resulted in fund managers all investing in a similar
way
34
POLAND
V. Macro economic impact
• Reduced pension liabilities Dependency ratio GDPR/GDP Primary
• Until 2005: before reform, 462% of GDP vs. (d)
surplus
needed to
after reform, 150% of GDP keep
• 2050, pension expenditure will drop from one of 2000 2050 chan 2000 2050 chan pension
debt at
the highest in Europe to one of the lowest ge ge 2000 level
• Transfer of a portion of contributions to
France 27.2 50.8 23.6 12.1 15.8 3.7 5.9
funded pension scheme is not a cost
• It reveals a portion of the implicit debt Germany 26.6 53.2 26.6 11.8 16.9 5.1 4.3
• It reduces future public finance
Spain 27.1 65.7 38.6 9.4 17.4 8.0 4.8
obligations
• Increased funding requirements can be Sweden 29.4 46.3 25.9 9.2 10.8 1.6 1.0
offset by higher debt, purchased by
Poland 20.4 55.2 34.8 10.8 8.3 -2.5 -1.0
pension funds
• Pension funds assets invested into
equities stimulate investment and
economic growth
• It is better to turn a portion of pension
liabilities into savings now than to have
much greater problems with redeeming
such obligations in the future
• Expenditure and revenue of the pension
system
• 2049, pension system surplus
35
POLAND
VI. Polish pension reform pro’s and con’s
Pro’s Con’s
• Mandatory, big bang pension reform • Lack of investment options to sustain a long term
high rate of return
• Simple & transparent: • Limited solutions to channel pension fund
• Individual account makes it easier to understand– assets into long term investment
amount an retiree receives equals to accumulated
contribution value, enhances personal interest and • Pension fund investment over reliance on domestic
accountability capital market
• Separate old age pension from other social security • Limited investment option when the capital
contribution – transparent and easy to understand for market is small (limited supply of financial
individual instruments and resources) and illiquid
• Defined contribution system makes it easier for people to
understand increase the confidence level • Over complicated regulations and international
• One investment fund per pension fund makes it easier to charges limited pension fund overseas investment
understand
• Few, but smart regulations to protect member rights
• Maximum asset based fees, no contribution fee
• Industry average investment return as a benchmark, low
performer has to pay penalty
• Dis-encouraged to take high risk investment
• One centralised administration system allows efficient
collection and administration, also saves cost
• Media attention and support helped people to understand
36
Netherlands
I. Dutch Pension System compared to World Bank (summary 1/2)
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
Holland VOLUNTARY
• Basic old age pension (AOW) • Employer sponsor, occupational pension
•PAYG schemes, voluntary
•Universal: system applicable to all •However, +90% employed
residents and f lat rate benef it participated in an occupational
Pension •Minimum guarantee to prevent pension scheme
System poverty (70% of minimum wage) •Including AOW benef it, the total
•Build up phase: 15 – 65 years replacement ratio is aimed at 70% of
•In case of a person who resides individual f inal, or average salary)
outside Netherlands during the • Pension payout
accumulation phase and the total • Early retirement is possible
retirement income is less than 70& • 4 types of pension f unds
of minimum wage, this person is •Industry-wide
entitled to receive social assistance •Company
•Insurance contract
•Pension f unds f or self employed
prof essionals
• DB (88%) and DC plans
• Ageing population created f uture pension • Over f unding requirements (strict
def icit in Pillar I solvency) by regulatory commission puts
Major •An AOW savings f und created to pressure on industry players
f inance part of the (AOW) expenditure • Current solvency margin still healthy (at
in f uture 110%), however, is historically low
Issues •Government deposits tax revenue to compared to bef ore crisis (at 150%)
the f und on annual basis
Recomme • Allow pension funds time for
ndations recovery – short term underfunding,
long term financial sustainability
37
Netherlands
I. Dutch Pension System compared to World Bank (summary 2/2)
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
Holland VOLUNTARY
• Basic old age pension (AOW) • Individual pension arrangement
•PAYG • Annuity and endowment insurance
•Universal: system applicable to all • Premium contribution tax deductible
residents and f lat rate benef it •Annuity benef it tax incentive is caped
Pension •Minimum guarantee to prevent at 70% of a person‟s f inal pay (incl.
poverty (70% of minimum wage) benef its f rom AOW and Pillar II
System •Build up phase: 15 – 65 years occupational scheme); contribution
•In case of a person who resides deduct f rom taxable income (€ 1,036
outside Netherlands during the per annum)
accumulation phase and the total
retirement income is less than 70& •Endowment with 15+ years policy
of minimum wage, this person is duration: interest tax f ree, principal
entitled to receive social assistance tax f ree up to a ceiling
• Ageing population created f uture pension • Tax legislation is very influential
def icit in Pillar I
•Both Pillar II & III applies EET
Major •An AOW savings f und created to
f inance part of the (AOW) expenditure
in f uture
Issues •Government deposits tax revenue to
the f und on annual basis
Recomme
ndations
38
Holland
Netherlands
II. System characteristics
Source: OECD,
Please note: OECD def inition is used in this table: 2 pillar ref lects employer sponsored pension schemes
39
Holland
Netherlands
II. System characteristics: Pillar I old age pension (AOW)
• Funding:
• Statutory pension contribution is set at 18.25%, in 2003, however, is set at 17.9% or up to €28,850 per annum
• Contribution are collected through tax bureau for which the tax bureau will automatically transfer the money to
SVB
• In case of funding deficits, government will grant tax revenue (to which pensioners contribute as well)
• An AOW savings fund established. Funding source is government tax money. Expected to reach €135 billion in
2020 & share 12% AOW expenditure in 2030
• Administration: Social Verzekerings Bank (SVB)
• An central administrative body set by the government
• Non-profit organisation
• Day-to-day operation independent from the government
• Board of Directors manages SVB, in consultation with board of advisors
• SVB responsibility: collect premiums and distribute to individual (amongst others, old age pension benefits)
• Supervisory body and process
• Ministry of Social Affairs and Employment (SZW) appoints members of SVB Board of Directors & Board of
Advisors
• SZW supervises SVB through regular inspections
• Investment:
• Currently, minimum capital surplus, hence NO investment management
• However, AOW savings fund is managed by Ministry of Finance
40
II. System characteristics: Pillar III Occupational Holland
Netherlands
pension scheme
The Dutch pension
market
• At this moment pension funds in the Netherlands are Number Number Total
managing close to five million employees, the of of active assents
funds/sch participan (billions
immense amount of around 390 billion euros. emes ts of euro’s
This means 120% of the yearly Dutch GNP. In 2040 the
pension fund assets will be risen to 195% of GNP. Branch 103 4.300.000 300
pension
funds
Company 876 80.000 90
• 3 types of pension schemes: funds
• Branch pension funds (Industry wide)
• 81 out of 103 f unds are made mandatory Directly +/- 40.000 350.000 30
• 14% of all the branch f unds are f ully re-insured insured
• Usually insurance companies or large specif ic sector based schemes
