PENSION FUNDS INTRODUCTION HOW CAN WE DEFINE THE PENSION FUNDS? WHICH KIND OF IMPACT DO THEY HAVE ON...
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PENSION FUNDS INTRODUCTION •HOW CAN WE DEFINE THE PENSION FUNDS? •WHICH KIND OF IMPACT DO THEY HAVE ON FINANCIAL MARKETS? •THE STRUCTURE OF PENSION FUNDS •PENSION FUNDS IN ITALY
PENSION FUNDS INTRODUCTION HOW CAN WE DEFINE THE PENSION FUNDS? WHICH KIND OF IMPACT DO THEY HAVE ON FINANCIAL MARKETS? THE STRUCTURE OF PENSION FUNDS
PENSION FUNDS INTRODUCTION HOW CAN WE DEFINE THE PENSION FUNDS?
WHICH KIND OF IMPACT DO THEY HAVE ON FINANCIAL MARKETS? THE
STRUCTURE OF PENSION FUNDS PENSION FUNDS IN ITALY
Slide 2
PENSION FUNDS:DEFINITION Pension funds are institutions
carrying out the collection of contributions of employees and / or
employers. Contributions have to provide beneficiaries with a
relevant paid-in capital at the end of the working life. Benefits
will be paid either in the form of annuity or in the form of
full/mixed payment. Institutional investors are having a social
security benefit. the shares are the contributions paid during the
period of employment which, properly invested, will ensure the
provision of future pension benefits. In fact this is a system
based on capitalization. Pension funds collect funds which will be
returned at the end of employees working life and then the manager
is faced with liquidity constraints, which are less strict about
the choices of the forms of investment.
Slide 3
THE IMPACT ON FINANCIAL MARKETS In view of the social security
purposes, the long-term perspective of investment, and the
considerable size of these actors in the global capital markets,
the PFs now constitute a category of investors vital to the growth
of modern economies. In fact, they contribute : a) to increase the
size of financial markets (it helps to increase the capitalization
of financial markets) b) to increase efficiency (it improves the
international diversification of private savings portfolio) c) to
improve the governance of companies they invest in, exerting
political activism, because it implies the involvement of investors
in the management of investing companies.
Slide 4
TYPES OF PENSION FUNDS Depending on the person establishing the
fund, we can identify two types of pension funds: OPEN AND CLOSED
FUNDS. Closed funds : closed-end funds are defined as such because
they are reserved exclusively for certain categories of workers or
firms. They are legal entities of association promoted by trade
associations, trade unions, business organizations. (eg, lawyers
and doctors) Open funds : are called open because they do not refer
to particular categories of workers, in fact you can join all those
who are not eligible to enter a closed pension fund.
Slide 5
TYPES OF PENSION FUNDS 2 We can also distinguish pension funds
according to different lines of investment: single sector funds and
funds with multiple compartments. Contractors are entitled to enter
for a predetermined period of time to one of these lines of
investment, depending on their risk appetite. in single-sector
funds there is only one line of investment, either bonds or
balanced; while in multi-sector funds there are several lines of
investment and in this case contractor may choose between cash,
equity, bond and mixed. the choice is determined by some factors,
such as: age (which defines the investment horizon), the total
wealth of the worker, marital status, education, gender.
Slide 6
PENSION SYSTEM DESIGN:ITALY Italys pension system consists of a
PAYG public pension pillar as well as voluntary occupational and
private pension plans. With a total of approximately EUR 350
billion pension assets under management in 2004, Italy is one of
the largest European pension markets. Its life insurance market is
at the fourth place out of all the European markets and it is set
to continue outpacing the European average growth rate. Although
Italys invested pension market is still small, the outlook for this
sector has brightened with the passing of a new bill that was
signed in October 2006. The bill encouraged the transfer of
indemnity payments (severance pay, which is compulsory in Italy) to
the private pension market. We expect new pension funds to grow at
a compound annual growth rate of around 30% until 2015, turning
Italy into one of the most important European markets. Total
pension assets in the market are expected to grow at an annual rate
of 5.9% reaching EUR 914 billion in 2020.
