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Pension FundsPension Funds

Globally, in Asia and in PakistanGlobally, in Asia and in Pakistan

Jeremy GadburyJeremy Gadbury

The International SecuritiesThe International SecuritiesConsultancy LimitedConsultancy Limited



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Jeremy Gadbury The International Securities Consultancy LimitedJeremy Gadbury The International Securities Consultancy Limited August 2005 August 2005

Pension Funds and Retirement Fund

Schemes ± A Global View

Concepts and Practice, Structure, Role of

Trustees and Investment Managers



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Global population growth tending to stabilise,

population mixes changing significantly in 1990¶s

Lower birth rates, particularly in urbanareas, developed countries

Improved healthcare

Decline in smoking related diseases

Ageing population ± more elderly people, fewer

people to support themAnd liable to change more in the years to come



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The ageing crisis«

Ageing population

People living longer, working less

4-2-1, 18-42-22, 15-50-10

« the pensions crisis ± or income after employment

Governments, companies afraid of future liabilities

Compounded by lower interest rates, poor equity

market returns since 1998, early retirement on fullpensions

And increasing dependency ratios; The number of

working age people ³supporting´ elderly.



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And some remedies«

World Bank in 1994

World Bank in 2005

The Chilean model

Encourage saving,

Change the benefit age

and the move to defined contribution



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The World Bank¶s advice in 1994

Three pillarsUsed as a reference point or adopted by a number

of developing economies, including China. China

had no securities market that anyone could

confidently invest in for some time.



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The World Bank¶s advice in 1994 :Three pillars

(b) a ³first-pillar´ contributory system that is linked to

varying degrees to earnings and seeks to replace someportion of income;

(c) a mandatory ³second pillar´ that is essentially an

individual savings account but can be constructed in a

variety of ways;

(d) voluntary ³third-pillar´ arrangements that can takemany forms (individual, employer sponsored, defined

benefit, defined contribution) but are essentially flexible

and discretionary in nature.



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The World Bank¶s advice in 2005

Five pillars

Two more pillarsZero -a noncontributory or ³zero pillar´ (in the form

of a demogrant or social pension) that provides a

minimal level of protection;, and

Five -informal intrafamily or intergenerational

sources of both financial and nonfinancial support

to the elderly, including access to health care and

housing.



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The Chilean model

Born out of a crisis«State system in crisis, huge liabilities, no assets

Solution - move to defined contribution, early

restrictions on investment with an emphasis on

government securities, individuals built up

savings.Well regulated products, some problems on

marketing, but overall a success, developing

assets for investment domestically.



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And a general trend to governments (for their own

promised employee benefits) and employers

wanting to replace promised benefits for all withdefined contribution systems

And now for some government social security and

basic pensions to be reviewed, when benefits are

payable and how much they might be.



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Occupational savings schemes and their structures

�Structures (such as 401(k)) determined by what the

legislation allows

�Legislation comes in Labour Laws and directives,

Pension Laws and directives, Tax Legislation that

encourages occupational savings schemes

�Pension reform programmes needed to update

legislation

Principle objectives are to increase coverage, protect

members and their savings



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Most schemes are voluntary, generally established by

an employer, i.e. occupational savings.

Legislation evolves, often through experience;

regulation and supervision reactive.

Schemes increasingly established separately to a

company, assets ring fenced through a trust structure,

policy or other separate legal identity.

Legislation identifies roles, the company, the trust and

trustees, and the various service providers



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Defined benefit causes greatest concern, law usually

needs them to be funded, with regular actuarial

valuation; generally liberal investment policy with

only few restrictions, need to matching liabilities,

through asset liability structures.

Defined contribution ± single investment policy,

increasingly replaced by member choice, the idea of

offering a range of investment products, evolving intomulti manager.



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Occupational savings

Decisions usually made by an employer as to what

structure is offered.

In member choice, pressure for a wide choice of funds

in North America becoming more usual, and in

Australia recent requirements to offer more products.



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Structure, transparency and publicity produces their

own safeguards, particularly since Maxwell crisis,

which led to collective responsibilities of trustees.

Trustees, seeking advice from Consultants,

employing Investment Managers

Employers/Plan Sponsors. Seeking advice from

Consultants, seeking to control their own ongoingliabilities

Regulator, legislation brings in marginal controls.



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Roles spread across various parties, even where

specific legislation doesn¶t apply

Regulated entities ± Investment Managers

Insurance Companies

Some Consultants

Legislation, regulation - Trustees

Generally unregulated - Consultants

Additional requirements, such as record keeping andadministration, accounting standards, auditing

requirements, actuarial valuations.



