IAA Response to World Bank IAA Response to World Bank Report on Old-age Income Report on Old-age Income Support in the 21Support in the 21stst Century Century

10 January 20052828ee CONGRÈS INTERNATIONAL CONGRÈS INTERNATIONAL

DES ACTUAIRESDES ACTUAIRESLe rendez-vous international de la Le rendez-vous international de la

profession actuarielleprofession actuarielle

Ken Buffin Social Security CommitteeInternational Actuarial Association

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Historical PerspectiveHistorical Perspective

Averting the Old-Age Crisis (1994) Policies to protect the old and promote growth Developments since 1994 1980 reform in Chile World paradigm for reform Three-pillar approach Public debt problems

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Experience with Original World Bank ModelExperience with Original World Bank Model

Funded individual DC accounts Funded systems assets Source of soft money diversion Variable replacement ratios Lower pensions Move away from solidarity, pooling of risks Redistribution and poverty alleviation Payout phase not addressed adequately Economists views vs. Actuaries views

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The 2005 World Bank ReportThe 2005 World Bank Report

Current policy thinking Framework for pension reform Financial support for development projects Enhanced focus on basic income provision Importance of local country conditions Extension to five-pillar model Adequate, affordable. Sustainable and robust Economic and social development goals

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General OverviewGeneral Overview

More balanced perspective Country- specific conditions Funded arrangements no panacea Role for individual accounts Need for regulation of funded arrangements Vital payout phase Recognition of actuarial role Commitment to Notional Defined Contributions Poverty alleviation and income replacement Fiscal position of governments Asset accumulation and economic development

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Complementary Essential Role of the ActuaryComplementary Essential Role of the Actuary

Actuarial role: design organization and implementation

Financial and actuarial monitoring Modeling expertise for long-term projections Role of economists and demographers Financial sustainability Credible financial projections

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The Multi-pillar Approach and DiversificationThe Multi-pillar Approach and Diversification

Original three-pillar approach Expansion to five-pillar approach Zero pillar minimum level of protection Mandatory first pillar publicly managed, linked

to earnings, redistributive, longevity protection, financed by intergenerational contributions

Mandatory second pillar, funded, contributory, private asset management, likely individual savings accounts or possibly defined benefit

Voluntary third pillar, funded, regulated privately managed

Fourth pillar financial and non-financial support

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Sovereign Government EmployeesSovereign Government Employees

Need for more visibility and adequate review Pension obligation for civil servants Integral part of government debt Role in political economy and fiscal equilibrium Generous design results in unaffordable

promises Real funding investing in marketable securities Virtual funding, virtual assets, government

bonds

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The Pay-out Phase and DC ArrangementsThe Pay-out Phase and DC Arrangements

Individual funded accounts and notional defined contribution arrangements

Main focus on accumulation phase Account balance distribution Old-age income security Annuitization Longevity risk, investment risk, inflation risk Canadian Life Income Fund Types of annuity providers Kinds of annuity products

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DB Arrangements vs. NDC SystemsDB Arrangements vs. NDC Systems

Problems of DB programs Search for sustainability Less risky design features Switch to DC not a solution NDC concept benefits linked to contributions NDC risks and financial imbalances NDC automatic balancing mechanisms Adjustments to indexation basis Demographic and economic changes Inflexible, not transparent, misrepresented The new Swedish system

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Funding versus financingFunding versus financing

Variety of financial paths Bias in favor of funding Funding not a panacea Not appropriate in less developed economies A benchmark not a blueprint Implicit pension debt Solvency and sustainability Stabilization fund

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TaxationTaxation

Consistent treatment EET regime TEE regime TEE risks and credibility EET future reserve creation

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Specific IssuesSpecific Issues

Automatic stabilizers Comparison of Canada and Sweden Savings Accounts for Unemployment Risk of economic catastrophe DC conversion Management of public assets

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Feasibility of 5-Pillar System in Gulf RegionFeasibility of 5-Pillar System in Gulf Region

Constrained by lack of developed financial markets

Regional culture and expectations Partially funded in most countries Kuwait full funding Generous minimum pensions and early

retirement Retirement age 55 or 50 for women in Kuwait Reform through parametric changes

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Conclusion: Need for a Prospective ApproachConclusion: Need for a Prospective Approach

Blueprint for further research Informal sector Retirement age and future lifestyle Potential IAA/World Bank partnership