Slide 7
THE AMOUNT OF PENSION BENEFITS Nowdays in the system the amount
of pension benefits will not depend on salary levels but on the
contribution deposits. At the end, a notional capital stock is
formed from the contributions paid in. Calculation of the pension
benefit takes into account this notional sum and the recipients
remaining life expectancy at the time of retirement. The statistic
forecast shows that the average pension level of a 60- year-old is
set to sink from 67% today to 48% by 2050. However, means-tested
social assistance pensions and supplements to social security
pensions will guarantee a minimum income level beyond the age of
65.
Slide 8
OPEN & CLOSED PENSION FUNDS AND IPP(INDIVIDUAL PENSION
PLAN) In Italy there are two types of pension funds: Closed or
contractual pension funds which are implemented either as company
pension funds by a single company or as industry-wide pension funds
which are set up by the employers association and by trade unions
for a specific group of participants; Open pension funds that are
offered by banks, insurance companies or investment management
companies for a generic group of participants, i.e. the
self-employed. the employee can choose between open and closed
pension funds and the individual pension plan PIP. However, it is
not certain that it will lead to a real competition between the
three core pension products, i.e. closed pension funds, open
pension funds and the individual insurance plans. All pension funds
have to sign an agreement with an external investment manager that
can only be an insurance company, a bank or a registered asset
management company (Societ Gestione Risparmio or SGR). Today, all
pension funds operate on a defined contribution basis, as this is
the only possible type of pension plan.
Slide 9
Termination indemnity payments (TFR) Upon termination of
employment for any reason, employers have to pay a termination
indemnity (Trattamento di fine Rapporto or TFR) to all employees.
In Italy the TFR is used as a backup in the event of redundancy or
as an additional pension benefit after retirement. Severance pay is
calculated as 6.9% of each years annual salary, revalued on the
basis of 75% of inflation plus a fixed rate of 1.5% during the
period of accrual, and is paid as a lump sum. Assuming that the TFR
benefit is accumulated throughout a full career, it is expected to
provide a pension of 10% to 15% of final pay.
Slide 10
Why should be convenient underwrite a pension fund
contract???
Slide 11
Countries analysed GreeceValentina Gaddoni GermanyFrancesca
Farinelli United KingdomSaverio Monti Scandinavian CountriesTeresa
Lamonica New European CountriesSergio Cibotari United StatesElena
Paesetti
Slide 12
The case of Greece Pension system: based on a public pension
pillar Private pensions plans exist 2008 Government: reform
1.Increase early retirement age 2.More incentives to work longer
3.Less complexity and more clearness in public pension system
4.Decrease number of pension funds available The generosity of the
pension system will be a heavy burden on public finances in the
years to come. 1
Slide 13
Retirement &Public pensions The official retirement age is
65(men)and 60(women), but retirement is also possible after 30
years of contributions, or based on a combination of age and
contribution periods. 1 Pillar: complex and important It covers
employees and certain self-employed. One of the main public pension
schemes is IKA( Social Insurance Institute). 2
Slide 14
Pension funds Pension funds: Legislation concerning
occupational pension funds was introduced in 2002. The pension
funds are autonomous, non-profit private entities with own legal
personality. They are supervised by the Ministry of Employment and
Social Protection. More than 130 funds provided primary and
supplementary pension coverage (now only about 13). 3
Slide 15
Pension funds Pension funds are subject to quantitative limits:
A maximum of 70% of assets may be invested in equities or corporate
bonds No more than 5% may be invested in investment funds
Investments in non-EU and non-EEA countries are generally not
permitted Taxation of occupational pension funds is unclear 4
Slide 16
Conclusions Life insurance and pensions funds play a
subordinate role in Greek household portfolios, accounting for only
3% of assets. Pension fund assets account for less than 1%of GDP.
This is a reflection of Greeces underdeveloped funded pensions, but
it has a great deal of development potential. (Greek retirement
market CAGR:13.9%) 5
Slide 17
GERMANY PENSION SYSTEM: Predominance of the public pillar 2002
RIESTER REFORM: Reduction of public pillar More attention to the
occupational pensions Plans with capital preservation guarantees
Challenge: the retirement market will grow at a CAGR (Compounded
Average Growth Rate) of 4.6% until 2020.
