OECD Private Pensions Outlook 2008

The Outlook provides comprehensive country profiles, describing private pension arrangements in individual OECD countrie...

Author: OECD Organisation for Economic Co-operation and Development

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The Outlook provides comprehensive country profiles, describing private pension arrangements in individual OECD countries. The Outlook can also be used in cross-country comparisons of key facets of retirement systems across OECD and non-OECD countries, using data acquired as part of the OECD Global Pension Statistics project. The performance of private pension systems can be evaluated according to key policy criteria using readily accessible information on the coverage of private pension systems, the adequacy of benefits, solvency, investment performance and administrative efficiency.

OECD Private Pensions Outlook 2008

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ISBN 978-92-64-04438-8 21 2009 01 1 P

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In addition to essential data on assets, investments, membership, and industry structure based on the latest official statistics, this volume presents a framework for evaluating the trends shaping the pensions industry, based on the role of the private pensions in relation to the public pension system.

Those with access to all OECD books on line should use this link: www.sourceoecd.org/9789264044388

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This edition presents a special feature on the implications of the financial crisis for private pensions, as well as in-depth, international analyses of private pension arrangements across OECD and selected non-OECD countries. The publication focuses on the role of pension funds, and also provides evidence on public pension reserve funds which complement the financing of social security systems.

The full text of this book is available on line via this link: www.sourceoecd.org/finance/9789264044388

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As the role of private pension systems grows in importance, there is a need to monitor their development and review their performance in an international context, especially following the crisis in the financial markets in 2008. This is the first edition of Private Pensions Outlook, a new OECD publication that guides readers through the changing landscape of retirement income provision.

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About OECD Browse_it editions In a traditional bookshop you can browse the display copies from cover-to-cover, free of charge. Wouldn't it be good to be able to do the same online? Now you can. OECD's Browse_it editions allow you to browse our books, online, from cover-to-cover. But, just as in a real bookshop where you can't take or copy pages from the books on display, we've disabled the print and copy functions in our Browse-it editions - they're read-only. And, just as in a real bookshop, you may choose to buy or borrow from a library some titles you've browsed, so we hope you'll buy or borrow our books when they meet your needs. Tell us what you think about our Browse-it service, write to us at [email protected]. Buying OECD Publications You can purchase OECD books and e-books from our Online Bookshop - www.oecd.org/bookshop where, if you purchase printed editions you can download the e-book edition free of charge. Our books are also available from a network of distributors, click the 'Distributors' button on this website: www.oecd.org/publications/distributors to find your nearest OECD publications stockist. OECD Publications in Libraries You'll find OECD publications in many institutional libraries around the world, especially at universities and in government libraries. Many subscribe to the OECD's own e-library, SourceOECD. SourceOECD provides online acess to our books, periodicals and statistical databases. If your institutional library does not yet subscribe to SourceOECD, tell your librarian about our free three-month trial offer. For more details about SourceOECD visit http://new.SourceOECD.org or email [email protected]. OECD has a network of Depository Libraries in each Member country where all OECD printed publications are available for consultation - www.oecd.org/deposoitorylibraries for a list.

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OECD r u t Private Pensions Outlook Lec

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ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

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r u t c The OECD is a unique forum where the governments of 30 democracies L work to e together

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address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members.

This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries.

Also available in French under the title: Perspectives de l’OCDE sur les pensions privées 2008

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© OECD 2009 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected]. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d'exploitation du droit de copie (CFC) at [email protected].

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Foreword

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fter a period of rapid growth in assets and high investment returns, the sub-prime crisis that started in the United States in 2007 triggered a financial crash that was more brutal and more widespread than even the “perfect storm” of the early 2000s. With asset values dropping by 20% on average in the OECD countries between January and October 2008, the financial crisis could severely affect the retirement savings of millions of individuals around the world. Workers are rightly worried about the security of their retirement savings and there is concern in the financial markets about the viability of some pension funds.

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While governments have extended blanket guarantees to cover bank deposits, private pension systems are largely on their own. In particular, systems based on individual accounts – also known as defined contribution arrangements – experienced major declines in account balances in 2008. These systems pay pension benefits whose level is determined only at retirement, depending on the level of contributions, investment returns and prevailing annuity rates at the time of purchase. Hence, low investment returns over the long term translate into lower pension benefits. The equity market crash of 2007-08 is of greatest concern for workers close to retirement who intend (or are required) to buy products such as annuities that effectively lock in these price declines, severely reducing their retirement income. For younger people, the risk is that they are panicked into selling their equity holdings now to “cut their losses”, thereby not only making a loss on their investment, but missing out on the market recovery that experience shows is bound to take place over the longer term. Policy makers need to think about how to improve the regulation of defined contribution systems so that individuals are better protected from financial risks in old age. Better regulation of the accumulation phase is needed. Default investment strategies – for those who prefer not to make active investment choices – should be gradually moved towards low-risk and risk-free products as the individual ages, since after retirement, it can be very difficult to find a job to make up for any shortfall in pension income. Such initiatives should be combined with more effective financial education programmes. Private pension systems based on defined benefit formulas, where benefits are fixed in relation to salaries, are generally better at maintaining retirement benefit adequacy under conditions of financial distress. However, such systems – with a few important exceptions such as in the Netherlands – are being replaced progressively throughout the world by defined contribution plans, largely because of the increasing costs of provision. One striking example is the United States, where private sector coverage of defined benefit plans declined from more than 80% in 1980 to less than 30% today.

OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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FOREWORD

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Understanding the different features of private pensions, their role in retirement income arrangements, and their performance is essential for policymakers to design better schemes. To give one example: a pension system that relies on a large, defined contribution component should be backed by a generous, publicly-managed basic pension that prevents poverty in old age.

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Companies that sponsor defined benefit systems have been hit hard by the financial crisis. Not only is their profitability rapidly declining as the recession deepens, but they are required to make up the widening gaps between the plan’s assets and liabilities via additional contributions. Regulatory forbearance may be expected, such as an extension of the recovery periods to eliminate funding deficits.

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This publication and the wealth of statistics it contains informs policymakers, pension industry actors and the public at large of the role and functioning of private pension arrangements. Using both a historical and cross-country approach, the report identifies trends in financial indicators such as asset growth, investment strategies, rates of returns, and solvency. It also provides a cross-country evaluation of the extent of coverage of private pension systems and estimates the adequacy of retirement income from these systems.

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Despite isolated examples outside the OECD, such as Argentina’s recent decision to nationalise the mandatory defined contribution system, the pension reforms of recent years are unlikely to be undone. Private pensions have become a key part of a diversified retirement income system, as recognised by the 1998 OECD publication Maintaining Prosperity in an Ageing Society. However, a major rethink is likely to take place in many countries, first about the relative weight of public and private systems, and, second, about the design of both types of system. This publication can inform that debate with official, OECD-validated data and groundbreaking comparative analysis. As economies recover from the worst effects of the financial crisis, governments in some countries are likely to continue their expansion of private pension systems. Their long-term performance, as shown by the indicators presented in this publication, remains attractive. Private pensions can and will help deal with the effects of population ageing, especially in those countries where public pensions are dominant. It is clear, however, that many countries will need to redesign their regulations to better protect private pension systems against the vagaries of financial markets. The OECD’s private pensions work, and in particular, its international leadership in setting regulatory standards, will be more relevant than ever in ensuring that decision makers have the objective data and analyses they need. This can provide useful pointers for public systems too, as they continue their drive to accumulate financial reserves to buffer their pay-as-you-go schemes against the demographic impact of ageing. The publication is divided into five chapters. Chapter 1 describes the main types of private pension systems and focuses on the growing role of funding, private pensions, and institutional investors in retirement income arrangements. Chapter 2 describes the main trends in assets and investments by pension funds, the main institutional investor financing private pension arrangements. Chapter 3 focuses on public pension reserve funds, the buffer funds set up by governments and social security institutions to help finance pay-as-you-go public pensions. Chapter 4 provides a set of performance indicators of private pension systems, including coverage, benefit adequacy and security, investment performance, solvency and administrative efficiency (operating costs and fees charged to participants). The last part of the publication contains a set of country profiles which describe in a concise manner the design of private pension systems in OECD countries.

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Carolyn Ervin

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Because private pension arrangements and financial markets in general will continue to play such an important role in delivering retirement income security in many countries and because the investment of pension assets increasingly affects capital markets, the availability of an accurate, comprehensive, comparable, and up-to-date body of international statistics and indicators, supporting solid analysis, is a necessary tool for policy makers, regulators, and market participants. This OECD Private Pensions Outlook is a major step in that direction.

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Director, Directorate for Financial and Enterprise Affairs


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Acknowledgments

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he Private Pensions Outlook was prepared by a team within the OECD Directorate for Financial and Enterprise Affairs, headed by Carolyn Ervin (Director), Adrian BlundellWignall (Deputy Director), Robert Ley (Counsellor to the Director) and André Laboul (Head of the Financial Affairs Division).

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The production of the Private Pensions Outlook would not have been possible without the contribution of OECD Delegates to the Working Party on Private Pensions and its Task Force on Pension Statistics. The OECD gratefully acknowledges their effort to supply qualitative information contained in this publication as well as data compiled within the framework of the OECD Global Pension Statistics project. Representatives from non-OECD countries provided input to the report through the OECD cooperation with the IOPS (International Organisation of Pension Supervisors). Juan Yermo and Jean-Marc Salou from the OECD Financial Affairs Division of the OECD Directorate for Financial and Enterprise Affairs prepared this report with contributions from many colleagues: ●

statistical and research assistance throughout the publication was provided by Stéphanie Payet;

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Chapter 3 was written by Yu-Wei Hu;

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in Chapter 4, sections related to coverage and performance were written by Pablo Antolin, sections related to pension adequacy and funding were written by Clara Severinson and the section that examines private pension operating costs and fees was written by Waldo Tapia;

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Chapter 5 was written by Jens Tinga and Yu-Wei Hu with contributions from Fiona Stewart and Clara Severinson, as part of co-operation with the International Organisation of Pension Supervisors.

This publication also benefits greatly from the comments and insights of Ambrogio Rinaldi from COVIP (Italy) and Chairman of the OECD Working Party on Private Pensions (WPPP), Ross Jones from APRA (Australia) and Deputy Chairman of the WPPP, William Bortz from the US Treasury and member of the WPPP Bureau, and José Pavao Nunes from the Portuguese Pension Supervisory Authority and Chairman of the OECD Taskforce on Pension Statistics. Useful comments were also received from Edward Whitehouse, from the OECD Directorate of Employment, Labour and Social Affairs and Robert Ley and André Laboul from the OECD Directorate for Financial and Enterprise Affairs. Support to the publication process was provided by Catherine Candea, Patrick Love, Therese Hogan, Edward Smiley, and the OECD Publishing Division.


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ACKNOWLEDGMENTS

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This publication benefited from financial support from both the public and private sectors, namely, Allianz Global Investors, ABI (American Benefits Insitute), BBVA, COVIP, the Dutch Association of Industry Wide Pension Funds (VB), EFFAS-EBC, ING Group, Pioneer investments, the Portuguese Pension Supervisory Authority, the European Commission and the International Organisation of Pension Supervisors.

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Table of Contents

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Special Feature: Private Pensions and the 2008 Turmoil in Financial Markets . . . . . .

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Reader’s Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Acronyms, Symbols and Conventional Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 1. Role and Types of Private Pension Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1. The growing role of funding and private pensions in retirement income arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2. The role of institutional investors in pension systems . . . . . . . . . . . . . . . . . . . . . 1.3. Types of private pension arrangements across OECD countries . . . . . . . . . . . . .

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Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 2. Key Pension Fund Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1. Pension fund wealth and membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2. Pension fund industry structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3. Pension fund investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4. Investment restrictions and pension fund asset allocation . . . . . . . . . . . . . . . . . 2.5. Revenues and expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6. Pension funds in selected non-OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7. Additional comparative tables, notes and reference series . . . . . . . . . . . . . . . . .

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u Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .L . . .e . . .c . . t 25

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Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Chapter 3. Public Pension Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 3.1. Wealth accumulated in public pension reserve funds . . . . . . . . . . . . . . . . . . . . . 102 3.2. Asset allocation of public pension reserve funds. . . . . . . . . . . . . . . . . . . . . . . . . . 104 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Chapter 4. Performance Indicators of Private Pension Systems . . . . . . . . . . . . . . . . . . . . 4.1. Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2. Are pension benefits adequate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3. Investment performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4. Funding and solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5. Private pension operating costs and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 Chapter 5. Country Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 How to Read the Country Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158


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Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Czech Republic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Iceland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Slovak Republic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 List of boxes

1.1. 3.1. 4.1.

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Categories of public pension reserve funds. . . . . . . . . . . . . . . . . . . . . . . . . . . 104 A brief guide to OECD pension models. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

List of tables 1.1. 1.2. 2.1. 2.2. 2.3. 2.4.

10

Types of private pension plans in OECD countries . . . . . . . . . . . . . . . . . . . . . . . . Total private pension assets in major OECD countries, 2007 . . . . . . . . . . . . . . . . Total number of pension funds in selected OECD countries, 2007 . . . . . . . . . . . Changes in bonds and equities indexes between 2001 and 2007 in selected areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign investment and foreign currency investment of pension funds in selected OECD countries, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total investment of pension funds in OECD and selected non-OECD countries, 2001-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41 43 67 71 72 83


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Total investment of pension funds in OECD and selected non-OECD countries,

2.7.

Total number of pension funds in selected OECD countries, 2001-2007 . . . . . .

89

2.8.

Pension fund portfolio allocation in selected OECD countries, 2007 . . . . . . . . . .

90

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Pension funds’ net income in selected OECD countries, 2001-2007 . . . . . . . . . .

2.12.

93

2.13.

tu Pension funds’ contributions in selected OECD countries, 2001-2007.L . . .e . . .c . . 95

2.14.

Employers’ contributions vs. employees’ contributions in selected OECD countries, 2001-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2.15.

List of administrative sources, OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Pension funds’ benefits in selected OECD countries, 2001-2007 . . . . . . . . . . . . .

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2.16.

List of administrative sources, non-OECD countries . . . . . . . . . . . . . . . . . . . . . . .

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Annual gross domestic product, expenditure approach, current prices . . . . . .

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2001-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2001-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Currency exchange rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Size of public pension reserve fund markets in selected OECD and non-OECD countries, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

3.2. 3.3.

Asset allocation information of public pension reserve funds, 2007. . . . . . . . . . 106 Changes in public pension reserve fund allocations to equities and bonds in selected OECD and non-OECD countries, 2001 vs. 2007 . . . . . . . . . . . . . . . . . . 107

4.1.

Gross replacement rate and coverage in public and private pension systems in selected OECD and non-OECD countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

4.2.

Assumptions used for retirement income projections under the Base-Case Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

4.3.

Basic statistical information on real investment returns by country . . . . . . . . . 128

4.4.

Countries pension funds’ returns net of benchmark returns. . . . . . . . . . . . . . . . 131

4.5.

Private pensions’ fee structure in selected OECD and non-OECD countries, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

4.6.

Limit on fees in selected OECD and non-OECD countries, 2007. . . . . . . . . . . . . . 146

4.7.

Average administration fee in selected OECD and non-OECD countries, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

List of figures S.1. S.2.

Major stock market performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominal and real pension fund returns in selected OECD countries January-October 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

S.3.

15 16

Nominal average annual pension fund return in selected OECD countries over the last 5, 10 and 15 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

R.1.

Private pension plan: Functional perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32

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Private pension plan: Institutional perspective . . . . . . . . . . . . . . . . . . . . . . . . . . .

32

1.1.

Public and private pension expenditure in selected OECD countries, 2006 . . . .

42

1.2.

Total private pension assets, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44

1.3.

Private pension assets compared with the public pension system’s gross replacement rate, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


45

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2.1. 2.2. 2.3. 2.4. 2.5. 2.6a. 2.6b. 2.6c. 2.7. 2.8. 2.9. 2.10. 2.11. 2.12. 2.13. 2.14. 2.15. 2.16.

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Ratio of the inactive elderly population aged 65 and over to the labour force. . . . . Ratio of public pension reserve funds’ assets and public pension expenditure for selected OECD countries, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets under management within selected financial entities, 2007 . . . . . Relative share and total assets by type of institutional investors, 1995-2007 . . Private pension assets by type of financing vehicle, 2007 . . . . . . . . . . . . . . . . . . Private pension assets by pension plan type in selected OECD countries, 2007 . . . Defined benefit private pension assets for selected OECD countries, 2003-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Geographical distribution of pension fund assets in OECD countries, 2001-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trends in total OECD pension funds assets, 2001-2007. . . . . . . . . . . . . . . . . . . . . Pension funds’ average annual growth rate in total assets over 2001-2007 in OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension funds’ average annual growth rate in total active members over 2001-2007 in selected OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Importance of pension funds relative to the size of the economy in OECD countries, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trends in pension fund assets: OECD countries with mature markets,

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1.7. 1.8. 1.9. 1.10. 1.11.

in selected OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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growth rates of private pension assets and GDP over the period 2001-07

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TABLE OF CONTENTS

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58 59 59 60 61 62 63 63 64 65 66 67 68 69 70 70 73 74


2.25. 2.26. 3.1. 3.2. 3.3. 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9. 4.10. 4.11. 4.12. 4.13. 4.14. 4.15. 4.16.


74 75 76 77 78 79 79

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2.18. 2.19. 2.20. 2.21. 2.22. 2.23. 2.24.

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Structure of defined benefit and defined contribution asset allocation in pension funds in selected OECD countries, 2007 . . . . . . . . . . . . . . . . . . . . . . . . Portfolio limits on OECD pension funds’ investment in equities, 2007. . . . . . . . Portfolio limits on OECD pension funds’ investment in corporate bonds, 2007 Portfolio limits on OECD pension funds’ foreign investment, 2007. . . . . . . . . . . Pension funds’ net income for selected OECD countries, 2007 . . . . . . . . . . . . . . Pension funds’ benefits for selected OECD countries, 2001-2007. . . . . . . . . . . . . Pension funds’ contributions for selected OECD countries, 2001-2007 . . . . . . . . Employers’ contributions vs. employees’ contributions in selected OECD countries, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Importance of pension funds relative to the size of the economy in selected non-OECD countries, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset allocation to major investment categories in selected non-OECD countries, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 Public pension reserve funds’ assets and 2001-07 average annual growth rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset allocation of public pension reserve funds in selected OECD and non-OECD countries, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign investment in public pension reserve funds in selected OECD and non-OECD countries, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Coverage of voluntary private pension plans by age . . . . . . . . . . . . . . . . . . . . . . . Coverage of voluntary private pension plans by income . . . . . . . . . . . . . . . . . . . Potential replacement ratio at normal retirement age: public pension, mandatory private pensions and typical occupational plans . . . . . . . . . . . . . . . Potential replacement ratios at normal retirement age: base case, higher and lower investment returns scenarios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potential replacement ratios at normal retirement age: base case, higher and lower salary scale scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potential replacement ratios at normal retirement age: base case, higher and lower cost of annuitisation scenarios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average annual returns and their standard deviation, 2000-2005. . . . . . . . . . . . Number of companies in the sample examined . . . . . . . . . . . . . . . . . . . . . . . . . . Companies reporting defined benefit obligations, 2007 . . . . . . . . . . . . . . . . . . . . Weight of defined benefit obligation as compared to market capitalisation. . . Weight of pension obligation (DBO) compared with market capitalisation in selected OECD and non-OECD countries, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . Average percentage over/(under) funding of sampled companies in selected OECD and non-OECD countries, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . Total operating costs of pension funds, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative charges per member in selected OECD and non-OECD countries, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative charges in selected OECD and non-OECD countries, 2007 . . . . Evolution of total fees since the inception of each system. . . . . . . . . . . . . . . . . .

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82 102 105 108 114 115 121 123 124 126 128 134 135 136 137 138 140 148 148 149

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SPECIAL FEATURE: PRIVATE PENSIONS AND THE 2008 TURMOIL IN FINANCIAL MARKETS

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The financial turmoil which started with the subprime crisis in the United States in mid-2007 has affected many aspects of the economy, including private pension arrangements. Stock markets have fallen by nearly half from the start of the year to October 2008 (see Figure S.1). The crash in equity markets has hit private pension systems, leading to large investment losses and weaker funding levels.

Figure S.1. Major stock market performance United States

Euro area

Emerging markets

Price index (1-1-2006 = 100) 200 180 160 140 120 100 80 60 40 20

Oc t. M 93 ar . Oc 9 4 t. M 94 ar . Oc 95 t. M 95 ar . Oc 9 6 t. M 96 ar . Oc 97 t. M 97 ar . Oc 98 t. M 98 ar . Oc 9 9 M t. 9 ar 9 . Oc 20 0 t. 0 20 M 00 ar . Oc 01 t. M 01 ar . Oc 02 t. M 02 ar . Oc 0 3 t. M 03 ar . Oc 0 4 t. M 04 ar . Oc 05 t. M 05 ar . Oc 0 6 t. M 06 ar . O c 07 t. M 07 ar . Oc 08 t. 08

0

Source: Thomson Financial Datastream.

1 2 http://dx.doi.org/10.1787/514582014352

By October 2008, the total assets of all pension funds in the OECD had declined by about USD 3.3 trillion, or nearly 20% relative to December 2007. Including other private pension assets, such as those held under personal plans in the United States (individual retirement accounts – IRAs) and in other countries, brings the loss to about USD 5 trillion. Pension funds experienced a negative return of nearly 20% in nominal terms on average (22% in real terms) over January to October 2008 (see Figure S.2).1 Most of this USD 3.3 trillion loss is accounted for by the 2.2 trillion lost by pension funds in the United States. The US funds account for more than half of all OECD countries’ pension fund assets and had the second worst investment performance. Only four other OECD countries saw OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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Figure S.2. Nominal and real pension fund returns in selected OECD countries January-October 2008

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-25 -30 -35

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I i te r ela d nd St at Ic e s el Hu a n d ng Au ar y st ra l OE C a ia 1 CD n a av d a er ag Po e la n Ne Ja d th pa er n la Un B nd e i te lg s d ium Ki ng 2 d No om rw F i ay S w nl a n tiz d 3 er l Po and r tu g Au al s t Sw ri ed a 2 en 2 , Sp 4 De a in 2 nm Ge ar rm k a Sl ov M ny a k ex Re i c o pu 5 bl ic 6 It a l y 2, Tu 7 rk Cz ec K ey h or Re e a pu 2 bl i Gr c 2 ee ce 2

-40

OECD weighted average rates of return

Note: OECD average is an asset-weighted average. Some data draw on official data received from Delegates to the OECD Working Party on Private Pensions (Australia, Austria, Belgium, Czech Republic, Denmark, Finland, Greece, Hungary, Ireland, Italy, Korea, Mexico, Poland, Portugal, Slovak Republic, Spain, Switzerland, and Turkey). 1. Official data up to June 2008 then complemented by OECD estimate up to October. 2. 2008 data refer to 30 September 2008. 3. Data refer to statutory earnings-related pension plans. 4. Data refer to occupational pension plans only. 5. Data refer to the mandatory and voluntrary pension systems. 6. Data refer to balance funds. 7. Data refer to new pension funds (contractual and open) instituted after 1993 legislation. Source: Various sources or OECD estimates.

1 2 http://dx.doi.org/10.1787/514583284066

negative pension fund returns greater than 20% in nominal terms. In absolute terms, the second largest loss was the United Kingdom’s (USD 0.3 trillion), followed by Australia’s (USD 0.2 trillion). Investment losses on all OECD private pension plans (including individual retirement accounts and pension insurance contracts) are estimated at USD 5 trillion, 3.3 trillion of which in the United States alone. These losses, though substantial, are smaller than the decline in equity values. Pension funds have benefited from having diversified investment portfolios, often with a large proportion invested in bonds, whose rates of return are lower but more stable than those of equities. In December 2007, in 13 out of 22 OECD countries for which information was available, over 50% of assets were invested in bonds, and around 60% of these investments were in government bonds. The impact of the crisis on investment returns has been greatest among pension funds in the countries where equities represent over a third of total assets invested, with Ireland the worst hit at –30% in nominal terms. Irish pension funds were the most exposed to equities, at 66% of total assets on average, followed by the United States, the United Kingdom, and Australia. The full impact on investment returns, however, will only be revealed when the annual reports for 2008 are submitted by pension funds to their supervisory authorities. In particular, there is a lack of clarity over the valuation of some illiquid assets – those that

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cannot be turned into cash quickly – such as real estate or so-called structured products (which combine a periodic payment at a predetermined rate and another component, often the option to buy or sell an asset at some time in the future). Direct exposure to the “toxic” part of structured products and asset-backed securities may be as high as 3% of assets under management for the pension fund industry as a whole. However, allocations differ across countries and between funds, with some likely to face much greater losses than others.

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Previous experience of similar situations may be helpful in this regard. The decline in equity returns over 2000-02 was just as serious as in 2008, though the latest one has been much faster. Despite the severity and proximity of these two market downturns, pension fund performance has been positive over the last ten years and rather healthy over the last fifteen years (see Figure S.3). For example, the average, annual nominal rate of return of pension funds over the last fifteen years was 11.8% in Sweden (8.5% in real terms), 10.6% in

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the United-States (6.1% in real terms) and 9.2% in the United Kingdom (6.1% in real terms). Focusing on a single year’s return gives a misleading picture of the ability of pension funds to deliver adequate pensions in old age. Pension funds also have very small liquidity needs in relation to their total assets under management. This means that they do not need to sell assets at current low prices to meet benefit payments and other expenditures as they can rely on the regular flow of contributions and investment income, even if the latter is reduced. The main exception is defined benefit plans with frozen accruals. These plans rely largely on running down their assets to meet benefit payouts, so when asset values decline sharply, they cannot wait until the market recovers to sell and may have to sell at a loss. This is the case of many plans in the United Kingdom and increasingly in the United States. The longer-term outlook depends of course on what happens in the markets. Optimists could argue that the much faster drop in values compared to 2000-02 is a result of closer links in the financial system and that recovery could be rapid. Pessimists could

Figure S.3. Nominal average annual pension fund return in selected OECD countries over the last 5, 10 and 15 years 5 years

10 years

15 years

14 12 10 8 6 4 2 0 Australia

United Kingdom

United States

Sweden

Source: Various sources and OECD estimates.

1 2 http://dx.doi.org/10.1787/514627072105


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point out that the previous crash was not followed by a major credit crunch and a deep recession across the developed economies as is the case today.

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Whatever happens, if poor financial market performance continues, pension funds’ ability to meet future obligations could be harmed. The effect could be important if, over several years, the real rate of return on a fund’s investments remained significantly below the funds’ long-term targets.

For people paying into defined contribution pension funds, the impact of the crisis depends critically on the fund’s asset allocation and the member’s age.

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In defined contribution systems, pensions depend directly on the market value of the assets held in individual accounts. A major drop in asset values may not matter much to younger workers who can expect the markets to recover overall in the long term. For workers close to retirement, on the other hand, large declines in asset values can mean permanent income losses if the money saved in the pension accounts must be used to purchase annuities at retirement. This is the case in many Latin American and Eastern European countries where defined contribution systems are mandatory. However, many of these systems are relatively young, so the number of older workers affected is small. Moreover, in many of these countries, older workers are restricted in the type of investment portfolio they can choose. Default options, for those who do not make an active choice of investment, also tend to be conservatively invested. The situation is different in other countries. For example, in the defined contribution systems of Australia and the United States the purchase of annuities at retirement is not mandatory. But the default investment option for older workers may often have as much as 50 to 60% of assets invested in equities. Even if these people maintain their savings in equities in the expectation of a recovery, retirement income will be lower at least temporarily. In defined benefit pension plans, benefits are linked to individual wages, so the main policy concern is worsening funding levels. The retirement income provided by defined benefit pension plans is in principle unaffected by changes in investment returns. However, lower asset prices worsen their financial solvency. Some OECD countries with large defined benefit systems such as Canada, Ireland, the Netherlands, Switzerland, the United Kingdom and the United States are reporting lower funding levels and in some cases large funding gaps (pension liabilities greater than assets). It can be difficult to know the real situation of funds because of the accounting practices used by the pensions industry. The price of pension liabilities in company balance sheets is calculated using corporate bond yields which have a risk premium (or return) above government bonds. The calculation is based on the return on high-quality corporate bonds where normally there is little risk, so the premium is small. However, if these bonds are seen as more risky, as happened in 2008 when even large, well-established firms got into trouble, the risk premium increases. In some instances – e.g. the United Kingdom – this effect has largely countered the decline in asset values, on paper at least. However, if one looks at the funding levels reported by supervisory authorities – which are often based on more stable government bond yields – declines in solvency are substantial.

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In Switzerland and the United States, the funding position of defined benefit plans has deteriorated by more than 10%, with rising bond yields partly offsetting the decline in asset values. Pension funds in the Netherlands have also experienced sharp falls in asset values, especially as they have an important exposure to the US markets in their equity portfolios. As the market discount rates used – which are based on swap rates – have declined, the rise in the market value of liabilities has worsened the solvency situation further. Aggregate funding levels in the Netherlands had already fallen by nearly 10% between December 2007 and June 2008. Since then, the funding level has deteriorated further. Members of defined benefit plans may experience benefit cuts, especially if the sponsoring company goes bankrupt.

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The emergence of funding gaps is forcing pension funds and their sponsoring employers to establish a recovery plan to reduce the deficit. In most instances, the plan will involve additional employer contributions but in some cases benefits may be reduced. For example, in the Netherlands, where conditional indexation of benefits is widespread, pension funds will most likely react to lower funding levels by stopping the indexation of benefits to wage inflation until funding levels recover. Hence, pensioners’ income will fall in real terms, while the real value of accrued benefits will be lowered in an equal manner. When funding recovers to a sufficiently high level, pension funds will make up for the lost indexation with higher benefits. Participants may also suffer benefit losses if they lose their jobs before they complete the vesting period or if deferred benefits are not protected against inflation. Participants are also exposed to the risk that the employer goes bankrupt when the plan is underfunded. Some OECD countries, including Germany, Sweden, the United Kingdom and the United States, have guarantee funds that insure benefits (usually up to a certain level) against this. However, there are also increasing concerns about the ability of these funds to meet the possible large claims that could arise with a growing number of corporate failures. Governments may well be forced to bail out these guarantee funds.

Reactions to the financial turmoil Backlash against private pension systems One possible consequence of the financial crisis is that policymakers in some countries may seize the opportunity to shrink private components of the pension system (as the Argentine government did in October 2008), nationalising pension funds and bringing contributions and assets back into the public pension system. In some Eastern European countries there is also talk of allowing participants to go back to the public pension system, something which the Argentine government did before seizing the private pension assets. Such decisions, taken in a rush, only contribute to the perception of panic and fail to acknowledge the achievements of private pension systems over the lifetime of participants. Some governments may also point to the temporary weakness of private pensions to justify delaying necessary reforms to the public pension system. Such opportunistic messages should be countered with a long-term outlook, based on independent financial projections for both the public and private systems. The best approach to pension provision is to use a mixture of sources of retirement income, including both public and private, as well as the two main forms of financing (pay-as-you-go and funded pensions).


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Relying solely or largely on one source may be imprudent, as all systems face major risks of different sorts. The financial crisis means that investment risk is uppermost in the minds of both the public and policymakers. However, public pension systems are under tremendous stress stemming from demographic ageing, and in some cases also by falling labour force participation rates. The financial crisis is also causing public debt to soar in many countries, making it more difficult for governments to finance public pension deficits.

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Pension funds can have a role as “market stabilisers”, smoothing out fluctuations in prices by selling when markets are high and buying when they are low. However, in this latest crisis, some pension funds have sold part of their equity portfolios. In some countries, pension funds have reacted by allocating new pension contributions to bank deposits and other instruments with government guarantees until the situation in capital markets stabilises.

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A flight from equities is already happening in defined contribution plans in some countries where participants can choose portfolios. In countries with mandatory systems, investment returns are reported monthly or quarterly, which has lead many participants to switch to lower-risk portfolios. Such behaviour, while seemingly rational from a short-term perspective, ultimately leads to lower pensions than if participants had stuck to their previous asset allocation into the long term. Participants risk missing out on the equity recovery and may only increase their equity allocations once the market becomes overvalued again. In defined benefit plans, a shift in investments away from equities is also likely, though perhaps less pronounced than in defined contribution plans. One important driving factor is the implementation of standards and rules governing how funds value assets and liabilities and what they have to do to bring the ratio between the two into line. If the estimated value of assets is too low to meet legal requirements and the required funding level rises with the pension fund’s exposure to equities, the funds may be forced to sell part of their equity holdings, even at a loss, during a downturn. This happened in Denmark in 2001-02 and again in 2008, before the regulator stepped in and relaxed the valuation standard. Finland has also introduced temporary changes in the calculation of pension fund liabilities and solvency margins in order to reduce pressures on pension funds to sell equities. On the other hand, in the Netherlands, which also has introduced risk-based funding regulations recently, pension funds appear to have so far retained their stabilising role, becoming net buyers of equities during the sell-off. However, as the funding level approaches the minimum solvency requirement of 105% (of liabilities), pension funds may decide to reduce their equity holdings. The crisis may also lead pension funds to reconsider their alternative investments (hedge funds, private equity, commodities, etc.) and strengthen their governance and risk controls. Many pension funds have been embracing alternative investments in a herd-like way, seeking the higher returns promised by these assets without fully understanding the underlying risks involved. Some pension funds are also starting to move into the market for loans that fund indebted companies and buy-outs. This market is a potential boost to the lending system dominated by banks and a few investment funds. Some pension funds have been pursuing

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The liabilities of defined benefit schemes are exposed to various risks (investment, interest rates, inflation, longevity), and to cover these, many pension funds have adopted strategies based on liability-driven investment (LDI) – investing assets in a way that takes into account the nature of their liabilities. Derivatives are increasingly used by pension funds to manage risk. The types of derivatives most used by pension funds are financial instruments that derive their value from interest rates (e.g. swaps) and are traded directly between two parties, without passing through a regulated exchange. There is evidence that the implementation of LDI using derivatives is slowing because of the credit crisis and in particular the possibility that the other parties to the agreement cannot honour it

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a strategy to diversify into credit for a number of years and consider the turmoil as a good buying opportunity. Sometimes, however, the bets have not paid off. For example, ABP, the large Dutch pension fund may have suffered major losses from an investment in Lehman Brothers made just before its insolvency.

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(counterparty risk). The freezing of the credit and capital markets and their slow unravelling is complicating risk management by pension funds. And apart from investment risk, defined benefit pension funds also have to deal with a longer-term risk, longevity. People are living longer and thus receiving payouts for a longer time, but there is much uncertainty over the future path of longevity. One way of dealing with this risk may be “longevity swaps”: the pension fund pays the swap’s counterparty an agreed revenue stream and receives an income that rises if longevity is higher than expected. However, this idea is not likely to prove very attractive in situations of great uncertainty and concerns over counterparty risk. Financial market regulators have restricted short-selling of stocks. Short-selling is the practice whereby sellers sell a security they don’t actually own yet, in the hope that they can buy it later at a lower price before having to deliver it. Some pension funds participated in this type of transaction by lending stocks to speculators in exchange for a fee. Hedge funds often borrow stocks to implement popular strategies based on expected price differences of the stocks. Many pension funds have now stopped their stock lending practices since the fees did not justify the risk that they would not recover the value of the stock loaned. They also fear that they may have contributed to the financial crisis through these lending practices. Forbearance over pension funding requirements To keep up with their pension funding requirements after disappointing investment returns, many companies may be forced to increase their contributions to pension funds, which were already quite high as a result of recovery plans implemented after the 2000-02 stock market declines. Policymakers seek to protect pension fund participants by setting funding levels sufficiently high. Employers may then have to make up the shortfall caused by lower asset values. Canada recently decided to give pension funds and their sponsoring employers more time to allow funding levels to return to their targets levels in order to avoid putting further strain on employers when the general economic situation is deteriorating. Pension funds in Ireland and the Netherlands have been given more time to prepare their recovery plans.


