IAA Response to World Bank Report on Old-age Income Support in the 21 st Century IAA Response to World Bank Report on Old-age Income Support in the 21 st Century 10 January e CONGRÈS INTERNATIONAL DES ACTUAIRES Le rendez-vous international de la profession actuarielle Ken Buffin Social Security Committee International Actuarial Association

2 Historical 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

3 Experience 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

4 The 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

5 General 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

6 Complementary 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

7 The 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

8 Sovereign 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

9 The 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

10 DB 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

11 Funding 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

12 Taxation  Consistent treatment  EET regime  TEE regime  TEE risks and credibility  EET future reserve creation

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

14 Feasibility 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

15 Conclusion: Need for a Prospective Approach  Blueprint for further research  Informal sector  Retirement age and future lifestyle  Potential IAA/World Bank partnership