pension f unds provide administration
• Sector based pension funds refer to, for instance, civil servants
pension funds (ABP) or health sector (PGGM)
• Company pension funds
• Larger enterprises usually administer own company pension f und
• The company pension f und is not allowed to invest more than 5%
of the assets in the employer‟s company
• Presently, 44% of these f unds are f ully reinsured
• Insurance companies (direct insurance)
• Through group or individual contract
• Administered by lif e insurance companies
41
Holland
Netherlands
III. Investment
• Follow prudent man rule – pension fund investment has to according to
prudent pension principal
• Pension regulator (PVK) judges each pension individually on its investment policy
• In case reserve shortage, PVK sets the rule to repair the shortage, See regulation
slide for further explanation
• No quantitative regulations on investment
• Worries that it will penalise the providers‟ profit
• However, Financial Testing Framework applied to each pension fund to achieve
required security both affordably and efficiently
• Each fund being judged on individual basis
• Free to invest in any asset class
• Free to invest off shore
• Traditionally very strict solvency rule (150%)
• However, due to recent stock market developments, the solvency ratio has been reduced
to 119%
42
IV. Regulation and supervision: applicable laws Holland
Netherlands
& main issues addressed by law (1/2)
• Regulation and supervision framework:
• Ensure all employees have access to a supplementary pension scheme
• +91% of all employees are covered
• Government safeguards accrual of supplementary pension entitlements and offer tax relief in
both Pillar II and Pillar III pension schemes
• Regulatory framework
• Pension and Savings Fund Act (PSW)
• Act on Mandatory Participation in a branch pension fund 2000 (Act Bpf 2000)
• PSW:
• Pension contributions must be placed outside the employer‟s company by either joining a
branch pension fund, or establishing a company pension fund, or concluding an agreement with
an insurance company
• Laid down institutional framework for pension schemes
• Act Bpf 2000
• A branch pension fund may request the government to impose an obligation to its employers
and employees to participate in the branch fund
• A branch pension fund is set up through employers‟ organisations and trade unions
43
Holland
Netherlands
IV. Regulation and supervision (2/2)
• One super-regulatory power
• Recently merged supervision activities of banking, insurance and pension fund
• Former Pensions & Insurance Supervisory Board (PVK), currently a
division under super-regulator, supervises / regulates pension funds
and direct insurance
• Regulatory principal
• Pension reserve adequacy level (Solvency) to ensure long term financial
sustainability
• Minimum reserve required by law: 100% assets divided by value of pension commitments
discounted by a factor of 4%
• However, regulatory requirement and industry standards: 119%
• Stock market shock wave 2001 – 20002 promoted new regulation:
• Minimum level of guarantee for equity - at 40% below the highest point in the last 48
months
• Minimum level of guarantee for bond - at 10% below the lowest in the last 10 months
• Should a pension fund capital reserve is below the benchmark, the pension fund has 2 – 8
years to recover
44
UK
I. UK Pension System compared to World Bank (summary 1/2)
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
UK VOLUNTARY
• 3 components: basic state pension, State Employer sponsored pension plan
Second Pension (S2P)* & pension Credit
• Employees (not self -employed) may • Occupational pension schemes, non
chose “contracted-out” SSP into private mandatory for both employer and
occupational pension scheme, or “opt out”
employee.
Pension into Approved Personal Pensions
• Minimum income guarantee, gross
• However, it is very common,
System replacement only 37% of average especially so in the larger companies
earnings
• Pension age man: 65, woman 60.
Equalise at 65 f rom 2010
• 44 years in workforce needed for full • In a shift towards international
basic pension accounting standard, more pension
Major plans move from DB to DC, likely
• Provide least income to prevent result in a reduced level of premium
issue poverty at age of retirement contribution
• Earning related pension on top of
• Gross replacement rate very low: being 20% of revaluated average
37% at average earning in UK (same earnings
as the US), NL: 70%, Sweden: 76%,
France: 71% • Contracted out because of
occupational pensions
* S2P previously is called State Earnings Related pension Scheme (SERPS)
45
UK
I. UK Pension System compared to World Bank (summary 1/2)
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
UK VOLUNTARY
Individual pension plans
• Traditional personal pensions,
defined contribution schemes
• 25% can be taken as a lump sum
Pension on retirement, rest as an annuity
System • Maximum contribution is € 5,450
a year
• Voluntary contributions to private
pensions based on occupational
schemes (stakeholder pensions
scheme)
• Huge tax relief on voluntary
pensions
• Very large privately funded pension
sector is available so difference
between different income groups is
Major very big. Mostly DB
issue
* S2P previously is called State Earnings Related pension Scheme (SERPS)
46
UK
II. System characteristics: general
• Four tiers pension systems:
• State social security benefits for pensioners, which consist of a basic flat rate state retirement pension and a
state earnings related pension scheme (SERPS)
• Occupational pension schemes, offered by employers
• Third pillar pension schemes established by private insurance companies
• Underpinning all the above, a state minimum guarantee, which any pensioner will be topped up to by the state
if his or her pension income falls below the minimum.
• Challenge:
• Growth in income inequality among pensioners, due to
• Too many people have difficulty adding on to their flat rate basic state old age pension
• SERPS does not fundamentally solve the problems that low wage earners ending up with small pensions
• Occupational and private pensions have tended to benefit the better off most
• Government solution:
• To making savings during the career more desirable and possible, and to protect those who cannot save
because of low earnings or other circumstances with a "State Second Pension" (S2P)
• The S2P will provide more generous additional pensions for low and moderate earners, certain careers and
people with a long-term illness or disability.
• 2003 the existing Minimum Income Guarantee (MIG) for pensioners, available to those whose total income falls
below a level set each year by Parliament, will be replaced by the "pension credit" which should provide extra
help to the poorest pensioners and reward those with low or modest incomes (for example from occupational
pension schemes).
• The cost associated with the new measures will have minimum increase on pension spendings
• Taxation of pensioners:
• A progressive income tax structure applies to all pensioners.
• A single person under 65 has an income tax allowance of GBP 4,615 per year in 2002 – 03
• Age 65 – 74 years old, GBP 6,100 income tax allowance per year
• Age 75 plus, GBP 6,370 income tax allowance per year
• If total income exceeds GBP 17,900, additional allowances are withdrawn at 50% of the expenses
47
UK
II. System characteristics – pillar I, state pension
• 3 components:
• Basic State Pension:
• Flat rate payment
• Full benefits only applicable for 44 years contribution
• Basic pension for a single person is GBP79.60 per week in 2004. The amount is set annually and
consumer price indexed.
