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1 Comparison between retirement schemes across Europe : different solutions for a common problem 1
2 INTRODUCTION 2
3 The demographic ageing 3
4 4
5 Demographic dependency ratio in 2008, projected for 2010, 2020, 2030, 2040, 2050 et
6 Evolution of spending from public retirement schemes planed between 2005 et 2050 (according to economic scenario planed in 2004) 6
7 I. Analysis of 6 european cases II. Respective evolution of these different systems through a comparative work 7
8 I. 6 organisations, 6 ways of thinking retirement 1) United Kingdom 8
9 Estimated retirement rates following a typical complete career 9
10 Pension funds coverage per decile of income 10
11 Pension funds coverage per age 11
12 I. 6 organisations, 6 ways of thinking retirement 2) Sweden 12
13 Estimated retirement rates following a typical complete career 13
14 Copulsory and optional swedish contribution rate 3.5%- Contractual Benefit 2.5% - Funded 22 % 16% - NDC PAYG-component Social Insurance 18.5 % 14
15 Chronology of the swedish reform Working group on retirement Dec - 91 First project Aug - 92 Quadripartite agreement Jan - 94 Parlementary agreement on principles June - 94 Gradual introduction of the new scheme 1 January
16 1992 First governemental project Published 1994 Governement proposal on main axis of a reform Application committe On reform Chronology 1998 Agreement On new reform Law on compensation mechanism 1991 Governmental committee on retirement 1994 Ok form parliement on Reform s axis 2000 Parliementary decision on AP funds 2002 Realization of the new legislation 16
17 1. Credibility The new scheme must be financially stable, that is to say that it must be a defined contribution schemes = all risks on beneficiaries 2. Transparency A. All intra generational redistribution must be explicit and financed every year on the basis of a pre-determined contribution. B. Separation between retirement, survivals, et orphans benefits. C. Annual individual information to insured people on the notional amount of retirement income they contributed for 3. Inter-generational equity Reform s objectives A. Pay as you go scheme where you have your contribution bring back B. Contribution rates indexed on level of income (with retrictions) C. Collective reserve funds D. Automatic equilibrium system 17
18 Relationship between contrib. and pension credit 100 % 100 % 0 % Contribution Contribution : % % New notional scheme I Old PAYG scheme Reform s strategy III Contribution : 2.5 % Funded scheme FDC 0 % 100% Degree of funding II IV 18
19 Relationship between contrib. and pension credit 100 % 100 % 0 % Reform s strategy Defined Contribution (DC) I Defined Benefit (DB) III 0 % 100% Degree of funding (DC) II (DB) IV Retirees Contributors Who carries financial and actuarial risk contributors or retirees? 19
20 Every contribution gives the same benefit SEK Income 16 % PAYG Funded 2,5 % Age 20
21 Incomes taken into account Illness Unemployment benefit 11% Invalidity 4% 2% Children education 83% Salaries, work incomes 21
22 National retirement account SEK Indexation value Life expectancy 18.5 y. Rate of interest 1,6% Contribution values divisor Age 22
23 Pension amount for a year 60 interest 0,0 % growth 1,6 % Pensions amount AGE interest 1,6 % growth 2,0 % interest 1,6 % gorwth 1,6 % interest 1,6 % growth 1,0 % 23
24 Financial processes : Information & money Employer Taxation treasury NSIB More than 500 funds PPM 24
25 Minimum guaranteed Pension amount Guarantee Income-related Contributive pensions pension Contributive pension 25
26 Right of information What is my Notional Capital This year? 26
27 Replacement rate depending on departure age Person born 1962 starts to work at age 21, turns 65 in year 2027, flat income profile, real income growth 2 %, real return on FDC and occupational pension 3,25 % 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% NDC pension FDC pension Occupational pension Note that unisex remaining life expectancy at 65 is forecasted to be 20.5 years in year In year 2002 unisex remaining life expectancy at 65 is roughly This forces the replacement rate to dropp by ap. 10% relative to constant life expectancy 27
28 Life expectancy increases effects Cohort born.. turns 65 year Forecasted divisor (at 65) Effect on pension, relative to cohort born 1940 Required delay of retirement age to offset effect of increase in divisor % + 5 months % + 9 months % + 13 months % + 16 months % + 20 months % + 23 months % + 26 months % + 28 months % + 29 months % + 30 months 28