Slide 18
PUBLIC PENSIONS The public pension pillar contributes more than
two- thirds of retirement income to people over 65 years of age
Public service schemes are financed directly through public budgets
German public system is known as pay-as-you-go system and it is
mandatory for all employees Some exceptions are provided for
certain professions, such as lawyers or architects and for the
self-employed
Slide 19
PUBLIC PENSIONS: RETIREMENT AGE REQUIRED:Actually people retire
at 65 years. However, recent reforms will increase the retirement
age to 67 in the period between 2012 and 2029 TAXATION:Since 2005,
at least 50% of pension benefits have been taxed. This share will
rise to 100% in 2040. The contribution rate is shared equally
between employers and employees and amounts to 19.9% of
salary.
Slide 20
OCCUPATIONAL PENSIONS Since 2001, employees have had the legal
right to access occupational pensions. Employers can offer
occupational pension provision in five ways: 1.Direct pension
promises (Direktzusage) 2.Direct insurance 3.Support funds
(Untersttzungskasse) 4.Pensionskassen 5.Pension funds
(Pensionsfonds)
Slide 21
PENSION FUNDS They were introduced in 2001 and are separate
legal entities. They are more return oriented and subject to much
more liberal rules than Pensionskassen: there are no limits to
equity investments, foreign investments or other asset classes.
However, there are limits to investments in single issuers or
issues and a 70% currency matching requirement. They guarantee the
paid-in capital minus costs.
Slide 22
..PENSION FUNDS.. Since 2005, Pensionskassen and Pensionsfonds
and direct insurance have been taxed in the same way. Contributions
of up to 4% of the social security ceiling are tax-deductible, up
to an amount of EUR 2,544. In addition, while investment income is
tax- exempt, benefits are taxed.
Slide 23
HOUSEHOLD PORTFOLIO
Slide 24
FINAL CONSIDERATIONS Occupational pension coverage in Germany
has been on the rise in recent years. The recent government
decision to extend the social security exemption of pension
contributions will also help the funded occupational pillar, that
is, pension funds as well.
Slide 25
The pension fund schemes in the UK the most large and
challenging pension market in Europe one of the most developed
funded pension systems
Slide 26
Quick look at the current pension system: Basic State Pension -
Old Age Pension - flat-rate scheme State Second Pension
-earnings-related - unlike the Basic State Pension, partecipation
to the S2P is voluntary
Slide 27
It is possible to contract out of the S2P by joining:
occupational pensions (arrangemetns established by employers to
provide pension and related benefits for their employees)
Stakeholder pensions (first example of a private pension designed
by governament with fixed administrative costs) Personal pension
plans (it is also possible for an individual to make contributions
under an arrangement they themselves make with a provider).
According to estimates, 60% of employees are in contracted-out
schemes.
Slide 28
The occupational pension system in the UK is voluntary and
plans have traditionally been implemented through pension funds and
insurance schemes. Most medium and large-sized companies sponsor
their own pension plans; small employers favour insurance schemes.
Pension funds
Slide 29
Pension plan can be of the: defined benefit (guaranteed level
of pension benefit established in advance) defined contribution
(pension determined by the value of the fund contributions) hybrid
type The UK is one of the first examples for the shift from defined
benefit to defined contribution plans.
Slide 30
Slide 31
Future trends While reforms in Continental Europe often try to
encourage funded pensions in general, reforms in the UK strive to
provide adequate pensions for lower-income earners. Attention is
paid to lower-income earners as these are most affected by the low
replacement rate of the public pillar. As for the the future market
trends, since the pension funds are still highly exposed to equity
markets, they will lose some of their value due to the current
market downturn.
Slide 32
Slide 33
The Icelandic pension system The pension system on the three
pillar principle: public pension membership in occupational pension
funds individual pension saving with tax incentives
Slide 34
The problem of ageing Smaller than among most developed
European countries: The Icelandic nation is younger than many other
European nations and the problem of ageing will thus be less during
the first decades of this century. High labour participation rates
of the elderly Mandatory membership of fully funded pension funds
(at least 10% of wages)
Slide 35
The Icelandic nation is younger than among most developed
European countries and will continue to be so well into this
century
Slide 36
Labour force participation
Slide 37
Norway The Government Pension Fund of Norway comprises two
entirely separate sovereign wealth funds owned by the Government of
Norway: The Government Pension Fund - Global (formerly The
Government Petroleum Fund) The Government Pension Fund - Norway
(formerly The National Insurance Scheme Fund)
Slide 38
Sweden Unique Public Pension Pillar in Western Europe: Social
security contribution is paid into individual investment accounts
and a funded pension is build up with independent fund management
companies responsible for the asset management.