• State Second Pension (S2P):
• Introduced in 2002, to replace the old state earnings related pension scheme
• Aim is to provide a more generous scheme for low and moderate income group
• S2P is for employee only, a quasi-occupational system
• Ability to contract out
• 87% scheme were contract out
• If opt for contract out, employee national insurance contribution drop by 1.6%, for employer the
rate drop by 3.5%
• Lower contribution to the national insurance means lower PAYG payment
• Pension credit:
• Means tested benefit for pensioners , only meant for pensioners without other adequate sources of
income or assets. Guaranteed minimum level is GBP105.45 per week for a single person
• Key issue:
• State pension become less generous:
• 1998 / 1999, replacement ratio for man is 34% for a full social security contributions and 37% for worman
• It declined to 25 – 28% in 2030
• “Savings gap” is rising
48
II. System characteristics: pillar III – occupational UK
private sector pension (1/4)
•Four type of schemes
• Occupational salary related (employer sponsored DB scheme)
• Occupational money purchase (employer sponsored DC scheme)
• Group personal pension Legal contract is in between individual and
• Individual personal pension insurance pension providers
•Low participation
• 11.3 million employees out of 25.6 million population in work did not contribute to any private pension
scheme (See following slide for reference)
•Shift from DB to DC
• Active membership of DB scheme has fallen by 60% since 1995
• In addition, a small but increasing % of scheme are now closed to benefit accruals for existing
members (DB)
• Average level of pension provision on a continuous decline
• Contribution level at DB: 16 – 20% vs DC: 7 – 11%
•Pension protection fund established to provide guarantees retirement payment in an event of bankruptcy
49
II. System characteristics: pillar III – occupational UK
private sector pension (2/4)
• Characteristics of occupational pension schemes
• Non-mandatory contribution
• However, most large companies have pension schemes
• Membership in mid-2000 is: 10.1 million,
• 5.7 million in private sector
• 4.5 million in public sector
• The fall in private sector has been significant due to number of employees working in the
private sector has been increasing, but the membership has been declined from 6.2
million in 1995 to 5.7 million in 2002
• Since 2001, mandatory for employers with 5 or more employees to offer stakeholder pension
scheme
• Employer contribution is not required
• Take-up has been slow till now
• Traditional schemes have been DB, guaranteed level related to final pensionable salary
• 90%, or 4.6 million out of 5.7 million members are in DB scheme in 2000
• However, a strong tendency shifting from DB to DC since 2000, as an effort from employer to:
• Contain costs and risks
• Funding difficulties after the downturn of the equity market
• Accounting issues
• Longevity risk no longer bearable
• To date, 36% DB plans are closed for new entrants, DC plans instead
• If DC, contribution is much lowered (from 16% - 20% to 7% - 11%)
50
II. System characteristics: pillar III – occupational UK
private sector pension (3/4)
• Tax rules (to be implemented in April 2006)
• A universal lifetime allowance on aggregate value of tax favourable benefits,
• Plus a universal maximum accrual contribution in any year
• The lifetime allowance at GBP 1.5 million and annual allowance at GBP 215,000
• Any excess will be levied with 40% income tax
• No limit on tax relief on employer contribution
• Personal contributions will get tax relief up to 100% of earnings or on a gross contribution of up
to GBP 3,600 per year
• Also, early withdraw can begin between age 50 and 75
• Fund must be externally funded to gain maximum tax advantage
• Insurance or pension fund can administered the fund
51
II. System characteristics: pillar III – occupational UK
private sector pension (4/4)
• Pension funds and insurance schemes are set up under trust law as separate legal entity and
the legislation for both is similar
• Most large companies sponsor their own pension plans
• Industry wide pension plans not common
• Small employers favour insurance schemes
• Large companies generally use self administered funds without using insurance, although lump sum death in
service benefits are usually insured
• Pension funds (self- administered plan)
• Obligatory to appoint investment manager and a custodian
• Investment manager is restricted that
• has to be authorised under the Financial Services Act 1986
• Formally appointed by trustees
• 6% manages pension f und f ully in-house
• Tax treatment
• Tax relief f or employees are 15% of income, if the plan is tax qualif ied
• Insurance schemes
• An employee can establish individually with an external providers a pension plan, in the form of annuity or other
type of insurance products
• It can also be a vehicle to contract out S2P
• Group contact is on the rise due to flexibility and cost effectiveness
52
II. System characteristics – pillar III, individual UK
private pensions
• Personal pension plans, introduced in 1988
• Majority sold by insurance companies
• Bank, building societies and other financial institutions can also provide the plans, but remain
small
• More investment choice with personal pension plans
• 25% male and 17% female fully time employees have personal pension plans
• Benefits is based on DC principal
• Upon retirement, 25% lump sum tax free withdraw, remaining balance is used to purchase an
annuity
• Benefits are taxed as income
• Stakeholder pensions
• Cheap, flexible and can be held as a company pension or personal pension
• Charges are caped at 1% per annum of the value of each members‟ fund
• Member are able to transfer into and out of the scheme at any time and to stop and restart
contribution payments without additional costs or penalties
• No guaranteed minimum benefits, entirely DC approach
• Withdraw as of age 50
• 25% tax free lump sum withdraw, the balance is to purchase annuity
• The scheme is run by trustees or scheme managers who are responsible for determining the
investment options and are authorised by Financial Services Authority
53
UK
III. Investment guidelines
•Trustee responsible for pension fund investment
•Trustee allow prudent man rule
• “A fiduciary must discharge his / her duties with the care, skill, prudence and diligence that a prudent person
acting in a like capacity would use in the conduct of an enterprise of like character and aims”
• Implication to the pension fund investment
• “Trust” f unction separates pension f und assets f rom “other monies”
• Provide legal obligation to seek to minimize potential divergence of interest in relationships where one party is particularl y
vulnerably to another
• Prudent man rule is based on the UK common law
• Trust is to perf orm due diligence when it comes to pension f und selection
•No restrictions on asset allocation or off shore investment
• As a result, the traditional equity exposure close to 70% of total pension fund assets
•Minimum funding required for occupational DB plan, largely follow European Pension Fund
Directive – statutory funding objective to cover technical provisions
•A pension bill is expected to pass:
• Requires trustees and employers to agree on a funding strategy appropriate for their circumstance
• However, this will subject to satisfying the European Pension Fund Directive
54
UK
IV. Regulation and supervision
• Pension regulator formed on April 6, 2005, former regulatory body is Occupational Pension Regulatory Authority
• Statutory objectives:
• To protect member benefits
• To promote good administration
• To reduce risk of situations that may lead to claims of compensation from pension protection fund
• Responsibility:
Trustee, administrators, employers,
• Investing schemes through data collection
• schemes, including details of membership, sponsoring employers, trustees, advisers, administration, funding
and investment.
• provide practical guidelines for trustees, employers, administrators and others on complying with the
requirements of pensions law; and
• set out the standards of conduct and practice that we expect.
• Proactive approach on risk management:
• inadequate funding;
• incomplete or inaccurate record-keeping;
• lack of knowledge or understanding on the part of trustees about their role and duties; or
• possible dishonesty or fraud.
55
Sweden
I. Sweden Pension System compared to World Bank (summary 1/2)
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
Sweden VOLUNTARY
• Pension reform introduced in 1999, applies • Voluntary contribution, but has
to people aged 45 or under at the time of universe coverage - pension plan
reform based on collective agreement
• 2 components: PAYG elements and pre- between employers and Unions.
funded elements • Two different schemes:
• Total 18.5% contribution, mandatory. • White collar workers (ITP),
• 16% contribution to notional account mostly DB schemes
• 2.5% to individual DC • Complementary occupational
Pensio • Notional account is indexed every year. pension (ITPK) – DC plans
n Contribution is used to pay current retirees above certain ceiling
benefit (PAYG elements) • Part that is DC plan: 13,4% of
System • Annuity payout is required upon retirement salary
• Guarantee pension is provided by the • Blue collar workers (AMF), DC
government at rate of 33% of average scheme and offers employees some
earnings. degree of investment choice
• DC plan: 3.5% of salary
• Managed by banks and
insurance companies
• Administered by AMF central
• Payout is depending on years active in
Major working force.