29 Cohorts variations and additional financing Pension rights A buffer fund is necessary 29
30 Equilibrium ratio reserves + Contribution amounts Ratio = Due benefits 30
31 Funds balance in 2005 Fund 550 mdr. SEK Contribution Asset Fund mdr. SEK SEK Pension Liabilities mdr. SEK ratio =
32 Normalised net income rates Demography = Base line 4.0% 2.0% 0.0% 60s 90s 40s % -4.0% -6.0% Old system Growth: 2% & 0.5% Labour particip. Lo,Mid,Hi -8.0% lågt AK., tillv. 0,5% lågt AK., tillv. 2% medel AK., tillv. 0,5% medel AK., tillv. 2% högt AK., tillv. 0,5% högt AK., tillv. 2% Without automatic balancing Without automatic balancing 32
33 Normalised net income rates Labour participation = Mid, growth = (0.5%, 2.0 %) 10.0% 5.0% High nativity Base line 0.0% % -10.0% -15.0% -20.0% 4 different demographic scenarios Low nativity Befolkningsscenario Low mortality A B C D Without automatic balancing Without automatic balancing 33
34 Balance ratio, Demography = Baseline, growth = 2% 1,50 1,40 1,30 1,20 1,10 5.0% 3.25% Rate of return 5.0% 3.25% 2% 1,00 0,90 2.0% %, with balancing 34
35 Buffer Fund Ratio Demography = Baseline, growth = 2% 10,0 Buffer Fund Ratio [years] 8,0 6,0 4,0 2,0 0,0 5.0% 3.25% Rate of return 5.0% 3.25% 2% ,0-4,0 2.0% 2.0%, with balancing 2.00% med 2.00% utan 3.25% med 5.00% med 35
36 Buffer Fund Ratio Nativity = Low, growth = 2 % 10,0 Buffer Fund Ratio [years] 8,0 6,0 4,0 2,0 0,0-2,0-4,0 5.0% % 2.0% Rate of return 5.0% 3.25% 2% 3.25%, with balancing 2.0%, with balancing 2.00% med 2.00% utan 3.25% med 3.25% utan 5.00% med 36
37 35 Comparative approach on investments on formation EU-15 B DK D EL E F IRL I L NL A P FIN S UK Eurostat
38 38
39 I. 6 organisations, 6 ways of thinking retirement 3) The Netherlands 39
40 Estimated retirement rates following a typical complete career 40
41 Dutch pension funds, per category 41
42 Dutch retirees income 42
43 I. 6 organisations, 6 ways of thinking retirement 4) The World Bank Model : Hungary and Poland 43
44 Estimated retirement rates following a typical complete career in Poland 44
45 Profit and losses of polish pension funds in Poland 45
46 Estimated retirement rates following a typical complete career in Hungary 46
47 I. 6 organisations, 6 ways of thinking retirement 5) Germany 47
48 Estimated retirement rates following a typical complete career in Poland 48
49 German retirees income s components before Riester reform 49
50 do you believe that the public retirement system will maintain your level of life? 50
51 Fiscal expenditure in favor of private supplementary funds in Germany 51
52 I. 6 organisations, 6 ways of thinking retirement 6) France 52
53 French retirement schemes organisation Basic regimes RG, RSI, MSA Complementary regimes AGIRC, ARRCO (2/3) (1/3) Corporate or Individual Supplementary Funded schemes Special regimes (civil servants included) PAYG schemes Social Security finance law 53
54 Salaried people regimes Catégory Basic regimes Complementary regimes Workers and employees in agriculture Workers, employees executives in industry, trade, services MSA Régime général ARRCO AGIRC State agent without public status Special enterprises salaried people CNAV IRCANTEC Banque de France, Retraite des mines, CNIEG, CRPCEN, Opéra de Paris Civil servant Local civil servant Régime agents de l Etat CNRACL Retraite additionnelle fonction publique RAFP State workers FSPOEIE 54
55 Repartition of contributors 55
56 General regime retirement branch Ministère du travail, des relations sociales, de la famille et de la ville Ministère du budget, des comptes publics et de la fonction publique Echelon national CNAV CNAM CNAF ACOSS UCANSS Echelon régional CNAV (Ile de France) CRAV (Alsace- Moselle) CRAM Echelon local CGSS (DOM) CPAM CAF URSSAF 56
57 The recurent desequilibrium of retirement branch
58 Parametrical reform of
59 Do you believe that public retirement schemes 59
60 Pre-retirement schemes in France 60
61 61
62 A communication plan for increasing the eleders rate of activity TV SPOTS 62
63 PAINTS AND PRESS INSERTS 63
64 The communication campain was well understood Q19. What did you understand form the last communication campain on retirement scheme En % Tout à fait d accord Plutôt d accord Plutôt pas d accord Pas du tout d accord Ne se prononce pas 100% I can work beyond the age of % 11% I cancumulate pension and income form activity % 23% The retirement scheme is now a question of individualchoice
65 The communication campain was well understood Q13. Are you now aware that you have the choice of your retirement age? Total Oui 60% 46% Total Non 30% 14% 11% 19% 10% Oui, vraiment Oui, un peu Non, pas vraiment Non, pas du tout Ne sait pas 65