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Towards a new regulatory agenda

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A lowering in the funding level targets is less likely as this would lower benefit security over the long term. On the other hand, there could be much debate on the suitability of statutory investment performance requirements on pension funds and the valuation standards for assets and liabilities. In Switzerland, for example, the government is considering a reduction in the minimum return that pension funds must guarantee, from 2.75% in 2008 to 2% in 2009. Questions are also being raised about the suitability of markto-market valuation for pension funds (an accounting practice that values assets and liabilities at current market prices rather than their book value, which is the original cost minus depreciation).

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Even before the 2008 crisis, there had been warnings about the need to reform private pensions. The OECD has been calling for stronger pension fund governance since the publication of a set of guidelines in 2001, which are currently being revised. The guidelines stress the need for effective monitoring of investment risks and performance and of the relationship between pension funds’ assets and liabilities. Greater expertise and knowledge are required on pension fund boards, including the appointment of independent experts. The OECD has also recently highlighted the interplay between scale and governance. Small pension funds are more prone to weak governance (and they are much more expensive to manage and supervise), so there is a strong case to consolidate the pension fund sector through mergers in some countries. Regulatory reform of both defined benefit and defined contribution systems should also be on the policy agenda. Some regulations intended to protect participants of defined benefit plans may actually make things worse by reinforcing the downward spiral in asset values. Even in a severe crisis, investors do not lose anything on an investment until they sell it at a less than they paid for it originally (or the company goes out of business). Yet in some countries, the rules do not allow funds to sit out a crisis and wait for values to rise again. They have to sell to maintain asset to liability ratios, and given the major role pension funds play in some markets, this drives prices down even further. Mark-to-market accounting valuation and, in particular, the practice of linking minimum funding levels to investment risk may have reinforced this effect. Such riskbased funding regulations deserve close scrutiny. Further debate is also needed on the balance between funding flexibility and benefit security and on ways in which funding regulations could be made more countercyclical. The crisis will lead to further closures of defined benefit plans as funding gaps widen and contribution requirements increase. Insolvency guarantee funds will also be active over the next couple of years bailing out the pension funds sponsored by bankrupt companies. As the defined benefit pension sector shrinks further over the coming years, policymakers should question the possible role of regulations in reinforcing this trend and consider ways to promote benefit security via hybrid pension arrangements and risk sharing. For defined contribution plans, there is going to be greater policy focus on appropriate default mechanisms and the design of “autopilot” funds (such as target-date or lifestyle funds) that shift towards lower risk investments as retirement date approaches without the beneficiary having to intervene. Policymakers may need to provide guidance on the

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Policymakers should also give further consideration to the suitability of different investment strategies as default options, taking into account the extent of choice in the payout stage, the generosity of the public pension system and the level of contributions, among other factors. Default investment strategies should be evaluated from the perspective of retirement income adequacy and predictability.

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design of these defaults as is common practice in some mandatory defined contribution systems of Latin America, where default funds have a maximum allocation to equities that declines as the person approaches retirement. A key goal of this regulation is to reduce the “timing risk” of transforming an accumulated balance into a regular benefit stream (an annuity).

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contribution systems. Some of the mandatory and default arrangements in place are far from safe and fail to integrate the accumulation and retirement stage in a coherent manner. In particular, making the purchase of annuities mandatory makes most sense in countries where public pension benefits are low. However, forcing individuals to purchase annuities goes against principles of free choice and may impose heavy costs on individuals when annuity rates are low or account balances have dropped as a result of adverse market conditions. A more flexible approach that could be introduced as a default option for the pension pay-out phase is to combine “phased withdrawals”, where a defined part of the fund balance can be withdrawn each year, with deferred annuities that start paying benefits after a certain age, such as 85. Such deferred annuities could be bought at the time of retirement with a small part of the accumulated balance. Finally, in the context of the financial crisis and the rapid growth of defined contribution plans in many countries, effective financial education programmes and information disclosure are becoming increasingly important to the well-functioning of the private pension system. Policy initiatives in this area should complement the regulations on investment choice and default options that already exist in some countries. As workers take more responsibility for saving for their own retirement, the role of policymakers changes but it remains of paramount importance to promote the adequacy and security of old-age income.

Note 1. This is an OECD average calculated on the basis of official data and estimates. Eighteen countries provided the OECD Secretariat with preliminary data for the period January to October 2008 (i.e. Australia, Austria, Belgium, the Czech Republic, Denmark, Finland, Greece, Hungary, Ireland, Italy, Korea, Mexico, Poland, Portugal, the Slovak Republic, Spain, Switzerland and Turkey). For countries for which investment returns were not available, the OECD Secretariat made estimates. Estimated figures were obtained by applying the variation of an index of cash, equities and bonds during 2008 to the asset allocations of pension funds at the end of 2007.


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u The 2008 edition of the OECD Private Pensions Outlook describes theL major ect

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expansion of funding and private pensions in retirement income arrangements. A Special Feature deals specifically with the impacts of the 2008 financial crisis.

Over the past two decades, there has been a marked shift towards funding and private sector management in pension systems, driven largely by the introduction of mandatory private pensions. Funding has also become increasingly important within publicly managed pension systems. Many countries have established public pension reserve funds (PPRFs) to provide financing support to otherwise pay-as-you-go systems. The average growth rate of OECD private pension assets between 2001 and 2007 was 9.4%. However, the expansion of private pensions has been uneven. The slow asset growth rate in some private pension systems raises concerns over retirement income adequacy. As public pensions have been cut back, policies to further develop private pension systems are urgently needed in some OECD countries. In 2007, nearly USD 28 trillion in assets were accumulated in private pension systems in the OECD area, of which more than 60% was held by the US private pension system (USD 17 trillion). The importance of private pension systems can also be gauged by looking at the market value of assets accumulated relative to the size of the economy. In relation to the national economy, the largest private pension system was Switzerland’s with a ratio of private pension plan assets to GDP of 151.9%. The OECD-weighted average ratio of private pension assets to the area’s GDP reached 111.0% in 2007.

Although all the main types of institutional investors contribute to the financing of pension benefits, pension funds are losing some importance among the “traditional” classes of institutional investors. Between 2006 and 2007, institutional investors’ total assets increased by 11.3%. However, pension funds’ assets rose only by 7.5%, while those of insurance companies and investment funds both grew 12.9%. Growth of insurance assets was mainly driven by steady growth in retirement and other wealth accumulation products. The growing role of insurance companies and especially mutual funds may be also explained by the shift towards defined contribution arrangements in the United States, which has by far the largest institutional investor sector in the world. On aggregate, the largest investors are investment funds, followed by insurance companies and pension funds. PPRFs, sovereign wealth funds, private equity funds, and hedge funds still represent only a small fraction of the assets accumulated by these “traditional” institutional investors. Moreover, a large share of the assets held by private


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equity and hedge funds is the property of pension funds and insurance companies, giving these investors great clout in global capital markets. Insurance companies are also major players in the private pension systems of many countries, while investment funds are used by both pension funds and insurance companies as vehicles to channel their investments. Consequently, the financial assets held by investors are heavily pension-oriented. As much as 60% of the total volume of assets held by institutional investors worldwide has as its main purpose the financing of retirement benefits.

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As shown in Chapter 2, the aggregate OECD pension fund market is large, but the size of domestic markets varies considerably across countries.

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64% of the total assets in private pension arrangements. In absolute terms, the United States has the largest pension fund market, with assets worth USD 10.2 trillion. However, its share of the OECD total pension fund assets has shrunk by 10% since 2001 as a result of faster growth among pension funds in other OECD countries. Total pension fund assets in the OECD area grew by 67% between 2001-2007, or 9% annually. Growth was relatively stable over the years, apart from the drop in 2001-02 caused by negative equity performance. Growth in pension fund membership was fastest in Luxembourg, Turkey and Germany. However, in Luxembourg and Germany this growth was not accompanied by a major expansion in assets, highlighting the small size of contributions and relatively conservative portfolio allocations. New Zealand was the only OECD country that experienced a decline in pension fund membership over the period, an experience that can be traced back to the withdrawal of tax incentives. The slow growth in pension fund assets in these and other countries (such as Belgium, France, and Sweden) is confirmed by the stability or decline in their asset-to-GDP ratios. This contrasts with the experience of countries such as Austria, Hungary, Italy, Mexico and Poland, where pension fund to GDP ratios are increasing rapidly, albeit from a low base. Growth prospects in some of these countries are very positive because of the mandatory nature of private pension provision. Only eleven out of thirty countries had assets-to-GDP ratios above 20%, which is considered the minimum for meeting the OECD’s definition of a “mature” pension fund market.

Defined contribution (DC) pension funds continue to grow faster than defined benefit (DB) funds . In recent years, occupational pension plan sponsors have in many countries shown a growing interest in DC plans, as demonstrated by the number of employers that have closed DB plans to new entrants and encouraged employees to join DC plans (and in some cases also frozen benefit accruals for existing employees). DB plans, however, still play an important role, largely due to their historical prominence as the favoured arrangement for workplace pensions in many countries. In 2007, DB pension funds held nearly 62% of all pension fund assets across the 19 OECD countries for which information was available.

Pension fund markets are much more concentrated in continental Europe than in Anglo-Saxon countries. The number of pension funds in OECD countries ranges from a handful to hundreds of thousands. In fifteen OECD countries there are fewer than 1 000 pension funds, and 7 of these countries have fewer than 100. Anglo-Saxon countries, on the other hand, tend to

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The large number of pension funds in some countries generally means a smaller scale of operation. The average pension fund is largest in Poland, with over USD 2.5 billion, followed by Finland (USD 1.5 billion) and the Netherlands (USD 1.4 billion). However, Canada has the highest level of pension fund assets per active member account, at about USD 170 000.

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have very dispersed pension fund industries, with Australia standing out with over 366 000 pension funds as of June 2007. An even larger number of pension funds exist in the United States (close to 1m) although official figures are not available.

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In most OECD countries bonds and equities remain the two most important asset classes, accounting for over 80% of total portfolios in 2007. Proportions of equities and bonds vary considerably across countries. Although there is, in general, a greater preference for bonds, the reverse is true in some OECD countries, namely Belgium, where equities outweigh bonds by 48% to 21.5%; Canada by 50% to 34.4%; Germany by 31.3% to 28.8%; and the United States by 59.2% to 22.4%. A rise in the proportion of cash and similar assets (e.g. money market instruments) was observed in 2006-07. Between 2001 and 2007, on average, investment in equities in the OECD area increased by 4.2 percentage points, while investment in bonds declined by 1.5 percentage points. In some OECD countries, on the other hand, pension funds either reduced their equity allocations (e.g. Denmark, the Netherlands, and Switzerland), or increased them only marginally (e.g. Spain and Sweden), while increasing their bond allocations substantially. A bigger and broader shift towards bonds and cash is expected in 2008. Pension funds have also increased their diversification in foreign markets in recent years. Over 2001-2007, pension funds based in the euro area benefited from the elimination of currency risks, leading to greater international diversification in pension fund portfolios. Of the OECD sample surveyed, the Netherlands has the most internationally diversified pension fund portfolio, with 82% of total assets issued by entities located overseas and nearly 40% in currencies other than the euro.

Pension fund net income flows had already turned negative in two OECD countries in 2007 while contributions were still at high levels. All OECD countries for which data were available, except for Belgium and Denmark, showed positive net income flows in 2007, mainly thanks to contributions and other forms of investment income, such as interest and dividends. 2007 was nevertheless substantially worse than the previous year, as net income declined in most countries. In 2006, no country experienced negative net income flows. The negative income in Belgium and especially Denmark were driven by sales of equities, as this asset class experienced adverse performance in some of the markets in which pension funds in these countries invest. As equity markets crashed in 2008, many more countries are expected to have negative pension fund income. In most OECD countries benefit payments have increased slowly but steadily over the last few years. In some countries however, benefit payments increased more rapidly in 2007. This was the case for Australia, Denmark, and Hungary, for instance. Benefits


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should increase at a more rapid rate over the next few years as the baby boom generation starts to retire in large numbers.

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Large pension fund asset pools have been accumulated in non-OECD economies, although they remain smaller than in the OECD area.

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Countries that experienced substantial increases in contributions included those with large defined benefit systems (e.g. Canada, the Netherlands, Switzerland, and the United Kingdom). Contributions to such pension plans rose after 2001 as part of an effort to reduce plan deficits. The establishment of new defined contribution plans should also prompt substantial growth in contributions.

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grown rapidly in recent years. The Chilean pension market, for example, grew from USD 55.6 billion in 2004 to USD 105.6 billion in 2007, while pension fund assets in Slovenia increased from USD 0.5 billion in 2004 to USD 1.4 billion in 2007. Pension markets in nonOECD economies nevertheless remain underdeveloped in comparison to OECD countries. In relation to GDP, few countries such as Chile and Israel had “mature” pension fund systems, with ratios above 20% (64% in Chile and 34% in Israel). On the other hand, pension fund assets in the BRIC countries were all relatively low in relation to GDP (17% in Brazil, 2% in the Russian Federation, 5% in India, and 1% in China). Bonds and equities are the main asset classes in which pension funds in non-OECD economies invest, with bonds traditionally playing a bigger role. In most countries, bonds and bank deposits accounted for more than one-half of total assets in 2007. The highest equity exposures, above 40% of total assets, were observed in Hong Kong (China) and Peru. As in OECD countries, allocations to equities are expected to decline dramatically in 2008. The effect is likely to be most pronounced in countries such as Chile with large defined contribution systems where investors can switch to lower risk portfolios.

As shown in Chapter 3, assets accumulated in Public Pension Reserve Funds had grown rapidly until 2007 and portfolios had become increasingly diversified. During 2001-2007 public pension reserve funds (PPRFs) continued their steady growth. By the end of 2007 the total amount of PPRF assets within the countries covered in this publication was equivalent to USD 4.3 trillion, compared to USD 2.6 trillion in 2001. The average growth rate of global PPRFs over the period 2001-2007 was 8.4%. The average assetto-GDP ratio in 2007 was 13.1%, up from 12.6% in 2001. PPRFs are expected to play a major role in the future financing of public pension systems, alleviating the impact of population ageing on the public purse. Asset growth rates also show substantial variation across countries. In terms of total assets relative to the national economy, on average, PPRF assets accounted for 14.5% of GDP in the OECD area in 2007, compared to 4.5% in non-OECD countries. PPRFs increased their equity allocation over the period 2001-2007. The trend of increased investment in equities might be due to reserve funds’ search for high long-term returns and the ability to withstand short-term volatility. Bond allocations dropped during the same period in some countries and rose in others. Some PPRFs also started shifting some assets to alternative investments and foreign assets, brought about by a pressure to increase returns and seek diversification benefits.

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The main conclusion from the first section, which examines coverage of private pensions using household surveys, is that although overall coverage is well above half of the employed population in the countries analysed, it is unevenly distributed. Younger workers and people with low incomes are much less likely to be members of a voluntary pension scheme. Low rates of coverage for low earners are not as much of a policy concern in countries where lower-income individuals have relatively high replacement rates. These results suggest that some OECD countries need to focus efforts to expand coverage among low earners.

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Chapter 4 provides an evaluation of the performance of private pension systems according to key policy criteria such as the extent of coverage of private pension systems, the adequacy and security of benefits provided, pension fund solvency, investment performance and administrative efficiency.

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The results from the analysis of benefit adequacy and security, described in Section 2, indicate that individuals in many OECD countries may be exposed to the risk of not having enough income in retirement to maintain the same standard of living as they enjoyed while in active employment. Furthermore, with public pensions facing growing demographic pressure, the income that they provide is likely to be reduced in many OECD countries at some point in the future. Section 3 provides a cross-country analysis of investment performance and makes some initial observations regarding the data that would be needed to undertake more in depth analysis of the risk-adjusted performance of pension funds. This could provide a starting point for an effort to develop international standards for the reporting of pension fund financial performance data that could support international comparisons and more in-depth performance evaluation. Section 4 focuses on the solvency status of occupational, defined benefit pension plans. Based on a sample of companies, the findings indicate that defined benefit pension plans appear to have the most financial implications for companies domiciled in Western Europe, the United States and Canada, Brazil and Japan. Despite the move towards defined contribution that has been made by many companies, legacy defined benefit plans and their obligations often remain on company balance sheets and continue to have a major financial impact. Section 5 examines the efficiency of private pension systems by looking at the total operating costs of pension funds measured in relation to assets managed. This section also provides evidence on the fees charged to individuals in the accumulation stage of mandatory defined contribution pension systems, focusing on the experience of mandatory DC systems in Latin America, Central and Eastern Europe, Australia, and Sweden. The lowest fees are found in Sweeden and Bolivia, at less than 0.5% of assets under management.


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The OECD Global Pension Statistics project

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The OECD Working Party on Private Pensions and its Task Force on Pension Statistics launched the Global Pension Statistics project (GPS) in 2002. The GPS intends to provide a valuable device for measuring and monitoring the pension industry, and permit intercountry comparisons of current statistics and indicators on key aspects of retirement systems across OECD and non-OECD countries. Data are collected on an ongoing basis so that trends can be readily identified and analysed. The statistics cover an extensive range of indicators and relate to a wide definition of private pension plans (see below OECD classification), themselves subdivided into detailed categories using coherent statistical concepts, definitions and methodologies.

The OECD classification There is a large variety of pension arrangements across OECD countries. Pension provision through private pension arrangements can take the form of mandatory or voluntary arrangements. They could be linked to an employment relationship, making them occupational pension plans, or they may be based on contracts between individuals and private pension providers, making them personal pension plans. Moreover, pension provision can be achieved through either defined contribution or defined benefit arrangements. Defined contribution plans are plans under which the plan sponsor pays fixed contributions and has no legal or constructive obligation to pay further contributions to an ongoing plan in the event of unfavourable plan experience, while defined benefit plans are plans other than defined contributions plans, generally classified into one of three main types, “traditional”, “mixed” and “hybrid” plans. The term private is used throughout this publication to refer to funded and bookreserved pension systems. The special, funded regimes for public sector workers that exist in some countries are also classified as private by the OECD. This classification follows the OECD taxonomy* and is in accordance with SNA. The classification is structured around two key terms (pension plans and pension funds) and two main approaches (functional and institutional). Figure R.1 presents the classifications under a functional approach; Figure R.2 does the same from an institutional perspective.

* OECD (2005), Private Pensions: OECD Classification and Glossary, OECD, Paris. The OECD classification is available at www/oecd.org/dataoecd/0/49/38356329.pdf.


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Source: OECD (2005), Private Pensions: OECD Classification and Glossary, OECD, Paris.

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Figure R.1. Private pension plan: Functional perspective

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Figure R.2. Private pension plan: Institutional perspective Private pension plan

Funded

Pension insurance contract

Book reserves

Pension fund

Source: OECD (2005), Private Pensions: OECD Classification and Glossary, OECD, Paris.

Sources This report is based on multiple sources of information. The primary source is statistical information provided by national pension authorities through the OECD Global Pension Statistics (GPS) project. Variables collected under the OECD GPS exercise pertain to the following broad categories: assets, contributions, benefits, membership and number of pension funds. Within the framework of the OECD Global Pension Statistics project, the original data sources are official administrative sources. Data include pension funds as per the OECD classification. More details on the OECD GPS project are available at www.oecd.org/daf/pensions/gps.

Statistical coverage While Chapter 1 of this publication covers all private pensions, statistical data in Chapters 2 and 5 only cover pension funds. Selected indicators are therefore presented in Chapter 1 for the whole private pension system. Because some countries still have difficulties to provide data for pension insurance contracts and book reserves, Chapters 2 and 5 focus on pension funds only (excluding other financing vehicles), providing an extensive range of statistics and indicators. The exact coverage of GPS data can be found in Chapter 5 in the table entitled “Overview of private pension system by type of plan and financing vehicle”, provided for each individual OECD country. This table describes existing pension plans in the country and gives the correspondence with the OECD classification in terms of pension plan type and financing vehicle. Pension plans included in the GPS database are also flagged in this

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Data provided in this Private Pensions Outlook refer to the year 2007 unless otherwise specified in accompanying notes. Preliminary 2007 data have been provided for the following countries: Austria (only for net income, contributions and benefits data), Belgium, Canada, Finland, France, Iceland (only for personal bank managed funds), and Switzerland. Two countries could not provide 2007 data at the time of the publication: Luxembourg and the United Kingdom. UK pension funds’ assets were estimated for 2007 taking into account their weight in the OECD private pensions market. Data back to 1963 were used to compute a regression model with ARMA errors and GDP as a predictor. For other statistics and for Luxembourg, 2006 data were used.

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table. Readers are therefore invited to check data coverage in these tables when interpreting information provided in Chapters 1 and 2.

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Each of the topics covered in this publication include information related to any significant national variations from the OECD classification which might affect data comparability. Limitations in data comparability are indicated in footnotes to tables and charts. Where an OECD average is included in a chart or a table, it is usually the weighted average of the countries presented, as specified in the accompanying note. Users should also refer to the corresponding tables for any further methodological information. In addition to tables and charts included in the main body of Chapter 2, supplementary tables are provided in a dedicated section. Readers interested in further detailed statistical information are encouraged to consult this additional documentation.

Data limitations Limitations in data comparability are indicated both in the text as well as in footnotes to tables and charts. The GPS database provides information on investments in mutual funds. However, there is no way of knowing through GPS either the asset allocation of these mutual funds or, consequently, real asset allocations of pension funds. To compensate for this data limitation, another database was used to estimate the part of mutual funds’ investments in equities, bonds, etc.: the OECD Institutional Investors’ database. This database shows asset allocations of open-end investment companies (mutual funds). The data reported in Figure 2.12 assumes that the mutual fund asset allocation observed in the Institutional Investors’ database was the same as for the mutual funds in which pension funds invest. Therefore, only usual asset classes are shown in this figure (equities, bills and bonds and other asset classes). This exercise was not possible for non-OECD countries as the Institutional Investors’ database only consider OECD countries. Therefore, “mutual funds” have been considered as a specific asset class in Figure 2.26. Additional tables showing asset allocation data in 2007, 2006 and 2005 for OECD countries (Table 2.8, Table 2.9 and Table 2.10) present the data as they are collected under the GPS exercise, i.e. with “mutual funds” representing a specific asset class.

Glossary This publication contains a separate glossary of selected terms used in the private pensions field.


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This publication includes OECD’s unique StatLink service, enabling the reader to download the exact Excel® versions of the tables and charts featured in Private Pensions Outlook. The StatLink address is printed under each table and chart and behaves exactly like an Internet address. By typing or copying the StatLink address into an Internet browser, the user obtains the corresponding data in Excel ® format allowing further analysis and manipulation. Further information on the StatLink service is available on www.oecd.org/statistics/statlink.

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ACRONYMS, SYMBOLS AND CONVENTIONAL SIGNS

KNF LDI LO MO MP NHO OFE PAMC PAYG

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Contractual Early Retirement Plan Association Générale des Institutions de Retraite des Cadres Asset Liability Management Australian Prudential Regulation Authority Association des Régimes de Retraites Complémentaires Association d’Épargne Pension Additional Voluntary Contributions Commission Bancaire, Financière et des Assurances Central and Eastern Europe National Commission for the Retirement Savings System Canadian Pension Plan Commission de Surveillance du Secteur Financier Defined Benefit Defined Benefit Obligation Defined Contribution Earnings-related provisions for private-sector workers European Economic Area Exempt-Exempt-tax Employee Pension Insurance Employees’ Pension Fund Financial Market Authority Gross Domestic Product Global Pension Statistics HM Revenue and Customs Income Base Amount Individual Retirement Account Individual Retirement Account Collectively bargained pension plan for white-collar employees Polish Financial Supervisory Authority Liability-Driven Investment Confederation of Trade Unions Mandatory Occupational Mandatory Personal Confederation of Norwegian Business and Industry Open Pension Fund Pension Asset Management Company Pay-as-you-go


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AFP AGIRC ALM APRA ARRCO ASSEP AVC CBFA CEE CONSAR CPP CSSF DB DBO DC TyEL EEA EET EPI EPF FMA GDP GPS HMRC IBA IKE IRA ITP

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PPE PPM PPRF PRSA QMO RAC S2P SAF SEPCAV SPS SIMPLE SNA SPMC SSRF SWF TFR TQPP UK US VO VP

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Plan Épargne Entreprise Plan d’Épargne pour la Retraite Collectif Plan d’Épargne Retraite Populaire Personal pension plan set up through life insurance contract Employee Pension Fund Premium Pension Authority Public Pension Reserve Fund Personal Retirement Savings Account Quasi-Mandatory Occupational Retirement Annuity Contract State Second Pension Swedish Employers’ Confederation Société d’Épargne Pension à Capital Variable Severance Pay System Savings Incentive Match Plan for Employees System of National Account Supplementary Pension Management Company Social Security Reserve Fund Sovereign Wealth Fund Trattamento di Fine Rapporto Tax Qualified Pension Plan United Kingdom United States of America Voluntary Occupational Voluntary Personal

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Symbols 000s m bn AUD EUR USD CAD CZK DKK HUF ISK

Thousands Million Billion Australian dollar Euro United States dollar Canadian dollar Czech koruna Danish krone Forint Icelandic krona

JPY KRW MXN NZD NOK PLN SKK SEK CHF TRY GBP

Yen South Korean won Mexican peso New Zealand dollar Norwegian krone Zloty Slovak koruna Swedish krona Swiss franc New Turkish Lira British pound

Conventional signs n.a.: not applicable n.d. / ..: not available

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Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom United States

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Chapter 1

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ISBN 978-92-64-04438-8 OECD Private Pensions Outlook 2008 © OECD 2009

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Role and Types of Private Pension Systems

In 2007, nearly USD 28 trillion in assets were accumulated in private pension systems in the OECD area, of which more than 60% was held by the US private pension system (USD 17 trillion). The OECD-weighted average ratio of private pension assets to the area’s GDP reached 111.0% in 2007. Between 2006 and 2007, institutional investors’ total assets increased by 11.3%. However, pension funds’ assets rose only by 7.5%, while those of insurance companies and investment funds both grew 12.9%. The financial assets held by investors are heavily pension-oriented. As much as 60% of the total volume of assets held by institutional investors worldwide has as its main purpose the financing of retirement benefits. Chapter 1 describes the main types of private pension systems and focuses on the growing role of funding, private pensions, and institutional investors in retirement income arrangements. Data shown in this chaper include all kinds of private pension arrangements (i.e. including pension funds, book reserves, pension insurance contracts and bank/investment company managed funds).

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1. ROLE AND TYPES OF PRIVATE PENSION SYSTEMS

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1.1. The growing role of funding and private pensions in retirement income arrangements Over the past two decades, there has been a marked shift towards funding and private sector management within mandatory pension systems. Traditionally, pension systems have combined two distinct components: one public, the other private. Public pensions were mandatory, financed on a pay-as-you-go (PAYG) basis, and managed by public sector institutions. Private pensions, on the other hand, were voluntary, employment-based (occupational) pension plans, or individual retirement arrangements (personal pension plans) based on the principle of asset accumulation (funding) or book reserve financing.1

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The mix of public and private pensions varied across countries. In some cases, public and private pensions could be substitutes (e.g. Japan and the United Kingdom), but there were clear dividing lines between the two. This marked shift towards funding and private sector management has been especially strong in Latin America and Central and Eastern Europe, where mandatory personal accounts systems have been introduced to replace part of social security benefits. A similar, though less radical, reform took place in Sweden with the introduction of the Premium Pension System. Other OECD countries with mandatory occupational pension systems include Australia, Denmark (ATP), Finland, Iceland, Norway, and Switzerland. All these mandatory, funded pension arrangements are classified as private in this publication. Even Finland’s mandatory pension system, which is a hybrid PAYG-funded arrangement, is treated as such. A few other OECD countries have private pension systems that may be classified as quasimandatory, as either collective bargaining or automatic enrolment policies ensure high levels of coverage of the workforce, usually above 80 per cent. Examples include the occupational pension systems in Denmark, the Netherlands, and Sweden, as well as New Zealand’s national retirement savings scheme, known as the “Kiwisaver”. Table 1.1 describes all the different types of privately managed pension plans available in OECD countries, although not all are covered by the data reported in this publication. For example, all OECD countries have voluntary personal pension plans, but statistical information on these plans is sometimes not available from official sources. As shown in Table 1.1, fourteen of the thirty OECD countries have some form of mandatory or quasi-mandatory private pension system in place. Increasingly, therefore, private pension systems are being considered an intrinsic part of the national retirement income system, rather than just a source of complementary benefits for higher income employees. The increasing similarities between public and private pension systems also extend to the financing system. As mentioned above, public pension systems were traditionally financed on a PAYG basis, where current contributions paid for current benefits. In recent years, however, funding has also become increasingly important within these publicly managed pension systems. Many countries have established public pension reserve funds (PPRFs) to provide financing support to otherwise PAYG systems. Examples include

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ROLE AND TYPES OF PRIVATE PENSION SYSTEMS

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Book reserve occupational plans3

Voluntary

Belgium

Voluntary

Voluntary

Canada

Voluntary

Voluntary

None

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Mandatory, quasi-mandatory and voluntary

Quasi-mandatory and voluntary

Finland

Mandatory and voluntary

Voluntary

France

Voluntary

Voluntary

Germany

Voluntary

Voluntary

Greece

Voluntary

Voluntary

Hungary

None


Iceland


Voluntary

Ireland

Voluntary

Voluntary

Italy5

Voluntary

Voluntary

Japan

Voluntary

Voluntary

Korea

Voluntary

Voluntary

✓

Luxembourg

Voluntary

Voluntary

✓

Mexico

Voluntary


✓


Voluntary

Voluntary


Netherlands New Zealand Norway


Voluntary

Poland

Voluntary


Portugal

Voluntary

Voluntary

Slovak Republic

Voluntary


✓ ✓

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Voluntary

Voluntary

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United Kingdom

Voluntary

Voluntary

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Table 1.1. Types of private pension plans in OECD countries

1. Pensions are quasi-mandatory when they are organised via extensive (national or industry-wide) collective bargaining agreements, or via nationwide pension plans involving automatic enrolment with an opt-out clause. Quasi-mandatory arrangements usually cover most of the workforce. 2. Personal mandatory plans mainly through national retirement plans based on individual accounts. 3. Refers only to countries with book reserves as a major source of retirement income. 4. Individuals may choose between mandatory superannuation funds, which are either occupational (industry or corporate superannuation funds) or personal (retail superannuation funds). 5. In Italy, from 2007 private sector employees have to choose whether to invest their annual severance pay provision (so called trattamento di fine rapporto – TFR) in a pension plan or to keep it in their firm. If employees do not make an active choice over a six-month period (starting from 1 January 2007 for old employees and from their hire date for new employees), the TFR will be automatically paid into an occupational pension plan. Nevertheless, the majority of the private sector employees have been opting out from the private pension system. Source: OECD Global Pension Statistics.

Australia’s Future Fund, France’s Fond de Reserve pour les Retraites, Ireland’s National Pension Reserve Funds, and New Zealand’s Superannuation Fund.2 Irrespective of the size of PPRFs, PAYG-financed pension systems are treated as public in this publication. The role of prefunding and private pensions is likely to continue growing, both in absolute terms and in relation to PAYG-financing and public pensions. Reforms are partly due to governments’ objectives of reducing the fiscal liabilities of public pension systems by scaling back benefit promises, and partly due to the advantages of financial markets in


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Italy Austria1 Switzerland Germany2 United Kingdom Poland Finland Belgium Netherlands Denmark Sweden Portugal Spain Hungary Czech Republic3 Australia Norway Canada4 New Zealand Luxembourg5 Iceland Korea Mexico

Private expenditure

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As a percentage of GDP

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Figure 1.1. Public and private pension expenditure in selected OECD countries, 2006

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3.6

4

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1. “Private expenditure” refers only to the expenditure of Pensionskassen (pension companies). 2. “Private expenditure” refers only to the expenditure of Pensionskassen (pension institutions) and Pensionsfonds (pension funds). 3. Data for private expenditure refer to the year 2007. 4. “Private expenditure” refers only to the expenditure of trusteed pension funds. 5. “Private expenditure” refers only to the expenditure of the pension funds supervised by the Financial Sector Supervisory Committee (CSSF) and the Commissariat aux Assurances (Insurance Commissariat). Source: OECD Global Pension Statistics and OECD Social Expenditure (SOCx) databases. 1 2 http://dx.doi.org/10.1787/514661732184

providing old-age support via better diversification of risks and positive macroeconomic repercussions, such as capital market development. In many OECD countries private pension arrangements already provide a major supplement to benefits from public pension systems for current retirees. As shown in Figure 1.1, private pension benefits in Canada, Denmark, the Netherlands, Switzerland, and the United Kingdom are below, but close to, the total benefits paid by the public pension system in 2006. In Australia and Iceland private pension benefits dominate retirement income provision, while in Finland the mandatory public-private pension system is by far the main source of retirement income.

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Private expenditure on pensions: includes payments made to private pension plan members (or dependants) after retirement. All types of plans are included (occupational and personal, mandatory and voluntary, funded and book reserved), covering persons working in both the public and private sectors. Data on book reserve plans and pension insurance contracts are currently included when available.

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Public expenditure on pensions: old-age pension benefits are regarded as public when relevant financial flows are controlled by general government (that is central, state, and local governments, including social security funds). Thus, social security benefits paid by social security institutions are within the public sphere. Pension benefits provided by governments to their own employees and paid directly out of the government’s current budget (PAYG) are also considered to be public. All pension benefits not provided by general government are within the private domain.

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Policies to further develop private pension systems are urgently needed in some OECD countries The importance of private pension systems can also be gauged by looking at the market value of assets accumulated relative to the size of the economy. The larger the value of their investments, the greater will be their ability to provide high benefits to individuals. The ratio of private pension assets to GDP shown in Figure 1.2 can thus be considered a measure of the extent of the “privatisation” of a country’s pension system for its current population as a whole. Table 1.2 shows that in 2007 nearly USD 28 trillion in assets were accumulated in private pension systems in the OECD area, of which more than 60% was held by the US private pension system (USD 17 trillion). In relation to the national economy, however, the largest private pension system was Switzerland’s with a ratio of private pension plan assets to GDP of 151.9%, as shown in Figure 1.2. Other countries with large private pension markets relative to GDP included the Netherlands (149.1%), Iceland (147.4%), Denmark (140.6%), the United States (124%), Australia (119.5%), and Canada (103.4%). In the remaining 23 OECD countries aggregate private pension plan assets were worth less than their respective country’s GDP, ranging from 1.9% in Turkey, 3.6% in Italy, 12.1% in Spain,

Table 1.2. Total private pension assets in major OECD countries, 2007 In USD trillion Private assets United States

17.1

United Kingdom

2.7

Canada

1.5

Netherlands

1.1

Australia

1.0

Japan

0.9

Switzerland

0.6

Other OECD

2.9

Total OECD

27.8

Source: OECD Global Pension Statistics and OECD estimates.

1 2 http://dx.doi.org/10.1787/514672773563


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Switzerland Netherlands Iceland Denmark United States Australia Total OECD Canada United Kingdom Ireland Finland Sweden Norway Portugal Japan Austria Germany Belgium Mexico Poland Spain New Zealand Hungary Korea France Czech Republic Slovak Republic Italy Turkey Greece

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Figure 1.2. Total private pension assets, 2007

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26.0 20.0 18.8 17.9 14.4 12.4 12.2 12.1 11.1 10.9 7.9 6.9 4.7 4.2 3.6 1.9 0.0 0

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Source: OECD Global Pension Statistics and OECD estimates.