• Over 700 type of funds available for
individual to chose for the investment of
Issues 2.5% contribution – too complicated
•Notional DC fund 16% of earnings, the concept of notional accounts means that the PAYGO character is retained, however the si ze of
contributions is registered on individual account 56
Sweden
I. Sweden Pension System compared to World Bank (summary 2/2)
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
Sweden VOLUNTARY
• Pension reform introduced in 1999, applies • Private pension plan is provided
to people aged 45 or under at the time of by insurance, bank or a similar
reform institution
• 2 components: PAYG elements and pre- • Tax incentive provided for
funded elements pension contribution
• Total 18.5% contribution, mandatory. • €2,178 per annum
• 16% contribution to notional account • Higher income group may
• 2.5% to individual DC able to contribute up to 5%
Pensio • Notional account is indexed every year. of salary, max €4,356 per
n Contribution is used to pay current retirees annum
benefit (PAYG elements) • Age 55 withdraw is possible
System • Annuity payout is required upon retirement • Salary reduction schemes gain
• Guarantee pension is provided by the importance over the last years
government at rate of 33% of average • Tax effective as no tax is
earnings. payable on contribution –
regardless of the amount
• Payout is depending on years active in
Major working force.
• Over 700 type of funds available for
individual to chose for the investment of
Issues 2.5% contribution – too complicated
•Notional DC fund 16% of earnings, the concept of notional accounts means that the PAYGO character is retained, however the si ze of
contributions is registered on individual account 57
Sweden
II. System characteristics: the reform
• Faced by largely the same demographic challenges as other OECD countries, Sweden opted in 1992/1994 for a
radical reform of its national old-age pension system, a process supported by five parties and some 85% of members
of Parliament.
• In effect, Sweden moved from a traditional income related defined-benefit system, to two types of defined-
contribution systems. The old system was financed more or less on a pay-as you-go basis. In the new system, an
individual will put 2.5% contribution into an individual financial account under the financial defined-contribution system
(FDC), another 16% of pensionable income is on a notional account and the real money will be channelled into the
new pay-as-you-go system. Financial accounts are managed by a variety of private funds chosen by the individual.
• The equivalent of 16% of each individual‟s annual pensionable income will be credited yearly to his or her notional
account under the Notional Defined Contribution System (NIC). The corresponding amount is transferred on monthly
installments to the system‟s Buffer Fund, similar to the Trust Fund of the United States‟ federal pension system,
which finances pension payments. Recently significant liberalisation has been introduced in the investment rules for
the funds, 70% of which can now be invested in equities.
• The new system has no formal age of retirement. Pension credits will always be earned and added to the notional (as
well as financial) accounts if the individual has pensionable income, regardless of age. Pension credits are given for
all social insurance benefits in the nature of income replacement, such as sickness, unemployment, disability, and
maternity/paternity benefits. In addition pension credits will also be given for some "activities" such as childcare
years, university studies and compulsory national service. Pensions from the pay-as-you go-system are calculated at
the time of retirement by dividing the notional-account balance by a life expectancy at retirement. Those with
insufficient contributions throughout their careers will be entitled to a minimum guaranteed pension, paid for by
general taxes. The guaranteed-pension is indexed by the change in the Consumer Price Index.
• Because of the commitment to keep the contribution rate fixed, the new system will accommodate demographic and
economic developments by adjusting the value of the pensions. The automatic balance mechanism legislation, the
final piece of pension reform legislation adopted in May 2001, ensures this. The mechanism provides for a switch in
indexation basis for pensions from growth in the average income to the internal rate of return of the NDC system if
liabilities in the system should exceed assets. The pension level is automatically re-established, as is the growth in
average income as the basis of indexation, as soon as this is possible without undermining the financial balance of
the system.
58
II. System characteristics: pillar III – occupational Sweden
pension system
• Occupational pension covers almost all employees in the country
• Conditions are determined by nation wide collective labour agreement
• 4 pension schemes
• ITP – white collar workers, 1.5 million employees, DB mainly, managed by insurance company Alecta
• SAF-LO – blue collar workers, 1.8 million employees, DC mainly (established in 1996), managed by AMF
• Civil servants plan: 700,000 employees, DB
• Employees from municipalities: 1 million employees, DC mainly
• 3 funding methods:
• Pension fund: DB, although risk benefits are fully insured (majority of ITP plans are using pension fund)
• Book – reserves: DB, same as pension fund, risk benefits are insured
• Pension insurance: mostly DC, common in small enterprises and dominating occupational pension plans for
blue collar workers
• Company segmentation:
• Small enterprises uses pension insurance, hence DC scheme
• Large companies participate in ITP plans, usually use book reserve in combination with credit insurance for
securing pension liabilities
• Pension foundations are increasingly popular among large companies
• Tax
• Employer contribution tax deductible up to 35% of the plan member‟s salary
• A ceiling of 10 times the price base amount applies - € 43,556 in 2005
• Employer contribution are not considered taxable income to the employee
• Benefits paid from occupational pension schemes are taxed as ordinary income
• Investment income is taxed – average interest on government loans in the preceding year to determine the
investment income
59
Sweden
II. System characteristics: pillar III - administration
• Pension funds – commonly used in ITP plans and other DB plans
• Set up as a separate legal entity but are affiliated with the company
• Pension funds have to participate in credit insurance which guarantees the pension payments
• Pension insurance – group insurance contracts
• Insurance contracts can be used for all types of plans
• ITP, SAF-LO and voluntary plans
• However, ITP and SAF-LO can only be administered by Alecta and AMF respectively
• Alecta responsible for the administration, collection, distribution and investment of the ITP plans
• AMF administers, collects and distributes premium to investment vehicle like bank or insurance
company, chosen by the employees (if no decision made by employees, assets remain in AMF)
• Endowment insurance contracts - can be used, seen as a legal form for securing a pension promise if
the contract is pledged to the employee.
• Pension insurance is the most common form for small enterprises and is dominate form for blue -collar
workers
• Book reserves – only applicable to DB scheme
• In case pension scheme under ITP plan is using book reserve method: -
• Mandatory to participate in credit insurance system - FPG (re-insurance)
• Pension payment and calculation of pension liabilities is done by a special institution - PRI
• Insurance companies hold up to 60% of pension assets
60
Sweden
III. Investment guidelines
•NOT required by law to appoint
investment manager
• External asset
managers become
increasingly a market
practice
•No specific investment
restrictions besides the Prudent
Person Rule and solvency
margin in case no re-insurance
(FPG)
•Funds can invest up to 80% of
assets in equities
61
Sweden
IV. Regulation and supervision
• Finansinspektionen (FI) is the primary supervisory agency for all financial institutions, including friendly societies, but
excluding the pension foundations
• Objective of Finansinspektionen is
• “promotion of financial stability and efficiency in the financial sector and promotion of consumer protection
goals.”
• Pension foundations are monitored by the parties to the agreements.