66 The communication campain was well understood Q14. Do you believe that you know more now about freedom of choice of retirement age Total Oui 42% Total Non 52% 39% 34% 18% 3% 6% Oui, vraiment Non, pas vraiment Ne sait pas Oui, un peu Non, pas du tout Q15. Would you like to know more about this issue? Total Oui 84% Oui, tout à fait Non, plutôt pas Oui, plutôt Non, pas du tout 54% Ne sait pas 30% Total Non 13% 4% 9% 3% Q16. Did you feel incitated to contact your retirement scheme to know how to use this freedom of choice Total Oui 63% 51% Total Non 26% 12% 7% 19% 11% 66
67 Question about confidence of the youngers Q14. What do you think of your present Retirement scheme? The present pension scheme. Tout à fait d accord Plutôt d accord Plutôt pas d accord Pas du tout d accord Ne sait pas 82% 97% des cadres 13% Is complicated En % 60% 37% Embodies solidarity between generations % 46% Avoid to big difference between richs and poors 30 50% % des cadres 40% 26 4 Is not concerned by the market evolution
68 Question about confidence of the youngers Q14. What do you think about the present retirement scheme? The retirement scheme. Garantees the reembursement of all my contributions Tout à fait d accord Plutôt d accord Plutôt pas d accord Pas du tout d accord Ne sait pas 13 34% 41% % 56% 26 3 En % 71% des ans Is well managed % 56% 65% des ans Is not expensive % 76% 88% des ans Is financially solid
69 69
70 MAIN MEASURES Increasing contributions for pensions drop (5% a year) and overvalue (3% a year beyond 60) Encourageing pension funds -individual(perp) or collective trough companies (PERCO) Evolution of the compulsory retirement age (from 60 to 65 years) 70
71 FOCUS : PERP AND PERCO PERP : Individual Fiscal deduction Private management (insurers) Eurobale Ratios Anticipated payment in case of accident pension PERCO : Collective via the company No individual fiscal deduction The employer can pay 4600 euros a year (tax free) Dedicated societies management Anticipated payment in case of purchasinf of a house or accident Pension or Capital 71
72 7% of the GDP 72
73 Financial intermediary (Banker or insurer) Input : deduction for contributions till 10% of the main income Output : low rate of contribution on life annuity Cash blocked till retirement age compulsorily life annuity Financial Securities : Each PERP is isolated, which means that even in case of bankrupcy, capital is safe Each PERP is ruled by a non profit organisation (representative of members) THE GERP- which the aim is to survey the PERP and inform its members by a Survey comitee Each PERP is supervised by the French Insurance Control Authority (ACAM) Annual report from the Survey Comitee Protections : In case of death : life annuity for family or pre-determined beneficiaries Two years before retirement age : 90% of the fund is placed in a euro investment (low risk and high secured placement). All capital is invested in bond at the retirement age FOCUS : PERP AND PERCO 73
74 2 millions of contributors in billions of euros placed Stocks : 22-23% of the capital Prudential ratios : FOCUS : PERP AND PERCO 90% of secure investments (Bonds, equity, no stocks) 2 years before retirement 80% from 5 to 2 years before retirement 65% from 10 to 5 years 50% from 15 to 10 years 40% from 20 to 15 years 0% beyond 20 years before retirement ange 74
75 FOCUS : PERP AND PERCO Made by the enterprise via a collective agreement Cash blocked till retirement age (exception in case of accident, unemployment or purchasing of a residence) Input : contribution of the enterprise is exempted of income tax, interest of the constituted capital are exempted of any tax Output : Life annuity is taxed in a favourable level Compulsory life annuity (exception in case of accident, unemployment or purchasing of a residence) Securities : Financial tools must be the property of a body agreed by the french Credit and investment companies comitee Funds ruled by an investment company agreed by the French Financial Market Authority Each Investment Fund (FCP) is surveyed by by a bipartite empler and employeessupervisory board. The President is an employee Protection : In case of death : life annuity for family or pre-determined beneficiaries 75
76 FOCUS : PERP AND PERCO companies covered in Billions of euros of capital salaried people covered Sources : participation : 35.8% Volontary contributions from salaried people : 48.9% Intéressement : 15,3% 76
77 FOCUS : PERP AND PERCO Fiscal expenditure Cost: Over 900 millions of euros of fiscal deductions main measures Deductibility from income tax till the Social security celling Exonerability from the wealth tax of the capital placed in retirement placement 77