1 2 http://dx.doi.org/10.1787/514674153416

57.4% in Sweden to 96.4% in the United Kingdom. The OECD-weighted average ratio of private pension assets to the area’s GDP reached 111.0% in 2007. Figure 1.3 below compares the importance of private pension assets in the economy with the benefits that the public pension system is expected to pay to a worker entering the labour force in 2005 and earning the average wage. Benefits are shown as gross (before taxes) replacement rates – average workers’ public pension benefits calculated as percentages of their final salaries before retirement.3 The horizontal line in the middle of the graph shows the OECD-average gross replacement rate of the public pension system, while the vertical line shows the OECD-average ratio of private pension assets to GDP. Figure 1.3 shows a group of countries, such as Australia, Denmark, Iceland, the Netherlands, the United States, and Switzerland, with large private pension asset pools that have correspondingly low public pension replacement rates (bottom right-hand quadrant). Most countries are, however, on the left-hand side of the graph, with small pools of assets, and either low (e.g. Mexico, Poland, the Slovak Republic) or high (e.g. Greece, Luxembourg, Turkey, Spain) replacement rates. Some countries – those in the lower left quadrant in Figure 1.3, such as Mexico, New Zealand, Poland, the Slovak Republic, and Sweden – have recently reformed their pension systems, introducing mandatory private plans,4 and will therefore experience fast growth

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Figure 1.3. Private pension assets compared with the public pension system’s gross replacement rate, 2007

50

100

150 200 Private pension assets as a % of GDP

Note: Public pension system refers to pay-as-you-go financed (PAYG) pension plans. Pay-as-you-go pension plan replacement rates refer to the year 2004 and are defined as the ratio of an individual’s – or a given population’s – (average) pension to his or her average income over a given period, in this case, the final salary before retirement. Data for Luxembourg refer to the year 2006. The vertical line gives the OECD-weighted average of assets as a percentage of GDP, while the horizontal line gives the OECD simple average of public gross replacement rates. Source: OECD Global Pension Statistics, OECD (2007), Pensions at a Glance: Public Policies Across OECD countries, OECD, Paris and OECD estimates. 1 2 http://dx.doi.org/10.1787/514723536302

in private pension assets in the years to come. However, in another group of countries, including Belgium, Germany, and Japan, private pensions are voluntary. The combination of low public pension replacement rates and low ratios of private pension assets to GDP could be a sign of retirement income inadequacy. However, a more precise picture can only be obtained taking into account the level of ageing, the labour force coverage of the private pension system and access to other means of savings for retirement.

The slow asset growth rate in some private pension systems confirms concerns over retirement income adequacy The difference between the average growth rate of private pension assets in a country and its GDP is an indicator of the expansion of the private pension system and its ability to offer higher benefits to a certain population or broaden its coverage to more people. The average of this indicator across OECD countries between 2001 and 2007 was approximately 14.5%. This average, however, hides substantial differences in growth rates across countries. Four main groups of countries can be identified, corresponding to the four main quadrants into which the chart in Figure 1.4 has been divided. Australia, Denmark, and Iceland are “moving ahead”, as both their assets and the rate at which they are growing relative to the GDP growth rate are above the OECD average. In Iceland for instance, pension funds’ assets grew by an average of 17.9% per year relative to GDP during the period 2001-07, reaching 147.4% of GDP in 2007. These are all countries with long experience of private pension provision and their private pension systems are either mandatory or quasi-mandatory (Denmark).


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Central and Eastern European countries like Poland, the Czech Republic, and Hungary, together with Mexico, recently introduced mandatory private pension systems. They therefore have low asset-to-GDP ratios, but they are catching up fast. They experienced the highest average growth rate differentials among OECD countries over the period 2001-07: Poland registered 42.5%, Hungary 30.3%, the Czech Republic 27.2%, and Mexico 17.8%. Spain’s voluntary private pension system also achieved a high growth rate, 23.1%.

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In the United States, although private pension assets are still an important part of the economy, accounting for 124% of GDP in total, they grew at a slower pace (2.0%) relative to GDP than the OECD average over the period 2001-07. Among other countries, the US private pension system may therefore be considered to be “losing momentum”.

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falling behind other OECD members in private pension development, as both their relative asset growth and asset-to-GDP ratios are low by OECD standards. Belgium’s private pension market, which represents only 14.4% of GDP, experienced growth well below the OECD’s 14.5% average. The low growth rate in Japanese private pension assets can be partly explained by the low investment returns over the past decade, as well as by many employers deciding to close down their pension plans and contract back into the social security system. New Zealand is not far ahead of this group, raising concerns over retirement income adequacy as replacement rates from the public pension system – as in Belgium and Japan – are relatively low. The combination of low public pension benefits and slow growth in private pension plans may explain the New Zealand government’s decision to introduce a quasi-mandatory pension savings scheme – the so-called “KiwiSaver Plan” – in 2007.

Figure 1.4. Private pension assets in 2007 compared to the difference in average growth rates of private pension assets and GDP over the period 2001-07 in selected OECD countries Difference in growth rates of private pension assets and GDP 45 POL 40 35 Catching up

HUN

30

Moving ahead

CZE 25

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IRL GBR

NOR Falling behind

NZL

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Losing momentum

CAN USA

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100

150

200 2007 assets as a % of GDP

Note: The vertical line gives the OECD simple average assets as a percentage of GDP, while the horizontal line shows the OECD simple average of the difference in growth rates of private pension assets and GDP. Countries in the upper right quadrant are “moving ahead” because both their assets and the rate at which they are growing are above the OECD average. Countries in the bottom left quadrant are “falling behind” because they are below the OECD average on both counts. Source: OECD Global Pension Statistics and OECD estimates.

1 2 http://dx.doi.org/10.1787/514740318383

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While pensions should be adequate, they should also be sustainable. As private pension systems rely heavily on funding, they require financial markets to deliver promised or targeted benefits. Adverse market performance can therefore reduce benefit outcomes. The main “asset” of public pension systems, on the other hand, is the current value of future contributions made by current and future generations of workers. However, with most OECD countries undergoing rapid demographic change as their population ages, the sizes of their workforces will dwindle in relation to burgeoning numbers of retirees (see Figure 1.5). In order to strengthen the sustainability of public pension promises, governments are therefore also building financial asset pools, or public pension reserve funds (PPRFs), which partly prefund future public pension benefits.

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Figure 1.5. Ratio of the inactive elderly population aged 65 and over to the labour force In per cent 2000

2050

100

80

60

40

20

Ic

el a M nd ex Un S w i c o i te ed d e Ne S t n th ate Ne er la s w n Lu Ze ds xe a l a m nd bo u Ca rg na No da rw Au ay st ra li Sw Tur a i t z ke y e Un D r l a i te en nd d m K i ar ng k do Ir e m la Au nd st r Fr ia a Po nc e r tu g F i al n Hu l a nd ng B e ar y lg C z G e ium ec rm Sl h R an ov e y a k pu Re bli pu c b Gr li c ee Po c e la n Sp d ai n Ko re Ja a pa n It a ly

0

Source: OECD (2008), OECD Factbook 2008: Economic, Environmental and Social Statistics, OECD, Paris. 1 2 http://dx.doi.org/10.1787/514752236785

The importance of prefunding for the sustainability of public pension benefits can be gauged by comparing pools of assets in PPRFs with the annual value of public pension benefits. The larger this ratio is, the less likely that there will be a need to raise contributions or cut benefits to meet the swelling costs of population ageing. The government or social security institution can draw on the PPRFs’ assets to pay part of the public pension system’s rising costs. Figure 1.6 shows that in 2006 Korea’s PPRF assets could cover more than 66 times its annual expenditure on public pensions. The Korean public pension system’s level of prefunding is by far the highest and, would therefore seem the most sustainable of any OECD country. However, this high ratio is explained largely by the recent and gradual introduction of the public pension system. Currently, only a small percentage of the above-65 population receives public pension benefits. As the system matures and coverage of the elderly expands, this indicator of the extent of prefunding is expected to fall rapidly.5 OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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Figure 1.6 also shows other countries where the ratio of PPRF assets to benefits is high. Interestingly, the second highest ratio is not in Japan, which has the largest PPRF in the world, but Ireland. Although Ireland only set up its PPRFs recently, assets already cover more than five times the annual public pension expenditure. Norway features quite low down the list, but this is because the OECD only classifies the Government Pension Fund – Norway (formerly the Social Security Reserve Fund) as a PPRF. The much larger Government Pension Fund – Global (formerly, the Norwegian Petroleum Fund) is classified as a sovereign wealth fund (SWF) by the OECD because by law its assets may be used for purposes other than financing the social security system. The degree of sustainability of public pension promises is likely to be substantially strengthened in countries like Ireland, where governments are setting aside large parts of their fiscal revenues in PPRFs.

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Figure 1.6. Ratio of public pension reserve funds’ assets and public pension expenditure for selected OECD countries, 2006 Korea1 Ireland 5.3 Sweden 3.9 Japan 3.5 United States 3.3 Mexico 2.3 Canada 1.9 New Zealand 1.7 Norway 1.2 Portugal 0.6 Australia 0.5 Spain 0.5 France 0.2 Denmark 0.0 Poland 0.0 0

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1. If the ratio is recalculated by supposing that all people over 65 years old in Korea get the average replacement rate, the ratio would drop to 1.8 Source: OECD, various national sources for public pension reserve funds’ assets, and OECD estimates for public pension expenditures. 1 2 http://dx.doi.org/10.1787/514758301033

1.2. The role of institutional investors in pension systems All the main types of institutional investors contribute to the financing of pension benefits Figure 1.7 below shows the main institutional investors active in global financial markets. On aggregate, the largest investors are investment funds, followed by insurance companies and pension funds. PPRFs, SWFs, private equity funds, and hedge funds still represent only a small fraction of the assets accumulated by these “traditional” institutional investors. Moreover, a large share of the assets held by private equity and hedge funds is the property of pension funds and insurance companies, giving these investors great clout in global capital markets. Insurance companies are also major players in the private pension systems of many countries, while investment funds are used by both pension funds and insurance companies as vehicles to channel their investments. Consequently, the financial assets held by investors shown in Figure 1.7 are heavily pension-oriented. As much as 60% of the

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total volume of assets held by institutional investors worldwide has as its main purpose the financing of retirement benefits.

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Pension funds are losing some importance among the “traditional” classes of institutional investors The relative importance of pension funds, insurance companies, and investment funds in terms of assets under management has remained relatively stable since 1995. In that year, pension funds collected 34% of the assets managed by “traditional” institutional investors, as compared to 33% for insurance companies and 29% for investment funds. In 2007, the relative shares of each institutional investor’s assets were: 30% for pension funds, 31% for insurance companies, and 37% for investment funds.

Figure 1.8. Relative share and total assets by type of institutional investors, 1995-2007 In USD billions Pension fund

Insurance

Other1

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largest institutional investor sector in the world.

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Between 2006 and 2007, institutional investors’ total assets increased by 11.3%. However, pension funds’ assets rose only by 7.5%, while those of insurance companies and investment funds both grew 12.9%. Growth of insurance assets was mainly driven by a steady growth in retirement and other wealth accumulation products. The growing role of insurance companies and especially mutual funds may be also explained by the shift towards defined contribution arrangements in the United States, which has by far the

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The average annual growth rate of all institutional investors’ assets over the period 1995-2007 stood at 8.6%. This figure hides disparities among institutional investors, however. The average annual growth rate was higher for investment funds (10.7%) and insurance companies (7.9%), as compared to pension funds (7.3%).

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1.3. Types of private pension arrangements across OECD countries 1.3.1. Types of financing vehicles Occupational pensions are overwhelmingly funded through pension funds in most OECD countries, the main exception being countries such as Denmark, Norway and Sweden where pension insurance contracts play a larger role, and Germany where book reserves are the main type of financing vehicle for occupational pension plans. Personal pension plans are often funded through pension insurance contracts or financial products provided by banks and asset managers (e.g. mutual funds). The main exception to this general trend are the mandatory personal pension plans established in countries such as Hungary, Mexico, Poland, and the Slovak Republic. These systems can only be financed via pension funds during the asset accumulation stage (before retirement), although state and pension companies may provide additional funding in special cases (like guarantee funds or minimum pension guarantee). In 2007, all OECD private pension markets, including both occupational (workplacerelated) and personal arrangements, were valued at an approximate total of USD 27.8 trillion. Of that amount, 64.2%, valued at USD 17.9 trillion, was held by pension funds; 17.7%, worth USD 4.9 trillion, was held in retirement products provided by banks or investment management companies; 16%, estimated at USD 4.4 trillion, was held in pension insurance contracts run by life and pension insurance companies; and 2.1%, or USD 0.6 trillion were book reserves. As shown in Figure 1.9, pension funds are the only financing vehicle for private pension plans in countries such as the Czech Republic, Hungary, New Zealand, Poland, the Slovak Republic and Switzerland. On the other hand, in Denmark, France, Norway and Sweden, pension insurance contracts account for the largest part of aggregate private pension assets.

1.3.2. Types of pension plans In almost all OECD countries, the main type of private pension arrangement remains occupational, or employer-based, with plans using not-for-profit organisations (pension funds or mutual insurance companies) or contractual funds as financing vehicles. The main exceptions to this structure can be found in Mexico, Poland, and the Slovak Republic. In these countries private pension plans are distributed directly to employees, bypassing employers and, although occupational arrangements also exist, they are dwarfed by mandatory personal plans.

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1. Other types of financing vehicle include some personal pension plans, like individual retirement accounts (IRAs) in the United States, personal registered retirement saving plans in Canada, individual pension savings in Sweden, personal pension trusts in Korea, mutual funds like the Mutual Pension Provident entities in Spain, and bank managed pension plans, as in Denmark and Iceland. 2. Data for pension insurance contracts is an OECD estimate. 3. Data for pension funds is an OECD estimate. 4. Data for book reserves is an OECD estimate. Source: OECD Global Pension Statistics and OECD estimates.

1 2 http://dx.doi.org/10.1787/514804366473

The relative size of occupational and personal pension plans can be largely explained by the extent to which they are mandatory Depending on the country, occupational and personal pension plans may be wholly voluntary, a voluntary substitute to social security (contracting-out), quasi-mandatory, or mandatory. Participation in occupational pension plans is voluntary in countries like Belgium, Canada, Germany, Ireland, Italy, New Zealand, Portugal, Spain, and the United States. Although employers are not obliged to sponsor pension plans for their employees, they are encouraged to do so through tax relief. Occupational pension plans in these countries are usually single-employer, though there are also some multi-employer and industry-wide plans. Voluntary “contracting-out” of private pension plans from the public pension system are practised both in the United Kingdom and in Japan. In the United Kingdom, employees


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Quasi-mandatory pension plans are not required by law but by labour contracts. Denmark, the Netherlands, and Sweden are examples of countries where occupational plans are quasi-mandatory. They are generally implemented through nationwide or industry-wide collective bargaining agreements. In the Netherlands, for instance, there is no legal obligation for employers to set up a pension scheme. However, participation in an

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and employers have the option of not fully participating in the social security system, with contributions being reduced in exchange for reduced benefits. If a company chooses to opt out, it must put in place pension plans that replace employees’ lost social security benefits. A similar design of contracting-out is available for employers in Japan. However, since the early 1990s, many companies have decided to return to the public pension system.

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even be declared mandatory by the state. Sweden, on the other hand, supports its occupational plans with nationwide collective agreements between employers and employees organisations. Both countries require permanent employees to join occupational pension plans. Occupational pension plans are mandatory in some OECD countries, such as Australia with its superannuation guarantee system; Finland, which has an earnings-related pension scheme; and Switzerland, which provides employee pension and disability insurance plans. The regulatory frameworks in these countries require an employer to contribute a percentage of the payroll to a pension fund for employees. As part of recent pension reforms, a number of Central and Eastern European countries have also introduced mandatory, personal account pension schemes, which partly substitute the benefits of the old public pension system. Such plans have been adopted in Hungary (1998), Poland (1999), and the Slovak Republic (2005). Sweden also adopted a funded tier as part of its statutory scheme in 2000. Under the system a share of an individual’s total social security contributions – 2.5% out of 18.5% – is credited to a fully-funded personal account. This contribution is compulsory and managed by a private institution. Similarly, in Denmark the ATP and SP systems are statutory, funded, occupational pension schemes, where contributions are paid into privately managed individual pension accounts. The relative size of occupational and personal pension plans can be largely explained by the extent to which they are mandatory. As shown in Figure 1.10, countries like Denmark, Finland, and Iceland, where occupational pensions are mandatory or quasimandatory while personal plans are voluntary, have private pension systems dominated by the former. On the other hand, in countries such as Hungary, Mexico, Poland and the Slovak Republic, personal pension plans account for most assets under management.

Occupational pension plans in OECD countries have traditionally been DB. However, in recent years there has been a shift to DC plans, in particular in the United Kingdom and in the United States In broad terms, and depending on how pension benefits are calculated and who bears the inherent risks, particularly those related to longevity and investment, pension plans can be either defined benefit (DB) or defined contribution (DC) in nature.6 In DC plans participants bear the brunt of risk, while in DB plans pension funds assume most of the risks.

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Figure 1.10. Private pension assets by pension plan type in selected OECD countries, 2007

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1 2 http://dx.doi.org/10.1787/514812220478 Source: OECD Global Pension Statistics.

Occupational pension plans in OECD countries have traditionally been DB. However, in recent years there has been a shift to DC plans, particularly in the United Kingdom and in the United States where companies have closed or frozen their DB plans, or converted them to DC, mainly as a result of concerns about the impact that rising life expectancy and new regulations regarding liabilities may have on their financial situation. In 1980, around 32% of active members of occupational pension plans in the United States belonged to plans that were DC in nature. This proportion doubled over the next 15 years to reach 64% by 1995, and grew further to 71% by 2003 (US Department of Labor). The UK Government Actuary Department reported in 2006 that the number of private sector employees belonging to DB plans fell from 4.8 million in 2000 to 3.7 million in 2005. This shift has also taken place in Canada, albeit at a slower pace. DC plans there increased their share of members from 8% in 1990 to 16% in 2004. In the private sector, DC accounted for 25% of all members in 2004 compared with 13% a decade earlier.7 In contrast, occupational pension plans in Finland, Japan, Germany, the Netherlands, Norway, and Switzerland have largely remained DB in nature, covering over 80% of participants in these plans. However, in Japan, Germany and Switzerland, occupational plans are increasingly of a hybrid DB-DC kind known as cash balance, where benefits are based on contributions plus a fixed, guaranteed return earned on them. Dutch occupational pension funds have also introduced some DC features into their DB plans, making them also of a hybrid kind. In the Netherlands, occupational pension plans are similar to DB plans in that accrued pension rights are based on an employee’s wages and years of service, and contribution rates can be raised in response to funding shortfalls. But they are like DC plans in that the annual indexation factor, which is applied to both the accrued rights of active workers and the benefits of retired workers, is tied to investment returns. In Australia, Denmark, Iceland, Italy, and Spain, occupational plans are chiefly DC in nature. According to the Australian Prudential Regulatory Authority, around 90% of members of the superannuation guarantee system are covered by DC plans.8 Similarly, DC pension


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Unlike occupational pension plans, personal pensions are exclusively of the DC type. After the Chilean reform of 1981, more than a dozen countries in Latin America and Central and Eastern Europe replaced their public DB pension systems either partially or fully with DC plans managed by private financial institutions. In all these countries (e.g. Mexico, Hungary, Poland, the Czech Republic) personal pension systems are fully funded, individual account, DC plans, where pension benefits are calculated on the basis of the personal savings that members have accumulated during their working lifetimes.

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schemes in Italy and Spain cover 93% and 66% respectively of all pension fund participants.9 Denmark and Iceland, meanwhile, have a type of DC system that targets a given replacement rate and provide minimum return (Denmark) or minimum benefit (Iceland) guarantees.

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Similarly, the Swedish personal pension plan (or premium pension system) is also a fully funded, individual account, DC system. In most OECD countries for which data is available DB plans account for a steadily falling share of total assets (see Figure 1.11). In the United States, DB assets shrunk by 22 percentage points from 60% of total assets in 1985 to 38.1% in 2007. The same trend has been observed in Italy, New Zealand, Portugal, and Spain. In Italy, for instance, the share of DB assets in total assets fell from 18.4% in 2003 to 12.1% in 2007. This trend is driven in Italy by Legislative Decree No. 124 of 1993, which closed all existing DB plans to new members. Many have since been wound up or converted into DC plans. Despite the intensity of the shift towards DC plans, DB plans’ share of total assets remains at very high levels in some OECD countries like Finland with 94% and Portugal with 84%. DB plans’ share even rose in Finland and other countries like Canada, France and Korea.

Figure 1.11. Defined benefit private pension assets for selected OECD countries, 2003-2007 As a percentage of total assets 2003

2007

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2. These PPRFs are also often classified as Sovereign Wealth Funds (SWFs) because they manage government (sovereign) assets. See Chapter 3 for a review of PPRFs.

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4. Quasi-mandatory in the case of New Zealand, as the new Kiwisaver system is based on automatic enrolment (see Section 1.3). 5. If the ratio is recalculated by supposing that all people over 65 years old in Korea get the average replacement rate, the ratio would drop to 1.8.

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6. For a comprehensive explanation of the difference between DB and DC plans, see OECD (2004), Classification and Glossary of Private Pensions, OECD, Paris.

7. Tamagno, E. (2006), Occupational Pension Plans in Canada: Trends in Coverage and the Income of Seniors, Caledonian Publications, Ottawa. 8. The data only include entities with more than four members. 9. Data refer to the year 2006. Information on Italy was provided by its Pension Fund Supervisory Commission (COVIP). The Spanish Ministry of Finance supplied data on Spain.


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Key Pension Fund Indicators

This chapter provides indicators on the trends in pension fund assets, investments, membership, and revenues and expenditure up to December 2007. The performance of private pension systems over the coming years will be strongly influenced by the evolution of the financial crisis and the depth of the economic recession. Some indicators, like pension fund net income flows will show a marked deterioration in 2008. The shift from defined benefit to defined contribution is likely to be accentuated in the years to come. Investment policies are also experiencing change, leading to lower equity allocations even after markets recover. Funds in emerging economies will grow in importance over the coming decades, so selected non-OECD countries are included too. While Chapter 1 looked at all types of private pension arrangements, this Chapter focuses exclusively on pension funds, for which detailed indicators are available. The Chapter therefore excludes data pertaining to: ●

book reserve systems (as they exist in countries like Austria, Canada, Finland, France, Germany, Italy, Luxembourg, Mexico, Spain, and Sweden);

●

pension insurance contracts (such arrangements exist in all OECD countries, the main exceptions being the Czech Republic, Hungary, Japan, Mexico, New Zealand, and the Slovak Republic) and;

●

funds managed as part of financial institutions (often banks or investment companies), such as the Individual Retirement Accounts (IRAs) in the United States and other countries.

The full description of data coverage can be found in Chapter 5 in the table entitled “Overview of private pension system by type of plan and financing vehicle”, provided for each individual OECD country. This table describes existing pension plans in the country and gives the correspondence with the OECD classification in terms of pension plan type and financing vehicle. Pension plans included in the data are also flagged in this table.

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2.1. Pension fund wealth and membership

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OECD pension fund assets reached USD 17.9 trillion in 2007. The United States’ share of this total has shrunk by 10 percentage points since 2001 as a result of faster growth r among pension funds in other OECD countries c tu

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In absolute terms, the United States had the largest pension fund market within the OECD member countries in 2007 with assets worth USD 10.2 trillion as shown in Figure 2.1. In relative terms, however, the United States’ share of OECD pension fund assets shrank from a level of 68% in 2001 to 57% in 2007. Other OECD countries with large pension fund systems include the United Kingdom with assets worth USD 2.4 trillion and a 13.4% share of the OECD pension fund market in 2007; the Netherlands, USD 1.0 trillion and 5.7%; Japan, USD 0.9 trillion and 4.9%; Australia, USD 0.9 trillion and 5.2%; Canada, USD 0.8 trillion and 4.4%; and Switzerland, USD 0.5 trillion and 2.8%. For the remaining 23 OECD countries, total pension fund assets in 2007 were valued at approximately USD 1.1 trillion, which accounted for 6.3% of the OECD total.

Figure 2.1. Geographical distribution of pension fund assets in OECD countries, 2001-2007 As a percentage of total OECD

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1 2 http://dx.doi.org/10.1787/514818532874

Pension fund asset and membership growth between 2001-07 was highest in countries that have started from a small base, such as Turkey, Luxembourg and Eastern European countries Total pension fund assets in the OECD area grew by 67% between 2001-07, or about 9% annually, as shown in Figure 2.2. Growth was relatively stable over the years, apart from the

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1 2 http://dx.doi.org/10.1787/514834040536

Figure 2.3. Pension funds’ average annual growth rate in total assets over 2001-2007 in OECD countries In per cent Turkey Poland Hungary Czech Republic Korea Mexico Iceland Italy Australia Austria Spain Norway Finland Ireland Netherlands Denmark Portugal United Kingdom Canada Sweden Germany Luxembourg Switzerland New Zealand Total OECD Belgium United States France Japan

72.6 49.3 39.2 34.3 28.7 26.3 26.2 23.3 22.8 20.8 20.7 19.5 18.8 17.2 16.2 15.0 15.0 14.8 14.4 13.7 13.1 11.7 11.6 11.2 8.9 6.0 6.0 4.9 2.4 0

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1 2 http://dx.doi.org/10.1787/514867178175

drop in 2001-02 caused by negative equity performance. The fastest average annual growth rate in assets was observed in Turkey (72.6%), followed by Poland (49.3%) and Hungary (39.2%). These high growth rates are largely explained by the relative youth of their pension


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funds, as well as their mandatory nature (in Hungary and Poland). The slowest average annual growth rate was that of Japanese pension funds, at 2.4%.

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of active membership accounts,2 has increased fastest in Luxembourg (65.2% average annual growth rate over 2001-07) followed by Turkey (54.9%) and Germany (18.1%). As German pension fund asset growth has been among the lowest in the OECD, the new members (and their employers) appear to be making relatively small contributions to the pension funds. Conservative investments and the accompanying low returns may also partly explain the divergent trend of assets and membership in Germany. A similar, though less marked contrast can be observed in Belgium while Luxembourg’s experience is very close to Germany’s. New Zealand also stands out for having experienced a decline in membership over the period, the only OECD country of those shown in Figure 2.4. New Zealand’s experience can be traced back to the withdrawal of tax incentives for occupational pension plans.

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Figure 2.4. Pension funds’ average annual growth rate in total active members over 2001-2007 in selected OECD countries In per cent Luxembourg

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1 2 http://dx.doi.org/10.1787/515042176233

The OECD weighted average asset-to-GDP ratio for pension funds increased from 67.3% of GDP in 2001 to 75.5% of GDP in 2007, with Iceland achieving the largest ratio in 2007, at 134% As Figure 2.5 shows, in 2007, only four OECD countries achieved asset-to-GDP ratios higher than 100% – Iceland (134%), the Netherlands (132.2%), Switzerland (119.4%) and Australia (105.4%). In addition to these countries, the United Kingdom exceeded the OECD weighted average asset-to-GDP ratio of 75.5%. Pension fund assets were of varying

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Iceland Netherlands Switzerland Australia United Kingdom1 Total OECD United States Finland Canada Ireland Denmark Japan 20.0 Portugal 13.7 Poland 12.2 Mexico 12.1 New Zealand 11.1 Hungary 10.9 Sweden 8.7 Spain 7.5 Norway 7.0 Austria 4.7 4.7 Czech Republic 4.2 Slovak Republic 4.1 Germany 4.0 Belgium 3.3 Italy 3.1 Korea Turkey 1.2 France 1.1 Luxembourg 2 1.0 Greece 0.0

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importance relative to GDP in the other countries. Only eleven out of thirty countries had assets-to-GDP ratios above 20%, which is considered the minimum for meeting the OECD’s definition of a “mature” pension fund market.

Trends in pension fund assets-to-GDP ratios Although the aggregate OECD pension market is large, the size of domestic markets varies considerably, reflecting a range of factors. These include the maturity of markets – whether participation in pension plans is mandatory or voluntary – and investment policies. These factors have largely driven the course of asset accumulation in recent years. For ease of comparison, markets are divided into three categories: “mature”, “growing”, and “sluggish” markets. Figures 2.6a to 2.6c show the pension fund assets-toGDP ratios between 2001 and 2007 for all OECD countries grouped into these categories: ●

Figure 2.6a: mature markets, where the ratio was above 20% in 2007;


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Figure 2.6c: sluggish markets, where the ratio was less than 20% and has remained more or less stable since 2001 (increases of below one percentage point), or even decreased.

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Figure 2.6b: growing markets, where the ratio was below 20%, but increasing at a fast pace;

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Eleven OECD countries fall into the mature market category (2.6a), where the fastest growth was observed among those countries with mandatory or quasi-mandatory pension funds, such as Australia, Iceland, the Netherlands, and Switzerland.

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Recent developments in some of these countries could provide a further boost to their pension fund markets. For example, in 2007 the Australian authorities implemented their most comprehensive simplification of the superannuation tax system in decades. It included the removal of pension benefit tax and the simplification of payment rules, which could have the effect of stimulating pension savings. Meanwhile, in Iceland, the mandatory employer contribution rate was increased by two percentage points in early 2007, which will further stimulate pension asset accumulation in that country.

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As shown in Figure 2.6b, there are also eleven countries with growing pension fund markets. Within this category Portugal has the largest market, as highlighted by the assetto-GDP ratio of 13.7% in 2007, up from 11.5% in 2001. In the other countries the ratio was in the range of 5% to 15%, significantly lower than in mature markets, though their asset growth rates were generally higher. When compared with the mature pension fund markets, many growing-market countries have short histories of private pension systems. Growth prospects in some of these countries are very positive because of the mandatory nature of private pension provision (e.g. Hungary, Mexico, Poland, and the Slovak Republic), or the transfer of resources from severance plans to pension plans (Austria and Italy). In countries like Spain

Figure 2.6a. Trends in pension fund assets: OECD countries with mature markets, 2001-2007 As a percentage of GDP Iceland

Netherlands

Switzerland

Australia

United Kingdom1 Ireland

United States Denmark

Finland

Canada

Japan

140 120 100 80 60 40 20 0 2001

2002

2003

2004

2005

2006

2007

1. Pension fund asset data for 2007 are an OECD estimate. Source: OECD Global Pension Statistics.

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Mexico1

Poland

Hungary

Norway Italy

Austria

Czech Republic

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Portugal Spain Slovak Republic 2

12

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10 8

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Korea 3

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Figure 2.6b. Trends in pension fund assets: OECD countries with growing markets, 2001-2007

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6 4 2 0 2001

2002

2003

2004

2005

2006

2007

1. The break in series in 2005 is due to the inclusion of occupational pension plans registered by CONSAR since 2005, not included in previous years. 2. The break in series in 2006 is due to the inclusion of voluntary pension plans, not included in previous years. 3. The increase in 2005 is due to the new employer-sponsored defined benefit and defined contribution pension plans, introduced in 2005. Source: OECD Global Pension Statistics.

Figure 2.6c. Trends in pension fund assets: OECD countries with sluggish markets, 2001-2007 As a percentage of GDP New Zealand France

Belgium

Sweden Turkey

Germany

Luxembourg1

16 14 12 10 8 6 4 2 0 2001

2002

2003

2004

2005

2006

2007

1. The break in series in 2005 is due to the inclusion of pension funds supervised by the Financial Sector Supervisory Committee (CSSF), not included in previous years. Source: OECD Global Pension Statistics.

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generous public pension systems limit the development of private pensions, although growth has picked up in recent years as the system’s coverage has expanded.

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There are, in addition, seven sluggish markets (2.6c), namely Belgium, France, Germany, New Zealand, Luxembourg, Sweden, and Turkey. The slow growth of assets in France, Germany, and Sweden can be explained by the fact that pension funds are not the main instrument of private pensions. In Germany, for example, asset growth has taken place mainly in the book reserve system.

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Pension funds represent more than half of stock market capitalisation

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OECD pension fund assets are equivalent to more than one-half of the area’s stock market capitalisation (Figure 2.7). The ratio of pension fund assets to market capitalisation is highest in the Netherlands (113.1%), followed by Ireland (82.4%), Australia (70.9%), Iceland (67.4%), and the United Kingdom (61.9%).

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While large pension funds and developed capital markets are both, to some extent, the results of market-oriented financial systems, the preference for equities amongst pension

Figure 2.7. Pension fund assets as a percentage of stock market capitalisation in OECD countries, 2007 Netherlands Ireland Australia Iceland United Kingdom1 Total OECD United States Finland Slovak Republic Switzerland Denmark Canada Hungary New Zealand Mexico Portugal Poland Japan Czech Republic Norway Austria Sweden Germany Italy Spain Belgium Turkey Korea France Luxembourg 2 Greece

113.1 82.4 70.9 67.4 61.9 53.3 51.4 50.3 47.9 39.8 38.8 36.1 32.6 30.6 27.2 24.7 24.2 18.7 8.7 7.8 7.5 6.7 6.5 6.4 6.0 5.0 2.8 2.7 1.1 0.3 0.0 0

20

40

60

80

100

120

Note: Total OECD represents OECD average assets as a percentage of market capitalisation, weighted by total assets. 1. Pension fund asset data in 2007 are an OECD estimate. 2. Data for Luxembourg refer to the year 2006. Source: OECD Global Pension Statistics.

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2.2. Pension fund industry structure

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funds in some OECD countries like the Netherlands, the United Kingdom, and the United States has certainly contributed to the growth of stock markets in these countries. However, countries in which large listed companies have built international shareholder bases, such as Sweden and Finland, have also witnessed strong growth in their local stock exchanges.

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Defined contribution (DC) pension funds continue to grow faster than defined benefit (DB) funds In recent years, occupational pension plan sponsors have in many countries shown a growing interest in defined contribution (DC) plans, as demonstrated by the number of employers that have closed defined benefit (DB) plans to new entrants and encouraged employees to join DC plans (and in some cases also frozen benefit accruals for existing employees). The growth in DC pension fund assets is further boosted by the fact that the growing markets mentioned above mostly, or solely, have DC systems.

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DB plans, 3 however, still play an important role, largely due to their historical prominence as the favoured arrangement for workplace pensions in many countries. Figure 2.8 shows that in 2007 DB pension funds held 61.8% of all the assets across the 19 OECD countries for which information was available. This contrasts with the situation in 2003, when DB pension funds held 64.3% of the total. Most of the increase in DC assets is explained by the United States, while Canada explains most of the growth in DB assets. As shown by Figure 2.9, the DB-DC split varies considerably across national markets. For example, in the Czech Republic, Hungary, Poland, the Slovak Republic, and Switzerland, all pension funds are classified as DC, while DB dominates in Finland, France, Korea, and Norway. Other OECD countries have arrangements that combine DC and DB.

Figure 2.8. Defined benefit vs. defined contribution assets in total selected OECD countries, 2003-2007 As a percentage of total assets Defined benefit

Defined contribution

100

80

35.7

38.2

64.3

61.8

2003

2007

60

40

20

0 Note: Data include the countries for which the split of assets between DB and DC plans is available (Canada, the Czech Republic, Denmark, Finland, France, Greece, Hungary, Iceland, Italy, Mexico, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Switzerland, Turkey, and the United States). Source: OECD Global Pension Statistics.

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Czech Republic Greece Hungary Poland Slovak Republic Switzerland Spain Denmark Italy Iceland New Zealand Mexico Turkey United States Portugal Canada Finland France Korea1 Norway

Defined benefit

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As a percentage of total assets Defined contribution

n

Figure 2.9. Relative shares of defined benefit and defined contribution pension fund assets in selected OECD countries, 2007

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100

1. Data does not include employer-sponsored defined benefit and defined contribution pension plans. Source: OECD Global Pension Statistics.

1 2 http://dx.doi.org/10.1787/515175461627

Number and size of pension funds The number of pension funds in OECD countries ranges from a handful to hundreds of thousands. Table 2.1 shows that in sixteen OECD countries there are fewer than 1 000 pension funds, of which 8 countries have fewer than 100. Anglo-Saxon countries, on the other hand, tend to have very dispersed pension fund industries, with Australia standing out with over 366 000 pension funds as of June 2007. An even larger number of pension funds exist in the United States (close to 1m) although official figures are not available. The large number of pension funds in some countries generally means a smaller scale of operation. This is shown in Figures 2.10 and 2.11 which show the average level of assets per fund and per member account in selected OECD countries. Poland stands out with the largest ratio of pension fund assets to the number of pension funds, while Canada has the highest level of pension fund assets per active member account.

