Conference on the challenge of pension reform 7 March 2005, Valdstejn Palace, Prague Pension reform

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Conference on the challenge of pension reform 7
March 2005, Valdstejn Palace, PraguePension
reform developments in CEE and OECD countries

• John K. Thompson, CounsellorDirectorate for
  Financial and Enterprise Affairs, OECD

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1. The demographic challenge
Ageing populations Lower fertility rates and
increased longevity raise difficult challenges
for pension systems in both OECD and other
countries ? endanger sustainability of
pensions schemes if current rules are not
adapted.
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The demographic profileis unfavourable for OECD
countries
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Populations are ageing in the OECD
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Ageing will increase financial burden
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2. Policy Concerns
Urgent need for comprehensive financial, social,
and fiscal reform

• In 1998 OECD Ministers stressed the importance
  of reform and agreed that prompt actions were
  required
• Issue is still with us and rising in importance,
  as effects of ageing are expected to begin very
  soon
• Ageing was on the agenda of May 2004 OECD
  Ministerial Meeting

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3. Policy actions

• Reforming public pension systems

• Adjust parameters
• Implement labour market reforms
• Promote fertility and immigration

• Most efficient, most painful, but unavoidable
  reforms
• Increase in retirement ages
• Reduction in replacement rates

• Diversifying sources of retirement income and
  developing private pensions

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4. The challenge for private pension systems

• Private pensions require adequate regulatory
  framework as well as strong and sound financial
  markets.
• But private pensions also face challenges
• Increased longevity
• Low coverage
• Corporate pension funding gaps

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Funding gaps in private pensions have increased
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4. (contd) The challenge for private pension
systems

• Shift towards defined contribution (DC)
  schemes ? need for proper financial education
  ? addressed in the OECD Financial
  Education Project

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The share of defined contribution pension plans
is increasing
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while the share of defined benefit pension plans
is declining
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4. (contd) The challenge for private pension
systems

• Asset meltdown hypothesis age structure
  affects savings behaviour and structure of
  financial markets
• Danger of overregulation

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5. The OECD response

• The OECD has developed important work to provide
  policy responses to these challenges
• Development of principles and standards
  ? The OECD is a leading standard-setter for the
  regulation of private pensions
• Benchmarking
• Statistical work

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Outlook for Institutional Investors in Transition
Economies

• The public confides its savings to specialized
  institutions for investment.
• Savings held for very long periods.
• The public must trust the institutions
• Experience
• Confidence in legal/ regulatory system.
• Institutions must be monitored by public
  authorities (regulators) and investors.
• High political visibility
• Savings of unsophisticated public involved
• The retirement earnings of the public at risk.
• Will Transition Economies Develop Large Stocks of
  Assets for Investment?

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In OECD Countries

• Institutional Investors Represent Rising Share of
  GDP and Financial Assets
• Disintermediationfrom Banks to Capital Markets
• Development of Legal Regulatory Infrastructure
• Ageing Population
• Change in Patterns of Pension Finance

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Over The Past Two Decades Institutional
Investors Have Grown Steadily In Size and
Importance
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Transition Economies Starting Point -1990

• State Pension System
• Actuarially Unsound Benefits
• No Separation of Pensions from Other Benefits
  (Health Etc)
• No Linkage of Receipts Obligations
• Dependence upon Budget

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Post Transition Environment

• Unemployment
• Informal Employment
• Fiscal Deficits
• High inflation destroys savings
• Bad Experience with Some Forms of Institutional
  Savings--Especially Privatization-related

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Assets of Institutional Investors/GDP
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Collective Investment Schemes

• Legislative Reforms
• Implementation of EU Directives
• Marketing by Western- affiliated Asset Managers

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Assets of CIS (euro millions)
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Attempts to Develop Funded Pensions

• Central Europe, Early 1990s
• Eastern Europe Former USSR, Late 1990s
• Inspired by World Bank two or three Pillars
• State pension-Pay as You Go (PAYG)
• Occupational/Mandatory/Funded/Defined
  Contribution (DC)/Minimum Guarantee
• Individual/Funded/ DC /No minimum guarantee

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Structure of the pension systems in Central Europe
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Outlook Obstacles to Success

• Informal employment
• Low voluntary participation
• High costs
• Risk of capture
• Absence of tradition and legal fiduciary
  responsibility

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Needed for Success

• High quality asset management industry
• Strong legal and regulatory framework for
  pensions
• Strong legal and regulatory framework for
  securities
• Transition economies are following the lead of
  OECD countries
• The general population is exposed to capital
  market risk and exploitation by managers of
  institutions