international pension reform perspectives: is nz...
TRANSCRIPT
INTERNATIONAL PENSION REFORM PERSPECTIVES: IS NZ BETTER THAN
WE THOUGHT?
David O. Harris Managing Director
TOR Financial Consulting Limited
Auckland, New Zealand 17 April 2014
Impressions of New Zealanders and New Zealand Pensions
‘NZ’s Retirement Framework, especially KiwiSaver provides real lessons for policy makers in the United States. Presidential advisers, Congressman and think tanks alike see real relevance in what could be advanced in necessary auto-enrolment reforms.’
• David John, Senior Strategic Policy Advisor – Public Policy Institute, AARP, April 2014
Grasping The Thorny Nettle of Pension Reform
Youth Working
Age Retirement
Employment Nexus Baby Retirement Savers Age of Conscription and Encouragement Housing and Debt Unemployment
Voluntarism vs Compulsion (Hard and Soft) Preservation and Hardship Tax Incentives ‘sweeties’ Education and Financial Literacy
People worried about living too long Than dying too soon. Approaching retirement – advice Regulatory imbalance – accumulation and Disbursement. Drawdown, Annuitisation and Long Term Care
Accumulation Disbursement
Demographic challenges:
Avoid resorting to early retirement or disability benefits to keep unemployment figures lower.
Long-term problems, such as ageing, have not gone away
0
2.5
5
7.5
10
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
OECD-30
Oldest
OECD
country
Youngest
OECD
country
Elderly Dependency Ratio, 1950-2050
Source: OECD, Pensions at a Glance
1.3
1.6
2.0
3.4
3.5
4.1
4.4
4.8
5.0
5.4
5.7
6.0
6.2
6.8
7.2
7.3
7.7
7.8
8.1
8.4
8.5
8.7
9.0
10.2
11.4
11.4
11.5
12.4
12.6
14.0
0 2.5 5 7.5 10 12.5 15
MexicoKorea
IcelandIreland
AustraliaCanada
New ZealandNorway
NetherlandsDenmark
United KingdomUnited States
Slovak RepublicSwitzerland
LuxembourgCzech Republic
SwedenTurkey
SpainFinland
HungaryJapan
BelgiumPortugal
GermanyPoland
GreeceFranceAustria
Italy
Public spending on pensions (% of GDP)
OECD average:
7.2%
Source: OECD, Pensions at a Glance 2011
It started as a financial crisis.
This had a direct effect on people’s private pensions and other retirement savings
-5.2
-7.2
-8.5
-10.5
-11.7
-11.8
-12.6
-13.8
-
-
-
-
-17.4
-17.7
-19.5
-20.1
-21.0
-21.4
-21.6
-22.9
-26.2
-26.7
-37.5
-40 -35 -30 -25 -20 -15 -10 -5 0
Mexico
Czech Republic
Germany
Slovak Republic
Spain
Norway
Switzerland
Portugal
Austria
Denmark
Sweden
Netherlands
United Kingdom
Poland
Finland
Japan
Hungary
Canada
Belgium
Iceland
United States
Australia
Ireland
Weighted
average:
-23.0%
Unweighted
average:
-17.4%
15.7
16.8
16.9
16.9
Real investment return in 2008 (%)
Pension funds’ real returns in 2008
Source: OECD, Pensions at a Glance 2011
-40 -30 -20 -10 0
0
25
50
75
Real investment
return in 2008 (%)
Equities,
% of total
portfolio
United
States
Mexico
Czech R
Slovak R
Hungary
Iceland
Australia
Spain
Germany
Netherlands
Poland
Norway
PortugalSwitzerland
Denmark ,
SwedenAustria
United
Kingdom
Japan
Ireland
Canada
Source: OECD, Pensions at a Glance 2011
Factors affecting Retirement Income for DC Plans
8 Retirement income
Contribution
rate
Contribution
Period
Returns on
investment Structure
Payout Phase
Time in
Retirement
Depends on:
- Choice variables
(Contribution rate)
- Risk variables
(Labour mart risk)
Depends on:
- Choice variables
(Retirement age,
time joining lmkt)
- Risk variables
(Labour mart risk)
Depends on:
- Choice variables
(Investment
strategy)
- Risk variables
(Financial risk)
Depends on:
- Choice variables
(Retirement age)
- Risk variables
(Longevity risk)
Depends on:
- Choice variables
(Annuities, phased
withdrawals,
combinations)
- Risk variables
(Longevity and financial
risk)
Source: OECD, Dr Pablo Antolin
Investment and Default Considerations
• Cross border investment considerations – pension providers and multinationals
• Strong growth in default option developments in many countries • US experience in target dated funds • Multi-National employer considerations
• Active investment options have been stunted since 2008 • European economic challenges have impacted on investment and default
developments • Consumers and Plan members are increasingly embracing the default
investment option • Growth of guaranteed investment options – overcome losses • South American growth frontiers > fully funded > Chilean Model
Regulation and Compliance
• Greater levels of co-operation between regulators • Country – USA, UK, Singapore, Australia and Chile • Regional – EU, Australia & New Zealand and North America • Global – OECD, IMF and World Bank
• Cross Border operations and co-operation between regulators • Asian Regional Funds Passporting (APEC) • Cross Border Collective Investment Schemes: South-East Asia • European Union – Initiatives and acceptance of European UCITS • Special Market Access - China
• US regulatory requirements • Reciprocation in regional areas and acceptance of ETFs • High investment returns in regionally uncertain areas
• Public relations and Brand risk costs • 24 hour news cycles will move information quickly and alert regulators • Public confidence • Global strategic and public relations plans