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366 567

120

Germany

178

Greece

3

Hungary

87

Iceland

38

Italy

se

10

Finland

O

5 036

Czech Republic

An

Canada

ea

258

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Belgium

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20

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Austria

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Australia

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Table 2.1. Total number of pension funds in selected OECD countries, 2007

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418

Luxembourg1

18

Mexico

1 378

Netherlands

713

Norway

109

Poland

20

Portugal

224

Slovak Republic

33

Spain

1 353

Switzerland1

2 667

Turkey

108

1. Data refer to the year 2006. Source: OECD Global Pension Statistics.

1 2 http://dx.doi.org/10.1787/515252758882

Figure 2.10. Average size of pension fund (ratio of pension funds’ total assets to the number of funds) in selected OECD countries, 2007 In millions of USD Poland Finland Netherlands Austria Czech Republic Germany Iceland Norway Switzerland1 Hungary Italy Canada Portugal Slovak Republic Spain Mexico Turkey Belgium Luxembourg1 Greece Australia

2 556 1 450 1 421 883 824 767 704 251 175 173 164 157 137 94 80 78 73 70 25 11 3 0

500

1 000

1 500

2 000

2 500

3 000


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135 620

Finland

68 655 41 153

Luxembourg1

39 466

Austria

36 777

New Zealand

R An

Belgium

O

100 461 72 377

e

Iceland

se

104 676

Netherlands

169 914

ea

Portugal

u le

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139 206

EC

Switzerland1

O

Canada Norway

d

In USD

D Br o

Figure 2.11. Average size of pension fund member account (ratio of pension funds’ total assets to the number of active members) in selected OECD countries, 2007

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25 887

Germany

22 230

Italy

20 260

Spain

10 427

Poland

3 874

Turkey1

3 092

Mexico

2 742

Czech Republic

2 080

Slovak Republic

1 325 0

40 000

80 000

120 000

160 000


1 2 http://dx.doi.org/10.1787/515257483071

2.3. Pension fund investments Bonds and equities remain dominant in pension fund portfolios In most OECD countries bonds and equities remain the two most important asset classes, accounting for over 80% of total portfolios in 2007 (see Figure 2.12). In Austria, for example, 45.4% of total assets were invested in bonds, while 35.8% were in equities, giving Austrian pension funds an aggregate average weighting of 81.2% in equities and bonds. In the countries for which data were available the combined proportion of bonds and equities relative to the total portfolio in 2007 was 94.6% for Mexico, 91.7% for Spain, 84.6% for the Netherlands, 70.9% for Switzerland, 60.1% for Germany, and 55.5% for Italy. Proportions of equities and bonds vary considerably across countries. Although there is, in general, a greater preference for bonds, the reverse is true in some OECD countries, namely Belgium, where equities outweigh bonds by 48% to 21.5%; Canada by 50% to 34.4%; Germany by 31.3% to 28.8%; and the United States by 59.2% to 22.4%. Within the “bonds” category, public sector bonds, as opposed to corporate bonds, comprise a significant share of the combined bond holdings in many countries. For example, public sector bonds comprise 82.4% of total bond holdings in the Czech Republic, 90.8% in Hungary, 81.6% in Italy, 97.2% in Poland, and 59.7% in the United States. The category of investments termed “Other assets” in Figure 2.12 includes primarily cash, deposits, unallocated insurance contracts (such as guaranteed investment products), and, to a much lesser extent, alternative investments (e.g. hedge funds, private equity, and commodities). A rise in the proportion of cash and similar assets (e.g. money market instruments) was observed in 2006-07. For example, Austrian pension funds increased their cash investments from 4.2% of their total portfolios in 2006 to 10.7% in 2007 – an

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Belgium United States Germany2 Canada Greece Switzerland Italy3 Austria Netherlands Slovak Republic Iceland Portugal 4 Sweden Norway Denmark Poland Korea Turkey5 Spain Hungary Czech Republic Mexico

Other assets1

R

Equities

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As a percentage of total investment Bills and bonds

n

Figure 2.12. Pension fund asset allocation for selected investment categories in selected OECD countries, 2007

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80

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100

Note: The GPS database provides information on investments in mutual funds. However, there is no way of knowing either the asset allocation of these mutual funds or, consequently, the real asset allocations of pension funds. The Institutional Investors’ database shows asset allocations of open-end companies (mutual funds). The data reported in Figure 2.12 assumes that the mutual fund asset allocation observed in the Institutional Investors’ database was the same as for the mutual funds in which pension funds invest. 1. The “Other assets” category includes cash and deposits, loans, land and buildings, unallocated insurance contracts, private investment funds, and other investments. 2. Equity investments are probably overstated, and therefore bond investments understated, due to the inclusion of investments in mutual funds that should be broken down and reallocated both to equity and to bond investments. 3. “Other investments” comprise unallocated insurance contracts, real estate, and undertakings for collective investments in transferable securities (UCITs). 4. “Other investments” are made of short-term accounts payable to fund managers (commissions) and payable loans. 5. Data refer only to personal pension plans. Source: OECD Global Pension Statistics.

1 2 http://dx.doi.org/10.1787/515272005713

increase of 6.5 percentage points over 2006-07. Cash holdings are also high in other countries: e.g. 51.9% in Greece, 34% in the Slovak Republic, 16.8% in Korea, 9.6% in the Czech Republic, and 8.2% in Switzerland.

Between 2001 and 2007, on average, investment in equities in the OECD area increased by 4.2 percentage points, while investment in bonds declined by 1.5 percentage points As shown in Figure 2.14, the countries that saw the biggest reallocation of assets to equities relative to total portfolios over the period 2001-2007 were: Austria, an increase of 19.9 percentage points from 15.9% in 2001 to 35.8% in 2007; Mexico, a 12 percentage points rise from 0.0% in 2001 to 12.0% in 2007; and the Slovak Republic, an 8.3 percentage points increase from 0.9% in 2001 to 9.2% in 2007. These rises in the share of equity were largely due to the global stock market rally over the 2001-2007 period (see Table 2.2), though a major driving factor in Mexico was the liberalisation of investment regulations


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-2.4 -1.9 -1.6

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-30.8

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Austria Mexico Italy Poland Belgium Czech Republic Portugal Canada Germany United States Iceland Norway Slovak Republic Denmark Switzerland Sweden Spain Netherlands

An

In percentage points

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Figure 2.13. Variations in bills and bonds allocations between 2001 and 2007 in selected OECD countries

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2.4 4.3 5.9 7.6 9.2 9.5 -35

-30

-25

-20

-15

-10

-5

0

5

10

15


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Figure 2.14. Variations in equities allocations between 2001 and 2007 in selected OECD countries In percentage points Netherlands Denmark Germany Switzerland Czech Republic Italy Sweden Spain Canada Belgium Iceland United States Poland Norway Portugal Slovak Republic Mexico Austria

-8.9 -8.1 -7.8 -2.0 -0.9 0.1 1.0 1.5 1.7 1.8 5.0 6.1 6.4 6.6 8.2 8.3 12.0 19.9 -15

-10

-5

0

5

10

15

20

25


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(see discussion below). Austria and Mexico also experienced the largest drops in bond allocations (see Figure 2.13). In some OECD countries, on the other hand, pension funds either reduced their equity allocations (e.g. Denmark, the Netherlands, and Switzerland), or increased them only marginally (e.g. Spain and Sweden), while increasing their bond allocations substantially (see Figure 2.13). Given the strong performance of equities over bonds in all these countries, pension funds engaged in a major rebalancing of their portfolio. This trend may

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Difference between bonds and equities

–11.2

–58.6

–47.8


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88.2

117.9 –29.7

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140.3

84.1

238.8

133.3

–98.5

–49.2

u le

32.0

180.4

Average

se

121.8

49.4

d

38.2

Total per cent change in equities index

Canada

ea

Total per cent change in bonds index

United Kingdom

R

Japan

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Euro area

D Br o

United States

EC

In percentages

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Table 2.2. Changes in bonds and equities indexes between 2001 and 2007 in selected areas

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be explained by the pension funds’ investment policies: when equities outperform bonds to such an extent that there is a major departure from their strategic asset allocation, pension funds become net sellers of equities and net buyers of bonds. However, there also appear to have been changes in the strategic asset allocation itself, particularly in countries such as Denmark and the Netherlands, where pension funds have been seeking lower equity

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exposures as a result of the introduction of stricter, risk-based funding requirements.

Increasing pension fund allocation to alternative investments Pressure to close DB funding gaps and raise returns is driving a move towards alternative investments, though fiduciaries remain concerned about the lack of transparency and the robustness of performance measures. Data on alternative asset classes are available at the aggregate level for only a few countries, all of which saw increases in alternative asset allocation between 2006 and 2007. In Germany private investment funds (including private equity and hedge funds) accounted for 0.62% in 2006, but increased to 0.9% in 2007, while in Switzerland their share rose from 3.5% in 2006 to 4.5% in 2007. In Finland, the Netherlands and Portugal hedge fund allocation was an aggregate 3% in 2006. The evidence also shows that the larger pension funds were the ones to invest in private equity and hedge funds, while most small funds have yet to enter these markets. One of the drivers for increasing exposure to hedge funds and other alternative investments has been the increasing pressure to reduce funding gaps in DB plans, in response to recent changes in both pension regulatory frameworks and accounting rules in the OECD area. Lower returns in conventional asset classes have also pressured pension funds into considering investment opportunities that provide higher risk-return trade-offs. The evidence suggests that, in most cases, pension funds have so far preferred to take a cautious, incremental approach to these new asset classes. This seems prudent, given pension fund fiduciaries’ concerns over the lack of transparency in some investments and the scarcity of long-term, robust, performance data. Nevertheless, despite the increasing popularity of alternative investments in the pension investment community, a number of key issues should be addressed carefully if funds are to find long-term solutions to problems of shortfalls in funding. Issues include more transparent investment disclosure, better understanding and confidence on the part of pension fund fiduciaries, and more consistent performance measurement.

Pension funds have also increased their diversification in foreign markets in recent years Over the 2001-2007 investment period under consideration, pension funds based in the euro area benefited from the elimination of currency risks, leading to greater


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Data on investment by currency paints a largely positive picture of the extent of international diversification of pension funds in OECD countries like Iceland, Japan, Switzerland, and particularly the Netherlands, where more than 80% of pension fund assets are invested abroad (see Table 2.3). Other OECD countries, on the other hand (e.g. Finland, Korea, Mexico, Poland, and Turkey), invest relatively little in overseas assets or

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international diversification in pension fund portfolios. However, there was also a move towards greater overseas investment in countries that had retained their national currencies, especially those where pension funds were very large in relation to the domestic capital market. Questions do remain, however, as to the extent of home bias in investment strategies.

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securities denominated in foreign currencies (less than 5% of total assets).

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Foreign investment in entities located abroad (including investment in local currencies) is even greater, in particular among countries that belong to the euro area. Dutch pension funds invest most heavily in overseas entities (82% of their total portfolio in 2006), followed by the Portuguese (46%). Other countries with high investment in foreign-based entities include Canada (32% of total investment), Denmark (32%), the United Kingdom (28%) and Finland (26%).

Table 2.3. Foreign investment and foreign currency investment of pension funds in selected OECD countries, 2007 As a percentage of total assets Asset overseas issued by entities located abroad

Asset overseas issued in foreign currencies

Austria

..

17.0

Canada

32.1

..

Czech Republic1

17.4

..

Denmark

31.8

..

Finland1, 2

26.4

0.4

Germany

20.1

..

Iceland

..

26.6

Japan3

25.4

25.4

Korea

0.6

..

Luxembourg1

25.0

..

3.9

1.6

Netherlands1

82.0

39.4

Norway1

20.4

..

1.0

1.0

Mexico

Poland Portugal

45.8

11.3

Switzerland

8.5

29.5

Turkey4

0.5

3.6

27.8

..

United Kingdom1 . .: 1. 2. 3.

means not available. Data refer to the year 2006. Voluntary occupational pension plans only. Data for Japan refer to “outward investments in securities”, defined as investments by residents in equities and securities issued by non-residents overseas or in Japan. “Outward investments in securities” are portfolio investments or holdings in assets denominated in foreign currencies. 4. Data refer only to personal pension plans. Source: OECD Global Pension Statistics and Eurostat Structural Business Statistics on pension funds. 1 2 http://dx.doi.org/10.1787/515345888111

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and Portugal experienced a decline in foreign investment over the period.

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Pension fund investment in foreign entities relative to total investment has grown rapidly over the period 2001-07 in some OECD countries like Canada, the Czech Republic, Iceland, Japan, the Netherlands, Switzerland, and the United Kingdom (see Figure 2.15). Of all the OECD countries for which foreign investment data is available, only two, Denmark

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On the other hand, a number of OECD countries invest relatively little in foreign entities (e.g. Korea, Mexico, Poland and Turkey, with less than 5% of total assets in 2007). These are the same countries that invest little in foreign-denominated securities. In particular, pension funds in Turkey invested only 0.5% of their portfolio in overseas entities in 2007. Although foreign currency assets accounted for nearly 4% of their portfolios, they were largely domestic government bonds denominated in foreign currencies.

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Figure 2.15. Assets issued by entities located abroad in selected OECD countries, 2001-2007 As a percentage of total assets Netherlands

Portugal

Iceland1 Switzerland

United Kingdom

Canada Japan 2

Mexico 1

Turkey3

Denmark Czech Republic

90 80 70 60 50 40 30 20 10 0 2001

2002

2003

2004

2005

2006

2007

1. Data refer to foreign currency investment. 2. Data for Japan refer to “outward investments in securities”, defined as investments by residents in equities and securities issued by non-residents overseas or in Japan. “Outward investments in securities” are portfolio investments or holding of foreign currency denominated assets. 3. Data refer only to personal pension plans. Source: OECD Global Pension Statistics and Eurostat Structural Business Statistics on pension funds. 1 2 http://dx.doi.org/10.1787/515434888185

In Australia and Belgium pension funds invest primarily via mutual funds As Figure 2.16 shows, pension fund investment in mutual funds is very high in Belgium and Australia, where they represent more than 50% of total investment. On the other hand, less than 10% of all investments in 2007 were in mutual funds in Spain, Sweden, Italy, Korea, Iceland, the Czech Republic, the Slovak Republic, and Poland.

There are many factors at play driving differences in asset allocation between DB and DC funds DB and DC funds tend to allocate assets differently, and the factors behind these differences also vary across countries. For example, in countries where DB plans are very mature there may be more investment in bonds, while DC funds catering mainly for OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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18.6

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9.5

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57.7

60

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70

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80.8

80

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90

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As a percentage of total investment

6.7

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5.9

4.5

2.6

pu

nd

Sl

ov

ak

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Re h

la

ic bl

bl pu

el Ic

ec Cz

Po

ic

d an

a re Ko

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en ed

k ar

Sw

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nm De

ng Hu

St

at

nd d Un

i te

th Ne

y

es

s

l la er

r tu

ga

nd la er

it z Sw

Po

na

da

li a Ca

ra st

lg

iu

m Au

r

0.5

0 Be

n

Figure 2.16. Investment in mutual funds in selected OECD countries, 2007


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Figure 2.17. Structure of defined benefit and defined contribution asset allocation in pension funds in selected OECD countries, 2007 As a percentage of total investment Bills and bonds

Equities

Other assets

100

80

60

40

20

0 DB

DC Canada

DB DC Denmark

DB

DC Italy

DB DC Mexico

DB DC Portugal

DB DC United States


1 2 http://dx.doi.org/10.1787/515523283757

younger workers are likely to lean towards more risky assets (such as equity). However, the transfer of risk from plan sponsors to employees that results from the DB-DC shift may also lead to widespread aversion to higher-risk portfolios on the part of individuals, thus lowering the aggregate share of assets allocated to equity. Figure 2.17 shows that there is no consistent investment pattern between DB and DC pension funds across OECD countries for which such data are available. In Denmark, for example, DB pension funds allocated 63% of their total assets to bonds in 2007, while DC plans allocated 56% of their portfolios to bonds. The same trend (i.e. a greater investment in bonds by DB plans when compared to DC plans) was found in Italy and Canada. In Mexico, Portugal, and the United States, on the other hand, the reverse situation occurred.

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2.4. Investment restrictions and pension fund asset allocation

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Asset allocation can be affected by quantitative portfolio limits. In some OECD countries, like Canada, Japan, and Mexico, the increase in equity and foreign investment during the last decade was driven not only by the performance of worldwide stock markets, but also by the relaxation or phasing-out of restrictions on investment. At the end of 2007 around one-half of OECD countries still limited pension fund investments in certain asset classes, most frequently equities and foreign securities. Eighteen of the 30 OECD countries required pension funds to limit the share of assets they invested in equities. Limits ranged from 80% in the Slovak Republic to 30% in Mexico. Just seven OECD countries capped foreign investment to other countries in the OECD, namely Austria (30%), Finland (10% for

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Investment regulations constrain pension fund investment portfolios in only a few OECD countries

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Figure 2.18. Portfolio limits on OECD pension funds’ investment in equities, 2007 As a percentage of total investment Total investment in equities, 2007

Quantitative limit on equities

United States Finland1, 2 United Kingdom 3 Austria 4 Poland1, 5 Iceland1 Norway Germany6 Denmark Sweden7 Canada Netherlands Australia Portugal Spain Switzerland Hungary1 Mexico 8 Turkey9 Italy Belgium1 Slovak Republic10 Czech Republic Luxembourg 3, 11 Korea12 0

20

40

60

80

100

1. 2. 3. 4.

Investment limit refers to listed equities. Investment limit refers to statutory pension plans. Data refer to the year 2006. The limit is relevant for Investment and Risk Sharing Groups without Minimum Yield Guarantee commitments. The aggregation of shares, negotiable securities equivalent to shares, corporate bonds, other equity securities and other assets must not exceed 70 %. 5. Investment limit refers to mandatory personal pension plans. 6. Investment limit refers to Pensionskassen (pension institutions). Equity investments are probably overstated due to the inclusion of investments in mutual funds that should be broken down and reallocated both to equity and to bond investments. 7. Pension foundations are not subject to uniform investment rules and are not, therefore, covered here. 8. Investment limit refers to Basic Fund 5. 9. Data only refer to personal pension plans. 10. Investment limit refers to growth funds. Other limits are 50% for balanced funds and absolute restriction of investing in equities for conservative funds. 11. Investment limit refers to ASSEP and SEPCAV. 12. Investment limit refers to corporate DB plans. Source: OECD Global Pension Statistics.

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by regulations in Germany and Poland (Figure 2.20).

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Quantitative limits on equity investment and actual pension fund investments in equities are shown in Figure 2.18. In three countries (Germany, Norway, and Poland) the limits appears to be binding, as pension fund investment in equity is close to the regulatory ceiling. Pension funds in these countries may therefore be investing less in equity that they would do in the absence of these limits. The restriction on corporate bonds also seems tight in Hungary (see Figure 2.19), while actual overseas investment is close to the cap set

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voluntary pension funds), Germany (30% for Pensionskassen4), Mexico (20%), Poland (5%), the Slovak Republic (70%), and Switzerland (30%). Investment restrictions also applied to other asset classes. For example, some OECD countries limit investment in corporate bonds, with the ceiling ranging from 70% in Denmark to 10% in Hungary.

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Figure 2.19. Portfolio limits on OECD pension funds’ investment in corporate bonds, 2007 As a percentage of total investment Total investment in corporate bonds, 2007

Quantitative limit on corporate bonds

Spain Germany1 Denmark Netherlands Iceland Portugal Mexico Austria 2 Czech Republic Korea 3 United Kingdom 4 Canada Italy United States Hungary Poland 5 Belgium Turkey6 0

20

40

60

80

100

1. Investment limit refers to Pensionskassen (pension institutions). Bond investments are probably understated, due to the inclusion of investments in mutual funds in the category “Equity” that should be broken down and reallocated both to equity and to bond investments. 2. The limit is relevant for Investment and Risk Sharing Groups without Minimum Yield Guarantee commitments. The aggregation of shares, negotiable securities equivalent to shares, corporate bonds, other equity securities and other assets must not exceed 70 %. 3. Investment limit refers to corporate DB plans. 4. Data refer to the year 2006. 5. Investment limit refers to mandatory personal pension plans. 6. Data refer only to personal pension plans. Source: OECD Global Pension Statistics.

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Netherlands 3 Portugal Canada Denmark United Kingdom 3 Luxembourg1, 3 Germany2 Norway3 Czech Republic 3 Switzerland Mexico Poland 4 Korea 5 Turkey6

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Quantitative limit on foreign investment

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Total foreign investment, 2007

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Figure 2.20. Portfolio limits on OECD pension funds’ foreign investment, 2007

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Investment limit refers to ASSEP and SEPCAV. Investment limit refers to Pensionskassen (pension institutions). Data refer to the year 2006. Investment limit refers to mandatory personal pension plans. Investment limit refers to corporate DB plans. Data refer only to personal pension plans.


1 2 http://dx.doi.org/10.1787/515563146656

2.5. Revenues and expenditure In 2007 pension fund net income flows became negative in two OECD countries In the pension fund industry, revenue is primarily composed of contributions and net investment income. Pension fund expenditure consists primarily of pension payments, operational expenses and insurance premia. The more mature a pension fund system is, the more likely it is to incur negative net income flows. Periods of adverse market performance, such as those experienced between 2001 and 2002 also lead to large negative income. Net income varies considerably from year to year, depending on accounting practices, because of unrealised changes in the value of investments. Most pension funds’ positive net income flow comes from contributions, unrealised investment gain, and other forms of investment income, such as interest and dividends (see Figure 2.21). In 2002, six countries experienced negative income, primarily because of adverse market performance. On the other hand, all countries for which data were available, except for Belgium and Denmark, showed positive net income flows in 2007. 2007 was nevertheless substantially worse than the previous year, as net income declined in most countries. In 2006, no country experienced negative net income. Negative net income in Belgium and especially Denmark were driven by equities, as this asset class experienced adverse performance in some of the markets in which pension funds in these countries invest. With the equity market crash in 2008, more countries are expected to have negative pension fund income.


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11.6 10.6 10.0 9.1 8.9 8.3 8.0 8.0 7.6 7.3 7.1 5.7 4.2 3.1 1.8 0.4

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Greece Australia1 Czech Republic Poland Iceland Hungary Luxembourg 2 Finland Netherlands Austria New Zealand Canada Germany Mexico Portugal Korea 3 Spain Switzerland United Kingdom 2 Norway Denmark Belgium

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Figure 2.21. Pension funds’ net income for selected OECD countries, 2007

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-1.3 -2.4 -10

0

10

20

30

40

50

Note: Net income flow = [Total contributions + Net investment income + Other income] – [Total benefits + Insurance premiums payable for allocated insurance contracts + Operational expenses + Other expenses]. 1. Data for “Other income”, “Insurance premiums payable for allocated insurance contracts”, and “Other expenses” are not available for self-managed superannuation funds. 2. Data refer to the year 2006. 3. Data do not include employer-sponsored defined benefit and defined contribution pension plans. Source: OECD Global Pension Statistics.

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Benefit payments have been increasing slowly and steadily over the last few years As Figure 2.22 shows, in 2007 pension fund benefit payments in relation to GDP were highest in Finland (8.7%), followed by Switzerland (5.4%), Australia (3.9%), Iceland (3.6%), the Netherlands (3.6%), and the United Kingdom (3.1% in 2006). Apart from the United Kingdom, these are also countries where private pensions are mandatory or quasimandatory, which explains the large size of pension fund expenditure in relation to the size of the economy. In other countries, where private pensions are mandatory (e.g. Hungary, Mexico, Poland and the Slovak Republic), benefit payments are also expected to grow rapidly in future years as the generations contributing to the new system start retiring. In most OECD countries benefit payments have increased slowly but steadily over the last few years. As a percentage of GDP, benefit growth has also been relatively stable, with major increases only observed in countries like Iceland (from 2.9% in 2001 to 3.6% in 2007) and Switzerland (from 4.7% in 2001 to 5.4% in 2007). In some countries however, benefit payments increased more rapidly in 2007. This was the case for Australia, Denmark, and Hungary, for instance. Australia’s average yearly growth rate was 1.4% between 2001 and 2006, and 21.2% over the period 2006-2007; Denmark’s was 10.6% and 17.1%; and Hungary’s was 30.4% and 58.1%. Benefits should increase at a more rapid rate over the next few years as the baby boom generation starts to retire in large numbers.

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Figure 2.22. Pension funds’ benefits for selected OECD countries, 2001-2007

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2 1 la nd Tu rk e Ge y 1 rm an y Au st ria No rw a Hu y ng ar y It a l M y ex ic o C z B el gi ec um h Re pu bl ic Sp ai De n nm ar k Ko re a2 Po Ne r tu g w Ze al al an Un d C i te an d a d Ki ng a do m3 Ic Ne ela th nd er la n Au ds st Sw r al it z ia er la n Fi d nl an d

ee Gr

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1. 2001 data refer to the year 2004. 2. 2001 data refer to the year 2002. 3. 2007 data refer to the year 2006. Source: OECD Global Pension Statistics.

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Figure 2.23. Pension funds’ contributions for selected OECD countries, 2001-2007 As a percentage of GDP 2001

2007

14 12 10 8 6 4 2

Tu y rk De ey 1 nm ar k No 2 rw Po ay r tu ga l Sp ai n Ko re a3 Cz M ex ec ic h Re o pu b Hu li c Ne nga ry w Ze al an d Po la nd Un i te C an d a d Ki ng a Ne dom 4 th er S w land s it z er la n Fi d nl an d Ic el an Au d st ra li a

ly

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lg Be

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0

1. Data refer only to personal pension plans. 2001 data refer to the year 2004. 2. The drop in contributions between 2003 and 2004 was due to the suspension of the “special pension contribution” (a mandatory tax on all labour) from 2004 and onwards. 3. 2001 data refer to the year 2002. 4. 2007 data refer to the year 2006. Source: OECD Global Pension Statistics.

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Pension fund contributions grew substantially in 2007 in Australia and Iceland

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Countries that experienced substantial increases in contributions included those with large defined benefit systems (e.g. Canada, the Netherlands, Switzerland, and the United Kingdom). Contributions to such pension plans rose after 2001 as part of an effort to reduce plan deficits. The establishment of new defined contribution plans should also prompt substantial growth in contributions.

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Like benefits, ratios of pension fund contributions-to-GDP exhibited wide disparities across countries. As shown in Figure 2.23, there was a clear divide between the three countries with ratios above 10% and the seventeen whose ratios were below 2%, with only two countries in the middle. Australia (11.7%), Iceland (11.4%), and Finland (10.7%) recorded the highest ratios.

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Figure 2.24. Employers’ contributions vs. employees’ contributions in selected OECD countries, 2007 As a percentage of total contributions Employer’s share

Employee’s share

Korea Norway Portugal Belgium Mexico1 United Kingdom2 Finland Netherlands Iceland Switzerland Canada Denmark Australia3 Greece Czech Republic4 Italy5 New Zealand Hungary2, 6 Spain Turkey7 Poland 0

20

40

60

80

100

1. Data do not include defined benefit occupational pension funds. Employer contributions include government contributions and transfers from the previous pension system (valid until 1997). Employee contributions include voluntary contributions. 2. Data refer to the year 2006. 3. Employee contributions also include “other contributions”. 4. Employer contributions also include state contributions and third-party contributions, which represent 13.5% of total contributions. 5. Employees’ contributions include the annual severance pay provision (so called trattamento di fine rapporto – TFR) paid into pension plans. 6. Employer contributions also include “undefined contributions”, which represent 7.1% of total contributions. 7. Data refer only to personal pension plans. Employer contributions include voluntary contributions from the employers within the framework of group pension plans. Employee contributions include contributions from both employees within the group pension plans, as well as personal contributions of workers within the framework of own individual accounts. Source: OECD Global Pension Statistics.

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There are wide differences across OECD countries between employer and employee contributions

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2.6. Pension funds in selected non-OECD countries

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Countries in which employees pay the highest proportions of contributions include Poland (99% of total), Turkey (97%), Spain (79%), and New Zealand (75%). By contrast, in countries like Portugal with 14% and Norway with 4% they pay much lower shares of contributions. There has, in fact, been a trend towards smaller shares of employee contributions in recent years, driven in part by employers’ efforts to reduce funding gaps in defined benefit plans (see Figure 2.24).

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Large pension fund asset pools have been accumulated in non-OECD economies, although they remain smaller than in the OECD area

Figure 2.25 provides data on 33 non-OECD economies in 2007. Brazil had the largest private pension fund market among the selected non-OECD countries for which data were available, with assets worth USD 224.2 billion. It was followed by Chile, whose pension market had assets of USD 105.6 billion, and Singapore, with assets valued at USD 90.6 billion. Non-OECD pension markets, although small in comparison to the OECD area, have grown rapidly in recent years. The Chilean pension market, for example, grew from USD 55.6 billion in 2004 to USD 105.6 billion in 2007, while pension fund assets in Slovenia increased from USD 0.5 billion in 2004 to USD 1.4 billion in 2007.

Figure 2.25. Importance of pension funds relative to the size of the economy in selected non-OECD countries, 2007 As a percentage of GDP Liechtenstein Chile Singapore Israel Hong Kong (China) Total non-OECD Jamaica Bolivia El Salvador Costa Rica Peru Brazil Suriname1 Uruguay Colombia Kenya1 Argentina India Thailand Estonia Bulgaria Nigeria Chinese Taipei Slovenia Dominican Republic Indonesia Latvia1 Russian Federation1 Macedonia China Republic of Serbia Pakistan Albania Romania

73.6 64.4 56.2 33.6 31.2 27.8 22.5 22.2 19.4 19.1 18.0 17.1 15.1 14.7 14.3 13.6 11.5 5.4 5.2 4.6 4.1 3.7 3.5 3.1 2.3 2.2 1.6 1.5 0.9 0.6 0.1 0.0 0.0 0.0 0

10

20

30

40

50

60

70

80

Note: Total non-OECD represents non-OECD average assets as a percentage of GDP, weighted by total assets. 1. Data refer to the year 2006. Source: OECD Global Pension Statistics.

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Four economies had ratios of less than 40% but more than 20% – Israel with 33.6%; Hong Kong, China with 31.2%; Jamaica with 22.5%; and Bolivia with 22.2%.

●

Nine countries ranged from 10% to 20%, e.g. Peru with 18.0%, Brazil with 17.1%, and Colombia with 14.3%.

●

In the remaining 17 non-OECD countries ratios were less than 10%.

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Pension markets in non-OECD economies nevertheless remain underdeveloped in comparison to OECD countries, as indicated in Figure 2.25 by their generally low assets-toGDP ratios in 2007. Liechtenstein’s high assets-to-GDP ratio of 74%, Chile’s 64% and Singapore’s 56.2% reflect the fact they have the most mature pension systems. Pension markets in the other non-OECD economies are smaller relative to their economies:

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Bonds and equities are the main asset classes in which pension funds in the non-OECD economies invest, with bonds traditionally playing a bigger role Figure 2.26 provides asset allocation statistics for non-OECD economies in 2007. Bills and bonds were the dominant asset category in pension fund portfolios, accounting for more than one-half of total assets in seven countries – Costa Rica (93.7%), Israel (81.5%), Colombia (68.2%), Jamaica (52.3%), Macedonia (59.8%), Slovenia (64.3%), and Thailand (75.9%). As regards pension funds’ equity allocation, Hong Kong, China led the field with 52.6%, while, at the other extreme, Colombia allocated only 0.1% of assets to equity and Albania none at all. As for shares of whole portfolios invested in mutual funds, they were high in Brazil (56.2%) and Chile (36.5%) in 2007, but only 5.2% in Costa Rica and 1% in Israel.

Figure 2.26. Asset allocation to major investment categories in selected non-OECD countries, 2007 As a percentage of total investment Bills and bonds

Equities

Mutual funds

Other assets

Brazil Romania Liechtenstein Pakistan Hong Kong (China) Estonia Albania Nigeria1 Republic of Serbia Chile Peru Bulgaria Indonesia Jamaica Macedonia Slovenia Colombia Thailand Israel Costa Rica 2 0

20

40

60

80

100

Note: It was not possible to reallocate investments in mutual funds into investments in other asset classes as it was done for Figure 2.12 because the Institutional Investors’ database used for this exercise does not include data for nonOECD countries. 1. “Other assets” include assets overseas. 2. “Other assets” are assets overseas. Source: OECD Global Pension Statistics.

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2.7. Additional comparative tables, notes and reference series

Australia

2005

2006

2007

537 781

602 742

874 383

1 100 413

8 343

9 339

10 370

11 726

12 743

12 887

Belgium

14 265

13 187

10 756

11 554

13 316

13 365

13 251

Canada

544 444

558 812

574 460

621 192

691 141

779 238

847 066

53 377

67 206

80 223

99 803

123 417

145 948

167 197

An

Denmark

R

518 100

6 337

O

519 030

Austria

Czech Republic

720 624

tu 532 312 548 978 Lec

363 115

357 062

398 872

451 032

521 852

Finland

69 200

70 800

78 600

94 213

107 951

119 149

127 000

France

..

..

20 000

20 000

20 000

20 000

20 000

72 745

74 773

78 679

83 835

90 590

97 843

99 613

..

..

..

..

..

..

25

Hungary

593 448

766 130

986 276

1 415 969

1 863 200

2 309 891

2 766 268

Iceland

648 140

685 107

826 837

989 939

1 227 134

1 514 852

1 713 955

Ireland

51 149

44 810

55 451

62 334

77 933

87 744

86 602

Italy

28 028

29 956

32 562

35 696

39 845

44 378

50 140

Japan

92 293 800

83 510 300

92 173 800

91 457 600

109 731 600

114 934 100

102 971 500

Korea

..

10 556 819

11 771 111

13 188 395

15 007 017

25 341 376

27 684 625

Luxembourg1

..

..

..

93

320

354

..

Mexico2

248 558

325 008

401 536

481 897

832 071

1 051 817

1 181 458

Netherlands

459 446

397 767

482 623

531 077

619 550

671 880

739 751

New Zealand

18 308

17 015

15 673

16 836

17 683

20 231

19 781

Norway

84 435

84 617

103 086

114 161

130 541

146 739

160 435

Poland

18 945

31 116

44 952

62 576

85 745

117 803

141 348

Portugal

14 826

15 552

16 284

15 186

18 982

21 185

22 356

0

0

272

..

9 085

45 564

76 855

39 162

41 447

48 487

55 654

65 618

73 744

79 135

Sweden

188 720

180 252

189 494

193 737

248 169

268 355

266 606

Switzerland

440 898

416 517

450 281

484 044

542 629

583 267

606 447

..

..

..

2 195

4 349

5 670

10 296

722 391

620 446

719 638

800 692

970 275

1 087 902

1 192 851

7 207 875

6 593 055

7 919 178

8 604 685

9 171 518

9 945 118

10 238 127

Germany Greece

Slovak Republic3 Spain

Turkey United Kingdom4 United States

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2004

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2003

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2002

d

2001

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OECD countries

EC

In millions of national currency

O

Table 2.4. Total investment of pension funds in OECD and selected non-OECD countries, 2001-2007

r

Selected non-OECD economies Albania

..

..

..

..

..

..

45

Argentina

..

35 685

46 815

53 514

65 520

89 709

93 194

Bolivia

..

8 201

11 437

13 620

16 612

18 416

22 850

Brazil

..

..

..

..

..

423 775

436 565

Bulgaria

187

337

513

794

1 117

1 522

2 328

Chile

..

25 521 621

29 505 951

33 889 085

38 312 676

47 186 675

55 173 152

China5

..

..

..

49 300

68 000

91 000

152 000

Chinese Taipei6

..

..

..