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But still the need for

Pensions Ombudsman, in the United Kingdom

Independent arbitrators

Appeals and complaints processes



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Overregulation can discourage innovation and

product development. Pricing controls generally

don¶t work ± except for ³high´ limits.

Underregulation leads to abuse, mis investment.

Regulation on voluntary systems tends to be light,

with firm touch, but reactive.

Doesn¶t prevent effects of financial failure of

employer where ongoing contributions are needed

to fund liabilities.



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Need to establish organisations such as Pension

Benefit Guaranty Agency in the United States,

Pension Protection Fund in United Kingdom.

Pension System is too big to protect from massive

financial shock, only able to protect small sample

in normal range of financial conditions.

Defined construction can only get structural

projection, limited investment protection.



2020




Personal savings and pension plans, aimed at self

employed and those wanting to make additional

savings, such as IRAs in the United States.

Tax driven, often in markets where they are ³sold´ not

³bought´, with high commissions.

There have been problems of pension misselling,

coming out of attractive structures into inappropriatehigh commission products



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Basic financial product dilemma ±

Regulate the product? or the means of distribution, the

individual and the corporate?

How much knowledge does the Regulator have over

how products are distributed, who buys them and why.

What is that makes products attractive or unattractive?



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Increasing coverage

Encouraging personal saving through

occupational savings methods

Tax incentives

Caps on fees

Educating people as to the importance of savings

Many pension products are sold not bought

But still low penetration«

« leading to the idea of mandatory systems.



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Where voluntary systems don¶t achieve policy goals,

more voluntary systems, then filling in the gaps with

mandatory systems.

Mandatory or near mandatory systems,

Australia Hong Kong¶s MPF

Korea, Malaysia,

Originally established as mandatory environment

Singapore¶s CPF



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Mandatory Systems

Regulatory touch, generally heavier, more threats,

controls, investigations. Need to regulate and control

various service providers.

Prescriptive legislation on investment, participants

and their financial and other qualifications.

Regulator is in the public eye, driven by fear of

individual loss and systemic risk.



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For investment managers

Definitive mandates on pension fund mandates,

reference to benchmarks

Increasing number of unconstrained mandates

On member choice

Lifestyle funds

Specialist equity and bond funds, supporting their own and third party products

High level of transparency



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Some global population pyramids«

India, 2000 China, 2000

A near standard pyramid One child policy



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Some global population pyramids: Source UN

Italy, 2000 Iran, 2000

Low birth rate



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Jeremy Gadbury The InternationalJeremy Gadbury The InternationalSecurities Consultancy LimitedSecurities Consultancy Limited August 2005 August 2005

Some global

population

pyramids, how they

are going tochange

Over 65

2001 18.4%

2015 22.3%

Impact of low birth

rate, ageing

population

continues

ITALY

2000

2025

2050



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Some global

population

pyramids how

they are goingto change

IRAN

2000

2025

2050



3030


Some global

population

pyramids how


improvinghealthcare

INDIA

2000

2025

2050



3131


Some global

population

pyramids how


low birth rate

CHINA

2000

2025

2050



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A government¶s dilemma

What does it do about an ageing population?

Whether it is the role of the government merely to

prevent pensioner poverty, or should it pursue a

policy to produce at least some relation between

earnings before retirement and the eventualpension, whether state or private?



3333




What is happening in Pakistan

An existing system of pensions, provident funds,gratuities in both the public and private sectors.

A new Voluntary Pension System.

From a ³policy´ point of view, not an ageingproblem, but for many individuals it is.



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Globally, in Asia and in PakistanGlobally, in Asia and in PakistanPakistan¶s

population

pyramids

1985

2000

Jeremy Gadbury The International Securities Consultancy Limited August 2005Jeremy Gadbury The International Securities Consultancy Limited August 2005



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20013.7% over 65

2015

4.0% over 65

fallingmortality rates

PAKISTAN

2000

2025

2050



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« some Pakistan demographics

Population growth rates Population Fertilityrates

1970 2.59% 59.56 million 6.28

2000 2.47% 142.65 million 5.48

2015 1.98% 193.42 million 4.11

2050 0.84% 304.70 million 2.06

Source: UN see www.globalis.gvu.unu.edu for more details



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« and some international comparisons

Life expectancy at birth

India Iran Italy Pakistan Russia1970 48.0 52.5 71.0 47.0 70.1

2000 62.1 68.6 78.2 59.0 66.1

2015 66.3 72.8 79.7 65.0 67.4

2050 73.8 79.1 82.5 74.7 74.2



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« and some international comparisons

Population aged 65 and above

India Iran Italy Pakistan Russia2001 5.0% 4.5% 18.4% 3.7% 12.8%

2015 6.3% 4.9% 22.3% 4.0% 14.3%



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Thank you

Presentation Jeremy

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