• Counties‟ administrative boards may supervise pension foundations according to the region where they are located.
• Since there are twenty four counties in Sweden, the supervision rules and practices can be significantly different.
• A general legal framework is the Act: safeguarding of pension obligations
• Legal framework to require the pension funds to buy credit insurance system
• Credit insurance is provided by FPG
• FPG guarantees pension payment in case an employer become insolvent
• 0.2% of pension liabilities is paid to FPG for insurance premium
• No legal requirements regarding minimum funding (solvency margin)
• Pension liabilities are re-insured through FPG
62
V. Macro economic impact - the reform helped the Sweden
economy
• Budgetary savings. Partial privatization, combined with reform of the
government-run, pay-as-you-go portion of the retirement system, is expected to
result in a fiscally sustainable system. Future expenditures will be significantly
lower, protecting Swedes from higher taxes, higher spending, and large deficits.
• Higher retirement income. The ability to invest privately over a working lifetime
will allow Swedish workers to benefit from compounding returns. The average
blue-collar worker, for instance, should enjoy 40 percent more old-age income.
Swedish retirees will have a safer and more comfortable retirement.
• Economic growth. By reducing the payroll tax rate and creating a direct link
between lifetime income and pension benefits, Swedish pension reform will
increase incentives to work. Moreover, the shift to a funded system will boost
national savings, thus providing capital for future growth.
63
Sweden
V. Macro economic impact: benefits of the new system
• Greater incentive to work. In the new system, pensions are determined by lifetime income,
which means that each year of gainful employment will have a positive impact on future
pension benefits. Because pension rights will be recorded in real and notional individual
accounts, workers will have much less reason to hide, shelter, and underreport their income.
The new system will also discourage workers from dropping out of the labor force.
• Increased national savings. Replacing a tax-and-transfer entitlement system with a partially
funded pension system will increase national savings, particularly as the new system
matures. Some recent empirical evidence from Swedish household sector data, for instance,
indicates that reform will result in a net increase in savings.
• Flexible retirement age. The new system neither penalizes nor rewards early retirement.
Workers can retire as early as age 61 or stay in the workforce as long as they choose. Early
retirement no longer burdens taxpayers since workers who choose to retire early do so in
exchange for a smaller pension. Moreover, the new system does not penalize workers who
remain in the workforce since they receive a larger pension or, if they so choose, earn
income and collect a smaller pension at the same time. These benefits are possible because
a worker’s notional account becomes an annuity based on life expectancy at the time of
retirement. Since the annuities do not reflect differences in life expectancies for men and
women, however, women receive more from the new system than men.
• Lower taxes and less government spending. The new pension system will yield large fiscal
benefits over time. The Swedish government calculated that the payroll tax rate necessary in
order to perpetuate the old system would have reached 36 percent by 2025. This tax rate —
and the level of government spending implied by such a tax burden—would have been an
enormous weight on the Swedish economy. Even the 16 percent tax in the new system is too
high, though the creation of notional accounts minimizes the adverse impact on labor supply.
64
Australia
I. Australia Pension System compared to World Bank (summary)
Publicly financed schemes, social Employer sponsored schemes or Additional voluntary arrangements +
WB security schemes private mandatory programs individual retirement income
I STATE II MANDATORY III
Australia VOLUNTARY
• PAYG - “Age pension”, universal, • Compulsory, earnings related • Voluntary member superannuation
means test benefit payment • Superannuation guarantee contributions
•Means tested: in accordance with • Established since 1992 • Tax preferred
income or assets, whichever • As of July 2002, minimum contribution • Contribution usually made by
determines the lower pension rate level 9%, paid by employer (phased
• Benefit payment from general revenue members of superannuation funds,
approach f rom 1992 – 2002)
(government tax income) •Contribution tax deductible
above the compulsory
• Retirement age: man – 65 years of • Fully f unded individual account, def ined superannuation contribution or, a
Pension age, woman – 61.5 contribution person is not eligible for compulsory
• Few investment restrictions superannuation
System • No early withdraw
• Retirement age: 55 (60 by 2025)
• Choice of lump sum, pension, annuity
with tax transf er incentive
• All employees aged 18 – 65
• Self employed not covered
• All superannuation funds accept both mandatory and voluntary
contributions
Key • Fund income (contribution and earnings) and benefits taxed at
charact concessionary rates
• Tax: employer contribution tax deductible, superannuation funds taxed
eristics
at 15%, benefits are taxed depend on type of benefit and its size
65
II. System characteristics: introduction of Australia
superannuation guarantee
• Before reform
• 2 pillars:
• Age pension, means tested
• Voluntary retirement savings
• 1990: Superannuation guarantee introduced
• Mandatory, employment related
66
II. System characteristics: Australia superannuation Australia
industry
• Superannuation funds operate as trusts and managed by boards of trustees
• Corporate funds
• Sponsored by a single or group of related employers
• Membership is restricted to employees of the employer
• If fund rules allowed, contribution may also be made on behalf of the employee‟s spouse or partner
• Represent 6% individual members
• Approximately 13% of the assets in the market
• Industry funds
• Members from a large number of employers across a single industry
• Represent 30% of individual members
• 10% of total assets
• Public sector fund
• Employer sponsor is a government agency
• Or, business enterprise that is majority government owned
• Represent 12% individual members
• Approx. 20% of total assets
• Retail funds
• Public offered superannuation funds, include master trust*
• Members are either self employed or additional voluntary contribution by members of other employment based
superannuation arrangements
• Represent 50% of individual members
• 34% of total assets
• Small funds
• < 5 members, mostly family owned company with family members as trustee
• Represent 2% of individual members
• Approx. 20% of total assets
* Non related individuals or companies to operate superannuation under a single trust deed
67
II. System characteristics: Role of trusteeship and Australia
service providers
• All plan assets must be held in trust
• “Trust” ensures pension scheme assets are separated from employer
• Trustee can be a person or superannuation fund but are separated from
the pension scheme
• Trustee may engage or authorise service providers to act on their behalf
• Service providers include: external fund administrator, actuaries, lawyers and
investment managers
• Bank, life insurance and investment management companies may be
appointed as service providers offering investment service, custodianship
of assets, administration of records etc.