355 958

381 890

408 049

434 982

11 365 880

15 675 986

20 341 995

26 447 502

36 582 054

43 171 846

51 114 187 2 559 458

Colombia Costa Rica

..

..

1 063 598

1 299 762

1 815 119

2 295 938

Croatia

..

2 334

5 282

8 770

11 668

..

..

Dominican Republic

..

1 040

8 171

11 585

21 326

31 775

El Salvador Estonia Hong Kong (China) India7

..

1 061

1 572

2 148

2 896

3 352

3 958

34

236

1 116

2 684

4 655

7 508

11 087

189 249

214 699

226 474

297 655

342 604

409 693

502 445

..

..

..

1 722 947

1 990 154

2 279 634

2 562 395


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2005

2006

61 000 000

74 800 000

87 904 869

201 125

223 276

131 916

173 912

630 781

..

.. ..

47 400 000

55 400 000

134 116

139 043

148 069

..

..

..

98 533

173 593

263 795

337 752

503 348

Kenya

82 711

97 773

121 423

141 768

171 176

224 007

Latvia

13

26

45

74

119

179

Liechtenstein

..

..

..

..

..

Macedonia

..

..

..

..

..

56 598

60 543

69 316

88 285

99 936

..

..

..

..

..

Mauritius Nigeria Pakistan

ea

R

Kazakhstan

..

O

Jamaica

188 424

d

40 200 000

EC

.. 120 169

Israel

2007

..

u Lect ..

3 675

..

3 125

..

..

..

815 190

..

..

..

..

..

..

648

12 467

15 906

22 055

25 908

32 574

46 050

61 051

Republic of Serbia

..

..

..

..

..

225

3 051

Romania

..

..

..

..

..

..

14

Russian Federation

..

..

..

..

344 376

407 511

..

Singapore8

..

..

..

127 535

121 455

113 510

136 587

Slovenia

..

..

Peru

South Africa Suriname Thailand Uruguay Zambia

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2003

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2002

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Indonesia

2001

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Selected non-OECD economies

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Table 2.4. Total investment of pension funds in OECD and selected non-OECD countries, 2001-2007 (cont.)

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..

439

647

883

1 027

380 718

465 915

747 417

..

..

..

437

528

643

661

752

..

222 917

244 823

287 320

305 480

345 884

390 928

441 710

..

18 990

34 755

48 172

52 704

62 251

79 612

542 971

655 721

1 177 191

1 060 499

1 208 522

..

..

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1. The break in series in 2005 is due to the inclusion of pension funds supervised by the CSSF, not included in previous years. 2. The break in series in 2005 is due to the inclusion of occupational pension plans registered by the National Commission for the Retirement Savings System (CONSAR) since 2005, not included in previous years. 3. The break in series in 2006 is due to the inclusion of voluntary pension plans, not included in previous years. 4. Pension asset data in 2007 are an OECD estimate. 5. Data refer to enterprise annuity assets. 6. Data refer to the (old) labour insurance scheme. 7. Data refer to all three components in the Employee Provident Fund Organisation – i.e. the Employee Provident Fund, Employee Pension Fund, and Deposit Linked Insurance Fund – in March of each year. 8. Data refer to the Central Provident Fund at end of year. Source: OECD Global Pension Statistics.

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443 443

10 553

12 882

Belgium

12 771

12 429

12 154

14 353

Canada

351 615

355 922

410 224

477 439

nl y 920 668

15 989

O

658 867

14 566

17 654

16 541

16 769

18 152

570 385

686 967

788 524

1 404

2 053

2 852

3 884

5 152

Denmark

43 639

45 288

60 646

75 328

87 032

Finland

61 952

66 730

88 814

117 035

134 101

France

..

..

22 599

24 845

24 845

65 125

70 474

88 903

104 143

112 534

122 764

..

..

..

..

..

..

34

2 071

2 976

4 397

6 989

9 338

10 978

15 068

Germany Greece Hungary

An

Czech Republic

548 928

6 462

8 241

89 569

100 864

149 497 25 094

u Lect 173 973 136 456

6 636

7 481

10 781

14 103

19 517

21 672

26 749

Ireland

45 791

42 234

62 656

77 433

96 811

110 093

118 633

25 101

28 232

36 794

44 343

49 496

55 681

68 686

Japan

759 720

666 722

795 040

845 679

996 681

987 797

874 426

Korea

..

8 438

9 884

11 516

14 652

26 624

29 786

Luxembourg1

..

..

..

116

398

445

..

26 600

33 643

37 213

42 718

76 409

96 469

108 107

Mexico2 Netherlands

411 322

374 898

545 337

659 723

769 627

843 011

1 013 357

New Zealand

7 687

7 865

9 094

11 157

12 446

13 123

14 535

Norway

9 389

10 596

14 565

16 939

20 266

22 875

27 385

Poland

4 624

7 623

11 560

17 140

26 513

37 958

51 115

13 273

14 658

18 399

18 865

23 580

26 581

30 625

0

0

7

..

293

1 537

3 114

35 060

39 064

54 788

69 135

81 513

92 527

108 404

Portugal Slovak Republic3 Spain Sweden Switzerland Turkey United Kingdom4 United States Total OECD

r

27 397

Iceland Italy

u le

348 859

7 863

2007

se

281 376

5 673

2006

e

268 181

Austria

2005

d

2004

ea

2003

R

2002

O

Australia

2001

D Br o

OECD countries

EC

In millions of USD

n

w


18 254

18 542

23 457

26 373

33 211

36 395

39 452

261 357

267 554

334 829

389 496

434 746

465 425

505 425

..

..

..

1 539

3 245

3 965

7 920

1 040 472

930 832

1 175 335

1 467 118

1 763 762

2 002 059

2 385 701

7 207 878

6 593 058

7 913 957

8 599 308

8 979 361

9 945 118

10 238 127

10 685 596

9 896 552

12 103 698

13 593 043

14 925 951

16 572 314

17 858 578


..

..

..

..

..

..

0

Argentina

..

11 650

16 139

18 306

22 565

29 371

30 105

Bolivia

..

1 144

1 493

1 716

2 060

2 299

2 910

Brazil

..

..

..

..

..

194 810

224 218

Bulgaria

86

162

296

504

710

976

1 629

Chile

..

37 045

42 676

55 599

68 444

88 985

105 602

China5

..

..

..

5 956

8 298

11 413

19 980

Chinese Taipei6

..

..

..

10 650

11 872

12 543

13 245

4 942

6 260

7 069

10 061

16 015

19 284

25 370

Costa Rica

..

..

2 668

2 968

3 799

4 490

4 954

Croatia

..

297

788

1 453

1 961

..

..

Dominican Republic

..

..

34

194

381

639

955

El Salvador

..

1 061

1 572

2 148

2 896

3 352

3 958

Estonia

2

14

81

213

370

602

970

24 267

27 529

29 085

38 220

44 052

52 742

64 404 61 971

Colombia

Hong Kong (China) India7

..

..

..

38 020

45 128

50 315

Indonesia

..

4 317

5 526

6 198

6 286

8 167

9 614

28 573

28 307

30 531

33 037

41 987

45 138

54 350

Israel


85


3 700

Kenya

1 053

1 242

1 599

1 791

Latvia

20

42

79

137

..

..

..

..

Macedonia Mauritius Nigeria Pakistan

..

2 007

2 535

4 747

..

..

3 107

..

2 266 210

319

..

..

3 062

..

70

..

..

..

..

..

..

1 943

2 021

2 484

3 211

3 388

..

..

..

..

..

.. ..

u Lect ..

..

..

..

..

..

..

4 523

6 341

7 590

9 883

14 065

19 517

Republic of Serbia

..

..

..

..

..

3

52

Romania

..

..

..

..

..

..

6

Russian Federation

..

..

..

..

12 175

14 987

..

Singapore8

..

..

..

75 454

72 972

71 438

90 629

Slovenia

..

..

..

547

804

1 108

1 406

South Africa

..

..

50 328

72 126

117 531

..

..

Suriname

..

186

203

235

242

274

..

5 017

5 699

6 926

7 595

8 600

10 320

12 796

..

893

1 232

1 678

2 153

2 586

3 392

150

149

249

222

271

..

..

Thailand Uruguay Zambia

r

6 480

3 555

Peru

u le

1 610

2 258

se

..

1 721

2007

e

..

1 183

2006

d

..

Kazakhstan

Liechtenstein

nl y

2005

ea

2004

R

2003

O

2002

EC

Jamaica

2001

An

Selected non-OECD economies

O

In millions of USD

D Br o


n

w

_it E d it e io s

11


1 2 http://dx.doi.org/10.1787/515754724108

86



356 909

9 339

10 370

Belgium

14 265

13 187

10 756

11 554

Canada

392 622

377 657

363 113

384 271

nl y 672 541

12 743

O

524 920

11 726

12 887

13 316

13 365

13 251

458 946

547 306

576 010

1 568

2 179

2 524

3 126

4 146

Denmark

48 729

48 053

53 682

60 629

70 028

Finland

69 200

70 800

78 600

94 213

107 951

France

..

..

20 000

20 000

20 000

72 745

74 773

78 679

83 835

90 590

97 843

..

..

..

..

..

..

25

2 313

3 158

3 892

5 625

7 514

8 747

11 007

Germany Greece Hungary

An

Czech Republic

441 681

5 148

6 020

71 360

73 680

119 149 20 000

u Lect 127 000

99 613

7 410

7 937

9 543

11 351

15 704

17 266

19 540

Ireland

51 149

44 810

55 451

62 334

77 933

87 744

86 602

Italy

28 028

29 956

32 562

35 696

39 845

44 378

50 140

Japan

848 322

707 437

703 737

680 651

801 955

786 978

638 761

Korea

..

8 954

8 749

9 269

11 789

21 212

21 758

Luxembourg1

..

..

..

93

320

354

..

29 702

35 698

32 940

34 382

61 481

76 857

78 971

459 446

397 767

482 623

531 077

619 550

671 880

739 751

8 583

8 346

8 049

8 980

10 014

10 455

10 617

Norway

10 484

11 243

12 893

13 634

16 306

18 225

20 005

Poland

5 163

8 089

10 233

13 795

21 333

30 241

37 339

14 826

15 552

16 284

15 186

18 982

21 185

22 356

0

0

7

..

235

1 224

2 275

39 162

41 447

48 487

55 654

65 618

73 744

79 135

Netherlands New Zealand

Portugal Slovak Republic3 Spain Sweden Switzerland Turkey United Kingdom4 United States Total OECD

r

20 000

Iceland

Mexico2

u le

308 796

8 343

2007

se

298 559

6 337

2006

e

299 457

Austria

2005

d

2004

ea

2003

R

2002

O

Australia

2001

D Br o

OECD countries

EC

In millions of euros

n

w


20 383

19 675

20 764

21 227

26 723

28 996

28 820

291 837

283 893

296 377

313 489

349 808

370 804

369 209

..

..

..

1 239

2 611

3 159

5 786

1 161 817

987 675

1 040 358

1 180 822

1 419 167

1 595 040

1 742 735

8 048 497

6 995 677

7 005 105

6 921 224

7 225 018

7 923 276

7 478 866

11 932 047

10 500 863

10 713 541

10 940 635

12 010 290

13 203 600

13 044 699


..

..

..

..

..

..

0

Argentina

..

12 361

14 286

14 734

18 156

23 400

21 991

Bolivia

..

1 214

1 322

1 381

1 657

1 831

2 126

Brazil

..

..

..

..

..

155 205

163 789

Bulgaria

96

172

262

406

571

778

1 190

Chile

..

39 307

37 775

44 749

55 072

70 895

77 141

China5

..

..

..

4 794

6 677

9 093

14 595

Chinese Taipei6

..

..

..

8 572

9 553

9 993

9 675

5 519

6 642

6 257

8 098

13 554

14 484

17 418 3 619

Colombia Costa Rica

..

..

2 362

2 389

3 057

3 577

Croatia

..

315

697

1 170

1 578

..

..

Dominican Republic

..

..

30

156

307

509

698

El Salvador

..

1 126

1 392

1 729

2 330

2 671

2 891

Estonia

2

15

71

171

298

480

708

27 097

29 210

25 744

30 761

35 445

42 020

47 047 45 269

Hong Kong (China) India7

..

..

..

30 601

36 311

40 086

Indonesia

..

4 581

4 892

4 988

5 058

6 506

7 023

31 905

30 036

27 025

26 590

33 784

35 961

39 702

Israel


87


1 296

1 999

2 978

Kenya

1 176

1 317

1 415

1 441

Latvia

22

45

70

110

..

..

..

..

Liechtenstein Macedonia Mauritius Nigeria Pakistan

nl y

1 599

1 852

..

..

2 475

..

1 823 169

..

..

..

..

..

..

2 170

2 144

2 199

2 584

2 726

..

..

..

..

..

O

..

3 820

254

..

..

2 235

..

51

.. ..

u Lect ..

..

..

..

..

..

..

4 800

5 612

6 109

7 952

11 206

14 257

Republic of Serbia

..

..

..

..

..

3

38

Romania

..

..

..

..

..

..

4

Russian Federation

..

..

..

..

9 797

11 940

..

Singapore8

..

..

..

60 730

58 715

56 915

66 204

Slovenia

..

..

..

439

647

883

1 027

South Africa

..

..

44 548

58 052

94 569

..

..

Suriname

..

197

180

189

195

218

..

5 602

6 047

6 131

6 113

6 920

8 222

9 348

..

948

1 091

1 351

1 732

2 060

2 478

168

158

220

179

218

..

..

Thailand Uruguay Zambia

r

4 733

3 970

Peru

u le

..

1 826

2007

se

..

1 321

2006

e

..

Kazakhstan

2005

d

2004

ea

2003

R

2002

O

Jamaica

2001

EC

Selected non-OECD economie

An

In millions of euros

D Br o


n

w

_it E d it e io s

8


1 2 http://dx.doi.org/10.1787/515758064024

88



w

268

267

3 193

3 045

3 045

3 816

14

13

12

11

Finland

144

144

..

153

Germany

Canada Czech Republic

21

..

258

258

5 036

3 816

20 5 036

11

11

10

174

129

120

175

178

136

165

177

182

Greece

..

..

..

..

..

Hungary

..

108

100

93

90

Iceland

54

51

50

48

46

Italy

366 567

178

.. 88 41

3

u Lect 87

517

507

470

458

431

432

..

116

116

116

138

..

Luxembourg1

..

..

..

3

16

18

..

16

14

12

26

1 331

1 342

1 378

Netherlands

964

963

876

843

800

768

713

Norway

149

140

135

125

119

122

109

Poland

18

20

20

21

20

20

20

241

241

240

221

223

227

224

Portugal Slovak Republic Spain Switzerland

r

38

Korea Mexico2

u le

..

324 789

21

se

..

306 553

e

Belgium

nl y

21

O

290 917

20

d

264 614

20

2007

ea

238 753

19

2006

R

222 971

Austria

2005

O

2004

D Br o

2003

EC

2002

An

Australia

2001

n

Table 2.7. Total number of pension funds in selected OECD countries, 2001-2007

418

..

4

4

5

..

24

24

33

699

804

919

1 163

1 255

1 340

1 353

3 290

3 170

3 050

2 934

2 770

2 667

..

Turkey

..

..

..

83

98

105

108

United Kingdom

..

..

..

94 535

91 674

..

..

..: means not available. 1. The break in series in 2005 is due to the inclusion of pension funds supervised by the CSSF, not included in previous years. 2. The break in series in 2005 is due to the inclusion of occupational pension plans registered by the National Commission for the Retirement Savings System (CONSAR) since 2005, not included in previous years. Source: OECD Global Pension Statistics. 1 2 http://dx.doi.org/10.1787/515776612682


89


w

_it E d it e io s

nl y O

u le

Unallocated Private Mutual Other insurance investment funds (CIS) investments contracts funds

d

..

..

..

4.3

25.4

3.2

57.7

..

..

10.7

45.4

66.2

33.8

1.2

35.8

2.0

..

..

..

Belgium

1.7

4.0

60.2

39.8

0.1

9.2

0.9

80.8

..

Canada2

3.2

24.0

70.8

29.2

0.4

28.7

4.0

36.1

..

Czech Republic

9.6

75.2

82.4

17.6

0.0

5.9

0.7

An

1.1

Denmark3

0.3

50.8

47.4

52.6

0.0

30.7

1.8

11.6

Germany4

3.1

28.8

6.0

94.0

31.7

31.3

2.9

51.9

37.2

100.0

0.0

..

5.4

Hungary

1.2

66.8

90.8

9.2

..

Iceland5

3.3

46.2

52.5

47.5

Ireland

3.8

18.5

..

Italy6

7.4

37.2

Korea

16.8

Mexico Netherlands

O

7.0

Austria

4.5

L0.0 e

se

Land and buildings

ea

Equities

R

Australia1

Loans

EC

Cash and deposits

Bills and Of which: bonds Bonds issued by Bills and bonds issued by issued by public and public the private private administration sector sector

2.3 4.8

e

D Br o


n

Table 2.8. Pension fund portfolio allocation in selected OECD countries, 2007

c t.. u ..

r 2.1 3.6 4.1

..

..

4.7

..

..

0.9

1.3

..

..

..

..

5.4

14.0

0.2

16.0

..

..

1.8

8.4

34.3

0.1

5.9

..

..

1.8

..

..

66.3

9.1

..

..

2.3

0.0

81.6

18.4

..

10.1

5.2

8.9

22.9

2.0

6.3

58.5

86.2

13.8

1.8

0.2

0.0

6.7

3.8

0.0

12.2

0.0

82.6

77.5

22.5

..

12.0

0.0

..

..

1.8

3.6

6.5

42.2

42.6

57.4

2.8

25.6

2.5

19.0

..

..

1.4

Norway

3.2

55.2

21.2

78.8

1.2

32.5

5.2

..

..

..

2.7

Poland

3.4

61.0

97.2

2.8

0.0

34.6

..

0.5

..

..

0.5

Portugal7

5.0

36.6

46.6

53.4

0.0

25.3

7.1

24.0

0.0

0.0

2.0

34.0

49.2

..

..

..

8.6

..

2.6

..

..

5.6

Spain8

6.1

65.1

43.3

56.7

0.0

19.0

0.1

9.3

..

..

0.3

Sweden

1.9

51.6

..

..

0.0

29.5

3.4

9.5

..

..

4.1

Switzerland

8.2

24.4

..

..

4.7

15.7

9.3

32.5

..

4.5

0.8

Turkey9

5.3

65.2

100.0

0.0

0.0

11.6

0.0

0.0

0.0

0.0

18.0

United States

0.9

15.7

59.7

40.3

0.9

49.0

0.6

18.6

3.5

..

10.8

Greece

Slovak Republic

..: means not available. 1. “Mutual funds (CIS)” refers to funds placed with investment managers. For pension funds this includes investments in PSTs, wholesale trusts, life office funds, and unlisted public offer unit trusts. “Other investments” includes other investments, receivables and deferred tax assets. 2. All forms of investment funds are included: pooled, mutual, segregated, and others. 3. Investments in bonds cannot be separated into the two types of bonds in company pension funds. Total company pension fund investment in bonds has been broken down using the same relative shares as in general pension funds. 4. Equity investments are probably overstated, and therefore bond investments understated, due to the inclusion of investments in mutual funds that should be broken down and reallocated both to equity and to bond investments. 5. Loans consist solely of collateral loans fulfilling requirements stipulated in Act No. 129/1997 for collateral ratios and may therefore include corporate bonds. Mutual funds include private investment funds in accordance with the classification in Act No. 129/1997. A pension fund is forbidden from investing in real estate or chattels except insofar as it may be necessary for the activities of the fund in accordance with Act No. 129/1997. 6. “Other investments” refer chiefly to investments in affiliated companies (generally with a 100% holding) that hold land and buildings. 7. “Other investments” include short-term accounts payable to fund managers (commissions) and payable loans. 8. “Loans”: includes credits granted to participants. “Other investments” include repurchase agreements (REPOS). 9. Data refer to personal pension plans only. The majority of “Other investments” consist of “reverse repo” investments. Source: OECD Global Pension Statistics. 1 2 http://dx.doi.org/10.1787/515800228053

90



w

nl y O

u le


7.5

..

..

..

4.1

24.8

3.3

58.3

R

..

..

Austria

4.2

50.8

68.5

31.5

0.8

36.1

2.1

..

..

..

Belgium

2.3

6.2

57.8

42.2

0.1

8.9

0.9

78.6

0.0

Canada2

2.9

24.1

69.6

30.4

0.5

28.3

3.8

37.1

..

Czech Republic

6.4

79.3

78.0

22.0

0.0

9.9

1.1

An

1.1

Denmark3

0.5

51.0

51.6

48.4

0.0

29.6

1.8

11.7

Finland

0.4

43.1

59.0

41.0

3.2

43.8

9.3

Germany4

2.6

31.6

4.2

95.8

26.2

34.0

Hungary

2.5

69.7

98.6

1.4

0.0

Iceland5

1.3

44.5

53.0

47.0

Ireland

5.5

19.7

..

Italy6

6.7

35.9

Korea

12.1

Luxembourg

O

Australia1

..

L.. e

se

Land and buildings

d

Equities

ea

Loans

EC

Cash and deposits

Bills and Of which: bonds issued by Bills and bonds Bonds issued by issued by public and public the private private administration sector sector

2.1 6.0

e

D Br o


n


c t.. u ..

r 1.9 3.2 3.3

0.0

0.0

5.5

..

..

..

0.2

2.9

0.0

0.0

0.6

2.1

9.4

0.2

13.0

0.0

0.0

5.3

8.1

39.2

0.1

5.6

0.0

0.0

1.3

..

..

63.4

9.0

..

..

2.4

0.0

80.1

19.9

0.0

10.8

5.9

11.1

22.9

0.0

6.8

68.3

67.1

32.9

2.3

0.4

0.0

5.6

1.4

0.0

8.9

2.9

20.8

..

..

0.0

1.0

0.0

74.7

..

..

2.3

Mexico

0.0

83.0

80.0

20.0

..

13.6

0.0

..

..

1.6

1.8

Netherlands

4.3

39.8

55.0

45.0

2.9

46.9

2.8

0.0

0.0

0.0

3.3

Norway

4.6

53.3

35.3

64.7

1.6

32.8

5.1

0.0

0.0

0.0

2.5

Poland

2.8

62.1

99.3

0.7

0.0

34.0

0.0

0.5

0.0

0.0

0.6

Portugal7

4.8

34.4

63.3

36.7

0.0

29.8

7.8

21.9

0.0

0.0

1.4

43.1

44.3

..

..

0.0

8.6

0.0

0.0

0.0

0.0

4.0

Spain8

5.4

64.1

43.8

56.2

0.0

19.8

0.1

10.0

0.0

0.0

0.5

Sweden

1.9

55.2

..

..

0.1

31.0

3.3

8.0

0.0

0.0

0.5

Switzerland

7.7

25.8

..

..

5.1

17.5

9.6

30.4

0.0

3.5

0.6

Turkey9

0.0

73.1

100.0

0.0

0.0

8.7

0.0

0.0

0.0

0.0

18.3

United Kingdom10

2.5

19.6

59.9

40.1

0.7

37.0

3.2

19.8

8.5

..

8.8

United States

0.9

15.4

58.5

41.5

0.8

49.5

0.8

18.3

3.7

..

10.7

Slovak Republic

..: means not available. 1. “Mutual funds (CIS)” refers to funds placed with investment managers. For pension funds this includes investments in PSTs, wholesale trusts, life office funds and unlisted public offer unit trusts. “Other investments” includes other investments, receivables, and deferred tax assets. 2. All forms of investment funds are included: pooled, mutual, segregated, and others. 3. Investments in bonds cannot be separated into the two types of bonds in company pension funds. Total company pension fund investment in bonds has been broken down using the same relative shares as in general pension funds. 4. Equity investments are probably overstated, and therefore bond investments understated, due to the inclusion of investments in mutual funds that should be broken down and reallocated both to equity and to bond investments. 5. Loans consist solely of collateral loans fulfilling requirements stipulated in Act No. 129/1997 for collateral ratios and may therefore include corporate bonds. Mutual funds include private investment funds in accordance with the classification in Act No. 129/1997. A pension fund is forbidden from investing in real estate or chattels except insofar as it may be necessary for the activities of the fund in accordance with Act No. 129/1997. 6. “Other investments” refers chiefly to investments in affiliated companies (generally with a 100% holding) that hold land and buildings. 7. “Other investments” include short-term accounts payable to fund managers (commissions) and payable loans. 8. “Loans”: includes credits granted to participants. “Other investments” include repurchase agreements (REPOS). 9. Data refer to personal pension plans only. The majority of the “Other investments” consist of “reverse repo” investments. 10. Equity share holdings are at market value and all other holdings at book value. Private equity and venture capital are included in the equity shares category. “Other investments” include security repurchase agreements, commercial paper and contributions receivable. Source: OECD Global Pension Statistics. 1 2 http://dx.doi.org/10.1787/515855155804


91


w

_it E d it e io s

nl y O

u le


7.3

..

..

..

5.5

29.5

3.7

51.0

R

..

..

Austria

3.5

53.2

68.5

31.5

0.8

37.0

1.3

..

..

..

Belgium

2.4

6.4

60.1

39.9

0.3

9.2

1.2

74.8

2.4

0.0

Canada2

4.4

24.4

66.5

33.5

0.6

28.1

3.5

36.4

..

Czech Republic

8.2

80.3

73.5

26.5

0.0

7.5

0.9

Denmark3

0.7

50.2

53.0

47.0

0.0

25.9

1.7

11.2

Finland

0.5

47.4

60.0

40.0

3.5

38.4

10.0

Germany4

2.6

30.8

4.1

95.9

26.1

34.6

3.2

Hungary

1.4

75.5

98.2

1.8

0.0

7.8

Iceland5

1.7

49.9

53.9

46.1

8.7

Ireland

4.5

21.5

..

..

Italy6

4.7

36.5

79.2

Korea

8.0

78.9

Luxembourg

3.9

Mexico

O

Australia1

se

Land and buildings

d

Equities

ea

Loans

EC

Cash and deposits

Bills and Of which: bonds issued by Bills and bonds Bonds issued by issued by the public and public private private administration sector sector

3.1 4.2

e

D Br o


n


..

r 3.4 2.6

0.0

0.0

10.2

0.0

0.0

0.0

0.3

0.0

0.0

0.6

2.1

0.2

9.0

0.0

0.0

6.1

34.5

0.1

1.8

0.0

0.0

3.3

..

65.0

8.0

..

..

0.8

0.0

20.8

0.0

9.9

7.8

11.3

23.9

0.0

5.9

35.5

64.5

10.9

0.7

0.0

0.1

0.0

0.0

1.3

19.4

..

..

0.0

3.5

0.0

57.0

0.0

15.0

1.2

0.0

87.2

85.3

14.7

0.0

11.2

0.0

0.0

0.0

0.0

1.6

Netherlands

2.3

40.8

57.0

43.0

3.3

46.2

3.4

0.0

0.0

0.0

4.1

Norway

4.9

55.4

40.7

59.3

1.9

28.9

4.6

0.0

0.0

0.0

4.3

Poland

4.1

63.1

98.2

1.8

0.0

31.8

0.0

0.5

0.0

0.0

0.4

Portugal7

10.0

40.6

62.3

37.7

0.0

21.3

8.1

21.8

0.0

0.0

–1.9

Slovak Republic

An ..

0.0 e L

c0.0t u

3.1

81.9

11.2

..

..

0.0

6.3

0.0

0.0

0.0

0.0

0.6

Spain8

4.6

57.7

34.7

65.3

0.0

19.4

0.2

9.3

0.0

0.0

8.8

Sweden

1.4

57.7

..

..

3.5

34.4

2.8

..

..

0.0

0.2

Switzerland

8.5

27.4

..

..

6.0

18.1

10.1

26.3

0.0

2.8

0.8

Turkey9

0.0

81.1

100.0

0.0

0.0

11.1

0.0

0.0

0.0

0.0

7.8

United Kingdom10

2.2

18.8

62.8

37.2

0.5

39.5

3.3

19.8

8.9

0.0

7.1

United States

1.0

15.6

59.4

40.6

0.8

48.7

0.9

18.0

3.7

..

11.4

..: means not available. 1. “Mutual funds (CIS)” refers to funds placed with investment managers. For pension funds this includes investments in PSTs, wholesale trusts, life office funds and unlisted public offer unit trusts. “Other investments” includes other investments, receivables and deferred tax assets. 2. All forms of investment funds are included: pooled, mutual, segregated, and others. 3. Investments in bonds cannot be separated into two types of bonds in company pension funds. Total company pension fund investment in bonds has been broken down using the same relative shares as in general pension funds. 4. Equity investments are probably overstated, and therefore bond investments understated, due to the inclusion of investments in mutual funds that should be broken down and reallocated both to equity and to bond investments. 5. Loans consist solely of collateral loans fulfilling requirements stipulated in Act No. 129/1997 for collateral ratios and may therefore include corporate bonds. Mutual funds include private investment funds in accordance with the classification in Act No. 129/1997. A pension fund is forbidden to invest in real estate or chattels except insofar as it may be necessary for the activities of the fund in accordance with Act No.129/1997. 6. “Other investments” refers chiefly to investments in affiliated companies (generally with a 100% holding) that hold land and buildings. 7. “Other investments” include short-term accounts payable to fund managers (commissions) and payable loans. 8. “Loans”: includes credits granted to participants. “Other investments” include repurchase agreements (REPOS). 9. Data refer only to personal pension plans. The majority of “Other investments” consist of “reverse repo” investments. 10. Equity share holdings are at market value and all other holdings at book value. Private equity and venture capital are included in the equity shares category. “Other investments” include security repurchase agreements, commercial paper and contributions receivable. Source: OECD Global Pension Statistics. 1 2 http://dx.doi.org/10.1787/515884780251

92



w

8 239

12 635

67 785

6.7

2.9

D Br o

3.6

303

–33

1 072

1 226

1 704

1 336

1 459

5.3

–0.4

Belgium

22

17

0

44

–144

380

–442

0.2

0.1

0.0

15 696

–1 744

21 035

38 797

50 149

64 670

62 814

4.5

EC

10.2

255

343

434

607

..

..

1 395

18.2

16.7

90 116 112 065 182 740

2001

2002

–0.5

2003

2004 15.3

2005

2006

2007 19.8

u le

2007

16.4

17.0

9.5

11.7

8.4

8.3

0.3

–0.9

2.3

–2.4

8.1

8.8

9.4

15.2

5.1

15.6

..

..

se

2006

O

2005

d

2004

8.0

R

2003

O

Canada

2002


ea

Australia1

2001

nl y

18 092

Austria

In millions of USD

n

Table 2.11. Pension funds’ net income in selected OECD countries, 2001-2007

1.7

An

8.3

..

795

1 114

2 244

2 355

2 311

1 604

..

26.7

25.3

32.1

25.2

21.0

10.6

Iceland

306

345

1 892

2 354

..

3 995

3 098

4.6

4.6

17.6

16.7

..

18.4

11.6

Korea2

..

1 022

935

1 253

1 334

10 235

1 532

..

12.1

9.5

10.9

9.1

39.6

5.7

Luxembourg

..

..

..

..

112

45

..

..

..

..

..

28.2

10.0

..

9 651

8 480

6 347

..

8 745

11 985

7 886

36.3

25.2

17.1

..

11.4

12.4

7.3

67 215 102 344

Czech Republic

262

–1 264

5 369

8 697

13 948

2 618

–1 308

0.6

–2.8

8.9

11.5

16.0

2.9

Finland

1 927

1 120

7 929

9 722

16 892

15 694

15 779

3.1

8.9

12.6

10.5

Germany

1 878

853

4 082

5 790

..

8 244

10 429

2.9

1.2

4.6

5.6

..

6.7

..

..

..

..

..

..

13

..

..

..

..

Greece Hungary

Mexico Netherlands

c tu

L e..

–1.3

e

Denmark

16.9

r

9.1 7.6

..

39.6

11 662

–2 528

13 257

69 546

89 926

2.8

–0.7

2.4

10.2

13.3

8.2

8.9

New Zealand

–149

–540

–609

789

..

1 226

1 166

–1.9

–6.9

–6.7

7.1

..

9.3

8.0

Norway

1 788

1 906

3 930

2 817

..

7 405

99

19.0

18.0

27.0

16.6

..

32.4

0.4

Poland

2 478

3 144

3 706

5 108

..

9 845

8 579

53.6

41.2

32.1

29.8

..

25.9

16.8

805

2 435

2 142

2 549

5 218

3 134

2 165

6.1

16.6

11.6

13.5

22.1

11.8

7.1

3 793

1 217

6 645

6 954

8 889

10 286

4 548

10.8

3.1

12.1

10.1

10.9

11.1

4.2

–4 659 –18 547

17 939

16 928

45 247

31 363

15 836

–1.8

–6.9

5.4

4.3

10.4

6.7

3.1

15 503

21 700

29 476

35 477

..

–0.1

1.0

1.3

1.5

1.7

1.8

..

Portugal Spain Switzerland United Kingdom

–962

9 320

..: means not available. Net income flow = [Total contributions + Net investment income + Other income] – [Total benefits + Insurance premiums payable for allocated insurance contracts + Operational expenses + Other expenses]. 1. Data for “Other income”, “Insurance premiums payable for allocated insurance contracts”, and “Other expenses” are not available for self-managed superannuation funds. 2. Data do not include employer-sponsored defined benefit and defined contribution pension plans. Source: OECD Global Pension Statistics. 1 2 http://dx.doi.org/10.1787/516011320345


93


w

_it E d it e io s

33 036

37 664

450

445

2007

33 199

30 669

359

349

395

Belgium

961

1 070

927

982

23 601

24 780

25 852

28 618

Czech Republic

4 535

5 224

5 969

5 414

Denmark

7 446

8 620

8 760

9 486

7 781

11 857

12 677

13 246

13 851

14 659

2 600

2 765

2 897

3 024

3 114

..

..

..

..

..

Hungary

12 000

15 677

16 433

28 571

33 168

33 242

Iceland

22 372

25 820

28 677

31 193

34 879

40 070

2 374

2 114

2 797

2 371

2 560

3 183

2 961

..

143 219

156 427

195 185

256 627

5 222 627

5 085 315

Finland Germany Greece

Italy Korea Luxembourg

..

41 121 445 728

31 699

33 588

..

9 180

ea

976

R

28 124

O

Canada

970

d

32 569

381

EC

30 597

Austria

8 818

9 460

14 760

15 628

3 279 ..

u Lect 2 968

45 871 46 030

..

..

..

7

22

19

..

1 323

5 810

4 673

5 708

20 446

21 084

Netherlands

13 358

14 370

15 300

16 600

17 874

19 039

20 286

New Zealand

2 720

2 652

2 509

2 055

2 037

2 501

2 298

Norway

2 874

2 980

3 233

3 434

3 616

3 705

3 980

Poland

0

0

0

0

0

7

13

983

1 041

950

1 016

990

1 081

1 087

Portugal Spain Switzerland Turkey United Kingdom

r

1

963

Mexico1

u le

2006

se

2005

e

2004

nl y

2003

O

2002

An

Australia

2001

D Br o


n

Table 2.12. Pension funds’ benefits in selected OECD countries, 2001-2007

2 851

3 841

2 464

2 431

2 992

3 816

3 245

20 417

21 042

22 463

23 883

24 439

25 965

27 676

..

..

..

243

324

371

422

29 051

31 208

32 269

33 133

36 881

39 930

..

..: means not available. 1. The break in series in 2006 is due to the inclusion of occupational pension plans registered by CONSAR since 2005, not included in previous years. Source: OECD Global Pension Statistics. 1 2 http://dx.doi.org/10.1787/516031046843

94



w

nl y

2003

2004

50 083

51 604

53 480

60 847

813

702

710

773

Belgium

1 012

1 401

874

1 047

Canada

16 567

19 409

26 189

29 674

Czech Republic

11 970

13 388

14 561

16 291

Denmark1

14 078

14 509

14 891

7 305

7 595

Finland

13 659

14 497

14 717

15 316

15 768

1 919

2 312

3 390

4 449

5 907

..

