february 2, 2004 violeta ciurel general manager ing nederlanden asigurari de viata going multipillar...
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February 2, 2004
Violeta CiurelGeneral Manager
ING Nederlanden Asigurari de Viata
Going Multipillar in the Romanian Pension System
2
Worldwide pension crisis• Demographic trends and economic developments increase spending on
public pension systems
• An aging population increases dependency ratios• rapid decline in birthrates• increase in life expectancy• past social/economic factors having effect on demographic structure (e.g. baby
boom)
• Poor economic performance has adverse effect on pension contributions– High social security contributions combined with high levels of unemployment
harm labor markets and international competitiveness which further reduces economic performance
• Early retirement schemes cause actual retirement age to be lower than official
3
European pension reform• EU aim to harmonize pension benefits • Increase in retirement age and reduce replacement ratios• Reduce early retirement schemes• Tendency towards defined contribution systems• Germany introduces corporate and income tax incentives for
additional savings• Introduction of funded private pension funds in Central and Eastern
Europe
4
The “middle ageing” of Europe
0
1000
2000
3000
4000
5000
6000
7000
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85
2000 2020Thousands
Source: Eurostat 2002/nVision company
6
Working hours are decreasing Change 1995 – 2001: all workers
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%D
enm
ark
Sw
eden
Fin
lan
d
Gre
ece
Bel
giu
m
Sp
ain
Ital
y
Au
stri
a
UK
Ger
man
y
Lu
xem
bou
rg
Net
her
lan
ds
Fra
nce
Por
tuga
l
Irel
and
EU
15
Source: Labour Force Survey/nVisionBase: All workers in the EU
7
Major changes in the dependency Ratios in CE Countries
0% 20% 40% 60% 80% 100% 120%
Croatia
Armenia
Macedonia
Czech Republic
Yugoslavia
Slovakia
Slovenia
Romania
Poland
Hungary
Ukraine
Bulgaria
Latvia
Albania
Pensioners / Contributors
Pre-1992
Most Recent Year
8
Objectives of Pension Systems and ReformsDifferent approaches:• Primary goals: To provide adequate, affordable, sustainable and
robust old-age income– Adequate refers to both the absolute and relative level (i.e. poverty
alleviation and income replacement)– Affordable refers to the financing capacity of individuals and the society– Sustainable refers to the financial soundness of the scheme, now and in
the future– Robust refers to the capacity to withstand major shocks, including those
coming from economic, demographic and political risks
• Secondary goals: To create developmental effects by – minimizing negative impacts (e.g. labor market)– supporting the economic development by increasing the savings and
mobilizing the financial resources and development of the financial market
12
Pension situation in Romania
Facts after 1990:• Rapid demographic changes: increase the life expectancy, decline
natural growth rate, increase ageing population• higher unemployment (economic reasons and early retirement
based on number of labor years)• decreasing the number of contributors within the active population:
in 1996 only 55% of this category were contributing to the pension system
• increase on the number of liberal professions and persons in agriculture (no pension contribution)
• black labor market• restructuring of the big state-owned and inefficient companies
13
Pension situation in Romania• decreasing the number of employees from 8 million in 1996 to 4.6
million in 2003 (shrinking the calculation base)• increasing the number of retired persons who benefit from state
pensions: 6.1 mill (of which 4.5 mill state pensions, 1.5 agriculture)• dependency ratio changed: from 2.5 in 1990 to 0.75 in 2003
(employees/retired)
14
Pension situation in Romania
Consequences:• financial constraints at state budget• impossibility of the state budget to cover the inflation rate by social
protection measures• increasing the contribution of the employees from 14% in 1990 to
36.5% in 2002• negative impact on the companies profitability and national
economy restructuring efforts• big discrepancies within the pension system by higher social
protection measures for the lowest pensions - pension calculation formula changed
15
Going Multipillar...