Slide 39
Finland Pension Reform purpose: improve the structural features
in the pension systems. Voluntary occupational schemes and private
pension savings are not well developed due to the dominance of the
existing compulsory scheme. How to fund the sharp rise in
pension?
Slide 40
Could renewable energy change pension funds? Denmark
Slide 41
Denmark: the first direct investment in energy from a pension
fund. PensionDanmark is a not-for-profit labour market pension fund
established in 1993. It offers defined contribution pension,
insurance and health care products on the basis of collective
agreements covering 578,000 individuals employed in 27,000
companies within the private and public sector. Contribution rates
range from 12.0 to 18.0 per cent of wages with the employers paying
2/3 of the contributions and the employees paying 1/3.
Slide 42
Denmark 26 September 2010, PensionDanmark makes landmark energy
deal. This is a model for risk sharing and it protects
PensionDanmark from the downside. The risk-return ratio is
attractive for us and for Dong Energy: they can reduce their
capital to offshore parks and free up funds for other investment
areas, where they can see higher returns. Mr Mger Pedersen,
PensionDanmarks chief executive officer.
Slide 43
PENSION FUNDS IN THE NEW EU MEMBER STATES During the 1990s many
of the Member States that entered the EU in 2004 (Czech
Republic,Estonia,Hungary,Latvia,Lithuania,Poland,Malta,Cyprus,
Slovakia and Slovenia) or 2007 (Romania and Bulgaria) faced severe
problems with the functioning of their statutory pay-as-you-go
(PAYG) public pension systems. Particularly the: relatively low
retirement ages, high replacement rates and rather high social
security contribution rates which provided limited incentives to
participate in the system putting the PAYG schemes under pressure
as their economies shrank and the informal sector rose. 43
Slide 44
Overview of pension systems in the NMS All NMS have a funded
pension pillar in combination with the standard old-age PAYG public
pension. While all of these countries apart from Romania have a
private pension scheme with voluntary participation, not all of
these countries have yet implemented a private pension scheme with
mandatory participation. In the Czech Republic and Slovenia a
mandatory private pension scheme does not exist at all, while in
Lithuania, Poland and Slovakia, participation in these schemes is
voluntary for some groups. 44
Slide 45
As next table shows, statutory funded private pension schemes
differ significantly across countries. First, the stage of
development of these systems differs depending on the year of their
implementation. For example, Hungary already introduced its
statutory private pension scheme in 1998, while Slovakia
implemented it only in 2005. In other words, the Slovak scheme is
in this sense less mature than the Hungarian. Second, statutory
funded private pension schemes differ both in terms of contribution
levels and how these are shared between employers and employees.
For example, in Poland and Romania the statutory pension scheme is
fully financed by employees, while it is fully financed by
employers in Slovakia. 45
Slide 46
46
Slide 47
As we see, with 13.6 %, Bulgaria saw the largest increase in
the employment rate between 2000 and 2008, followed by Latvia 11.1%
and Estonia 9.4 %. The increase in unemployment over 2008-10 is
projected to be the strongest in Lithuania 10.1 %, followed by
Estonia 8.6 % and Latvia 8.5 %. The rise in unemployment also tends
to reduce individual pensions accounts. 47
Slide 48
Pension fund performance and risks These risks include in
particular the: inflation risk -namely the fact that inflation
grows faster than nominal returns on assets financial market risk
-which is associated with exposure of the pension assets to stock
market developments. 48
Slide 49
The size and structure of private pension fund assets The
savings cumulated in the pension funds increased sharply in the
NMS, but still remained at low levels when compared to many of the
old EU Member States. For example, the pension funds assets as a
share of GDP represented only about 4.7 % in the Czech Republic in
2007, 10.8 % in Hungary, 12.2 % in Poland and 4.2 % in Slovakia,
while they were about 79 % in the United Kingdom or 138 % in the
Netherlands. 49
Slide 50
The impact of inflation and financial market developments on
pension fund performance is determined by the structure of pension
fund portfolios. Private pension fund assets consist of: (1) bills
and bonds issued by the public and the private sector, (2) mutual
funds, (3) shares, (4)cash and deposits (5) other investment (e.g.
