Robert Holzmann World Bank

Transcription

1 The Financial Crisis and Mandatory Pension Systems in Developing Countries: Short and Medium-term Responses for Retirement Income Systems Brown Bag Lunch P&D: January 13, 2009 Robert Holzmann World Bank

2 Financial crisis Motivation has reduced asset values affecting funded pension benefits and the reserves of PAYG schemes has impacted the real economy, incl. employment and fiscal revenues and costs What does this mean for Individuals and their benefits? Fiscal choices amidst competing priorities? Design and implementation of (funded & unfunded) systems? Short- and medium-term policy responses?

3 What is the impact of the financial crisis on funded pensions? (1) Recent real returns of pension assets (yoy) are substantially negative Wide-spread perception that retirement income is substantially threatened Short term views can be misleading - over the long term pension funds have had good performance There is room for recovery from current low asset values for pension funds and investing at low prices Financial assets form only part of the retirement income package

4 What is the impact of the financial crisis on funded pensions? (2) Many countries offer a minimum pension guarantee Only a minority of plan members may need to retire while financial assets are undervalued Potential increases in switching to PAYG schemes in countries with hybrid schemes and individual switching options Growing unemployment with an increased pressure to access the pension scheme (old age and disability pensions)

5 Table 1: Recent Real Returns of Funded Pension Funds (yoy) Growth Balanced Conservative Chile 13-Oct-08 real Mexico 30-Sep-08 real Peru 10-Oct-08 real Uruguay 30-Sep-08 real -7.5 Estonia 15-Oct-08 real Hungary 15-Oct-08 real -35.0* * Lithuania 15-Oct-08 real Poland 30-Sep-08 real Slovak Republic 13-Oct-08 real

6 Figure 1: Long Term Funded Pension Fund Returns Uruguay Peru Poland Chile El Salvador Bolivia Mexico Costa Rica Colombia Hungary Argentina Czech Republic Real Average Gross Annual Return (%)

7 Figure 1: Role of Financial Assets in the Retirement Package C h ile Peru M exico El Salvador Iceland U nited Kingdom Denmark Latvia N etherlands Slovak Republic Dominican Republic A u s tr a lia Poland Estonia Ir e la n d United S tates Lithuania Sweden Canada B u lg a r ia Hungary Argentina Uruguay G ermany C osta R ica S witzerland N o rw a y B e lg iu m Mandatory defined contribution Defined benefit Voluntary private pensions P rivate pensions, percentage of total retirem ent package

8 Figure 2: Minimum Pension Guarantees as a Proportion of Economy-wide Average Earnings Ira n Colombia Lou xem bourg Portugal Brazil Bahrain Egypt Jordan Spai n Al ge ria El Salvador Lybia Tunisia Tu rkey Pol and Peru Mexico Slovakia Djibouti Ira q Uruguay Costa Rica Swi tz erl and Bul garia Morocco UK Eston ia Average 0% 10% 20% 30% 40% 50% 60% 70% M inimum P ension (P ercent Average E arnings)

9 Financial crisis risk to impact real economy and budget position more than expected Peak-to trough changes in severe financial crisis Cum. changes % Duration, years Housing prices Equity prices Unemployment GDP per capita Change in public debt (after 3 years): +86 % Impact on LICs and MICs may be even stronger Source: Reinhart and Rogoff (2009)

10 Are pay-as as-you-go pensions affected as well? PAYG schemes are less exposed to financial crisis but will suffer from impact on real economy and employment In some countries the demand for fiscal support to pay old age pensions will increase as a result of the crisis The effects on plan members will depend on how governments accommodate pension payments (e.g. benefit indexation) There is also a risk of observing higher expenditures on disability benefits and early retirement pensions

11 What can be done and should not be done over the short term? The main advice is not to overreact and to analyze policy responses carefully.. In particular: (i) governments should avoid short-term term reform reversals that have not been properly assessed and may come at a high price for future retirees (ii) governments should treat the effects of the financial crisis as a tail/extreme event that requires temporary measures not structural changes in policy (iii) governments should not underestimate the positive effects that solid institutional investors (such as pension funds) can have on the financial system, enterprise financing, and ultimately employment and growth.

12 But the financial crisis cannot be ignored and the following measures need to be considered: Establish a public information campaign which explains which cohorts are effected and the likely longer term effects on benefits Carefully evaluate the tradeoffs in providing early retirement or limited early withdrawals. Establish a framework for deferred annuitization of cash balances and phased withdrawal in the meantime. Reconsider asset valuation rules in cases of extreme volatility and illiquidity in financial markets Evaluate the tradeoffs in establishing a time- bound program of guarantee of principal up to a maximum amount or proportion of an individual s balance.

13 What short-term term measures are advised for PAYG schemes? Disclosure of individual entitlements and a public information campaign which clarifies the risks and potential effects of the crisis and economic slowdown on anticipated individual benefits Where needed and affordable, provide government assistance to PAYG systems to deliver essential basic benefits to low income and vulnerable retirees Work to ensure that early retirement benefits are actuarially fair and fiscally sound

14 What should be done over the medium term? (1) Substantially improve pension fund risk management both for funded and PAYG schemes Improve supervision and adopt a riskbased supervision approach Better manage financial risks in funded schemes during accumulation and decumulation phases (e.g. life cycle risk management)

15 What should be done over the medium term? (2) Enact structural reforms to the overall package of multi-pillar pension savings and insurance mechanisms so that individual old-age income protection is more robust and secure (e.g. NDCs) Establish a small and well-designed zero pillar that assists the poorest and most vulnerable Integrate unemployment savings and possible insurance options into the overall social insurance system