Proposition Development
• Consumer complexity and understanding by regulators for investment solutions > closely monitored since 2008
• Cross border and regional considerations becoming more pronounced • Employers • Trustees
• Acceptance of country specific investments in other jurisdictions
• Regulatory co-operation and liaison > regulatory reciprocation
• Mobility of high valued staff and human resources will drive proposition development and demand for innovation • EU • APEC
• Technological advancements will shape proposition development across borders
The Pension Reform Equation • Coverage Levels
• Contribution Rates
• Stable and sustainable First Pillar
• Replacement rate
• Intergenerational Fairness
• Taxation Incentives
• Accumulation
• Disbursement
• Financial Education and Literacy
• Public
• Private
• Prudential and Consumer Regulation
• Investment Design – Passive & Active
• Human resource offsets
• Default Design • TDF • Lifestyle • DGF
• Political Leadership
• Public Servant Leadership
• Economic Realities
• Financial Services Infrastructure
• Technological Capability and Capacity
• Employer & Trustee Commitment
• Legal Framework
Lessons from South America • Chilean Model
• Historical developments • Development in 1980 > 1981 to aid economic and social reforms • Previous system: PAYG, Unfunded Liabilities • Mandatory, individual retirement account system • Wage Increases supported contribution into the new system • 10 Countries in Central and South America – Adopted the Chilean Model
• Main features of the Chilean model • Administradoras de Fondos de Pensiones (AFPs)
• Transfer between AFPs and have a savings account • Self-Employed Voluntary • Uniformity of contributions and its structure of benefits covers old age, disability and survivors pensions • Initially contributions were at 10% up to $US2,000 per month • Additional contributions of 3% for disability • Voluntary contributions
• Accumulation and disbursement considerations • Marketing costs • Distribution costs • Regular contributions • Annuity providers – Government assistance in selecting the best annuity rates
Lessons from South America
• Chilean Model
• Investments
• Growing diversified portfolio
• Weighted towards local equities
• Need to seek further diversification and more elaborate default solutions
• Greater competition between AFPs
• Interpreting global trends for local market innovation
• Next steps will centre on further cost efficiencies and improvements to distribution
• Accumulation • Self Employed
• Coverage – regular contributions/retirement prosperity
• Disbursement
• Continued influence on international global pension reform developments
Voluntary Enrolment/Taxation Incentives • Germany
• Rapid Ageing of the Population • Generous PAYG 1st Pillar • Review of Occupational Pension Approaches • Riester Reforms – Tax Incentives • Capital Guaranteed Investment Solutions
• Ireland • Economic Austerity – Pension Levy • Uneven coverage and contribution rates • Sharp Decline in DB – Waterford Crystal Case • OECD Report – Mandation vs AE • Response by Government to the OECD Report • Chronic Need for Sustainable Reforms • Social Cohesion
• France • Generous PAYG 1st Pillar • Decline in Occupational DB – Economic austerity • PERCO – first tentative steps towards collective • Wider pension reforms, ageing, economic austerity and industrial unrest • Industrial unrest placing pressure on retirement reforms
Auto-Enrolment
• United Kingdom • Modest PAYG 1st Pillar Pension
• Embracement of Auto-Enrolment Experiences – Lessons from the United States
• Development of NEST and Mastertrusts/Corporate Platforms
• Target Dated Fund Growth
• Price Capping
• 4% employee, 3% employer and 1% by the government
• Re-Enrolment after 3 years
• Radical changes to the treatment of disbursement – March 2014 Budget
• The Netherlands • Generous PAYG 1st Pillar
• Decline of Defined Benefit Schemes
• Sharp growth in defined contribution with underlying investment guarantee and AE
• Collective DC Solutions
• Pension Premium Institution (PPI) – Cross Border
Auto-Enrolment
• United States • Future of Social Security (First Pillar) increasingly being questioned – PAYG/Ageing Population
• Sharp decline in Defined Benefit schemes
• 401(k) growth and development took place from the mid 1980s
• Target Dated Funds used extensively from 2006 Pension Protection Act 2006 - Default
• Auto Enrolment is seen as the major mechanism for ‘conscripting workers’ to save for their retirement – levelling off
• Prescribed rates of contributions generally remains constant under AE scheme. Lower than to generate sufficient replacement rate
• Decline in Self Managed Accounts since 2008
• Enhanced member engagement to assist employees preparing for retirement
• Rollover and draw down/variable annuity popularity
• Need to find ways to grow coverage of 46% of the overall workforce • Racial
• Gender
• Workplace considerations
Mandation
• Switzerland
