1. 1 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited

2. 2 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Pension Funds and Retirement Fund Schemes – A Global View Concepts and Practice, Structure, Role of Trustees and Investment Managers

3. 3 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Global population growth tending to stabilise, population mixes changing significantly in 1990’s Lower birth rates, particularly in urban areas, developed countries Improved healthcare Decline in smoking related diseases Ageing population – more elderly people, fewer people to support them And liable to change more in the years to come

4. 4 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 The ageing crisis… Ageing population People living longer, working less 4-2-1, 18-42-22, 15-50-10 … the pensions crisis – or income after employment Governments, companies afraid of future liabilities Compounded by lower interest rates, poor equity market returns since 1998, early retirement on full pensions And increasing dependency ratios; The number of working age people “supporting” elderly.

5. 5 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 And some remedies… World Bank in 1994 World Bank in 2005 The Chilean model Encourage saving, Change the benefit age and the move to defined contribution

6. 6 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 The World Bank’s advice in 1994 Three pillars Used as a reference point or adopted by a number of developing economies, including China. China had no securities market that anyone could confidently invest in for some time.

7. 7 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 The World Bank’s advice in 1994 :Three pillars (b) a “first-pillar” contributory system that is linked to varying degrees to earnings and seeks to replace some portion of income; (c) a mandatory “second pillar” that is essentially an individual savings account but can be constructed in a variety of ways; (d) voluntary “third-pillar” arrangements that can take many forms (individual, employer sponsored, defined benefit, defined contribution) but are essentially flexible and discretionary in nature.

8. 8 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 The World Bank’s advice in 2005 Five pillars Two more pillars Zero -a noncontributory or “zero pillar” (in the form of a demogrant or social pension) that provides a minimal level of protection;, and Five -informal intrafamily or intergenerational sources of both financial and nonfinancial support to the elderly, including access to health care and housing.

9. 9 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 The Chilean model Born out of a crisis… State system in crisis, huge liabilities, no assets Solution - move to defined contribution, early restrictions on investment with an emphasis on government securities, individuals built up savings. Well regulated products, some problems on marketing, but overall a success, developing assets for investment domestically.

10. 10 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 And a general trend to governments (for their own promised employee benefits) and employers wanting to replace promised benefits for all with defined contribution systems And now for some government social security and basic pensions to be reviewed, when benefits are payable and how much they might be.

11. 11 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Occupational savings schemes and their structures Structures (such as 401(k)) determined by what the legislation allows Legislation comes in Labour Laws and directives, Pension Laws and directives, Tax Legislation that encourages occupational savings schemes Pension reform programmes needed to update legislation Principle objectives are to increase coverage, protect members and their savings

12. 12 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Most schemes are voluntary, generally established by an employer, i.e. occupational savings. Legislation evolves, often through experience; regulation and supervision reactive. Schemes increasingly established separately to a company, assets ring fenced through a trust structure, policy or other separate legal identity. Legislation identifies roles, the company, the trust and trustees, and the various service providers

13. 13 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Defined benefit causes greatest concern, law usually needs them to be funded, with regular actuarial valuation; generally liberal investment policy with only few restrictions, need to matching liabilities, through asset liability structures. Defined contribution – single investment policy, increasingly replaced by member choice, the idea of offering a range of investment products, evolving into multi manager.

14. 14 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Occupational savings Decisions usually made by an employer as to what structure is offered. In member choice, pressure for a wide choice of funds in North America becoming more usual, and in Australia recent requirements to offer more products.

15. 15 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Structure, transparency and publicity produces their own safeguards, particularly since Maxwell crisis, which led to collective responsibilities of trustees. Trustees, seeking advice from Consultants, employing Investment Managers Employers/Plan Sponsors. Seeking advice from Consultants, seeking to control their own ongoing liabilities Regulator, legislation brings in marginal controls.

16. 16 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Roles spread across various parties, even where specific legislation doesn’t apply Regulated entities – Investment Managers Insurance Companies Some Consultants Legislation, regulation -Trustees Generally unregulated - Consultants Additional requirements, such as record keeping and administration, accounting standards, auditing requirements, actuarial valuations.

17. 17 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 But still the need for Pensions Ombudsman, in the United Kingdom Independent arbitrators Appeals and complaints processes

18. 18 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Overregulation can discourage innovation and product development. Pricing controls generally don’t work – except for “high” limits. Underregulation leads to abuse, mis investment. Regulation on voluntary systems tends to be light, with firm touch, but reactive. Doesn’t prevent effects of financial failure of employer where ongoing contributions are needed to fund liabilities.