..

..

..

..

Hungary

166 700

188 180

240 627

297 520

337 033

376 669

Iceland

62 712

64 365

73 652

72 355

87 006

96 062

3 363

3 616

3 904

4 068

4 429

4 993

6 780

..

938 421

806 416

1 201 080

1 289 346

14 302 012

7 470 168

Germany Greece

Italy Korea Luxembourg

895

ea

..

122 564

860

770

37 130

29 309

..

34 519

R

30 860

8 003

8 370

17 996

19 041

6 578 ..

u Lect 10 992

283 830 145 866

..

..

..

13

45

37

..

62 793

56 862

59 291

64 532

69 534

98 738

92 579

Netherlands

12 584

17 004

20 789

22 783

25 278

23 726

23 576

New Zealand

2 446

1 943

1 791

1 823

1 953

2 179

2 583

Norway

7 625

8 484

7 572

8 630

10 555

10 889

12 598

Poland

8 719

9 664

10 399

11 540

14 148

15 785

17 340

Portugal3

2 158

4 110

1 402

1 666

3 371

1 650

1 006

Spain

7 514

8 374

6 486

6 878

7 567

8 096

7 097

28 234

29 694

31 769

33 844

36 302

38 464

40 038

Turkey4 United Kingdom

r

10

Mexico2

Switzerland

u le

895

se

85 063

700 782

2007

d

69 991

O

Austria

2006

An

Australia

2005

O

2002

EC

2001

e

D Br o


n

Table 2.13. Pension funds’ contributions in selected OECD countries, 2001-2007

..

..

..

297

1 117

2 592

3 917

16 314

19 523

26 128

30 749

37 007

40 607

..

..: means not available. 1. The drop in contributions between 2003 and 2004 is due to the suspension of the “special pension contribution” (a mandatory tax on all labour) from 2004 onwards. 2. The break in series in 2006 is due to the inclusion of occupational pension plans registered by CONSAR since 2005, not included in previous years. Total contributions include mandatory contributions for retirement from employees, employers, and government, and voluntary contributions and transfers from the previous pension system (valid until 1997). 3. The transfer of the total value of a closed pension fund to another, due to a merger between sponsors, explains the sharp rise in 2002. The value transferred was EUR 1 450.382 million. Total contributions grew substantially in 2005 (made mainly to closed and other open funds), particularly due to extra contributions made in order to match pension fund liabilities, which were increased by the new method of calculation introduced to comply with International Accounting Standards (IAS). 4. Personal pension plans only. Source: OECD Global Pension Statistics. 1 2 http://dx.doi.org/10.1787/516031264202


95


w

_it E d it e io s

nl y

As a percentage of total contributions

2004

2005

2006

2007

2001

O

2002

2003

2004

2005

2006

2007

44.6

35.2

7.7

13.1

33.6

37.4

41.7

47.2

10.9

15.2

14.3

d

2003 64.8

66.4

62.6

58.3

52.8

45.2

92.3

86.9

89.1

84.8

85.7

85.5

9.9

Canada

63.1

64.7

71.2

69.7

68.0

71.4

62.9

36.9

35.3

28.8

30.3

32.0

28.6

Czech Republic2

16.1

18.2

19.2

19.3

..

..

28.7

83.9

81.8

80.8

80.7

..

..

Denmark

66.4

..

66.7

61.4

62.3

63.3

61.3

33.6

..

33.3

38.6

37.7

36.7

Finland

80.0

80.0

80.0

80.1

80.1

80.0

80.0

20.0

20.0

20.0

19.9

19.9

Germany

66.6

41.5

39.3

33.4

61.3

..

..

33.4

58.5

60.7

66.6

..

..

..

..

..

..

..

..

51.0

..

..

..

..

..

..

49.0

Hungary3

22.9

28.2

28.9

25.3

24.3

22.7

..

77.1

71.8

71.1

74.7

75.8

77.3

..

Iceland

73.0

71.1

74.2

71.6

73.0

69.9

77.6

27.0

28.9

25.7

28.4

27.0

30.1

22.4

Italy4

37.4

34.6

36.3

38.2

33.5

33.9

26.9

62.6

65.4

63.7

61.8

66.5

66.1

73.1

Korea

..

66.6

59.8

65.1

71.9

100.0

100.0

..

33.4

40.2

34.9

28.1

0.0

0.0

Mexico5

87.7

84.6

84.5

84.8

85.2

85.3

85.3

12.3

15.4

15.5

15.2

14.8

14.7

14.7

Netherlands

75.9

78.6

77.1

80.6

77.8

77.5

78.0

24.1

21.4

22.9

19.4

22.2

22.5

22.0

New Zealand

15.6

19.4

22.9

29.5

32.5

27.1

25.4

84.4

80.7

77.1

70.5

67.5

72.9

74.6

Norway

92.8

95.5

95.5

91.4

90.0

88.7

95.6

7.2

4.5

4.5

8.6

10.0

11.3

4.4

Poland

0.1

1.2

1.1

1.0

0.8

1.1

1.0

99.9

98.8

98.9

99.0

99.2

98.9

99.0

Portugal

38.7 Le

14.5 37.1 71.3

e

An

Greece

se

55.4

90.1

Australia

1

O

54.8

Belgium

R

2002

EC

2001

Employee’s share

ea

Employer’s share

u le

D Br o

n

Table 2.14. Employers’ contributions vs. employees’ contributions in selected OECD countries, 2001-2007

c tu 20.0

r 38.7 20.0

..

..

87.1

95.4

96.1

89.9

86.1

..

..

12.9

4.6

3.9

10.1

13.9

Spain6

41.6

42.5

21.5

19.8

18.7

18.6

20.9

58.4

57.5

78.5

80.2

81.3

81.4

79.1

Switzerland

60.7

60.2

58.6

57.3

56.4

56.3

64.8

39.3

39.8

41.4

42.7

43.6

43.7

35.2

..

..

..

..

4.8

3.4

3.3

..

..

..

..

95.2

96.6

96.7

69.8

73.4

79.9

82.5

84.3

85.3

..

30.2

26.6

20.1

17.5

15.7

14.7

..

Turkey7 United Kingdom

..: means not available. 1. Employee contributions also include “other contributions”. 2. Employer contributions in 2007 also include state contributions and third-party contributions, which represent 13.5% of total contributions. 3. Employer contributions also include “undefined contributions”. 4. Employees’ contributions include the annual severance pay provision (so called trattamento di fine rapporto -TFR) paid into pension plans. 5. Data do not include defined benefit occupational pension funds. Employer contributions include government contributions and transfers from the previous pension system (valid until 1997). Employee contributions include voluntary contributions. 6. On the 16 November 2002 Spain completed the externalisation process. This process involved transferring the internal funds that companies had constituted to pay their employees’ pension contributions from their balance sheets to occupational pension funds managed by a managing entity. For this reason employer contributions were high to the end of 2002 – a trend that ceased on completion of the externalisation process. 7. Data refer only to personal pension plans. Employer contributions include voluntary contributions from the employers within the framework of group pension plans. Employee contributions include contributions from both employees within the group pension plans, as well as personal contributions of workers within the framework of own individual accounts. Source: OECD Global Pension Statistics. 1 2 http://dx.doi.org/10.1787/516040074516

96


it EFUND d i INDICATORS _PENSION KEY e tio s

Australian Prudential Regulation Authority

Austria

Financial Market Authority

Belgium

Banking, Finance and Insurance Commission

Canada

Statistics Canada

Czech Republic

Czech National Bank

Denmark

Danish Financial Supervisory Authority

Finland

Insurance Supervision Authority

France

National Institute for Statistics and Economic Studies (INSEE)

Germany

Federal Financial Supervisory Authority

Greece

Hellenic Ministry of Labour and Social Security

Hungary

Hungarian Financial Supervisory Authority

Iceland

Financial Supervisory Authority

Italy

Commissione di Vigilanza sui Fondi Pensione (COVIP)

Ireland

Irish Association of Pension Funds

Japan

Bank of Japan

Korea

Financial Supervisory Service

Luxembourg

Commissariat aux Assurances

Luxembourg

Commission de Surveillance du Secteur Financier (CSSF)

Mexico

Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR)

Netherlands

Statistics Netherlands

New Zealand

Ministry of Economic Development

Norway

Financial Supervisory Authority of Norway

Poland

Financial Supervisory Authority

Portugal

Insurance and Pension Funds Supervisory Authority

Spain

Banco de Espana

Spain

Ministry of the Treasury

Spain

The Spanish Confederation of Mutual Provident Societies

Slovak Republic

Ministry of Labour, Social Affairs and Family

Switzerland

Swiss Federal Statistical Office

Sweden

Statistics Sweden

Turkey

Turkish Treasury, General Directorate of Insurance

United Kingdom

Office for National Statistics

United States

Department of Treasury

United States

Federal Reserve Bank

e

R

se

ea

EC

Australia

An

O

u le

d

Administrative source(s)

O

Table 2.15. List of administrative sources, OECD countries

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Notes and reference series

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97


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Association of Latin American Pension Supervisors

Bolivia


Brazil

Ministry of Social Security

Bulgaria

Financial Supervision Commission

Chile

Chilean Pensions Supervisor

China

Ministry of Labour and Social Security

Chinese Taipei

Council of Labour Affair

Colombia

Superintendencia Financiera de Colombia

Costa Rica

Superintendencia de Pensiones

Croatia

Croatian Financial Services Supervisory Agency

Dominican Republic


El Salvador


Estonia

Ministry of Finance

Hong Kong (China)

Mandatory Provident Fund Schemes Authority

India

Employees’ Provident Fund Organisation

Indonesia

Pension Fund Bureau, Ministry of Finance

Israel

Ministry of Finance

Jamaica

Financial Services Commission

Kazakhstan

Financial Supervision Authority

Kenya

Retirement Benefits Authority

Latvia

Financial and Capital Market Commission

Liechtenstein

Financial Market Authority

Macedonia

Agency for Supervision of Fully Funded Pension Insurance

Mauritius

Financial Services Commission

Nigeria

National Pension Commission

Pakistan

Securities and Exchange Commission

Peru

International Federation of Pension Funds Administrators

Republic of Serbia

National Bank of Serbia

Romania

Private Pension System Supervision Commission

Russian Federation

Ministry of Economic Development and Trade of the Russian Federation

Singapore

Central Provident Fund Board

Slovenia

Slovene Insurance Supervision Agency

Slovenia

Slovene Security Market Agency

South Africa

Financial Services Board

Suriname

Centrale Bank van Suriname

Thailand

Securities and Exchange Commission

Urugay


Zambia

Pension and Insurance Authority

d

se

ea

e

R An

O

O

Albanian Financial Supervisory Authority

Argentina

EC

Albania

u le

D Br o

Administrative source(s)

n

Table 2.16. List of administrative sources, non-OECD countries

u Lect

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98



w

780 847

841 974

220 841

226 175

236 149

Belgium

258 883

267 652

274 726

289 690

Canada

1 108 048

1 152 905

1 213 175

1 290 829

Czech Republic

2 352 214

2 464 432

2 577 110

2 814 762

Denmark

1 335 611

1 372 737

1 400 689

1 466 180

Finland

139 868

143 974

145 938

France

1 497 185

1 548 555

Germany

2 113 160

2 143 180

967 207

1 044 467

245 330

257 897

272 669 330 800

1 446 307

1 531 654

2 987 722

3 231 576

3 556 684

1 548 153

1 641 520

1 696 238

152 345

157 335

167 041

1 594 814

1 660 189

1 726 068

1 807 462

1 892 241

2 163 800

2 211 200

2 244 600

2 322 200

2 423 800

R

O

1 375 080

ea

316 622

An

Greece

896 514 301 966

2007

178 759

u Lect

146 260

157 586

171 258

185 225

198 609

213 985

228 949

15 270 126

17 180 604

18 940 742

20 718 120

22 042 476

23 795 306

25 405 796

Iceland

771 894

816 557

841 483

928 656

1 026 251

1 167 684

1 279 379

Ireland

116 939

130 215

139 413

148 502

161 498

174 705

185 764

1 248 648

1 295 226

1 335 354

1 391 530

1 428 375

1 479 981

1 535 540

Japan

497 719 700

491 312 200

490 294 000

498 328 400

501 734 400

508 925 100

515 747 340

Korea

622 122 631

684 263 469

724 674 958

779 380 501

810 515 869

848 044 635

901 188 604

22 572

23 992

25 726

27 439

30 032

33 854

36 137

5 809 688

6 263 137

6 891 992

7 709 096

8 361 107

9 149 911

9 754 842

Netherlands

447 731

465 214

476 945

491 184

508 964

534 324

559 537

New Zealand

124 632

130 996

139 754

149 153

156 849

165 379

178 148

Norway

1 536 887

1 532 307

1 593 826

1 743 041

1 945 716

2 161 728

2 276 757

Poland

779 564

808 578

843 156

924 538

983 302

1 060 194

1 162 903

Portugal

129 308

135 434

138 582

144 128

149 124

155 323

162 756

1 020 595

1 111 484

1 212 665

1 355 262

1 471 131

1 636 263

1 823 800

Hungary

Italy

Luxembourg Mexico

Slovak Republic Spain

680 678

729 206

782 929

841 042

908 450

980 954

1 049 848

2 326 176

2 420 761

2 515 150

2 624 964

2 735 218

2 899 653

3 070 591

Switzerland

430 321

434 258

437 731

451 379

463 673

486 178

508 027

Turkey

240 224

350 476

454 781

559 033

648 932

758 391

856 387

1 003 297

1 055 793

1 118 245

1 184 296

1 233 976

1 303 915

1 384 823

10 075 900

10 417 600

10 908 000

11 630 900

12 376 100

13 132 900

13 776 500

Sweden

United Kingdom United States

u le

735 762

215 878

2006

se

689 350

Austria

2005

e

Australia1

nl y

2004

O

2003

d

2002

D Br o

2001

EC


n

Table 2.17. Annual gross domestic product, expenditure approach, current prices

r

1. Data refer to June of each year. Source: OECD Reference Series.

1 2 http://dx.doi.org/10.1787/516050165538


99

1.359

0.885

0.805

Belgium

1.117

1.061

0.885

0.805

Canada

1.548

1.570

1.400

1.301

38.016

32.733

28.129

25.695

Denmark

8.321

7.884

6.577

5.988

Finland

1.117

1.061

0.885

0.805

France

1.117

1.061

0.885

Germany

1.117

1.061

0.885

Greece

1.327

1.195

0.805

0.797

0.730

0.797

0.730

0.805 1.212

1.134

1.074

23.955

22.585

20.289

5.996

5.943

5.443

0.805

0.797

0.730

0.805

0.805

0.797

0.730

0.805

0.805

0.797

0.730

An

Czech Republic

1.313

u Lect

1.117

1.061

0.885

0.805

0.805

0.797

0.730

Hungary

286.491

257.449

224.297

202.609

199.527

210.402

183.591

Iceland

97.671

91.585

76.693

70.192

62.875

69.899

64.076

Ireland

1.117

1.061

0.885

0.805

0.805

0.797

0.730

Italy

1.117

1.061

0.885

0.805

0.805

0.797

0.730

Japan

121.484

125.255

115.936

108.147

110.097

116.354

117.759

Korea

929.462

1 290.410

1 251.045

1 190.959

1 145.197

1 024.226

951.817

Luxembourg

1.117

1.061

0.885

0.805

0.805

0.797

0.730

Mexico

9.344

9.660

10.790

11.281

10.890

10.903

10.929

Netherlands

1.117

1.061

0.885

0.805

0.805

0.797

0.730

New Zealand

2.382

2.163

1.724

1.509

1.421

1.542

1.361

Norway

8.993

7.986

7.078

6.739

6.441

6.415

5.858

Poland

4.097

4.082

3.888

3.651

3.234

3.103

2.765

Portugal

1.117

1.061

0.885

0.805

0.805

0.797

0.730

48.346

45.300

36.760

32.230

31.040

29.653

24.680

Slovak Republic Spain

1.117

1.061

0.885

0.805

0.805

0.797

0.730

10.338

9.721

8.078

7.346

7.472

7.373

6.758

Switzerland

1.687

1.557

1.345

1.243

1.248

1.253

1.200

Turkey

1.228

1.512

1.503

1.426

1.340

1.430

1.300

United Kingdom

0.694

0.667

0.612

0.546

0.550

0.543

0.500

United States

1.000

1.000

1.000

1.000

1.000

1.000

1.000

Sweden

u le

1.542

1.061

se

1.841

1.117

2007

e

1.935

Austria

EC

Australia

2006

O

2005

d

2004

ea

2003

R

2002

O

2001

D Br o

National units per US dollar

w

n

Table 2.18. Currency exchange rate

_it E d it e io s

nl y


r

Source: OECD Reference Series.

1 2 http://dx.doi.org/10.1787/516070715445

Notes 1. Active members are those that are contributing or accruing benefits in a pension fund or have deferred benefits. 2. In many countries an individual may be an active member of more than one pension fund. For example, an individual may be a deferred member of one occupational pension fund and an active member of another. An individual may also be an active member of both an occupational and a personal pension fund. 3. Hybrid pension arrangements such as cash balance plans are currently included under the DB category. The DC category includes also protected plans that provide minimum returns or benefit guarantees but operate with fixed contribution rates such as the collective DC plans in Denmark and Iceland. Swiss pension funds are also classified as collective DC. 4. This restriction was abolished in January 2008.

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Chapter 3

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Public Pension Reserve Funds

In some countries public pension systems are accumulating large reserve funds to complement pay-as-you-go financing. This chapter presents the main trends in assets and investments of these funds up to December 2007. The 2008 financial crisis has had a major impact on the value of some of these funds as their equity allocations had been rapidly increasing in recent years. However, some of these funds have an even longer investment horizon than pension funds, especially in those countries where by law they are not expected to make any disbursements for the next ten to twenty years. Hence, these funds can take larger risks than most pension funds in the expectation that over the long term the investment strategy will pay off. This chapter contains data and analysis on public pension reserve funds (PPRFs) which are defined as funds set up by governments or social security institutions with the sole objective of complementing the financing of pay-as-you-go (PAYG), public pension plans.

101

nl y u le

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3.1. Wealth accumulated in public pension reserve funds

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EC

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3. PUBLIC PENSION RESERVE FUNDS

e

Throughout 2007 public pension reserve funds (PPRFs) continued their steady growth. By the end of that year the total amount of PPRF assets within the countries covered in r this publication was equivalent to USD 4.3 trillion, compared to USD 2.6 trillionc t u Le in 2001. The average growth rate of global PPRFs over the period 2001-07 was 8.4%. The average asset-to-GDP ratio in 2007 was 13.1%, up from 12.6% in 2001

An

PPRFs are expected to play a major role in the future financing of public pension systems, alleviating the impact of population ageing on the public purse. As Table 3.1 shows, total amounts of PPRF assets (see Box 3.1 for a definition of PPRF categories) were equivalent to USD 4.3 trillion by the end of 2007 within the OECD and nonOECD countries dealt with in this publication. The largest reserve was held by the US social security trust fund1 at USD 2.2 trillion, accounting for 55.3% of total OECD assets (i.e. USD 4.1 trillion), while Japan’s national reserve funds were second at USD 1.1 trillion – 27.4% of the OECD total. Of the remaining countries, Korea and Sweden had also accumulated large PPRFs, respectively accounting for 5.6% and 3.4% of the total. The total

Figure 3.1. 2007 Public pension reserve funds’ assets and 2001-07 average annual growth rate Assets expressed as percentages of GDP and growth as a percentage rise Selected OECD countries Sweden Japan Korea United States Ireland Canada New Zealand Norway Australia1 Spain Portugal 2 France Mexico 2 Poland Denmark

+16.9 -0.9 +25.4 +10.8 +27.0 +22.8 +71.8 +5.2 +219.6 +90.0 +19.6 +36.0 +20.2 n.d. +21.2 Selected non-OECD countries +21.7

Jordan 2 Thailand 2 China Russian Federation Saudi Arabia 2 Pakistan

+28.1 +35.3 n.d. +24.9 +24.0 0

5

10

15

20

25

30

35 40 As a % of GDP

1. The Australian Future Fund was created in 2006. 2. Data refer to the year 2006. Source: OECD and various national sources.

1 2 http://dx.doi.org/10.1787/516102504423

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E dRESERVE FUNDS _itPENSION PUBLIC iti e s o 3.

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d

Asset growth rates also show substantial variation across countries. Figure 3.1 shows that the highest growth rate was Australia’s, whose fund size more than tripled between 2001 and 2007. This extraordinary growth rate, however, is driven largely by the recent establishment of the Future Fund (2006), as the regular contributions from the government to the fund still represent a large fraction of total assets under management. Spain’s social security reserve fund, New Zealand’s Superannuation Fund and France’s FRR,

u le

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a m o un t o f s el ec t e d P P R F s w i t h i n n o n - O E C D c o u nt r i e s wa s much s m a l le r – USD 212.7 billion in 2007. China, with USD 152 billion, and Russia, with USD 32 billion, boasted the largest funds. Other non-OECD countries had lower assets, e.g. Thailand with USD 11.6 billion and Saudi Arabia with USD 8.6 billion.

An

tu c over established respectively in 1997, 2001 and 1999, also experienced high growth rates Le

r

the period (90%, 72% and 36%, respectively). Outside the OECD, the fastest growing PPRF were China’s national and provincial social security reserve funds (35%). The largest of these funds, the National Social Security Fund was established in 2001. In terms of total assets relative to the national economy, Table 3.1 shows that in 2007 Sweden had the highest ratio – 31.7% of GDP. Other countries where the ratio was of a significant size included Japan with 26.2% and Korea with 23.9%. On average, PPRF assets

Table 3.1. Size of public pension reserve fund markets in selected OECD and non-OECD countries, 2007 Assets Type of fund

Name of the fund or institution

Founded in USD billions

As a % of GDP

Selected OECD countries Social security reserve funds

Sovereign pension reserve funds

Canada Denmark Japan Korea Mexico1 Spain United States Australia France Ireland New Zealand2 Norway Poland Portugal1 Sweden

Canadian Pension Plan Social Security Fund Government Pension Investment Fund National Pension Fund IMSS Reserve Fondo de Reserva de la Seguridad Social Social Security Trust Fund Future Fund Fond de Réserve des Retraites National Pensions Reserve Fund New-Zealand Superannuation Fund Government Pension Fund – Norway Demographic Reserve Fund Social Security Financial Stabilisation Fund National Pension Funds (AP1-AP4 and AP6)

1997 1964 2006 1988 n.d. 1997 1940 2006 1999 2000 2001 n.d. 2002 1989 2000

108.7 0.8 1 149.2 228.7 7.4 62.1 2 238.5 43.7 47.4 29.0 9.5 20.1 1.2 8.3 137.0 4 091.8

7.9 0.3 26.2 23.9 0.9 4.5 16.6 4.9 1.9 11.5 7.8 5.2 0.3 4.3 31.7 14.5

China Jordan1 Pakistan Saudi Arabia1 Thailand1 China Russian Federation

National Reserve Funds Social Security Corporation Employees' Old-Age Benefits General Organisation for Social Insurance Social Security Office National Social Security Fund National Wealth Fund

1951 1980 1976 1973 1990 2001 2007

94.6 5.3 2.4 8.6 11.6 57.8 32.4 212.7

3.1 36.7 1.8 2.4 5.6 1.9 3.3 4.5

Total selected OECD Selected non-OECD countries Social security reserve funds

Sovereign pension reserve funds Total selected non-OECD

1. Data refer to the year 2006. 2. The fund was not established until 2003. Source: OECD and various national sources.

1 2 http://dx.doi.org/10.1787/516120477572


103

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Box 3.1. Categories of public pension reserve funds

d

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SSRFs are set up as part of the overall social security system. They are funded chiefly by surpluses from employee and/or employer contributions over current payouts and, in some cases, by top-up contributions from the government through fiscal transfers and other sources. Some examples are Denmark’s Social Security Fund, Japan’s Government Pension Investment Fund, and USA’s Social Security Trust Fund. They may be managed either as part of a national social security scheme or by an independent – often publicsector – fund management entity.

u le

O

Two main categories of public pension reserve funds can be identified: social security reserve funds (SSRFs) and sovereign pension reserve funds (SPRFs).

u Lect

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SPRFs are funds established by governments (independently of social security systems), who finance them directly through fiscal transfers. Unlike SSRFs, SPRFs are usually mandated to finance public pension expenditure at a specific future date. Some are not allowed to make any payouts for decades. Examples include the Australian Future Fund, the New Zealand Superannuation Fund, the Irish National Pension Reserve Fund, the Government Pension Fund – Norway, and the French Fonds de réserve pour les retraites. Some may be treated as sovereign wealth funds (SWFs) and a few indeed fit both definitions. In 2006, for example, Norway introduced its restructured Government Pension Fund, which comprises two components. One is the Government Pension Fund – Norway, formerly the National Insurance Scheme Fund (pension reserve fund). The other is the Government Pension Fund – Global, which was previously an SWF called the Government Petroleum Fund. It draws its funding from oil revenues and has a mandate that goes beyond financing pension expenditure, so is not classified as a SPRF in this section.*

* This fund was classified as a PPRF in previous issues of the OECD newsletter Pension Markets in Focus. Sovereign Wealth Funds (SWFs) are pools of assets owned and managed directly or indirectly by governments to achieve national objectives. A main difference between an SWF and an SPRF lies in whether its mandate is solely focused on financing public pension liabilities. Other differences include financing sources and governance structure. See Blundell-Wignall, Hu and Yermo (2008),“Sovereign wealth and pension fund issues”, Working Paper or Insurance and Private Pensions, No. 14, OECD, Paris, for more details.

accounted for 14.5% of GDP in the OECD area in 2007, compared to 4.5% in non-OECD countries, among which Jordan’s 36.7% ratio was the highest. In all other selected nonOECD countries the figure was less than 6% – e.g. 5.6% in Thailand and 3.3% in Russia.

3.2. Asset allocation of public pension reserve funds Although traditional asset classes (primarily bonds and equities) are still the most common kind of investment in PPRF portfolios, there is a broad shift towards alternative forms, brought about by pressure on PPRFs to increase returns and seek diversification benefits As Figure 3.2 shows, bonds and equities have been, and still are, the predominant asset classes within PPRF portfolios. There is also a strong equity bias in some funds, especially those established in recent years, which reflects their long-term investment outlook and generally greater investment autonomy. For example, in 2007 France’s fonds de réserve des retraites (FRR) invested 64.5% of its assets in equities and 33.5% in bonds, while the figures for Ireland were 72.1% and 16.9%, for Sweden 57.1% and 38.5%, and 59.9% and 17.3% for New Zealand. On the other hand, older funds, such as Korea’s and Japan’s, invest much more in bonds than equities. In 2007, Japan’s Government Pension Investment Fund

104



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Other assets

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United States Spain Korea1 Portugal 2 Poland Japan 2 Sweden Norway France Canada Denmark 2 New Zealand 3 Ireland Australia

e

Equities

Selected OECD countries

u le

D Br o

As a percentage of total assets Bonds

n

Figure 3.2. Asset allocation of public pension reserve funds in selected OECD and non-OECD countries, 2007

An

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Selected non-OECD countries

Russian Federation Pakistan1 China 2, 4 Jordan 2 0

20

40

60

80

100

Note: “Other assets” is a residual category, which may not refer to the same asset classes in different countries. It denotes unlisted unit trusts and non-financial assets in Australia, for example, but loans and technical reserves of insurance companies, among other things, in Denmark. 1. Data refer to investment assets. 2. Data refer to the year 2006. 3. “Bonds” include both bonds and cash. 4. Data refer to the National Social Security Fund only. Source: OECD and various national sources.

1 2 http://dx.doi.org/10.1787/516174480276

(GPIF) had 37.3% of its assets in equities and 62.7% in bonds, while in Korea the figures were 13.7% and 83.2%. The extreme cases are those of the Spanish and US PPRFs – both old, traditional social security reserve funds, which are by law fully invested in bonds. However, while Spain’s social security reserve fund is fully invested in euro-denominated government bonds issued in the markets by various European governments the US trust fund is fully invested in non-tradable IOU’s issued specifically by the US Treasury. The Spanish government is also considering relaxing its investment restrictions, allowing some equity investment. Were this reform to be implemented, the US trust fund would become the sole major social security reserve fund invested solely in government paper. The investment strategies of PPRFs in non-OECD countries also tend to be very conservative. The PPRF in Pakistan had invested 17.7% of its assets in equities and 76.9% in bonds in 2007, while Russia’s newly established National Wealth Fund (NWF) is required to invest all assets in foreign bonds issued by either foreign governments or intergovernmental organisations. The main exception to the general bond bias among nonOECD PPRFs is Jordan’s reserve fund, which in 2006 had invested 63.5% of its assets in equities and 17% in bonds. As Table 3.2 shows, cash typically accounts for a small share of PPRF portfolios. The only exceptions are Australia and Denmark, where the proportions of cash relative to total


105


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0.0

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Alternative investments

Other

0.0

0.1

6.8

0.6

39.1

57.5

0.0

France

64.5

33.5

1.1

0.0

Ireland

72.1

16.9

4.7

1.4

Japan3

37.3

62.7

0.0

0.0

Korea1

13.7

83.2

0.3

0.0

New Zealand2

59.9

17.3

0.0

6.9

Norway

59.6

35.5

3.4

0.0

0.0

Poland

22.7

66.8

10.5

0.0

0.0

0.0

Portugal3

20.8

70.1

2.2

3.6

0.0

3.3

0.0

100.0

0.0

0.0

0.0

0.0

57.1

38.5

1.1

0.0

1.5

1.8

0.0

100.0

0.0

0.0

0.0

0.0

Spain Sweden United States

0.0

0.0

2.9

R

O

1.6

6.9 0.0

0.8

5.0

0.0

0.0

0.0

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Denmark

2.5

10.8

u le

72.8

28.3

se

0.0

57.9

ea

25.6

Canada

EC

Australia

e


Property

O

Cash

d

Bonds

D Br o

Equities

n

Table 3.2. Asset allocation information of public pension reserve funds, 2007

tu 5.1 Lec 0.3

r

1.5

Selected non-OECD countries China3, 4

24.2

53.7

9.5

0.0

0.0

12.6

Jordan3

63.5

17.0

8.1

4.4

2.6

4.3

Pakistan1

17.7

76.9

0.0

3.1

0.0

2.3

Russia

0.0

100.0

0.0

0.0

0.0

0.0

Thailand3

7.2

80.7

8.4

0.0

0.0

3.6

Note: Although “alternative investments” generally refers to hedge funds, derivatives, etc., it does not necessarily do so in all countries. 1. Data refer to investment assets. 2. “Bonds” include both bonds and cash. 3. Data refer to the year 2006. 4. Data refer to the National Social Security Fund only. Source: OECD and various national sources. 1 2 http://dx.doi.org/10.1787/516175140453

portfolios in 2007 were 72.8% and 57.5%, respectively. The high cash allocation of Australia’s Future Fund could be due to the fact that the fund was only recently established, and hence not ready to invest all its assets in the financial market. In Denmark’s case, the high cash allocation may be explained by the fact that the fund is mainly used for liquidity management purposes with a small volume of assets under management. Table 3.2 shows that, with the exception of Australia, Denmark and Poland, cash accounted for a lower share of PPRFs in OECD countries than in selected non-OECD countries, though even in these they represented less than 10% of total assets in 2007. Some PPRFs have started to invest also in property (including infrastructure) and nontraditional asset classes like private equity, hedge funds, and commodities, while others have increased their existing allocations. Canada, for example, allocated 6.8% of its CPP assets to property and 6.9% to alternative investments in 2007 – 13.7% in total. Similarly, by 2007 New Zealand’s Superannuation Fund had invested 6.9% of its portfolio in property and 10.8% in alternative assets, with a combined allocation of 17.7%. Investment in nontraditional assets was also observed in non-OECD countries like Jordan and Pakistan. The reasons behind such a surge of interest in alternative assets might be both the pressure on PPRFs to enhance returns in order to meet rising pension liabilities and the benefits arising from more diversified investment, particularly across less closely correlated asset classes.

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Jordan again stands out among non-OECD countries, with a 4.4% investment in property and 2.6% in alternative asset classes (7% in total).

se

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Many of the PPRFs covered in this publication increased their equity allocation over the period 2001-07. For example, Table 3.3 shows that Canada Pension Plan (CPP) raised its allocation from 15.6% of its portfolio in 2001 to 57.9% in 2007, and Norway from 14.7% to 59.6%. The trend of increased investment in equities might be due to reserve funds’ search for high long-term returns and the ability to withstand short-term volatility. Bond allocations dropped during the same period in some countries and rose in others. Canada, for example, invested 28.3% of its PPRF assets in bonds in 2007, down from 64.6% in 2001, while Korea’s bond allocation climbed from 50.8% in 2001 to 83.2% in 2007.

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Table 3.3. Changes in public pension reserve fund allocations to equities and bonds in selected OECD and non-OECD countries, 2001 vs. 2007 As a percentage of total investment Equities

Bonds

2001

2007

2001

2007

..

25.6

..

0.0

Canada

15.6

57.9

64.6

28.3

Denmark1

50.9

0.7

43.8

26.4

France

..

64.5

..

33.5

Ireland

..

72.1

..

16.9

Japan1

39.9

37.3

58.9

62.7

Korea2

5.2

13.7

50.8

83.2

New Zealand3

..

59.9

..

17.3

Poland

..

22.7

..

66.8

Norway

14.7

59.6

19.3

35.5

Portugal1

10.5

20.8

51.5

70.1

0.0

0.0

100.0

100.0

56.0

52.9

37.2

38.5

0.0

0.0

100.0

100.0

Selected OECD countries Australia

Spain Sweden United States

Selected non-OECD countries China

1, 4

1.3

24.2

46.8

53.7

Jordan1

..

63.5

..

17.0

Pakistan2

..

17.7

..

76.9

Russian Federation

..

0.0

..

100.0

1. 2007 data refer to the year 2006. 2. Data refer to investment assets. 3. “Bonds” include both bonds and cash. 4. Data refer to the National Social Security Fund only. Source: OECD and various national sources.

1 2 http://dx.doi.org/10.1787/516187068676


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75.3

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80

100.0

EC

100

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As a percentage of total investment 120

34.8

An

39.8

33.1 25.5

e

60 40

n

Figure 3.3. Foreign investment in public pension reserve funds in selected OECD and non-OECD countries, 2007

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16.4

20

11.0

10.8

0 New Zealand

Canada

Ireland

France

Japan1

Australia

Korea

OECD countries

Russian Federation

China1

Non-OECD countries

1. Data refer to the year 2006. Source: OECD and various national sources.

1 2 http://dx.doi.org/10.1787/516331866408

Meanwhile, PPRFs also have started to invest increasing shares of their assets abroad. Figure 3.3 shows that, among the few countries for which 2007 data was available, the New Zealand Superannuation Fund invested 75.3% of its portfolio in foreign assets, the Canada Pension Plan 39.8%, France’s Fonds de réserve des retraites 34.8%,2 and Korea’s National Pension Service 10.8%. As for non-OECD countries, Russia has, as noted earlier, invested its entire National Wealth Fund in foreign-denominated (government) bonds, while China’s NSSF has, in contrast, invested around 11% of its portfolio in foreign assets.

Notes 1. US Trust Funds are all invested in non-tradable US Treasury securities. 2. Includes only non-euro denominated instruments.

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Chapter 4

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Performance Indicators of Private Pension Systems

The 2008 financial crisis focused attention on the reliability of private pensions systems, with some workers suddenly confronted by the prospect of losing a significant part of their benefits. Some schemes will recover less quickly from the crisis than others, and there are even fears that some may not recover at all, at least not without help from the taxpayer. However, the performance of the private pension system as a whole should not be judged by focusing on investment returns in a single year alone. In particular, in order to gauge the private pension system’s ability to deliver benefit adequacy and security in old age, one needs to make projections about the level of benefits that these plans may pay in the future. The following chapter provides a set of performance indicators of private pension systems. In addition to benefit projections for a representative private pension plan in each country, the chapter analyses indicators on coverage, investment performance, solvency and administrative efficiency (operating costs and fees charged to participants) of private pension systems.

