“It’s a Camel’s Life” David Punter – Principle Consultant - EMEA Oracle Insurance Global Business Unit [IGBU]

OR….. “The Tale of Three Camels”

Beast of Burden Travel Companion Persisting A long term relationship It carries stuff for us

AND….. “The Tale of Three Pillars of Pension Provision” (broadly based on the World Bank Definition) 1. Carries our record of State Participation (PAYG) 2. Carries our Accumulation of Obligatory Pension Provision (Funded) 3. Carries our Accumulation of Privately Managed Provision (Funded)

1.Source: Projections made by the Romanian Association of the Private Pensions Providers. 2.G. Bojio Garnier Scale. which shows that if the share of population of those aged over 60 years and the total number of inhabitants is higher than the level of 12%, then there is the phenomenon of "aging population". Pillar 1 – Generic Issues It is PAYG – sustainability relies on an ongoing rate of replacement The replacement rate is not a constant – demographic shift Falling employment levels Ageing Population - People living longer (1) (2) Participation in return for a “Participation Record” Benefits in relation to Participation record can be changed Extending Retirement Ages Removal of early retirement provisions Changes to revaluation factors Gradual shift of Burden & Contributions to Pillar 2 Gradual reduction in Pillar 1 benefit levels (1)

Pillar 2 – Generic Issues It has a history of “Defined Benefit” in many geographies Guarantee of benefits based on service Increasingly expensive to operate The shift is towards “Defined Contributions” Unattractive alternative to DB for employees Reduces the employers liability Coverage Membership as a condition of employment? Doesn’t help the Self Employed Generally, people would rather have the money now

Pillar 2 – Developments Compulsory Provision/Participation – Defined Contribution Superannuation – Australia Sisterna Previsional – Chile Kiwisaver – New Zealand Personal Accounts – UK OTP (Obligatorisk tjenestepensjon) – Norway Obligatory Pension System – Romania

Pillar 2 – Considerations Lack of Guarantee’s – new arrangements are typically DC Effect on “means tested benefits” Sufficient levels of contribution to provide a real benefit? Minimum regulated contributions v Cost of Administration Australia – 9% Chile – 13% New Zealand – 4% UK – 2% increasing to 8% by 2017 Norway – 2% Romania – 2% from 2008, increasing in 0.5% increments to 6%

Pillar 2 – Considerations Incentives to pay higher levels of contributions (where permitted) Matching of voluntary contributions Tax credits National Insurance Rebates Regulated level of charges Transparency Investment Guarantees

Pillar 2 – Providers & Standards Newly established state bodies (e.g. N.E.S.T. in the UK) Authorised/licensed providers (e.g. Insurance Companies) Maximum charge structures as a condition of authorisation Default fund selections and lifestyling Access to advise Improved regulation of advice/corporate governance/Investment Management Use of technology to control costs and provide required service levels

Pillar 3 – Private & Voluntary Provision Still Perceived as “High Advice” area of provision Can involve complex Planning; Specialist Scheme Administration Services High Net Worth Individuals Pension products as a Tax Planning vehicle Wealth Management Estate Planning Privately Managed Funds

Pillar 3 – Private & Voluntary Provision An important element in enhancing Pillar 1 & 2 retirement benefit provision For pension savings in excess of those permitted into Pillar 2 Basic Principles relatively simple Group or “Grouped” products (portability) Advice becoming more readily available Advice becoming more tightly regulated Flexible and competitively priced products increasingly being marketed by providers Tax efficient means of accumulating and decumulating funds

So, what is the future for the respective Camels?

Pillar 1 Camel 1. The Pillar 1 Camel will continue as record keeper, carrying our Participation history PAYG is becoming increasingly unsustainable so it’s role will continue to be reviewed It will continue as the mainstay for elderly workers/pensioners It’s burden will be transferred over time to the Pillar 2 Camel and will reduce proportionately

Pillar 2 Camel 2. Use of the Pillar 2 Camel will be encouraged and promoted, driven by legislation and government publicity campaigns Minimum contributions have been increased over time by legislation in some cases– Australian Superannuation a case in point There have been postponement of scheduled increases and some reductions however (Romania & Latvia respectively) The number of Pillar 2 Camels will increase (e.g. Slovenia & Armenia) Options for members to “opt out” may be removed altogether It’s burden is certainly anticipated to increase, but it needs resources if the expectation is to be fulfilled..

Pillar 3 Camel 3. Use of the Pillar 3 Camel will be encouraged and promoted Regulation is anticipated to improve advice standards Simplified access methods will be made available (e.g. through bancassurance, worksite marketing, public advice) Competition should encourage cheaper more understandable products They are the main tax privileged vehicle for providing pension benefits for the self employed They will carry funds in excess of those the Pillar 2 Camel is permitted to transport Pillar 3 Camels destined to carry the burden of a wider audience driven by legislation and increased awareness

Summary Analysis – Focus is on the Pillar 2 Camel…. Pillar 2 It’s clear our Pillar 2 Camel is being groomed to solve the problem of current PAYG systems over time It will carry funds arising from compulsory contributions that would previously have been absorbed in the provision of Pillar 1 benefit (shift from state responsibility) If it is to do this effectively however it needs: Transition planning, Pillar 2 more addresses the need of future generations, the rights of elderly worker and pensioners need to be maintained A sustained realistic level of contributions to provide a proper supplement to ones retirement income To be able to offer some guarantees that how these funds are managed is transparent, is proper, and risks are minimised Low cost, high standard service from providers Awareness, people need clarity if they are to do more than the minimum, or even continue to participate where opting out is permitted. Co ordination with Pillar 3, contributions, charges, funds…… More than “light touch” regulation

Focus is on the Pillar 2 Camel…. Pillar 2 SHIFT OF RESPONSIBILITY

Focus is on the Pillar 2 Camel….SWOT Pillar 2 Strengths - Simplicity of concept - Low charges - Access - Regulated Administration (CAT) - Market driven competition - They are Defined Contribution - Compulsory Participation - Ability to implement default choices and lifestyling - Encourages sense of ownership Weaknesses - Defined Benefit mentality in some geographies - Risk carried by employee’s - Insufficient Contributions/Pensions Adequacy - Effect on Means Tested Benefits - Coverage for part time workers - There can be complexity where integrated with Pillar 1 Opportunities - Address the PAYG issue - Increase pensions coverage - Remove reliance on Replacement Rate - Introduce Compulsory Employee Contribution - Introduce Transparency into the system - Capital Market Development - Ultimate Harmonisation Threats - Capital Markets Performance (Global Crisis) - EU’s Stability and Growth Pact (SGP) rules? - Contribution levels are not maintained - Employers reduce salary to compensate for compulsory contributions - Time running out