19. 19 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Need to establish organisations such as Pension Benefit Guaranty Agency in the United States, Pension Protection Fund in United Kingdom. Pension System is too big to protect from massive financial shock, only able to protect small sample in normal range of financial conditions. Defined construction can only get structural projection, limited investment protection.

20. 20 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Personal savings and pension plans, aimed at self employed and those wanting to make additional savings, such as IRAs in the United States. Tax driven, often in markets where they are “sold” not “bought”, with high commissions. There have been problems of pension misselling, coming out of attractive structures into inappropriate high commission products

21. 21 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Basic financial product dilemma – Regulate the product? or the means of distribution, the individual and the corporate? How much knowledge does the Regulator have over how products are distributed, who buys them and why. What is that makes products attractive or unattractive?

22. 22 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Increasing coverage Encouraging personal saving through occupational savings methods Tax incentives Caps on fees Educating people as to the importance of savings Many pension products are sold not bought But still low penetration… … leading to the idea of mandatory systems.

23. 23 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Where voluntary systems don’t achieve policy goals, more voluntary systems, then filling in the gaps with mandatory systems. Mandatory or near mandatory systems, AustraliaHong Kong’s MPF Korea, Malaysia, Originally established as mandatory environment Singapore’s CPF

24. 24 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Mandatory Systems Regulatory touch, generally heavier, more threats, controls, investigations. Need to regulate and control various service providers. Prescriptive legislation on investment, participants and their financial and other qualifications. Regulator is in the public eye, driven by fear of individual loss and systemic risk.

25. 25 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 For investment managers Definitive mandates on pension fund mandates, reference to benchmarks Increasing number of unconstrained mandates On member choice Lifestyle funds Specialist equity and bond funds, supporting their own and third party products High level of transparency

26. 26 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids… India, 2000China, 2000 A near standard pyramid One child policy

27. 27 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids: Source UN Italy, 2000 Iran, 2000 Low birth rate

28. 28 Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids, how they are going to change Over 65 2001 18.4% 2015 22.3% Impact of low birth rate, ageing population continues ITALY 2000 2025 2050

29. 29 Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids how they are going to change IRAN 2000 2025 2050

30. 30 Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids how they are going to change improving healthcare INDIA 2000 2025 2050

31. 31 Jeremy Gadbury The International Securities Consultancy Limited August 2005 Some global population pyramids how they are going to change low birth rate CHINA 2000 2025 2050

32. 32 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 A government’s dilemma What does it do about an ageing population? Whether it is the role of the government merely to prevent pensioner poverty, or should it pursue a policy to produce at least some relation between earnings before retirement and the eventual pension, whether state or private?

33. 33 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 What is happening in Pakistan An existing system of pensions, provident funds, gratuities in both the public and private sectors. A new Voluntary Pension System. From a “policy” point of view, not an ageing problem, but for many individuals it is.

34. 34 Pension Funds Globally, in Asia and in Pakistan Pakistan’s population pyramids 1985 2000 Jeremy Gadbury The International Securities Consultancy Limited August 2005

35. 35 Jeremy Gadbury The International Securities Consultancy Limited August 2005 2001 3.7% over 65 2015 4.0% over 65 falling mortality rates PAKISTAN 2000 2025 2050

36. 36 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 … some Pakistan demographics Population growth ratesPopulation Fertility rates 1970 2.59% 59.56 million6.28 2000 2.47%142.65 million5.48 2015 1.98%193.42 million4.11 2050 0.84%304.70 million2.06 Source: UN see www.globalis.gvu.unu.edu for more detailswww.globalis.gvu.unu.edu

37. 37 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 … and some international comparisons Life expectancy at birth IndiaIranItaly Pakistan Russia 1970 48.052.571.0 47.0 70.1 2000 62.168.678.2 59.0 66.1 2015 66.372.879.7 65.0 67.4 2050 73.879.182.5 74.7 74.2

38. 38 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 … and some international comparisons Population aged 65 and above IndiaIranItaly Pakistan Russia 20015.0%4.5%18.4% 3.7% 12.8% 20156.3%4.9% 22.3% 4.0% 14.3%

39. 39 Pension Funds Globally, in Asia and in Pakistan Jeremy Gadbury The International Securities Consultancy Limited August 2005 Thank you