• Universal licensing will be issued in 2 – 3 years
• Current trustee licensing procedure expected to be changed
68
Australia
III. Investment guidelines
• Investment strategy follows ―prudent man‖ principal
• No limit on asset category / quantitative rules
• Ie., asset allocation in bonds, deposits or equity
• No limit on minimum diversification requirement
• No limit on foreign investments
• No limit on ownership concentration
• Only restriction: loans or financial assistance to members not permitted
• Asset allocation, as % of total assets, reference Sep. 2004
• Cash & deposits: 8%
• Loans: 4%
• Interest bearing securities: 16%
• Equities and units in trusts: 49%
• Land and buildings: 5%
• Overseas: 17%
• Other: 2%
69
Australia
IV. Regulation and supervision
• Regulation principal: prudent man
• No rate of return or asset requirements
• Australian Prudential Regulation Authority (APRA)
• Integrated financial sector regulatory body
• Primary responsibility: prudential regulation of superannuation, insurance and banking
• Administers superannuation industry supervision act (SIS Act)
• SIS Act is principal legislation relating to prudent management of superannuation entities
• Supervisory approach:
• Risk based (through internal risk rating), consultative and in line with international practices
• Recognize management and boards are primary responsible for financial solutions
• Australian Securities and Investment Commission (ASIC)
• Responsible for market integrity and consumer protection
• Responsibility across the financial system, including areas of superannuation
• Australian Tax Office (ATO)
• Responsible for regulation of self-managed superannuation funds
• General: Information sharing among the parties APRA, ASIC and ATO is
regulated through Memoranda of Understanding (MOU)
• Objective of the MOU is to reduce duplication and compliance costs for industry
70
Table of contents
I The World Bank model
Leading role pension models compared to the World Bank model:
II
• Chile I. Country pension system summary
• US II. System characteristics
• Poland** III. Investment guideline
• Netherlands IV. Regulation and supervision
• UK V. Macro economic impact *
• Sweden VI. System pros and cons**
• Australia
III Main characteristics of other country’s pension systems
• Europe • Latin America • Asia
• Hungary • Mexico • China
• Czech Republic • Brazil • Korea
• Peru
• Slovak Republic
• Romania
• Greece
• Ukraine
• Russia
•* Only applicable to countries recently reformed
•**Only applicable to *marked countries 71
Hungary
Hungary Pension System compared to World Bank
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
HUNGARY VOLUNTARY
• PAYG • Mandatory occupational pension, • Voluntary pension f unds, individual
• Covers the entire labour force individual account. Free choice of the retirement savings
• 18% employer contribution to PAYG employee • Tax incentive paid either by the
• 8.5% employee contribution to PAYG • Half of the workforce is covered. employee or the employee
Pension (However, in certain circumstance, Career starters are obliged to join • Employer should treat employees
0.5% ee contribution to PAYG; 8% to • Remark: equal by providing equal amounts or
System Pillar II) • Single investment portfolio per fund; equal percentage of the pay as a
• Benefit: replacement ratio: first • Not really 2nd pillar, a recent study of contribution.
pension/final pay may vary between Pragma Consulting called this (along • Employees are free to chose between
25%-80% with the Polish system) 1st pillar bis. funds, employer can not restrict,
however informally does.
• Strong degression in the system,
• One pension fund can offer different
including a cap on income forming
investment portfolios
basis of the pension rights (This will
Major disapper until 2012 or 2020) II AND III
• Further decline of the average Alliance of major f unds is lobbying f or change:
Issues replacement ratio • Funds legal structure (self governance) is not appropriate for funds with
several hundred thousands members. Multinationals run reputation risk
without formal controll and ownership.
• Lobby f or legislation, supervision change:
MPF investment portf olios, administration • Clients can switch fund too frequently (6 months) following short term yield
ease, ownership – on going along with the changes, supported by a very low cap on exit fees. We would prefer being able
Recom competitors to tie the client to the fund (on a voluntary basis) e.g. by offerring lower fees.
• Lobby f or more public / private
menda partnership: expect a raise in 8%/18.5% in
f avour of MPF. MPF is a more important
tions market than VPF (f aster growth, more
stable income)
• Investment regime – not prohibiting at this
stage
72
Czech
Czech Pension System compared to World Bank
Publicly financed schemes, social Employer sponsored schemes or Additional voluntary arrangements
WB security schemes private mandatory programs + individual retirement income
I STATE II MANDATORY III
Czech VOLUNTARY
• Two part system: • Non – existence in our definition • Voluntary DC pension funds by
•Flat rate basic amount for all employer / ee and state (minimum
•Earnings related portion related sponsoring). AuM: € 3 bln
to employment • Also voluntary pension arranged by
Pension • PAYGO mechanism
• Contribution 21,0% by employer 7,0% insurance companies. AuM € 1.5 bln
• >50% workforce participated
System by employee
• 25% employee have additional
contribution by employer
• Tax incentive
• No political consensus on future • Government election ahead, no • Highly consolidated market: 12
pension system major decision to be made prior pension fund owned by 10 groups
Major • Low fertility rate election • Too low contribution: benefit is
• Funding for transitional period less than3% of avg. gross wage
Issues uncertain
• Advice government to establish • Increase contribution rate,
mandatory pillar II business with possibly introduce mandatory
Recom meaningful tax incentive scheme
• Acquire extra planholders (grow
menda from 25% to40%) for additional
tions contribution by employer
• Increase tax incentives for
employers and direct subsidies
for individuals
73 • Product / investment solution
Slovak
Slovak Pension System compared to World Bank
Publicly financed schemes, social Employer sponsored schemes or Additional voluntary arrangements
WB security schemes private mandatory programs + individual retirement income
I STATE II MANDATORY III
Slovak VOLUNTARY
• PAYG, DB • Mandatory contribution for all new • Voluntary pension plan (DDP)
• 28.5% mandatory contribution employees entering work force; • AuM < 1% GDP
•After reform, individual can Voluntary for people in current
Pension chose contribution rate to be
workforce
reduced to 19.5%
• Individual account with 9%
• Current pension expenditure: 7%
System of GDP contribution, with minimum 10
• Replacement ratio 45.2% (net years commitment
pension / gross wage)
• Ageing population • Good participation rate • To be transformed to align with
• Sustainability of quite generous second pillar
Major benefits of I. pillar after reform
Issues
• Develop the third pillar more
extensively
Recom
menda
tions
74
Romania
Romania Pension System compared to World Bank
Publicly financed schemes, social Employer sponsored schemes or Additional voluntary arrangements
WB security schemes private mandatory programs + individual retirement income
I STATE II MANDATORY III
Romania VOLUNTARY
• PAYG state pension • Non existent in practice • Occupational pension law was
• Currently already 10% of GDP • Current new law approved in issued in 2004, but not implemented
2004 not sufficiently worked out yet
Pension yet; changes expected to be • Law in process of ammendment, to
made by the new government be implemented in 2006 with tax
benefits;
System • Very small at the moment, only
pension products labeled like this
and offered by life insurance co.