16 Possible work program i. Continue to assist client countries to anticipate the medium- and long-term effects of short-term term reform measures ii. Support improved pension fund risk management iii. Support improved supervision in part through the adoption of a risk-based supervision approach iv. Strengthen the framework for individual risk management with multi-pillar systems, including o managing risk over an entire lifecycle o payout of benefits that limit the impact of short term financial volatility v. Establish a framework for a well-designed zero pillar vi. Evaluate options for integrating unemployment savings and insurance options into the overall social insurance system

17 Conclusions and recommendations (1) The effects of the financial crisis on pension funds cannot be extrapolated simply by looking at losses in asset values In a majority of countries only a portion of the retirement package depends on financial assets and many offer minimum pension guarantees Pensions are long-term investments and only a fraction of plan members would be exposed today to the realization of financial losses

18 Conclusions and recommendations (2) Governments should avoid adopting structural reforms that have not been properly analyzed Over the short term there is a rationale for targeted interventions to compensate affected individuals through temporary guarantees on principal or return Over the medium-term governments should take steps to strengthen current systems seeking a better diversification and management of financial and labor market risks The current crisis strengthens the need for diversified multi-pillar pension systems which allow for a better diversification of risks Increasing attention should also be paid to managing the exposure of individuals to short term financial risks in funded systems

19 Further reading and related links AFP (2008). Rentabilidad de los Fondos de Pensiones debe Evaluarse en el Largo Plazo. Nota No 67. October Santiago. Chile. Bebczuk Ricardo N. and Alberto R. Musalem (2009). Can the Financial Markets Generate Sustained Returns on a Large Scale?. In Holzmann Robert (ed). Aging Populations, Pension Funds, and Financial Markets: Regional Perspectives and Global Challenges for f Central, Eastern, and Southern Europe. World Bank. Washington DC., in print. D Addio, A.C., J. Seisdedos and E.R. Whitehouse (2008), Investment risk and pensions: measuring uncertainty in returns, Social, Employment and Migration Working Paper no. 70, OECD. Reinhart, Carmen and Kenneth Rogoff (2009): The Aftermath of the Financial Crisis, AEA Meeting. OECD (2008a), Pensions in a financial crisis. How should retirement-income income systems respond to financial-market turmoil? OECD, Paris, Dec. OECD (2008b), Pension Markets in Focus Issue 5, OECD, Paris, Dec. World Bank (2008), The financial Crisis and Mandatory Pension Systems in Developing Countries, HDNSP, World Bank. Washington DC., Dec.

20 Country % Wage to Funded Proporti on of total Contribu tion to Funded Pension systems in ECA Year Funded Started Participation in Funded Bulgaria 5% 21.7% 2002 Mandatory <42 Full cohorts in 2023 Croatia 5% 25.0% 2002 Mandatory <40, Voluntary Year Funded Participants Retire Partial cohorts of women by 2008 and of men by 2013; full cohorts of women by 2022 and of men by 2027 Estonia 6% 20.0% 2002 Voluntary Partial cohorts by 2012 Hungary 8% 23.9% 1998 Mandatory new entrants; voluntary for all others Kazakstan 10% 100.0% 1998 Mandatory for all Partial cohorts by 2008; full cohorts by 2035 Full cohorts by 1999 but acquired rights in old system in addition Kosovo 10% 100.0% 2002 Mandatory for <55 Full cohorts by 2012 Latvia 8% 24.0% 2001 Mandatory <30, Partial cohorts by 2013; full cohorts by Voluntary Lithuania 5.5% 22.0% 2004 Voluntary Partial cohorts by 2014 Macedonia 7.42% 35.0% 2006 Mandatory for new Partial cohorts by 2016; full cohorts of entrants women by 2043 and of men by 2045 Poland 7.3% 26.1% 1999 Partial cohorts of women by 2009 and of Mandatory <30; men by 2014; full cohorts of women by Voluntary and of men by 2034 Romania 2%, increasin g to 6% 6.7% 2008 Mandatory <35; voluntary Russia 6% 30.0% 2002 Mandatory for <35 Partial cohorts of women by 2023 and of men by 2028; full cohorts of women by 2033 and of men by 2038 Full cohorts of women by 2022 and of men by 2027 Slovak Republic 9% 31.3% 2005 Voluntary for all Partial cohorts by 2015 Source: Regional Bank Staff

21 Pension systems in LAC Includes funded scheme? National Scheme "True Multipillar" (1) Contribution Rates (Main system) Employee Employer Self Employed % of contributions to funded % of workers in funded scheme Argentina Yes Yes 11.0% 11-16% 27.00% 40-50% 55.0% Bolivia Yes No 12.2% 0.0% 12.20% 100.0% 100.0% Brasil No % 20.0% 20.00% Chile Yes No 12.5% 0.0% 100.0% 96.0% Colombia Yes No 7.8% 23.3% 31.00% 50.0% 56.0% Costa Rica Yes Yes 2.5% 4.8% 0.0% 100.0% Ecuador No % 1-3% 6.60% El Salvador Yes No 6.0% 7.0% 100.0% 98.0% Guatemala No % 3.7% 5.50% Haití No % 6.0% Honduras No % 2.0% México Yes No 2.7% 6.3% 9.00% 72.2% 100.0% Nicaragua No % 15.0% Panamá Yes Yes 7.5% 3.5% 11.00% 68.2% n/a Paraguay No % 14.0% Perú Yes No 13.0% 0.0% 100.0% 72.0% Rep. Dominicana Yes No 2.9% 7.1% 100.0% 93.5% Uruguay Yes Yes 15.0% 7.5% 15.00% 50.0% 43.0% Venezuela No % 4.8% Note: (1) Means that workers in the funded scheme also participate in a PAYG pillar Source: Regional Bank Staff based on based on Mesa Lago (2008), FIAP (2008), and Goldschmit (2008).