The Evolution of Retirement Income Systems: DB, DC and Shared Risk Presentation to the 9th Transatlantic Conference Montreal, Quebec May 10, 2017 Bob Baldwin

Introduction Interpretation of my mission (which I chose to accept) Discuss pension reform with particular focus on how reforms affect the balance among DB, DC and TB plans Place greater emphasis on general lessons/conclusions versus details of reform Hopefully of some help in interpreting the presentations that will follow and in interpreting events in your home countries I will tend to be OECD and Canada centric

General Comment on Reforms Continuous process of reform since mid 1990s Reform in all 34 OECD country Still ongoing (biennial reviews) Reforms are multi-dimensional Reforms involve a shift away from DB toward DC in pillar 2 and 3 Reforms have been driven by concerns about the impact of ageing Increased contributions Pension costs and government budgets Stable plan rules do not mean stable outcomes

OECD Three Pillars Pillar Key Characteristics Prevalence Pillar 1 Publicly administered Financed from general revenues (usually) Benefits based on age and length of residence and may be means or income-tested 30 of 34 have 1st pillar Pillar 2 Mandatory earnings-related plan – includes privately administered plans that are required through legislation and/or collective bargaining 32 of 34 have pillar 2 plans 12 involve mandatory private administration – including Netherlands Pillar 3 Privately administered Voluntary for employers and/or individuals (Prefunded, regulated and tax-supported) Important in: Belgium, Canada, Germany, Ireland, New Zealand, UK and US

Some Similarities and Differences Maturity reached after WW II Pillars 1 and 2 DB before reforms financed on pay-as-you go basis Balance between pillars 2 and 3: a big point of difference “Anglo liberal” approach: emphasize pillar 1 with modest (or no) pillar 2 Alternative approach: stronger pillar 2 Pillar 3 tends to be residual and its importance varies widely More important in “Anglo liberal” approach

Reforms to Pillars 1 and 2: Overview Increase age of eligibility (most common) Reduce initial benefits Reduce indexation Thematic Increase prefunding Rebalance from pillar 2 to 3 Coverage initiatives Broadly based: NZ, UK and Canada Focused: e.g. France, Finland

Shift Away from DB Pillar 2 Mandatory DC accounts Displace older pillar 2 plans (Australia + mainly outside OECD) Complement other pillar 2 programs Introduction of Notional DC Combines elements of DB and DC Main pillar 2 program in 4 OECD countries Experimentation in the Netherlands Conditional indexation, collective DC, ... Other contingencies Age of eligibility based on life expectancy (e.g Finland, Spain) Indexation linked to funding status (Canada)

Shift Away from DB Pillar 3 Major shift in WPPs in Canada, UK and US Contingency in Canadian DB (recent) DB with contingent indexation in provincial public sector Mixing DB, DC and contingent benefits not new: MEPPs an important case in point Controversies over TB DB and DC: spectrum versus binary choice

Concerns about the Shift to DC Many concerns, pre-eminent Predictability of benefits Level of contributions Note role and interactions The obvious: where whole system is DC the impacts will be greater than if a tranche is DC Where strong pillar 1 programs are in place, impacts will increase with earnings Where pillar 1 programs are income (means) tested, impacts will be moderated for low income pensioners PIT will also moderate impacts Note: future fiscal impacts Will play out differently in different contexts Think of US, Netherlands, Canada

Concluding Remarks: Pensions as a Balancing Act Adequacy versus affordability In pillar 1, affordability is largely an issue of budgetary limitations In pillars 2 and 3 it is an issue of balancing pre-retirement sacrifice with post-retirement income Competing virtues: predictable benefits and predictable contributions Both are desirable but tend to be difficult to reconcile – especially where promises are backed by financial assets