78 FOCUS : PERP AND PERCO PARLIAMENT RECOMMANDATIONS Simplification: Legal personnality for PERP Survey comitee and PERCO Supervisory Board (litigation) A better distinction between PERP GERP and Survey comitee Lower the qorum for PERP general assemblies Developping a label Epargne Retraite to inform the Public Better adequation between risks and security : After five years, PERP must have grouped 2000 people and invested more than 10 millions of euros (other contracts are less heavy to develop) : for the parliament, there is reasons to to lower this obligation till the level of other retirement plans such as the one open for self salaried people Technical rate of 0% Lack of a wanrantee fund in case of bankrupcy of the financial intermediary 78
79 FOCUS : PERP AND PERCO PARLIAMENT RECOMMANDATIONS Communication : Annual reports on the evolution of PERP and PERCO Better control : Solvency II : ratio implemented by a decree of march 2008 Specific chapter on the annual report of the Control authority for insurance companies and mutuality Tax ependiture : Contributions form enterprises on PERCO should be totally deductible from income Confirm the deductibility from income and wealth tax 79
80 CONCLUSION Key elements for a successful pension scheme 80
81 Conclusion : prerequisite for a successful Scheme (Samuelson) 81
82 II. Respective evolution of these different systems through a comparative work 82
83 II. Respective evolution of these different systems through a comparative work 1) The European Union role 83
84 European employment rate by age 84
85 II. Respective evolution of these different systems through a comparative work 2) Toward a convergence? 85
86 National replacement rate compared to OECD estimated average replacement rate 86
87 Necessary contribution rate to reach average OECD replacement rate 3 examples 87
88 Aggregated replacement rate per country 88
89 Private pension funds assets compared to average replacement rate authorized by public retirement schemes 89
90 II. Respective evolution of these different systems through a comparative work 3) Comparison is not reason 90
91 Private retirement schemes : type, couverage and average rate of contribution 91
92 Coverage rate of voluntary retirement schemes 4 examples 92
93 Repartition Public/private in compulsory retirement schemes across Europe 93
94 Potential replacement rate at retirement age (% of last income) 94
95 Evolution of repartition between Public/private before and after reforms (% of average income) 95
96 Evolution of repartition between Public/private before and after reforms (% of average pension to pay) 96
97 Projection of public retirement schemes spending (as a % of GDP) 97
98 Projection of public retirement schemes spending per person of 65 and more 98
99 Breaking down of public retirement schemes spending evolution between 2005 and 2050 (in %age) 99
100 Bismarckian compulsory retirement schemes replacement rate between 2000 and 2030 (France and Germany) 100
101 Elder people poverty risk exposure (60% of median income) 101
102 Income inequality (ratio between first and last quintile) among 65 and more 102
103 Net replacement rate guaranteed by compulsory public schemes 103
104 Compensation of inequality in 4 western European countries 104
105 Private funds size in four western European countries 105
106 Importance of voluntary private pension funds origins in income of retired men and women (%age of married men and women between 64_and 75) 106
107 administrative and operational burden of pension funds 107
108 Average size of pension funds (per amount of assets) 108
109 II. Respective evolution of these different systems through a comparative work 4) Focus on comparative consequences of financial crisis 109
110 Financial market evolution form December 2006 to October
111 Pension funds results form January to October
112 Importance of pension funds regarding national economy size 112
113 Evolution of pension funds wallet : bonds share 113
114 Evolution of pension funds wallet : assets share 114
115 Evolution of buffer funds wallets : bonds and equities share 115
116 CONCLUSION The essential is 116
117 Provide insurance against low income and wealth in old age Relieve poverty and redistribute income and wealth Avoid important adverse labour market incentives Improve the capital market efficiency 117
118 Retirement spendinf evolution, public and total, projected for
119 Thank you for your attention 119
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