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4.1. Coverage

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4. PERFORMANCE INDICATORS OF PRIVATE PENSION SYSTEMS

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Retirement income in many OECD countries comprises payments from savings accumulated in funded (private) pensions. Moreover, in some of those countries, savings in voluntary private pensions are the main source of retirement income. Therefore, promoting high levels of coverage of private pensions in these countries is critical to ensure that individuals can complement their public pension income and maintain their standard of living after retirement. While some countries have made private pensions mandatory or quasi-mandatory, in many countries private pensions remain voluntary, to be established at the discretion of employers (in the case of occupational arrangements) or joined by individuals (in the case of personal plans).

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The level of coverage in voluntary, private pensions is therefore a major indicator of the system’s success in meeting its goal of retirement income security and diversification of the sources of retirement income. The level of coverage can be compared across countries using the share of the labour force that is contributing to (or accruing benefits in) a private pension plan as well as the proportion of retirement income that these systems provide. This section focuses on the first measure of coverage, the number of people employed contributing to or with assets in a private pension plan. This section provides evidence on coverage of voluntary private pension systems in several OECD countries and non-OECD countries. The next sub-section examines broad data on coverage stemming from administrative and household survey data, where possible. It also relates the data on coverage to the replacement rate from public pensions. Administrative data on coverage suffer from double-counting problems or lack information on individual characteristics to assess coverage of private pensions adequately. In this context, the rest of the section focuses on assessing the coverage of private pension using data from household surveys in those countries for which such data is readily available and where retirement income from voluntary private pensions is one of the main sources of retirement income. The main conclusion from examining coverage of private pensions using household surveys is that although overall coverage is well above half of the employed population in the countries analysed, it is unevenly distributed. Younger workers and people with low incomes are much less likely to be members of a voluntary pension. Low rates of coverage for low earners are not as much of a policy concern in countries where lower-income individuals have relatively high replacement rates. These results suggest that some OECD countries need to focus efforts to expand coverage among low earners.

Estimating coverage of private pension plans Table 4.1 below reports the estimated level of coverage of private pensions in OECD countries for which information was available using several data sources,1 as well as the replacement rate provided by public pensions. For countries where the replacement rate from public pensions is relatively high (e.g. Austria, Luxembourg and Spain) examining the

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PERFORMANCE INDICATORS OF PRIVATE PENSION SYSTEMS

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80.1

Belgium

40.4

Canada

nl y

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85.0

85.0

18.8

9.7

..

45.3

13.9

..

..

..

n.a.

55.6

..

43.9

..

53.7

n.a.

Denmark3

25.0

45.6

..

ATP: 90.7 SP: 88.6 QMO: 76.1

Finland4

63.4

..

..

..

8.7

France

51.2

..

..

n.a.

~1.0

..

Germany5

39.9

..

67.9

n.a.

..

9.4

Hungary

50.7

26.2

..

64.5

n.a.

..

Ireland

32.5

..

55.0

n.a.

40.1

14.9

Italy

67.9

..

..

..

10.6

5.1

Luxembourg

88.3

..

..

n.a.

5.6

..

4.4

31.4

38.0

..

..

..

Netherlands

31.3

50.7

..

~90.0

..

..

Norway

59.3

..

..

n.a.

..

3.0

Poland

27.1

31.3

..

71.7

~1.0

..

Portugal

54.1

..

..

n.a.

4.0

..

Slovak Republic

24.4

32.4

..

65.8

..

..

Spain

81.2

..

n.a.

8.7

..

Sweden

37.8

15.4

..

~100

~90.0

..

United Kingdom

30.8

..

59.1

n.a.

47.1

18.9

United States

41.2

..

57.7

n.a.

46.0

34.7

UPF: 55.7

..

..

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Mexico6

25.7

u le

Personal

39.4 n.a.

se

17.4

Austria

Occupational

e

Australia2

O

OECD countries

Voluntary

d

Mandatory and quasi-mandatory

ea

Total coverage rate in private pension

R

Mandatory private

Coverage (as a percentage of total employment)

EC

Public

D Br o

Gross replacement rate1 (percentage)

n

Table 4.1. Gross replacement rate and coverage in public and private pension systems in selected OECD and non-OECD countries

u L e c ..t ..

r

7.3

Non-OECD countries Bulgaria

..

..

..

PPF: 4.4 Chile

..

..

53.6

n.a.

..

53.6

Estonia

..

..

..

50.5

n.a.

..

Latvia

..

..

..

83.7

..

..

Lithuania

..

..

..

37.3

..

..

Slovenia

..

..

..

n.a.

18.5

..

Notes: “..” means not available and “n.a.” means not applicable. For occupational and personal distinction, see OECD (2005), Private Pensions: OECD Classification and Glossary, OECD, Paris. 1. For further details on gross replacement rates, see OECD (2007), Pensions at a Glance: Public Policies Across OECD Countries, OECD, Paris. 2. It is compulsory for employers to contribute to the superannuation fund, while contributions are voluntary for employees. Therefore, the 85% coverage under mandatory coverage refers to the share of employees with compulsory employer’s contributions to their superannuation fund. The data under voluntary coverage (the total is 26.7%) refers to the share of employees contributing voluntarily to their superannuation fund. 3. “QMO” means quasi-mandatory occupational plans. 4. One third of contributions to public pensions is funded and managed by private pension funds. 5. The total includes life insurance and pension plans for the year 2002, while the number on personal plans is the Riester pensions as of 2004. 6. Total coverage rate in private pension was sourced from the World Bank (November 2006). Source: OECD (2007), Joint EU-OECD project and Antolin, P. (2008), “Coverage of funded pension plans”, Working Paper on Insurance and Private Pensions No. 19, OECD, Paris. 1 2 http://dx.doi.org/10.1787/516341584143


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Therefore, this section focuses on examining the coverage of voluntary private pensions in countries where public pensions provide a low replacement rate and private pensions are not mandatory. This is done using household survey data because these data permits to control for problems related to double counting and permits assessing coverage according to personal and socio-economic characteristics.4 There are two broad types of data sources to calculate coverage of private pensions. First, there are administrative data collected from pension plans that provide the number of members in each plan, assets under management and benefits paid to retirees. Secondly, there are household surveys, where individuals are asked about whether they are enrolled in, have assets in, contribute to or receive pension benefits from private pension plans.

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coverage of private pensions is less relevant than in countries with low replacement rates. However, some countries with low replacement rates from public pensions have mandatory or quasi-mandatory private pensions that provide a relatively large replacement rate and cover a relatively large share of the employed population (e.g. Iceland, the Netherlands).2, 3

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Unfortunately, for many countries, administrative data suffer from a problem of multiple counting of individuals who are members of more than one pension plan at the same time. For example, many individuals are simultaneously covered by both an occupational (e.g. a 401(k) plan in the United States) and a personal pension scheme (e.g., an individual retirement account, IRA, in the United States). Additionally, double counting can result in occupational plans from people who have left the scheme but whose pension rights are “deferred” or “preserved” until they reach the pension eligibility age. Household survey data, in principle, avoid the multiple-counting issue but are more exposed to inconsistent responses. Because people are interviewed directly, it is generally possible to determine both whether they are enrolled in private pension plans and in how many of them. However, not all the questions are always appropriate for this purpose. Moreover, many of the surveys that focus on retirement issues (e.g. the Health and Retirement Study, HRS, in the United States and the Survey of Health, Ageing and Retirement in Europe, SHARE) only sample older people (older than age 55, for example), rendering them unsuitable to assess coverage in private pension plans of most people of working age. The results reported below are obtained from household surveys that record voluntary private pension coverage in a comparable manner. They comprise selected OECD countries where mandatory public pension plans provide a relatively low replacement of previous earnings (Australia, Canada, Germany, Ireland, United Kingdom and the United States), so people need voluntary pensions to complement their future retirement income, two OECD countries where mandatory PAYG-financed pensions provide relatively high replacement of previous earnings (Finland and Norway) plus Chile, where personal DC private pension plans are mandatory.5

Overall coverage Coverage of private pension plans is well above 50% in five of the countries where they are voluntary (Canada, Germany, Ireland, United Kingdom and United States), as well as in the Australian and Chilean mandatory systems (Table 4.1). Coverage of voluntary private pension plans is low in Finland and Norway where PAYG-financed pensions provide a

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relative large replacement rate and in Australia, where the mandatory pension system offers a relatively low replacement rate.

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Coverage by age

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In countries where the information is available, coverage of occupational pension plans is greater than coverage of personal plans. In Australia, Ireland and the United Kingdom enrolment in occupational plans is more than double that of personal pension plans. In Chile, enrolment is only in personal pension plans. Finally, in the United States, the share of the employed population enrolled in personal pension plans is quite large and only around 10 percentage points below the enrolment rate in occupational plans.6

u c tage, Coverage of voluntary private pensions has a hump-shaped relationship L ewith

r

reaching a peak at prime working ages, i.e. 35-44 or 45-54, depending on the country (Figure 4.1). However, young people are more likely to be enrolled in a Riester pension in Germany than older people, reflecting, most likely, their recent introduction.7 Younger people are more likely to be enrolled in Chile, reflecting recent measures to increase awareness. The fall in coverage rates at older working ages occurs in most countries except Finland, Norway and the United States, and it could be linked to early retirement.

Coverage by income Coverage of voluntary private pensions tends to increase with income (Figure 4.2).8 Among the poorest income groups, coverage is low: 10-20% in all countries, bar Germany (40%). In the Riester pensions, coverage is higher for mid-income groups (Antolin, 2008). Moreover, combining age and income seems to suggest that young people with low income are the ones at highest risk of insufficient old age income provision. However, this may be not the case if low income individuals have a higher replacement rate from the PAYG public system (e.g. Australia and Canada). Yet, in Germany, the United Kingdom and the United States, low income people have a replacement rate from the public PAYG system similar to other income levels, and in Chile there is not PAYG system. Summing up, although overall coverage of voluntary private pension plans is well above half of the employed population in the seven countries analysed, it is unevenly distributed. Younger workers and people with low incomes are much less likely to be members of a voluntary pension. Low rates of coverage for low earners are not as much of a policy concern in countries where lower-income individuals have relatively high replacement rates (Australia, Canada and Ireland), as it may be in Chile, the United Kingdom and the United States, where even low earners have low replacement rates from the PAYG-financed system. These results suggest that some OECD countries need to focus efforts to expand coverage among low earners. The pattern of coverage by age suggests that most people who do eventually have a private pension only start contributing at age 30 or even later. These missing years in people’s contribution histories substantially increase the savings effort needed in the years when people do pay into their private pension. For example, delaying joining a pension plan for five years, from age 25 to 30, raises the required contribution rate to achieve a replacement rate of 65 percent of previous wages, by almost 3 percentage points a year.9 The implication is that public policy needs to focus on younger workers, bringing forward the time at which people start contributing to private pensions.


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10

0

20-24

25-34

35-44

45-54

55-64

0

20-24

O

25-34

Chile 70

70 60

50

50

40

40

30

30

20

20

10

10 20-24

25-34

35-44

45-54

55-64

0

20-24

Germany 70

70 60

50

50

40

40

30

30

20

20

10

10 20-24

25-34

35-44

45-54

55-64

25-34

0

20-24

25-34

Ireland

55-64

35-44

45-54

55-64

45-54

55-64

45-54

55-64

Norway

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10 20-24

25-34

35-44

45-54

55-64

0

20-24

25-34

United Kingdom

35-44 United States

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

45-54

r

80

60

0

35-44

u Lect

Germany, Reister

80

0

55-64

80

60

0

45-54

35-44

Finland

80

u le

20

10

se

30

20

e

30

d

50 40

ea

50 40

R

70 60

O

70 60

Canada

EC

80

An

Australia 80

nl y

As a percentage of total employment

n

Figure 4.1. Coverage of voluntary private pension plans by age

20-24

25-34

35-44

45-54

55-64

0

20-24

25-34

35-44

Note: The data for Australia excludes individuals with only employer contributions (i.e. only individuals with voluntary contributions are included). Source: Antolin, P. (2008), “Coverage of funded pension plans”, Working Paper on Insurance and Private Pensions No. 19, OECD, Paris. 1 2 http://dx.doi.org/10.1787/516367716648

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6

7

8 9 10 Income deciles

1

2

3

nl y O d

6

5

6

Chile

5

e

4

7

Finland

100 90 80 70 60 50 40 30 20 10 0

100 90 80 70 60 50 40 30 20 10 0 1

2

3

4

5

6

7


Germany

100 90 80 70 60 50 40 30 20 10 0 1

2

3

4

5

6

1

2

3

4


u Lect 8 9 10 Income deciles

7


7


r

Ireland

100 90 80 70 60 50 40 30 20 10 0 7

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ea R

3

O

2

Canada

An

1

100 90 80 70 60 50 40 30 20 10 0

EC

Australia 100 90 80 70 60 50 40 30 20 10 0

u le

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As a percentage of total employment

n

Figure 4.2. Coverage of voluntary private pension plans by income

1

2

3

Norway

4

5

6

United Kingdom 100 90 80 70 60 50 40 30 20 10 0

100 90 80 70 60 50 40 30 20 10 0 1

2

3

4

5

6

7


7


1

2

3

4

5

6

7


United States 100 90 80 70 60 50 40 30 20 10 0 1

2

3

4

5

6

Note: The data for Australia excludes individuals with only employer contributions (i.e. only individuals with voluntary contributions are included). Source: Antolin, P. (2008), “Coverage of funded pension plans”, Working Paper on Insurance and Private Pensions No. 19, OECD, Paris. 1 2 http://dx.doi.org/10.1787/516442838235 OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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4.2. Are pension benefits adequate?

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The replacement rates modelled in this section give a general idea of how pension income varies between OECD countries. They are estimates based on a particular set of assumptions and produce just one of many possible outcomes. (Different assumptions would show different results.) Nevertheless, they do give an indication of the levels of pension income that are possible on retirement, and serve to compare the generosity of the

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This section seeks to assess the adequacy of pension income for a representative worker in each of the OECD countries. To that end, pension income includes the public pension, any mandatory private pensions, as well as voluntary occupational pensions. Pension income adequacy is measured by calculating the replacement rate as the ratio of pension income in retirement to the final salary immediately before retirement.

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various sources of pension income in OECD countries. Furthermore, the results incorporate the effect of variations in some individual assumptions, though certainly not all those affecting future pension benefits. The results indicate that individuals in many OECD countries may be exposed to the risk of not having enough income in retirement to maintain the same standard of living as they enjoyed while in active employment. Furthermore, with public pensions facing growing demographic pressure, the income that they provide is likely to be reduced in many OECD countries at some point in the future. This means that an ever greater share of future retirement income will need to come from occupational pension plans or individual savings. If occupational pension plans are to be more effective, many countries need to increase their coverage, with employers being encouraged to provide more generous benefit provisions. In addition, the shift towards defined contribution plans in many countries heightens the risks faced by individuals, who need to be more aware of such risks. The goal of providing appropriate, effective financial education in the light of this shift of responsibility away from the state and employers towards individuals is a key challenge facing OECD countries in the near future.

What can individuals expect to receive in retirement? When individuals reach retirement, they can expect to receive a pension from a number of sources. For instance, in many countries they will receive pension income from the state, here termed “public pension”. They may also be entitled to a pension from their various employers’ occupational plans. Some countries require people by law to save for retirement through statutory private pension accounts – another pension source. Equally, some individuals may have private savings from which they may draw in retirement. If these various sources of pension income are combined, what can individuals expect to receive in retirement? What they actually do receive depends on a number of factors, e.g. how long they were in work, their earnings history, whether their employers had occupational pension plans. If an individual had joined a defined contribution pension savings plan, the investment returns it yields will also have a major impact. This section draws and expands on existing OECD estimates taken from the publication Pensions at a Glance 2007 (PaG 2007), which outlines the levels of pension income that individuals may potentially receive from public pensions and other mandatory and quasi-mandatory schemes in each of the OECD countries. The PaG 2007 estimates have been complemented by potential pension income from voluntary occupational pension plans. The representative individual in the estimates is someone earning the average

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In order to estimate the level of potential pension benefits from voluntary occupational plans, the first factor considered is the prevalence of such plans in each OECD country. For those countries where voluntary occupational pension plans cover at least 30% of the working population, it is assumed that the average-earning individual is enrolled in such a plan. For those countries where such plans cover less than 30% of the working population, it is assumed that the average-earning individual does not participate in a voluntary occupational plan. Retirement income projections for these countries do not, therefore, include these plans.

EC

n

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salary in each respective country. It is assumed that he or she entered the workforce in 2005 and works a full career spanning approximately 45 years. This model individual is termed the “average-earning individual” throughout this section.10

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4.

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The second factor is the level of pension benefits to which it should be assumed that an individual is entitled through participation in a voluntary occupational pension scheme. For each country it is assumed that the individual participates in a pension plan with benefit levels that are representative of what employers typically offer their employees. In the Netherlands, for instance, a typical pension plan would offer a benefit on retirement of approximately 1.75% to 2% of career average salary for each year of service that an individual has worked. Obviously, companies in the Netherlands offer a wide variety of plans with various types of benefit formulas. The typical average-earning individual in each country is assumed to participate in the pension plan most widely offered there. For those countries where there is more than one typical plan, or where there has been a significant shift from one type of plan to another, the results are presented for each of the typical plans and the assumption that the average-earning individual participates in each of them, respectively. The countries for which more than one set of results is given are Ireland, Norway, Sweden, the United Kingdom, and the United States. It is important to note that typical voluntary occupational plan models are likely to be more representative of pension provision market practice in large or medium-sized companies, as such employers are more likely to offer typical plans and more data on their pension provisions are available. Individuals also save for retirement through other means, such as voluntary personal pension arrangements, other private savings, and home ownership. Such private sources of savings have not been taken into consideration. The focus is solely on pension income from public systems, mandatory private plans, and voluntary occupational arrangements.

The concept of the replacement rate The pension benefits that average-earning individuals may receive are expressed as replacement rates in this section in order to compare their pensions in retirement to their earnings just before retirement. The replacement rate is commonly used in pension literature to measure the level of pension income in relation to earnings. The purpose of this measure is to indicate what level of pension an individual will have in retirement in comparison to the individual’s earnings just before retirement. It is measured at retirement for an individual as the annual pension income in the first year of retirement divided by the individual’s salary in his final year of work. For instance, if an individual was to receive an annual pension income of € 30 000, and his salary in his final year of work was € 60 000, then the replacement rate would be: Replacement rate =

50%

=

€ 30 000 € 60 000


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What, however, does replacement rate mean in the “real world”? Individuals with a 50% replacement rate can expect a post-retirement income that is half of their preretirement income. Will this be enough for the individual to maintain a similar standard of living after retirement as he or she experienced before retirement? Will this level of pension income be enough to keep the individual out of poverty in his or her old age? There is no easy answer to these questions and a full discussion of this important matter is beyond the scope of this section. A rough rule of thumb, however, is that a replacement rate of around 70% is necessary if an individual is to enjoy a standard of living in retirement that is similar to the standard he or she enjoyed prior to retirement. It is important to note that, for an individual living near or below the poverty line, any reduction in income in retirement could mean significant hardship. That said, readers may consider the 70% rate as the adequate retirement income benchmark for the average individual.

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Moreover, it should be noted that the replacement rate is measured as of the date of retirement, so pension income in relation to pre-retirement income is measured only as of that date. The replacement rate metric defined in this section does not specify how the ratio of pension income to pre-retirement earnings may evolve over time (although, in traditional pension plans, the replacement rate tends to stay relatively stable over an individual’s post-retirement lifetime). In particular, the replacement rates shown in this section take no account of how pension annuities payable from defined benefit plans may be increased after retirement. Defined benefit plans in some countries tend to increase pension annuities in-line with prices or average earnings. This would make them relatively more generous than defined benefit plans in other countries where no such postretirement adjustments are made.

Overview of methodology This section attempts to arrive at a broad estimate of the total pension income which an average-earning individual in each OECD country may receive from state, mandatory, and voluntary occupational pensions11 after a full working lifetime. The pension incomes projected here, however, should be considered only as broad indications of what may happen, as they are conditional on a number of assumptions. Foremost, it is assumed that individuals are covered by public pension plans throughout their careers. For the countries where occupational pension plans are common, averageearning individuals are assumed to be covered throughout their careers by occupational pension plans that are typical of market practice in that country. In countries where private pension accounts are compulsory, they are assumed to have participated in the compulsory system throughout their careers. The individual is assumed to enter the workforce today as of age 20 and work under existing legislation and plan rules until his or her normal retirement age. Individuals with shorter careers or with breaks in their careers could expect lower benefits than those presented in this section. Further, individuals that at some point in their careers switch from a traditional defined benefit plan based on final earnings to a plan based on current or average earnings such as a defined contribution plan, could expect to receive lower benefits than those presented, as well. The total pension income estimates in this section build on the results published in PaG 2007 and the following section draws on similar assumptions, methodology, and data. A full description of the assumptions, methodology and data used, as well as the reasoning behind them, can be found in that publication. The estimates presented in this section complement those of PaG 2007 in that they include potential income from those voluntary

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Box 4.1. A brief guide to OECD pension models

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Pension entitlements that are calculated and compared are based on the parameters and rules in current legislation. All value parameters are those for calendar year 2004. Changes to rules contained in legislation that has been passed but is being phased in gradually are assumed to be fully in place. It is assumed that pension rules remain unchanged thereafter.

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The parameters and rules of pension plans are complex and retirement income systems typically have multiple components. OECD pension models aim to calculate prospective pension entitlements promised in the future to today’s workers from all mandatory parts of the pension system.

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Calculations show the pension entitlements of a worker who enters the system today and enjoys a full career, defined as uninterrupted work from age 20 to the standard age of pension eligibility. Although this is clearly unrepresentative of actual labour market experience, it is the only assumption that can generate comparable results. Most pension systems provide credits for periods in education, military service, unemployment, child rearing etc. Simply assuming that people who are not in work are not covered during career gaps would produce misleadingly low pension entitlements for such people.

Entitlements are calculated for a single person. This is both because the rules governing benefits for married couples can be very complicated and because the results depend on assumptions throughout both partners’ career histories. Results include all mandatory pension plans for private sector workers, regardless of whether plans are publicly or privately provided. Resource-tested benefits for which retirees may be eligible are also included and the comparisons assume that all entitled pensioners take up these benefits. Where there are broader means tests, which also take assets into account, the income test is taken as binding. It is assumed that all income during retirement comes from the mandatory pension scheme when calculating pension benefit entitlements. In addition to public and mandatory and quasi-mandatory private pensions, the results include typical voluntary occupational pension plans for those countries where such schemes cover at least 30% of the working population. The benefit provisions assumed for the typical voluntary occupational pension plan in each country are those considered as market practice in the country in question. Plans with near-universal coverage – more than 80% of employees – are considered as “quasi-mandatory” and are included as voluntary occupational in the results. The benefits from defined contribution plans are assumed to take the form of a priceindexed life annuity. The value of this annuity is calculated at an actuarially fair price, based on population mortality data from the UN/World Bank database. The comparisons are based upon the same set of economic assumptions for all countries to facilitate cross-national comparisons that reflect differences in pension systems and policies alone.

occupational pension plans which typify market practice in each country. For a description of voluntary occupational pension plan designs in OECD countries, refer to the country profiles later in this publication.12


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Potential replacement rates

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This section presents seven sets of results. The first set of results is the “Base-Case Scenario” and uses the same assumptions as PaG 2007. Some assumptions have then been varied, as indicated below, to give readers an idea of how various outcomes – in, for instance, investment return or salary growth – would affect ultimate potential replacement rates. The assumptions used in the Base-Case Scenario and in each alternative scenario are described below. Each of the alternative scenarios is identical to the Base-Case scenario (see Table 4.2 below), but for one assumption, which has been changed.

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Table 4.2. Assumptions used for retirement income projections under the Base-Case Scenario Assumptions

Base-Case Scenario (same assumptions as PaG 2007)

Post-retirement discount rate

4.55%

Net expected return on assets

6.05%

Salary scale

4.55%, individual salaries are assumed to grow in-line with country-wide average earnings

Inflation

2.55%

Mortality

Projected mortality rates to 2040 from the United Nations/World Bank population database

Additional annuitisation costs

None

Age at entry

20 (unless a different age is specifically legislated)

Normal retirement age

Standard pension age for each country1

Taxes

All replacement rates are gross of tax

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1. In those countries where the standard pension age differs for men and women, the standard pension age for men has been used. In Finland, where the standard pension age varies from 62 to 68, age 65 is used. Source: OECD (2007), Pensions at a Glance: Public Policies Across OECD Countries, OECD, Paris. 1 2 http://dx.doi.org/10.1787/516480665014

In addition to the Base-Case Scenario, alternative scenarios have been modelled in order to assess the impact on potential replacement rates due to changes in specific assumptions. Each of the alternative scenarios presented below use the same assumptions as the base-case scenario, although with one specific assumption changed. The alternative scenarios are: ●

Scenario 2: Higher Investment Return (8.05%, or the Base-Case Scenario plus 2 percentage points);

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Scenario 3: Lower Investment Return (4.05%, or the Base-Case Scenario minus 2 percentage points);

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Scenario 4: Higher Salary Scale (5.55%, or the Base-Case Scenario plus 1 percentage point);

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Scenario 5: Lower Salary Scale (3.55%, or the Base-Case Scenario minus 1 percentage point);

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Scenario 6: Higher Cost of Annuitisation (Base-Case Scenario with 20% higher cost of annuitisation);

●

Scenario 7: Lower Cost of Annuitisation (Base-Case Scenario with 20% lower cost of annuitisation).

The replacement rate results for the OECD countries under the Base-Case Scenario are shown in Figure 4.3.

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Greece Italy Luxembourg Korea United States – DB Netherlands Spain United Kingdom – DB Austria Iceland Hungary Denmark United States – DC Turkey Norway – DB Ireland – DB Ireland – DC Norway – typical DC Belgium United Kingdom – DC New Zealand Finland Sweden – DB Poland Norway – minimum DC Sweden – DC Switzerland Slovak Republic Japan Canada Portugal Germany France Czech Republic Australia Mexico

Mandatory private pension

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Voluntary occupational pension

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As a percentage of final earnings Public pension

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Figure 4.3. Potential replacement ratio at normal retirement age: public pension, mandatory private pensions and typical occupational plans

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Target replacement rate of 70%

0

20

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60

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Source: OECD calculations.

1 2 http://dx.doi.org/10.1787/516501446148

Under the assumptions used in the Base-Case Scenario for the average-earning individual in each country’s typical pension plans, the highest potential replacement rates from all pension income sources considered in this study are in Greece at 96%, Italy at 92%, and Luxembourg at 88%, whereas the lowest are in Mexico at 36%, Australia at 43% and the Czech Republic at 49%. The average replacement rate from all considered sources across OECD countries is 68%, where, on average, 44% comes from the public pension scheme, 10% from mandatory private plans, and 15% from voluntary occupation plans.13 As Figure 4.3 shows, the average income in the country scenarios presented above is 68%, which is very close to the target replacement rate of 70%. However, only 15 of the 36 countries are modelled as providing replacement rates at or above the 70% level, whereas the rest fall below this rough target. Given that public pension systems are under


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Variations in investment return

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increasing demographic pressure and many countries will need to decrease the benefits provided by their public systems, the need for private pensions that offer adequate coverage and generosity will become increasingly acute. Currently, it does not appear as if individuals in most OECD countries will be adequately provided for through their state, mandatory and voluntary pension systems. Either private pension systems must be strengthened or individuals will need to save through other private means to be able to look forward to a standard of living after retirement comparable to the one they enjoyed while employed.

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The results of the Base-Case Scenario are just one potential outcome for c tu Lthe e average

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earner based on one specific set of assumptions. Some country results are more sensitive to changes in certain assumptions than others. In particular, those that mainly offer defined contribution plans will be much more sensitive to investment returns than those which overwhelmingly provide defined benefit schemes. For this reason, Figure 4.4 shows the Base-Case Scenario’s total replacement rates results (the light-blue bars), plus the changes in country results caused by annual variations of plus or minus two percentage points in the investment returns experienced by the average-earning individual. The changes in country replacement rates due to investment return variations are shown by the dark-blue horizontal lines denoting their positive or negative effect on the base case results. Figure 4.4 compares the Base-Case Scenario with Scenarios 2 and 3: ●

Scenario 2: Higher Investment Return Scenario; Base-Case Scenario return plus 2 percentage points per annum;

●

Scenario 3: Lower Investment Return Scenario; Base-Case Scenario return minus 2 percentage points per annum.

As Figure 4.4 illustrates, the countries that mainly offer defined contribution plans – such as Denmark, Australia, and Mexico, as well as the defined contribution scenarios in the United States, the United Kingdom, and Ireland – are those where replacement rates are most affected by swings in investment return. If the rate of return on investments is two percentage points per annum higher than assumed in the Base-Case Scenario, the replacement rates in those countries will increase by an average of 23%. On the other hand, if the rate of return on investments is two percentage points per annum lower than the Base-Case Scenario, replacement rates will shrink by an average of 13%. In countries with plans that are mainly defined benefit in nature (for example, Greece and Luxembourg), replacement rates are not directly affected by variations in investment return. Moreover, in the case of investment returns that are two percentage points per annum higher than in the Base-Case Scenario, the average replacement rate increases to 76%, which is well above the rough target replacement rate of 70%. Twenty-one of the 36 country scenarios will be above the target, whereas 15 will remain below. Where investment returns are two percentage points per annum lower than the Base-Case Scenario, the average replacement rate drops to 64%, and only 12 of the 36 countries will be above the target. Countries where defined contribution predominates tend to be very sensitive to variations in investment return.

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As a percentage of final earnings Greece Italy Luxembourg Korea United States – DB Netherlands Spain United Kingdom – DB Austria Iceland Hungary Denmark United States – DC Turkey Norway – DB Ireland – DB Ireland – DC Norway – typical DC Belgium United Kingdom – DC New Zealand Finland Sweden – DB Poland Norway – minimum DC Sweden – DC Switzerland Slovak Republic Japan Canada Portugal Germany France Czech Republic Australia Mexico

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Figure 4.4. Potential replacement ratios at normal retirement age: base case, higher and lower investment returns scenarios

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1 2 http://dx.doi.org/10.1787/516552634220 Source: OECD calculations.

Variations in salary increases The sensitivity of potential replacement rates to changes in annual rates of salary increases (the salary scale) depends on how pension schemes are designed. Both defined benefit and defined contribution plans can be affected by variations in salary scale. Figure 4.5 below compares the Base-Case Scenario with Scenarios 4 and 5: ●

Scenario 4: Higher Salary Scale Scenario; Base-Case Scenario salary scale plus one percentage point per annum;

●

Scenario 5: Lower Salary Scale Scenario; Base-Case Scenario salary scale minus one percentage point per annum.

As can be seen from Figure 4.5, most countries are affected by variations in the rates at which salaries change. However, pension benefits are most affected in Italy, Denmark, Iceland, Portugal, France, Australia, Mexico, and in defined contribution scenarios in the


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United States, the United Kingdom, and Ireland. Typically, a higher salary scale means a lower replacement rate. Consequently, fast-tracking employees tend not to do as well in their pension savings (taken as a percentage of final salary) as those with slower career growth. Pension benefits from defined contribution plans as well as defined benefit plans that average earnings over a long period of time tend to be affected in this manner.

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Greece Italy Luxembourg Korea United States – DB Netherlands Spain United Kingdom – DB Austria Iceland Hungary Denmark United States – DC Turkey Norway – DB Ireland – DB Ireland – DC Norway – typical DC Belgium United Kingdom – DC New Zealand Finland Sweden – DB Poland Norway – minimum DC Sweden – DC Switzerland Slovak Republic Japan Canada Portugal Germany France Czech Republic Australia Mexico

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As a percentage of final earnings

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Figure 4.5. Potential replacement ratios at normal retirement age: base case, higher and lower salary scale scenarios

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1 2 http://dx.doi.org/10.1787/516560243872

If individuals are awarded annual salary increases that are one percentage per annum less than the Base-Case Scenario, then 19 out of 36 of the country scenarios will meet or exceed the rough target replacement rate of 70%. (In the Base-Case Scenario 15 scenarios meet or exceed the target.) If individuals receive salary increases that are one percentage point per annum higher than in the Base-Case Scenario, then only 11 country scenarios will meet the target.

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Defined contribution plans tend to be especially sensitive to changes in the cost of annuitisation. The reason for this is that defined contribution plans are often, although not always, designed so that at retirement, an individual’s defined contribution account savings are converted to a lifetime pension annuity based on prevailing annuitisation costs charged by the insurance market. If these costs are higher when the time comes for individuals to annuitise their defined contribution pension savings, their lifetime pension income – and hence, replacement rates – will be lower. On the other hand, if prevailing annuitisation costs are lower when an individual retires, their lifetime pension income will be correspondingly higher. Annuity rates change for a number of reasons, such as supply and demand factors, regulation, market interest rates, and changes to the expected longevity of pensioners.

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Countries where plans are predominantly defined benefit in nature tend to be relatively immune to changes in insurance company annuitisation costs. However, changes to market interest rates and longevity can also have an impact on pension income in these countries, depending on the defined benefit plan design. For present purposes, however, it has been assumed that changes to the costs of annuitisation only affect those countries where pension benefits are directly tied to insurance company annuitisation costs. The following Figure 4.6 compares the Base Case Scenario with the Scenarios 6 and 7: ●

Scenario 6: Higher Cost of Annuitisation Scenario; Base-Case Scenario with 20% higher cost of annuitisation.

●

Scenario 7: Lower Cost of Annuitisation Scenario; Base-Case Scenario with 20% lower cost of annuitisation.

As mentioned above, variations in the cost of annuitising pension savings into a lifetime stream of pension income mainly affects defined contribution plans. However, certain types of defined benefit plans are sensitive to such variations, as are some cashbalance plans. Numerous factors affect the cost of annuitisation, such as market interest rates and, in particular, changes in expected longevity. The factors affecting annuitisation costs also have an impact on the benefits paid by a number of public pension systems. However, the impact of such specific factors has not been modelled here. Defined contribution plans and cash-balance plans may incorporate annuitisation cost guarantees which can limit the impact of variations, as is the case in Switzerland. Moreover, regulations can limit exposure to this annuitisation risk by requiring the purchase of annuities over a specified longer period of time – e.g. annually from age 60 to 65 – rather than full purchase immediately on normal retirement at the age of 65.


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As a percentage of final earnings Greece Italy Luxembourg Korea United States – DB Netherlands Spain United Kingdom – DB Austria Iceland Hungary Denmark United States – DC Turkey Norway – DB Ireland – DB Ireland – DC Norway – typical DC Belgium United Kingdom – DC New Zealand Finland Sweden – DB Poland Norway – minimum DC Sweden – DC Switzerland Slovak Republic Japan Canada Portugal Germany France Czech Republic Australia Mexico

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Figure 4.6. Potential replacement ratios at normal retirement age: base case, higher and lower cost of annuitisation scenarios

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1 2 http://dx.doi.org/10.1787/516584824325

4.3. Investment performance Comparing the investment performance of pension funds across countries is a hazardous task. Plan designs, regulations and degree of system maturity differ, affecting investment goals and hence the ultimate performance of pension fund portfolios. Ultimately, however, all pension systems are designed with a common goal in mind, which is the provision of adequate levels of retirement income. Hence, comparing risk-adjusted investment returns across countries can help policymakers identify obstacles to better pension fund performance and higher pensions. The OECD in collaboration with the World Bank and some private sector institutions14 is involved in a project to compare investment performance of privately managed pension funds across selected OECD, Latin American and Central and Eastern European (CEE) countries. The work so far has primarily focused first on collecting and analysing the

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The main tentative conclusions distilled from the work done so far can be summarised as follows. Firstly, the availability of adequate data has been an important limitation for conducting these studies, especially the evaluation of the risk-adjusted investment performance of pension funds. Section 3 below provides some initial observations regarding the data that would be needed to undertake more in depth analysis of the riskadjusted performance of pension funds. This could provide a starting point for an effort to develop international standards for the reporting of pension fund financial performance data that could support international comparisons and more in depth performance evaluation. A more structural problem is the fact that most of the private pension systems have less than 10 years of history, which imposes a restriction for examining the long-term nature of investment performance.