• Pensions unfundable • Following Polish model but • Increase incentives, currently
• Looking into pension reform contributions are too low from 2% there are not deductible for the
Major • Current drafts very unclear to 6% in 8 years individuals and dis-incentivised for
• High inflation and pension not • The categories of eligible persons the employer;
Issues indexed according to the cost of and the low contribution make it • State sector institutions and
living – retired persons most unattractive for business; companies not allowed to have
affected changes expected pension schemes
• Use copies of other pension reforms • Set fees at a rate that is • Tax incentives are key
• Use co operation between public and acceptable for private parties to • Review the eligible companies
private sector to arrange a optimal
Recom system
invest in Romania that can create occupational
• Increase the contribution, pension schemes;
menda increase the potential eligible • Leave it to the market forces the
tions persons for the private system level of fees
75
Greece
Greece Pension System compared to World Bank
Publicly financed schemes, social Employer sponsored schemes or Additional voluntary arrangements
WB security schemes private mandatory programs + individual retirement income
I STATE II MANDATORY III
Greece VOLUNTARY
• Very diffuse first pillar, very • Non existing • Very low number of AUM
fragmented and financially • Most payouts are in lump sum
unbalanced
Pension • Based on occupational lines
• Three tiers all based on PAYGO
• Total spending already 12,5% of
System GDP
• Very high replacement ratio of
107%
• Totally unaffordable and • No big tax relief
unsustainable system
Major • Unclear system
Issues
• Huge reform needed • Improve benefits
• Inefficient systems should be • Payout in annuities
improved
Recom
menda
tions
76
Russia
Russian Pension System compared to World Bank
Publicly financed schemes, social Employer sponsored schemes or Additional voluntary arrangements
WB security schemes private mandatory programs + individual retirement income
I STATE II MANDATORY III
Russia VOLUNTARY
• PAYGO system • 1996: individual personified • Non state pension funds; life
• Large coverage accounts introduced in State PF insurance
•Labor pensions • 2003: Choice of opting out to • NSPF through employer, with
Pension •Social pensions
Asset Management Company possibility of joint financing and
• 2004: Choice of opting out to additional individual contributions
System Non-state Pension Fund
• Non sustainable • Still relatively new concept and as
•So far only about 8-10% of
• Very low pensions; non indexed a result lack of awareness
eligible population has opted out
Major • Flawed introduction of
•No awareness campaign;
monetization of pension benefits
practical difficulties for opting out
Issues led to up rise amongst population
•Rules of the game constantly
• Reforms needed
changing
• Higher pension age
•Unambiguous political support •Abolish social security tax on
for pension reforms pension contributions
Recom •Awareness campaign for •Introduce further tax incentives
menda population for individuals
tions •Create level playing field for all •More stable legal and fiscal
providers environment; more predictable
and professional supervision
77
Ukraine
Ukraine Pension System compared to World Bank
Publicly financed schemes, social Employer sponsored schemes or Additional voluntary arrangements
WB security schemes private mandatory programs + individual retirement income
I STATE II MANDATORY III
Ukraine VOLUNTARY
• PAYGO system effective since • Active from January 1, 2007 • Effective since January 1, 2004
2004 • Personal accounts • Open funds, corporate funds,
• Principles of solidarity and • 7% of wage contribution professional funds; voluntary
Pension subsidization -everyone has to
• Payout lump sums or annuities participation - employers/
contribute to Pension Fund of
• Between 2007/2018 managed by employees
Ukraine (PFU)
System • 34% of wage fund PFU and asset management • Tax benefits
• Old age pensions, disability companies. In 2018 pension • The banks participation declared
pensions, survivor‟s pensions funds get access to management via accumulation accounts
• The pension level remains • The issue of privileged pension is
inadequate even after increase not resolved • Totally new concept: market
• A lot of privileges in contributions • Criteria for the asset management just started up
Major • Legislative contradictions exist
payment to the PFU from different companies is the focus for
• Problems with investments of
Issues economy sectors legislative controversy pension assets
• PFU is non sustainable
• Reforms needed
• Make it attractive for private
• Higher pension age • Resolve legislative
parties with international
• Reduce privileges in payment of experience to enter the market problems/contradictions
Recom contributions to PFU; set up • Bring related effective laws in the • Launch ad-hoc propaganda of
menda allocations within State Budget
line with current pension Non State Pension System
expenditures to compensate for
tions privileges; ensure complete legislation • Develop reliable investment
separation of sources for funds options for pension assets
* Laws still have to be implemented by bylaws
78
Table of contents
I The World Bank model
Leading role pension models compared to the World Bank model:
II
• Chile I. Country pension system summary
• US II. System characteristics
• Poland** III. Investment guideline
• Netherlands IV. Regulation and supervision
• UK V. Macro economic impact *
• Sweden VI. System pros and cons**
• Australia
III Main characteristics of other country’s pension systems
• Europe • Latin America • Asia
• Hungary • Mexico • China
• Czech Republic • Brazil • Korea
• Peru
• Slovak Republic
• Romania
• Greece
• Ukraine
• Russia
•* Only applicable to countries recently reformed
•**Only applicable to *marked countries 79
Mexico
Mexico Pension System compared to World Bank
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
MEXICO VOLUNTARY
• PAYG • AFORES & SAR System Private sector employees:
• Facing out: • Mandatory contribution of 6.5% • DB driver = Termination Indemnity
• Employees before „92 who did not salary and possibility of voluntary (11,6 bln Euro*)
change to new individualized contributions • Some additional DC plans (mainly
Pension multinationals and corporate 500+).
system (SAR & AFORE) • Offered via large agent network
Mostly as hybrid system (1,45 bln E)
System • Civil servants (ISSTE) -- although • AuM: 46 bln Euro
Individuals:
currently issuing law to transfer • Participants: 32 mln • Voluntary contribution to AFORE
them to Afore (estimation 2 mln • Other individually acquired plans /
civil servants) savings
• Un-funded • Although fully funded, not sufficient Private sector employees
• If ISSTE civil servants are mandatory coverage. • Lack of regulation enforcing
transferred, PAYG will be • „Unnatural fit” between privately run retirement age (DB driver =
Major system (high profit), mandatory by Termination Indemnity)
completely facing out in due time
Gov. (lowering costs) >overregulated • Lump sum at pay out
Issues • Informal economy Individuals
• Providers fee structure • Low awareness and information
• Transfers war • No tax incentives
• Finally transfer of ISSTE • Enlarge the coverage and increase Private sector employees
employees to Afore system the investment range abroad • Termination indemnity should not be
Recom • Incentivise formal economy retirement-termination
menda • Set retirement age • Incentivise via taxes
• Mandatory contributions for Individuals
tions independent workers • Tax incentives
• Product and investment options
80
Brazil
Brazil Pension System compared to World Bank
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
BRAZIL VOLUNTARY
• PAYG • Private sector employees • Closed corporate pension funds,
• Mandatory, minimum benefit • Non-existing, government not open corp. pension plans &
defined by constitution interested in discussion so far individual plans
Pension • Large deficit caused by imbalance • Short-term saving so far (change to
and ageing of population long-term products; recently
• Civil servants‟ pension unified with proposed new product family should
System be in place as of 2005)
private sector employees and so
capped recently • Tax incentives available
• Dominated by banks
• In-transparent system mixing • Not in place • Short-term products only
different social&health payments • Crucial for overall pension reform • Heavily regulated including ban on
Major together • Brings substantial assets for penalties for early withdrawal
• Informal economy boosting national economy • Transformation of the closed pension
• Not a feeling for acute changes at funds to the open plans
Issues • Outsource plans to professional
the moment providers
• Step-by-step change to be started • Introduce this pillar ! • Individual & Corporate
• Differentiate clearly the obligation • The Vision: “Mandatory scheme • Introduce truly long-term products
(now mixed in one social system)
Recom • Increase of transparency and move to
ran by professional pension while keeping tax incentives for
providers and asset mangers individuals as well as for
menda fully funded system in the long-term with long term commitment” corporate sponsors
tions • Incentivise formal economy
• Make the system less generous for
• Active participation in formulation • Product options
the state civil servants of the second pillar • Investment options
81
Peru
Peru Pension System compared to World Bank
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
PERU VOLUNTARY
• National System competes with Private • Private sector (AFP): new industry of • Other voluntary pension
System pension f und managers, strictly arrangements
• Public system: PAYGO, mandatory (if you regulated by State, mandatory (if don´t • Could be added as voluntary
enter public system), 11.19% monthly
Pension don‟t enter to private system), 13%
f ees contribution.
contributions to the AFP, although
employees contribution, lump sum will imply restrictions on withdrawals
• Not maximum top-cap f or contributions
payment at retirement age. • Very small
System • State guarantee minimum pension: S/ 415
increase f inal pension f or af f iliate
• No tax incentives
• Fully f unded • Lacks to complement benefits from
• Only 3.5mln of the 12mln economically
active population is af f iliated to an AFP
the mandatory pillars
• Un-f unded • Not suf f icient coverage • Low awareness and information
• In Peru exist an elderly population which • Political pressure to reduce prices • No tax benefits
misses social assistance benef its. (In • Multiple Pensions Funds
2003 only 26% of elderly were receiving • New transf er regulation
Major pensions, WB recommends the • Not tax benef its f or employers and
establishment of a “Zero Pillar” employees
Issues • Broken system • New player in system.