• PAYG – First Pillar
• Referendum to move towards mandation in the first half of the 1980s
• Equal co-contributions from employers and employees – increasing as you age 7% and 18%
• Guaranteed rate of return/Domestic Investments
• Prescribed Investment Approaches
• National Consensus
Australian Hard Compulsion
• Poor coverage 1983 and AUM - $A32 billion AUM 40% coverage
• Developed through centralised wage fixing in 1987 and the tax system in 1992
• Recycled and reused existing financial services infrastructure
• No NEST or role of central clearing house
• Life insurance now banks dominate superannuation asset accumulation
• Charges remain stubbornly high, with financial planners being central to small, self directed schemes
• Master trust solutions have flourished – especially around Industry Funds and EBC sponsored solutions
• Currently 91% coverage and 9.25% contribution rates rising to 12% by 2020
• Work on improving default design (MySuper) and distribution efficiencies
Future Prospects • Growth in infrastructure developments
• Default design to follow more US trends – TDFs, sophisticated lifestyling
• Only 15% of superannuation plan members make investment decisions
• Disclosure value centred on statements rather than annual reports
• Growth in infrastructure projects and related ownership
• Stronger governance considerations
• Loosening of industry funds or multi sector asset growth
• Concern over charges and fees
• Governance and trustee quality being reviewed and improved
• Qualifications
• Independent trustees
• Voluntary contributions – average 3%
• TTE tax model that causes some international consternation
• Broad public acceptance through mysuper thinking and marketing
• Disbursement thinking still sharply underdeveloped – lump sum culture
• Investments – around 20% of $A1.8 trillion invested overseas
APRA: Quarterly Superannuation Performance, December 2013
APRA: Quarterly Superannuation Performance, December 2013
New Zealand’s Economic and Retirement Future
Today
• All Blacks
• Tourism
• Agricultural Products - Milk
• Lord of the Rings
• Maritime Design
• ‘It’s a great country’
Tomorrow • Deeper Diversified Economy
• Improved Infrastructure
• Improved Social Policy • Long Term Care • Health Care
• Becoming more the Clever Retirement Policy Country
• Enhancements to the Retirement Framework
• Hard compulsion?
• The Need to Refit and Respect KiwiSaver
Global Impressions of NZ Retirement Framework • Is NZS sustainable and immune from political risk?
• Demographic and Investment Considerations
• The Clearing House function of the IRD has been recognised and analysed carefully – KiwiSaver
• Cost per member
• IT demands and capabilities
• Targeted taxation incentives – smart use of visible ‘sweeties’
• Coverage and opt out rates > but you have baby KiwiSavers – Sweeties
• Housing and pension policy – do they mix?
• Globally simplified default approach towards default for KiwiSaver
• No real thinking that is concrete and concise on the disbursement function of KiwiSaver
• A necessary policy element looking for political and regulatory direction and certainty. A ship looking for a port.
• Role of the Retirement Commissioner/For Financial Literacy
• Independence, International Insight and Resources – soft and cuddly policy issues
• NZ lacks joined up pension policy development – myriad of government agencies, departments, stakeholders and financial entities
• Act Local Yes but Please Think and Consider International Experiences in Detailed and Measured Manner
• Retirement Policy and Research Centre
Retirement Policy and Research Centre Global Industry Participants
• JP Morgan
• AMP
• Friends Life
• AXA Wealth
• Standard Life
• Aegon plc
• Partnership
• Principal Financial Group
• T. Rowe Price
• Vanguard Investments
• Fidelity
• Challenger
Global Stakeholders
• Cass Business School – UK
• ASFA – Australia
• Griffith University – Australia
• National University of Singapore
• Centre for Policy Studies – UK
• Harvard University
• Boston College – Prof Lawrence Kotlikoff
• Professor Peter Diamond – Noble Prize Winner
• MIT
• ACLI
• AARP
• Brookings Institution
• University of Illinois – Former member of the President’s Council of Economic Advisers
• ICI
• Jonathan Callund – Adviser to Chilean Insurance Companies
Likely Next Steps
• Increased global scrutiny of the NZ Retirement Framework - USA
• Political discussions and debate in 2014 – sensible and silly commentary
• Full integrated review of the NZ retirement framework – 2020 aspirations
• What is the goals and aspirations of NZ’s retirement framework
• Critically analyse in a balanced fashion international retirement systems
• Understand and utilise global contacts and insights
• Plan Ahead Get Ahead of the Global Retirement Reform Trends
• Pension Policy – participate not because it is easy but because it is hard.
INTERNATIONAL PENSION REFORM PERSPECTIVES: IS NZ BETTER THAN
WE THOUGHT?
David O. Harris Managing Director
TOR Financial Consulting Limited
Auckland, New Zealand 17 April 2014