mutual funds). 50
Slide 51
Structure of Pension Funds Assets in 2007 As they should secure
income for their members in their post-retirement period, pension
funds in the NMS have often (but not always) opted for investing
rather conservatively. 51
Slide 52
Structure of Pension Funds Assets in 2007 As we ca see, in
2007, the share of pension fund assets invested in cash and
deposits, associated with low returns and low risks, varies from 70
% in Romania to 1 % in Hungary. 52
Slide 53
Structure of Pension Funds Assets in 2007 Also we can see,
apart from Estonia and Romania, bills and bonds issued by the
public and the private sector formed the largest share of private
pension assets in 2007. The majority of these debt securities were
issued by the public sector. 53
Slide 54
Structure of Pension Funds Assets in 2007 Source : OECD 54
Slide 55
The OECD estimates that the total investment loss worldwide of
private pension plans due to the 2008 turmoil in financial markets
was around USD 5 trillion (out of which USD 3.3 trillion in the
United States). Next figure shows a declining trend in the nominal
yields of pension funds between 2003 and 2006 in the NMS. The
nominal yields of pension funds were higher in the NMS than in the
old EU Member States; they declined from about 20 % in 2003 to
about 16 % in 2006 in the NMS, while they fluctuated in the old
Member States. The explanation of higher returns in the NMS may be
higher inflation and more profitable investment opportunities in
the NMS. Employees and employers contributions to pension funds
have been rising sharply in the NMS since 2003; however, their
level remained below that in the old Member States in 2007,
reaching only 1.2 % of GDP while it was about 1.7 % of GDP in the
old Member States. This could potentially be an indicator that the
population in the NMS is not accumulating sufficient savings for
the post-retirement period. 55
Slide 56
Source: OECD 56
Slide 57
Pension funds US PENSION SYSTEM
Slide 58
Pension funds
Slide 59
PENSION I PILLAR The pay-as-you-go (PAYG) basic state pension
scheme II PILLAR Occupational pension provision III PILLAR Personal
pension provision
Slide 60
THE FIRST PILLAR: public pensions Pension funds The official
name of American state pension system is OASDI (Old.Age, Survivors
and Disability Insurance Program). Assets (not negociated in the
market) are totally invested in bonds issue by the Government. is
financed through social security taxes equally shared between
employers and employees. The statutory retirement age lies between
65 and 67
Slide 61
Accumulation of the surpluses in the Social Security Fund to
meet future expenditures 1983: increasing of the social security
tax 20422042 year of the expected exhaustion of the Security Trust
Fund USD2.2 trillion : amount of the surpluses in 2004 Pension
funds
Slide 62
THE SECOND PILLAR: occupational pensions Pension funds There
are two categories of occupational pension plan: Defined-benefit
plans which are relatively heavily regulated and are financed by
the employer. Assets and liabilities are put into the property of
the firm. Defined-contribution plans the costs of which are more
predictable (15.000$ per year) Es:401(k) plan Defined contribution
is based on private funds managed by a consultant (external from
firm)provided by the employer.
Slide 63
THE THIRD PILLAR: personal provision Pension funds In 401(k)
plans, occupational meets personal pension provision
Slide 64
Financial crisis and US pension system Pension funds Less
active workers, less capitalLess active workers, less capital
Economic recession and public debt growth are risky for the long
term payments Their pensions depend from the fluctuactions of
financialmarket or banckruptcy of the firm.Their pensions depend
from the fluctuactions of financialmarket or banckruptcy of the
firm. es. Enron: es. Enron: When Enron failed, its employees lost
not only their jobs but also most of their pension. Defined
contributions schemes are risky for savers Pensions payed are
highly variable from one year to the nextPensions payed are highly
variable from one year to the next No stability of the private
investment account system
Slide 65
Pension funds President Obama is strongly opposed to
privatizing Social Security. Governments Program But the fact is a
secure retirement is being threatened today. Part of the reason is
rising costs. I dont have to tell you about this. You feel the
pinch every time you fill up a tank of gas because the price at the
pump has tripled over the past several years. You feel it every
time you go to the pharmacy and find that youre paying more for the
same drugs than you were this time last year [Barack Obama,
10/27/07] Strengthen Social Security Create Automatic Workplace
Pensions Expand Retirement Savings Incentives for Working Families
Require Full Disclosure of Company Pension Investments Reform
Corporate Bankruptcy Laws to Protect Workers and Retirees