• Unf air and bias pensions
• High proportion of National Budget used in
pension payments
• In the short run, reduce gap between • In the long run, commission should be • Increase awareness and
dif f erent pension regimes (20530 and based as percentage of AUM information
• Tax incentives in order to increase
Recom 19990)
contributions rates
• Product options
• In the short run, reduce resources directed • Investment options
menda to pensions •Tax incentives f or companies
• In the long run, close public system f or < •Tax incentives f or individuals • Tax benefits (EET)
tions 45 years in order to switch f rom pay-as- • Spread private pension system benef its
you-go to def ine contribution and stop to all the labour f orce
entrance of new labour f orce
82
Table of contents
I The World Bank model
Leading role pension models compared to the World Bank model:
II
• Chile I. Country pension system summary
• US II. System characteristics
• Poland** III. Investment guideline
• Netherlands IV. Regulation and supervision
• UK V. Macro economic impact *
• Sweden VI. System pros and cons**
• Australia
III Main characteristics of other country’s pension systems
• Europe • Latin America • Asia
• Hungary • Mexico • China
• Czech Republic • Brazil • Korea
• Peru
• Slovak Republic
• Romania
• Greece
• Ukraine
• Russia
•* Only applicable to countries recently reformed
•**Only applicable to *marked countries 83
China
China Pension System compared to World Bank
Publicly financed plans, social security Employer sponsored plans or private Additional voluntary arrangements
WB plans mandatory programs (possibly sponsored by Employer)
CHINA I STATE II
III MANDATORY VOLUNTARY
• Basic old age pension consists of 2 • • Corporate annuity is voluntary, but
components: perceived as 2 pillar corporate
Ia. Social pool pension – Employer pension.
• Legislation announced, implementation
contributes 15% (in some cases 17%) to
is scheduled in 2006
f inance current retirees. Def ined benef it
Pension at 20% of (local) average wage
• 4 types of players: trustee, custodian,
plan administrator and asset manager
1b. Individual account – Employer • Employer receives 4% (up to 10%,
System contributes 5% (in some cases 3%) and depend on the region and provincial /
employee contributes another 6% - 8% municipality decision) tax benefit on
(8% applicable if employer contribution is pension contribution
3%). Benef it based on 11% contribution • Individual receives no tax benefit
• Voluntary Personal savings (life annuity)
small
• Rapid aging population created a bigger • Lack of tax incentives (tax system is not
pension gap as 15% of employer yet in place) Voluntary contribution in a market
contribution was not enough to pay 20% where pension is still a new concept, this
at retirement effectively lead to limited subscription
• Lif e expectancy increased f rom 49
years in 1949 to 71 years now. In • Lack of long-term investment instruments
complicates participation of commercial life
urban area, the rate is even higher companies (Bank deposit = 2%, max. 10-year
• One child policy duration bonds available, no international
Major • Due to insuf f icient f unding, some of the 1b investments are allowed)
individual account asse.ts being used to
pay of f the social pool benef it. As a result, • Individual voluntary savings is almost non-
Issues individual account is more of a notional existent
account. • Low individual awareness
• Economic inequality (between the rural
and urban, or costal and inland) resulted
in dif f erences in some regions have better
pension f unding than other. Hence,
pension problem has to be dealt with on
regional basis
84
Korea
Korea 1.) Current Pension System compared to World Bank
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
KOREA VOLUNTARY
• National pension scheme, compulsory f or • Retirement allowance system equals to • All financial institutions provide
all employees (Civil servants, teachers severance pay (ESP) personal pension plans
and armed f orce arranged separately) • Retirement insurance contract (RI) or trust • High tax incentive, plan can
• 9% wage contribution, equally divided structure (RT) used to externalise liabilities withdrawal as early as 5th year
er/ee under ESP
Pension • Benef its related to number of years • Insurance companies have over 90%
employment and also earnings. Relative market share in RI
• RI do not grow in recent years due to
System generous benef it with currently 60%
unf avourable accounting standards to
replacement ratio
employer and weak economic conditions
• Retirement age : 60, to be raised to 65 • Employer pays all contribution, contribution
• Current NPS f unded with a surplus of 140 tax deductible
trillion won, approx. 15% of GDP • Lump sum or pension benef it at age 55
• However, demographic developments as • Retirement allowance covers all • Premature withdrawal by many
well as low return lead to structural employees work in companies with 4+ people as too favourable tax
imbalance of the f unds people. However, it represents only 30% of structure for individuals
• Unf avourable perf ormance of the f und due economically active population • Fierce competition among financial
• Benef its used as annual bonus or lump
to tight investment restrictions - currently institutions which erodes margins
Major part of f unds outsourced to int‟l f und
sum payment to meet cash f low needs ->
for service providers
insuf f icient income f or retirement. Benef its
managers (ING - Kookmin is one of the NOT meaningf ul even f or members with 35
Issues f und managers) years contribution and no early withdrawal
• Public lack of conf idence in NPS bef ore age of 55
• Self employed, account f or a quarter of • System severely under f unded
working population, NOT covered by NPS • Companies under f unding lead to slow shif t
to new RPS
• Structured loan arrangements can help
transition (f rom RAS to RPS)
Recommen
dations
85
Korea 2.) reformed Pension System compared to Korea
World Bank
Publicly financed plans, social Employer sponsored plans or Additional voluntary arrangements
WB security plans private mandatory programs (possibly sponsored by Employer)
I STATE II MANDATORY III
KOREA VOLUNTARY
• Same as previous slide • 3 dif f erent sub-markets exist af ter ERISA • Same as previous slide
•Retirement allowance system
•Retirement pension system
•IRA (f or job switchers and companies
with < 10 employees)
Pension • Contribution: 8.3% annual salary
• Benef it: pension payout or lump sum
payout (only applicable if member has <10
System years contribution)
• Early withdrawal possible if meets certain
criteria, ie., f irst time house purchasing
• Tax benef it unclear
• Too many options (old system remain)
•Members (employers too) obliged to
join a system, but it is up to the member
to choose f rom new or old system
• Not clear incentive f or individual and
Major employer to switch to new retirement
pension system
Issues
86