• A multi-pillar pension system and reform approach makes sense as it produces diversification of different kind of risks – economic and demographic – retirement income is exposed to
• Mandatory or quasi-mandatory funding part of the future retirement income makes sense for macroeconomic and microeconomic reasons, as well as for reasons of political economy
• A radical reform of a PAYG pillar is needed under any scenario
16
Current situation on Romanian pension system
• presently, one system - state one, compulsory - PAYG - new law -
Law 19/2000 enforced in April 1st 2001
• draft law on Facultative Occupational Pension Schemes - approved
by the Government (Oct.9) and to be approved by the Parliament -
draft law on the universal pension funds to be drafted by the
Ministry of Labor and
• still life insurance companies offer pension type of products - not
regulated as the 3rd pillar
17
Existing - 1st pillar principles• Unique public pension system, state guaranteed, PAYG• National Pension House - autonomous institution for management of
public system• increasing the categories of contributors for increasing the funding• New Labor Code - impact on the pension budget• increasing the retirement age: until 2014 - men from 62 to 65, women
from 57 to 60• reducing the contribution for the fund from 11.6% to 9.5%• new calculation formula - ceiling for the maximum pension level• possibility of early retirement• inflation adjustment of the pension level• changes in definition and approach of the permanent/total disability -
more severe
18
How they currently define How they currently define
retirementretirementMainly negative connotations:
• Poverty
• Depression
• Humility
• Dependence
• Sadness
• Loneliness
• Spare time
• Silence / less stress
Mainly negative connotations:
• Poverty
• Depression
• Humility
• Dependence
• Sadness
• Loneliness
• Spare time
• Silence / less stress
Two main expectations
• Dynamic – have time and resources to
develop activities they haven’t done yet:
Traveling – as the main aspiration
(also seen as sign of aspirational
Western types)
Allocate time for hobbies (fishing,
fixing cars etc.)
Peaceful / static / relaxing
Take care of grandchildren
Move to / return to nature /
countryside
Two main expectations
• Dynamic – have time and resources to
develop activities they haven’t done yet:
Traveling – as the main aspiration
(also seen as sign of aspirational
Western types)
Allocate time for hobbies (fishing,
fixing cars etc.)
Peaceful / static / relaxing
Take care of grandchildren
Move to / return to nature /
countryside
Dominant Dominant
patternpattern
CURRENTLY
How they expect retirement to beHow they expect retirement to be
EXPECTED
Many respondents stated they would feel attracted to
buy a supplementary pension so as to get closer to the expected portrayal of
the retirement time
Red = positives
Blue = negatives
Consumers’ Portrayal of Retirement Time
Source: Qualitative Research Study developed for ING by Synovate, in May 2003
19
Objectives of Pension System Reform in Romania
• providing adequate, affordable, sound, sustainable and decent old-age income no matter the economic, political risks
• structurally support the economic growth• brings the EU admission closer• avoiding the negative social effects created by the very low
levels of pensions• creating possibility of economic development by
– minimizing negative impacts (e.g. labor market)– investments on the local capital market– supporting the development of the financial market
20
World-wide ING pension models • Occupational pensions Benelux• Defined contribution US• Life greenfields
• Taiwan, Korea, China, India• Poland, Hungary, Czech and Slovak Republic, Romania, Chile
• Pension funds• Mexico, Peru, Chile, Poland, Hungary, Czech Republic, Australia, Russia,
Bulgaria, Slovak Republic • Corporate banking is gateway to pensions (WSM)• Investment expertise Asset Management
Pensions are prime example of how ING can combine insurance, banking and asset management skills
21
ING Pension “best practices”Region Name of the operation “best practice”/ Lessons learned
Latin-America
AFP Integra (Peru)
USA
Europe
Asia/Pacific
AFP Santa Maria (Chile)
ING Commercial America Afore (mexico)
Cost efficiency, Market based strategy,Innovative culture, efficient campaign,agent productivity, in-house payroll
deduction system
Commercial and investment strategyTechnology
Entry strategy (short time-to-market)
ING Aetna Financial Services
Using different distribution channels to gain maximum marketpenetration (Direct sales, TPA,indep brokers, Top broker
dealer firms). Market research and market literature Cultural diversity marketing
ING Pension fund Czech Rep.
Great success in short notice, efficient and wellstructured campaign, fast expansion of sales force at
launch, limitation of number of non-contributive membersING Pension Fund Poland
ING Pension Services (NL)Short time-to-market in a mature market
Flexibility of the product
Broker distribution
ING Austraila
Product development, Management, brand/product advertising,lobbying/influencing capability. Emloyer Data Transfer Service,
Commission structure, Administration systems, distributionexpertise, Investment management capability
22
ING competitive edgeCombination of competencies:
• Advice
• Local capital market development• Emerging markets banking
• ING Brand • ‘ING, the pension provider’• Stability, trust and innovation• Important to speed up global branding
• Asset management capabilities
• Multi-product / multi-distribution
23
Needs and expectations for future developments of pensions in Romania• Customers’ financial protection and emotional security
• wider access to pension reform• proper replacement ratios
• New Fiscal code • to provide fiscal sustainability • to create short-term fiscal balance, long-term financial viability and incentives to pay
contributions
• Transparency, supervision, control, security, efficiency• clear regulations • customer protection• responsibilities for product providers, sales persons, purchasers• consistent approach across all product types and distribution channels
• Country level infrastructure, operational systems
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