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available data to assess investment performance; and, secondly, on undertaking some preliminary evaluation of the performance of privately managed pension funds on a risk adjusted basis using Sharpe ratios and attribution analysis, and against some benchmark portfolios using ex post Markowitz portfolio maximization.15, 16

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Secondly, the performance analysis show that, for those countries with enough information and data to adjust returns accordingly, privately managed pension funds have obtained a risk premium against short-term investment alternatives. Additionally, pension funds have generally underperformed with respect to the hypothetical portfolio with the highest (mean) return for a given level of risk (i.e. an ex post efficient frontier). Finally, the analysis suggests that in several countries investment restrictions have had a negative impact on performance.

Empirical evidence on investment returns As a result of differences in asset allocation, regulatory environment, reporting frameworks, valuation methodologies and time frame of pension systems, there are many limitations to international comparability of investment performance across countries using reported returns. Nevertheless, it is important to see in isolation how investment returns have evolved in the different countries. In this regard, Table 4.3 reports average real returns (nominal returns in local currency less price inflation) for the countries examined in this report since the system has been in place and for the last five-year period. It is interesting to notice that by assessing average rate of return in the last five years (2000-2005), for which there is data for all countries, against the volatility of these returns as measured by the standard deviation, most countries have had relative low average returns and relative low volatility (Figure 4.7). However, some countries achieved relatively high returns with relatively high volatility (Uruguay and, to some extend Argentina and Peru), others achieved relative high returns with relatively low volatility (Bolivia and Poland), and, finally, Hong Kong (China), Japan, the United Kingdom and the United States had very low average returns over the 5-year period and relatively high volatility. Finally, the volatility (i.e. standard deviation) of returns in OECD countries is larger than in nonOECD countries.


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Average return

Standard deviation

9.1

6.2

6.2

Czech Republic (VP)

1995

1.0

1.1

1.6

Hungary (MP)

1998

2.3

2.4

5.4

Japan (VO)

1990

3.4

3.7

8.9

Mexico (MP)

1998

7.3

7.3

3.8

Netherlands (QMO)

1993

6.1

6.4

8.2

2.0

Poland (MP)

2000

8.7

8.7

4.9

9.6

4.8

Sweden (QMO)

1990

6.2

6.6

9.7

1.0

10.4

United Kingdom (VO)

1982

8.7

9.5

12.5

1.9

16.5

United States (DB) (VO)

1988

7.1

7.5

9.6

1.5

13.9

United States (DC) (VO)

1988

6.1

6.5

8.7

0.7

13.1

Argentina (MP)

1995

9.7

10.2

11.6

7.3

15.0

Bolivia (MP)

1998

10.1

10.2

4.6

9.6

5.9

Brazil (VO)

1995

5.7

5.9

6.3

2.7

4.8

Chile (MP)

1982

9.5

9.8

8.5

6.1

2.7

Costa Rica (MP)

2002

5.8

5.9

3.3

4.6

3.3

El Salvador (MP)

1999

5.7

5.8

4.5

3.7

2.5

Estonia (MP)

2002

5.2

5.3

4.5

4.1

4.5

Hong Kong (MO)

2000

2.1

2.7

13.2

1.7

13.2

Kazakhstan (MP)

1999

7.9

8.4

12.7

2.3

5.3

Peru (MP)

1994

14.3

14.6

8.8

15.0

6.1

Uruguay (MP)

1997

14.7

15.3

13.0

19.2

16.4

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5.7

4.9

8.4

3.5

1.9

1.5

1.5

3.1

5.8

4.8

13.9

6.5

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Data since

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10.3

Selected non-OECD countries

1. Calculation since the year specified in column “Data since” and for the last 5-year period. Higher returns do not entail better performance because this data does not take into account several dimensions to allow performance comparisons. MP = mandatory personal plans, VP = voluntary personal plans, MO = mandatory occupational plans, VO = voluntary occupational plans, QMO = quasi-mandatory occupational plans. Source: OECD calculations. 1 2 http://dx.doi.org/10.1787/516654168048

Figure 4.7. Average annual returns and their standard deviation, 2000-2005 Annual average return (%) 20

URY

18 16

PER

14 12 10

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POL

8 CRI

4

SLV

CAN

2

ARG

MEX

CHL

6

BRA

CZE

AUS

EST

JPN

HUN KAZ

NLD SWE

HKG

0 0

2

4

6

8

10

12

USA (DB) USA (DC)

GBR

14 16 18 Standard deviation of returns


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Unfortunately, the data available from pension funds and regulators suffer from several biases that render any comparison attempt across countries hazardous. The previous section already addressed some of the issues posed for any meaningful comparison across countries: different valuation methodologies, differences in expenses charged to the funds, and differences in the legal environment (e.g. investment restrictions). This section briefly discuses some additional problems related to the way investment returns are averaged across pension funds and over the year, which introduces several biases. The data available from pension funds and regulators suffer the problems of “lagged aggregate weights”, “weighted average share values”, “non-overlapping synchronized portfolio, benchmark and risk free returns”, “clear portfolio composition separation between different asset classes” and “survival bias”.

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The “lagged aggregate weights” is linked to the performance bias. This bias arises when calculating the aggregate performance of a group of pension funds or of a country; they use the relative weight of each pension fund at the end of the period. This will lead to an important bias against (in favour of) pension funds that have experienced a lower (higher) performance over the period under analysis. This bias can be overcome by using lagged values. Calculations of returns should use as weights those at the beginning of every month, quarter or year. Additionally, when averaging returns over different period (e.g. monthly or quarterly) the weights need to vary over time as well (“variable weights”) to avoid biases. In this regard, the problem of “weighted average share values” stems from using constant weights across time to calculate returns. Additionally, some countries (e.g. Colombia, Costa Rica, and El Salvador) provide overlapping returns (e.g. a 12-month moving average return). Returns reported in this manner cannot be worked back into monthly, quarterly or annual rates of return. Moreover, they will always suffer the problem of constant weights. One of the more severe problems when comparing investment performance across pension funds and countries is the lack of a clear portfolio composition separation between the different asset classes. This renders the task of calculating hypothetical portfolios benchmarks using different asset classes as a near impossible task. The data reported by pension funds and regulators also suffer from the survival bias. This bias arises when constructing weighted averages across pension funds using only data from existing funds. Using only funds that remain in business without accounting for those funds that did not survive over the period analysed will bias upwards the returns. This bias reduces the usefulness of comparisons of investment performance across countries and pension funds groupings when pension funds’ survival rates differ. Finally, the analysis that follows compares asset-weighted average gross investment returns across several countries gross of investment management costs. Ideally, it should compare returns net of investment management costs. Pension funds incur in many costs, among them administrative costs, marketing and advertising costs, as well as investment management costs.17 However, only costs associated with the investment activities of pension funds should be netted out in order to produce a comparison of investment performance.18 Unfortunately, there is a lack of consistent and widely available data on investment management costs. In most countries, supervisory entities only publish information on total charges to members and do not provide a breakdown of different costs. Moreover, countries charge fees following different approaches.19 OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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This section presents the results of estimating Sharpe ratios against several alternative specifications of low risk reference assets. In order to perform these calculations, attempts to correct for some of the biases mentioned above are made for those countries for which data may lend itself to such corrections. Sharpe ratios are calculated using four alternative specifications for the risk free asset: a short-term local rate, a long-term local rate, a short-term US rate (T-bill), and a long-term US rate (T-bonds). Moreover, another performance measure using Sharpe’s empirical attribution analysis is also calculated.

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An exploratory study of the financial performance of pension fund systems around the world using Sharpe ratios and attribution analysis

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u L e c t In Sharpe ratios present several limitations when assessing portfolio performance.

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particular, the assumptions required for the Sharpe ratio to be a valid ranking instrument are particularly unwarranted when comparing across countries. First, it is not the same investor who is comparing different alternatives, and we cannot compare welfare across countries. Second, foreign exchange risk and real interest rate risk are viewed differently in different countries. Third, the very meaning of the Sharpe ratio is unclear when a riskless rate does not exist or when proxies for it are used. But even if riskless rates do exist, comparability across countries is questionable. Nevertheless, one can meaningfully assess, using Sharpe ratios, whether the different pension systems have obtained a risk premium or have beaten their own benchmarks or low risk references. In this context, the main conclusion from the analysis of Sharpe ratios and attribution analysis is that for those countries with appropriate data, privately managed pension funds have obtained a positive premium given the level of risk when comparing at least with the short-term alternative investment instrument.

Comparing investment returns using some artificially constructed benchmark portfolios Table 4.4 reports preliminary results of assessing the investment performance of privately managed pension funds against an initial benchmarking exercise that uses a Markowitz mean-variance portfolio maximization approach with historical data. That is, it compares the investment performance of a pension fund with that of an artificially constructed benchmark portfolio whose asset mix would have produced the highest (mean) return for a given level of risk (variance). As a result, it calculates, with hindsight, how much better pension funds could have done, given past market returns, for a specific level of risk. The benchmark portfolio combines six asset classes: equities (national and overseas); government bonds (national and overseas); money market securities (with overnight and 3 month maturities) and corporate bonds. Additionally, the exercise also takes into account that pension funds operate under different regulatory environments and, as result, they may be subject to specific investment constraints. Therefore, this study uses 2 hypothetical ex post benchmarks to assess the performance of privately managed pension funds in each country: (A) an artificially constructed benchmark portfolio whose asset mix would have produced the highest (mean) return for a given level of risk (variance), reported in column 5; and (B) an artificially constructed benchmark portfolio whose asset mix would have produced the highest (mean) return for a given level of risk (variance), fulfilling each country specific investment constraints, reported in column 7.

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Returns net of benchmark returns Returns of the Nominal returns benchmark portfolio Benchmark of the Gross nominal with six asset clases Standard unrestricted Standard Standard Un-restricted portfolio with the investment subject to highest overall deviation deviation2 deviation benchmark benchmark return1 quantitative return subject to portfolio of six portfolio investment investment asset classes restrictions constraints

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Table 4.4. Countries pension funds’ returns net of benchmark returns

Argentina

01/1997-12/2004

11.6

0.216

14.5

0.219

13.5

Australia

01/1990-12/2005

12.0

0.059

10.0

0.071

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Canada

1990-2005

8.7

0.027

6.5

0.027

6.7

Chile

06/1982-12/2004

23.0

0.168

23.1

0.169

18.9

0.142

Czech Republic

07/1998-12/2005

6.7

0.020

6.4

0.018

6.3

0.024

0.3

0.4

Hungary

01/1999-12/2004

10.0

0.056

11.3

0.067

11.3

0.065

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1990-2004

Mexico

10/1998-12/2004

Netherlands

1993-2005

Poland

09/2000-12/2004

Sweden United Kingdom United States

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0.076

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16.1

0.075

16.2

0.075

14.5

0.0713

–0.1

1.6

8.6

0.078

9.2

0.086

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*

–0.6

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13.9

0.070

12.0

0.070

12.0

0.070

1.9

1.9

1990-2004

8.3

0.091

8.8

0.078

1985-2004

10.1

0.135

11.9

0.146

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07/1989-12/2004

10.3

0.097

11.4

0.111

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–0.5

Note: * means countries with a “prudent man” framework, i.e. there are not strict investment restrictions. The six asset classes used to construct the hypothetical portfolio are: equities (national and overseas); government bonds (national and overseas); money market securities (with overnight and 3 month maturities) and corporate bonds. 1. Returns in column (3) do not necessarily coincide with those in Table 4.3. The periods considered can be different due to data constraints resulting from the different asset classes used to construct the hypothetical benchmark portfolio. 2. The standard deviation in column (6) is within ±2.5% of the standard deviation in column (4), while in column (8) is lower that 2.5% of the standard deviation in column (4). Source: OECD calculations. 1 2 http://dx.doi.org/10.1787/516686086805

Investment performance is measured using the rate of return of the portfolio accumulated since the introduction of funded private pensions. The reason for choosing the accumulated rate of return is that, what matters to an investor in a pension fund is the accumulated return at the moment of retirement. The measure of risk used is the standard deviation of annual (monthly) returns over the period, which is a measure of the volatility of the returns. The results reported are those of netting the returns of the benchmark portfolio from the returns of the actual portfolio (columns 9, 10 in Table 4.4).20 In this regards, a positive number means that countries’ pension funds have done better than the benchmark portfolio. The results indicates the performance of pension funds in most countries is below what would have been possible, as indicated by the negative value of the returns net of benchmark returns for each country (column 9). However, countries subject to quantitative investment restrictions have tended to overperform their benchmark portfolios when the benchmark is calculated taken the investment restrictions into account (column 10).


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This section focuses on the solvency status of occupational, defined benefit pension plans. The level of funding, that is, the ratio of pension plan assets to liabilities, is estimated using accounting data from pension plans sponsors. Comprehensive requirements for the reporting of pension obligations exist for exchange-listed companies that sponsor defined benefit pension plans. Pension plan defined benefit obligations can be one of the biggest liabilities that a company has on its balance-sheet, and as such, often receives particular attention from stakeholders, management, analysts and the press. Recent and proposed changes to accounting rules have introduced greater transparency and comparability between companies and countries to pension plan reporting, but also greater volatility to company balance sheets and earnings.

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In order to get an understanding of the relative magnitude and impact of pension plan accounting on company financial statements, a number of pension indicators based on public information for a sample of companies and a global index, covering 6 200 companies were used. This global index is a total market equity index created by Thomson Financial Limited that covers 50 countries and all sectors.21

The findings of our examination of the global index of companies indicate that defined benefit pension plans appear to have the most financial implications for companies domiciled in Western Europe, the United States and Canada, Brazil and Japan. These regions have long histories of traditional defined benefit plans, although this has been changing over the past several years as companies move away from traditional defined benefit plans towards plans that are more defined contribution in nature. Despite the move towards defined contribution that has been made by many companies, legacy defined benefit plans and their obligations often remain on company balance sheets and continue to have a financial impact. On average, and measured on an accounting basis, pension obligations tend to be quite underfunded. It is important to note that in our study, we have only looked at a few broad indicators. In order to form more specific conclusions as to the financial implications of defined benefit pension plans in any particular country or company, country-specific and company-specific factors would need to be examined in greater detail. The increased rigour, transparency and volatility of defined benefit plans that have been introduced over the past several years due to stricter international accounting requirements have pushed the managing of pension plan financial results into the spotlight for many companies. With further accounting reforms expected to international accounting standards, we would expect the focus on defined benefit plan financials to continue. The magnitude of pension obligations can represent a very significant portion of a company balance sheet. We expect that the financial management of defined benefit pension plans will remain a top priority for the sponsoring companies.

Examination of a global index of companies Of these 6 200 companies in the global index, approximately 2 500 companies, or 40%, reported a Defined Benefit Obligation due to pensions as of their fiscal year ending in 2007. A Defined Benefit Obligation, or DBO, is the term given by international accounting standards to a company’s liability due to pension promises that have been accrued by

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We have grouped the companies in our index sample that have reported a DBO by the country where they are domiciled. As an example, if a company is domiciled in the United States, then we have classified the company (and all its associated liabilities and assets) as from the United States. We have taken no regard as to where in the world companies may have pension plans or subsidiaries when making this classification. As such, our findings can make no statement about the level of pension liabilities or the state of pension funding in any particular country. Rather, in our examination, we have attempted to give a very

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current and past employees. Pension plans that are defined contribution in nature or pension plans that are fully insured with an insurance company typically have no associated DBO.

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c tu general indication of which countries are the primary homes to companies where L e defined

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benefit plans have a significant impact on company finances. The following Figure 4.8 shows the breakdown of the companies in our sample by where their companies are domiciled, as well as, what number of those companies have reported a DBO in their financial statements for the fiscal year ended in 2007. As can be seen from the chart, the largest number of companies in the sample is from the United States and Japan, followed by the United Kingdom. To clarify this further, the following chart shows the percentage of these companies reporting a DBO grouped by a country of domicile (Figure 4.9). There are 4 main reasons that a company in our global index would not report a DBO (if we assume that the companies in the index are properly reporting their material pension liabilities under one of the major international accounting standards): ●

The company offers no material pension benefits to its employees.

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The only material pension promises that the company makes are defined contribution in nature.

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Any material pension promises that the company offers are from multi-employer pension plans22.

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The company offers defined benefit-type pensions, but any material obligations associated with these pension promises have been fully insured with an insurance company. The companies in our global index that do report a DBO either offer defined benefit-

type pension promises to some or all of their employees or have legacy defined benefit pension promises that they will be obliged to pay out at some point in the future. The four countries with the highest percentage of companies reporting a DBO are Japan, Finland, Germany and Sweden – all countries with a strong tradition of defined benefit plans. Many of the countries with a large portion of companies reporting DBOs have experienced a strong shift towards defined contribution plans over the past years, such as the United Kingdom and the United States. A significant portion of the reported DBOs for companies domiciled in these countries could be due to legacy plans. Other countries such as the Netherlands and Belgium with a history of defined benefit plans, yet with lower percentages of companies reporting DBOs could be due to companies insuring away their pension obligations with insurance companies, or that they offer multi-employer plans that are reported as defined contribution.


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Figure 4.8. Number of companies in the sample examined

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Argentina Australia Austria Belgium Bermuda Brazil Canada Chile China Colombia Czech Republic Denmark Finland France Germany Greece Hong Kong, China Hungary India Indonesia Ireland Israel Italy Japan Korea Luxembourg Malaysia Mexico Netherlands New Zealand Norway Pakistan Peru Philippines Poland Portugal Russian Federation Singapore Slovenia South Africa Spain Sri Lanka Sweden Switzerland Taiwan Thailand Turkey United Kingdom United States Venezuela Unspecified

Number of companies reporting a DBO

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946 530 565 0

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Japan Finland Germany Sweden Ireland France United States Greece Switzerland United Kingdom Taiwan Denmark Pakistan Belgium Canada All countries South Africa Austria Norway Australia Luxembourg Netherlands Philippines Portugal Hong Kong, China India Malaysia Italy Brazil Mexico Israel Spain Turkey Bermuda Sri Lanka China New Zealand Singapore Indonesia Korea Unspecified Venezuela Thailand Slovenia Russian Federation Poland Peru Hungary Czech Republic Colombia Chile Argentina

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Figure 4.9. Companies reporting defined benefit obligations, 2007

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How big are the defined benefit plans in relation to the market size of the companies?

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In order to get a sense of the relative sizes of defined benefit plans in relation to the market sizes of their sponsoring companies, we have examined the following indicator for each company:

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A company’s market capitalization at a particular point in time is the share price of the company times the number of shares outstanding and can be considered an indication of a company’s size. The ratio of the company’s DBO over its market capitalization could be seen as one measure of the relative importance of the company’s DBO on its financial performance. In other words, a defined benefit pension plan is likely to have a relatively greater financial impact on a company with a DBO that is a very large percentage of its market capitalization than a company where the DBO is not as sizable in relation to the market size of the company. This indicator could therefore be considered one proxy for the relative importance from a financial perspective that a company places on its defined benefit pension plan. Other indicators could certainly also be considered such as the effect of the annual cost of maintaining a pension plan on the company’s profit and loss statement. This and other indicators are discussed later in this section.

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Defined benefit obligation/Company market capitalization

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For the approximately 2 500 companies in our sample that reported a DBO in their 2007 financial statements, the ratio of each company’s DBO over its market capitalization is shown below. The ratio is shown individually for each company in descending order from left to right with the company with the greatest ratio furthest to the left in Figure 4.10. The highest ratio in our sample came from one company with a DBO that was 774% of the company’s market value. The average of this ratio for the 2 500 companies reporting a DBO in 2007 was 18% whereas the median was 8%. Further, 179 of these 2 500 companies, or 7%, had a DBO that was more than 50% of the company’s market capitalization. 23 of the companies, or 1%, reported a DBO in 2007 that was more than 150% of their market

Figure 4.10. Weight of defined benefit obligation as compared to market capitalisation As a percentage of market capitalisation 900 800 700 600 500 400 300 200 100 0 Each of the 2 500 companies in the sample represents one point in the graphic Source: Thomson Financial Datastream and OECD calculations.

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capitalization. Of these 23 companies, 10 have their domicile in the United Kingdom, 7 in the United States, 3 in France, 2 in Switzerland, and 1 in Sweden.

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The OECD country with the highest average DBO as a percentage of market capitalization is the United Kingdom at 38%, followed by the Netherlands at 27%, Ireland and Switzerland at 23% and the United States at 19%.

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Figure 4.11 shows the average of this same indicator for all companies in our global index that reported a DBO in fiscal-year 2007. We have grouped these companies by their country of domicile. In order to mitigate the effect of one or two individual companies, we have only shown the countries with at least 10 companies in the index that reported a 2007 DBO.

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Figure 4.11. Weight of pension obligation (DBO) compared with market capitalisation in selected OECD and non-OECD countries, 2007 As a percentage of market capitalisation United Kindgom Netherlands Bermuda Ireland Switzerland United States Brazil Average of all companies Canada Japan Sweden Germany France Portugal Belgium South Africa Finland Luxembourg Austria Spain Italy Norway New Zealand Australia Mexico Denmark Philippines Hong Kong, China Malaysia India Israel Greece Pakistan Singapore Taiwan 0

5

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25

30

35

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Note: Average for companies reporting a DBO grouped by country of domicile. Countries with 10 or more companies reported only. Source: Thomson Financial Datastream and OECD calculations.

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Are defined benefit obligations over-funded or under-funded?

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It is important to note, however, that the definition of plan assets under international accounting standards is quite strict and does not give credit for all types of funding vehicles. In particular, pension obligations financed using book-reserves with external credit insurance in the case of company insolvency are considered completely unfunded for purposes of international pension accounting standards. Therefore, countries where this type of financing arrangement is common, such as, for example, Sweden and Germany, tend to have companies with balance sheets that appear relatively less funded and hence less secure than countries where segregated pension funds is the dominant form of pension funding. Arguably, this does not always give an accurate picture of the level of security of company pension obligations in these countries.

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We have also looked at to what extent pension fund assets are backing the pension obligations for the 2 500 companies in our sample that reported a DBO in their financial statements for the fiscal-year ended 2007. For each of these companies, we have estimated the percentage by which a company’s DBO is over-funded (where plan assets exceed the DBO) or under-funded (where plan assets are less than the DBO).

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Figure 4.12. Average percentage over/(under) funding of sampled companies in selected OECD and non-OECD countries, 2007 In per cent South Africa Hong Kong, China Australia Portugal Switzerland Ireland United Kingdom United States Canada Pakistan Netherlands Brazil India Finland Average of all companies Philippines Japan Belgium Denmark Mexico Norway Sweden Taiwan France Spain Malaysia Germany Austria Greece -100

-80

-60

-40

-20

0

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Note: Per cent over/(under) funded = (Plan assets – DBO)/DBO. Only companies from our index that reported a 2007 DBO were included. Only countries with 10 or more companies reporting a DBO are included. Source: Thomson Financial Datastream and OECD calculations.

1 2 http://dx.doi.org/10.1787/516882051311

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Of the companies in our index that reported a 2007 DBO, those that are domiciled in South Africa, Hong Kong and Australia had, on average, the best funded status of the companies in our study. These were also the only countries whose companies had, on average, pension plan assets that exceeded the associated pension obligations on an accounting basis. The rest of the countries are on average to some extent under-funded.

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That said, Figure 4.12 shows the average per cent by which a company’s pension fund assets exceed (or do not exceed) the company’s DBO as defined by international accounting standards. Companies have again been grouped by country of domicile. To minimize the effect on country results of just a few companies, the graph only shows those countries where at least 10 companies reported a 2007 DBO.

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u e contan Greece, Austria and Germany had on average the lowest funded L status

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accounting basis. This can most likely be explained by the common use of book-reserves as a financing vehicle for pension obligations in these countries. Across all companies that reported DBOs in the fiscal-year ending in 2007, the average level of underfunding was 24%.

4.5. Private pension operating costs and fees Introduction The efficiency of private pension systems can be judged by looking at either the total operating costs of providing a given level of benefits, or the costs in relation to assets managed. The total operating costs of private pension systems include all costs of administration and investment management involved in the process of transforming pension contributions into retirement benefits. In the first instance, costs vary depending on the type of pension plan. For example, a defined contribution pension fund that transfers the money accumulated at retirement to an insurance company to buy an annuity only endures operating costs during the accumulation (or pre-retirement) stage of the pension plan. On the other hand, a defined benefit pension fund that pays out itself benefits as annuities also has operating costs relating to the pay-outs. Another concern when comparing costs data internationally is that there may be underreporting problems, especially in occupational plans where sponsoring employers may provide administrative services to the pension fund for free. Investment management costs may also go underreported, especially those of funds managed externally by professional asset managers who deduct management fees directly from the funds. Figure 4.13 shows the operating costs of the pension fund industry reported by OECD countries in 2007. In general, countries with defined contribution systems (e.g. the Czech Republic, Mexico, Australia) and those with large numbers of small funds (e.g. Canada, the United Kingdom) appear to have higher operating costs than countries with only a few funds offering defined benefit, hybrid, or collective defined contribution pension arrangements (e.g. Denmark, Finland, Germany, and Iceland). In defined contribution private pension systems, providers cover their operating costs through the fees they charge to plan members. These costs include marketing the plan to potential participants, collecting contributions, sending contributions to investment fund managers, keeping records of accounts, sending reports to participants, investing the assets, converting account balances to annuities, and paying annuities. In defined contribution systems, retirement income depends on accumulated contributions, the investment returns earned by these contributions, and on the fees OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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charged to individuals by the pension providers. Contributions to mandatory private pension systems are usually stipulated in reform legislation. To accumulate adequate savings, therefore, participants need plans that achieve high returns and low fees. The rest of this section focuses on the fees charged to individuals in the accumulation stage of mandatory defined contribution pension systems.23 It looks at the experience of Latin America, Central and Eastern Europe, Australia, and Sweden. Many factors influence fees in these countries, including the size and maturity of the system, market structure, competition, investment strategy, and regulations.24 In order to compare fees across countries, changing patterns in the ratio of annual fees to assets under management are considered. This ratio is a simple metric and, unlike more sophisticated ones, such as charge ratio or reduction in yield, is a purely accounting figure that does not involve any projections. As such, it can only be used to compare fee levels across countries if allowance is made for the maturity of the systems and fee structures in place. The relatively high fee-to-assets ratios in some Latin American and Central and Eastern European countries (over 1.5% of assets under management in some cases) can, therefore, be explained in part by the fact that they have implemented private systems only recently. System maturity cannot, however, explain all the differences observed between countries. For example, the Swedish Premium Pension system had a fee level in 2007 that was substantially below that of the Chilean scheme (0.45% vs. 0.6% 25), although the latter had been in place for long enough (26 years) to offset the effect of the contribution-based fee structure. The only country where costs have evolved in a similar manner to (but still above) the Swedish benchmark is Bolivia. The cost advantages of the Swedish and Bolivian systems stem largely from a decision to force cost competition among providers via a central agency or “clearing house”. Bolivia went as far as limiting the market to two providers and restricting competition between

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them. In other countries, marketing and sales agents have been used in the past to encourage members to switch providers, leading to an increase in operational expenses and fees. As members are not very responsive to higher fees, systems that a priori seemed to be highly competitive, with many players, have actually turned out to do rather poorly in terms of fees.26

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The structure of charges adopted in the countries under study is fairly complex. This complexity means that, in general, charges are poorly understood by the average pension fund member. For example, survey evidence from Chile and Poland suggests that most people do not know what fees are paid to pension companies.27 A recent survey in Poland revealed that 63% of contributors declared very limited understanding of contribution fees, while 71% said they understood little about management fees. More than 40% of those surveyed did not know that there was a transfer fee for moving their account to another provider.

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Similarly, knowledge of the new Chilean pension system is far from perfect. A microlevel analysis of retirement saving showed that more than 96% of Chilean members did not know that pension companies levied management fees as a percentage of their monthly earnings.28 Likewise, a recently developed longitudinal survey of individual respondents showed that fewer than 2% of respondents knew either the fixed or variable commissions in any one year and less than 1% claimed to know both fixed and variable commissions.29 The fact that workers and savers know virtually nothing about the costs of investing their funds suggests that there is much work to be done on educating participants about this key aspect of their retirement system.30 Fees can be either fixed or variable. Fixed fees are characterised by the fact that their levels depend neither on salaries nor on funds. One of the advantages of fixed fees is that participants can easily understand and compare them. However, the system is considered regressive and, as a consequence, few countries allow them. Examples of this type of fee are found in certain Latin American countries, such as Chile and Uruguay. A variable fee may take the form of a percentage of the outflow of payments, of the inflow of contributions, of the amount of assets managed, or of the investment return on the assets under management. Variable fees on flows – usually percentages of salaries – are the most common and are found in most countries under consideration in this section.31 They bear direct relationships to collection fees and guarantee even flows of revenue for pension companies. However, the main criticisms of variable fees charged on flows are that they offer no incentive for better investment and heavily penalise members who pay in high levels of contributions (typically higher earners). Additionally, pension companies do not collect revenues from people who do not contribute, but still have to bear the cost of administering these people’s funds. A variable fee on stock can be levied either on the value of the fund or on returns. Such fees may encourage pension companies to seek higher investment returns. They also ensure a continuous flow of revenue from non-contributors. The main criticism of this type of commission is that it can encourage the search for investment strategies which are profitable in the short term at the expense of the ultimate goal of maximising long-term results in order to guarantee participants an adequate pension. It also generates a potentially problematic flow of revenue for managing companies, which must face usually


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high initial expenses with a small revenue flow while the asset base builds up. Fees on the value of funds are widely practised in Central and Eastern Europe, whilst commissions on returns or performance can be found in a few countries, like Kazakhstan and Costa Rica.

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The structure of charges, and, in particular, the balance between fees levied on contributions and asset management fees, reflects the relative emphasis policy makers place on different objectives. In Latin America mandatory pension systems were introduced when the financial sector was still relatively underdeveloped and there was concern about limited entry and insufficient competition in the market for pensions. This led to a greater emphasis on contribution fees. In Central and Eastern Europe there has been less concern over entry, perhaps owing to the presence of established financial services companies in Western Europe with an interest in expanding operations. As a result, there has been a greater reliance on management fees and fees on returns.

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Pension companies may also charge exit fees when workers transfer their individual accounts to another pension company. Exit fees may either be fixed or operate on a sliding scale with loyalty being rewarded by lower exit fees.

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Type of fees allowed Pension fund designs in Latin American countries are relatively similar. The legal framework governing fees includes limits on the types and levels of charges levied on pension fund members. With the exception of Chile, pension funds were also established relatively recently, as a result of which observations on cost levels are to some extent distorted by the impact of start-up costs. The commission structure is regulated in all Latin American countries (see Table 4.5). Commissions to cover the administrative costs of account and asset management are calculated as percentages of salaries or contributions in most Latin American countries. However, only a part of the fees levied on contributions constitutes net income for the pension company. A share of it is transferred to life insurance companies as a premium for the disability and survivor insurance used to cover contributors. Pension companies in four countries charge fees on contributions only. In Argentina, for instance, pension companies are entitled to charge fees solely on contributions. There is no asset management fee and flat-rate fees were abolished in November 2001. Similarly, pension companies in Peru were initially allowed to charge affiliates a monthly fixed commission, a fee on contributions, and a fee on assets. However, since January 1997, the law has allowed only variable commissions as a percentage of contributions. In Colombia, on the other hand, pension companies are allowed to charge fees on contributions, fees on assets, and fixed administrative fees. But all fees currently charged are levied on contributions, with no pension companies charging fixed fees or fees on assets. In Chile and Uruguay, most pension companies charge two-tier tariffs, consisting of monthly fixed administrative fees and contribution-based fees. When private pension funds were introduced in Chile, pension companies were also authorised to charge percentages of the balance in personal accounts, but this practice was banned in 1988. In Bolivia, pension companies may charge monthly commissions on contributions and annual commissions on assets. Up to the end of 2007, pension companies in Mexico could freely determine their yearly fees, which could be charged as percentages of contributions or of assets under management, or both. At the beginning of 2008 fees on account holders’ monthly

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Limit on fees

✓

Chile

✓ ✓

Costa Rica ✓

El Salvador

ea ✓ ✓

Peru ✓

✓ ✓

✓

✓

Mexico Uruguay

✓

✓

se

✓

✓

R

✓

✓

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Colombia

✓

O

✓

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✓

Bolivia

EC

Latin American countries Argentina

Death and disability insurance

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O

Fees on assets

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Fees on contributions

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Fixed commission

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Table 4.5. Private pensions’ fee structure in selected OECD and non-OECD countries, 2007

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✓

✓

✓

✓

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Central and Eastern European countries ✓

Bulgaria

✓

✓

✓

Estonia ✓

Hungary

✓

✓

✓

✓

Kazakhstan Latvia

✓

✓

Poland

✓

✓

Slovak Republic

✓

✓

✓

✓

✓ ✓

✓

✓ ✓

OECD countries Australia

✓

Sweden

✓

✓

✓

✓

Source: Tapia and Yermo (2008)

contributions were abolished, and only fees on individual account balances may now be charged. The designs of pension systems in Central and Eastern Europe bear certain similarities with those in Latin America. When preparing reform to their pension systems, national authorities took a particular interest in the experiences of countries (especially Chile) that had implemented funded systems incorporating individual choice, which explains similarities both in approaches to charge structures and the structuring of administrative costs. Fees and commissions have been relatively less scrutinised because mandatory private pension systems are still relatively new. Of the ten or so countries that have implemented mandatory private pension systems, most introduced them after 2001. Asset management fees – charged as percentages of individual account balances – are the most common and are to be found in all the countries reviewed. In Estonia, for instance, there are two types of management fees: the (occasionally charged) unit redemption fee, calculated as a percentage of the net asset value of redeemed units, and a management fee, which must be proportionate to the market value of the fund assets and must be set out in pension fund rules.32 In Poland, on the other hand, asset management fees comprise a fixed component, charged as a percentage of fund assets, and a variable part, which depends on a fund’s investment performance. The pension companies with the highest rates of return may charge the highest rates for the variable component of their management fees (within set limits), while companies whose funds generate the lowest returns may not even charge the variable part of the fee. OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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In addition to asset management fees, pension companies in Bulgaria, Hungary, and the Slovak Republic are also allowed to charge contribution fees as percentages of salaries.33 In the Slovak Republic, for example, pension companies may only charge fees as percentages of total assets and contribution fees for maintaining personal pension accounts. Pension companies may not charge any other fees (e.g. switch or exit fees). A third fee is one levied on performance or returns, an approach practised in Latvia and Kazakhstan.

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Finally, pension companies may charge exit fees when participants transfer their individual accounts to another company. Exit fees may be fixed, or operate on a sliding scale, with loyalty being rewarded by lower exit fees. In Poland, for instance, switch fees vary from PLN 80 to PLN 160, depending on the duration of membership. Members are free to switch funds at any time, as in Bulgaria, where the charge is BGN 20. Neither Hungary

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nor Kazakhstan34 allow exit fees. Nor do Estonia or Latvia, where participants may switch pension companies once a year free-of-charge.

Limits on fees Some countries have capped the fees that pension funds may charge in order to ensure that administrative costs do not eat into participants’ retirement income. The problem with fee-capping, however, is the risk that governments may set the “wrong” ceiling. Too high a limit is ineffectual. Ones which are too low might prevent fund managers from covering their costs, which restricts competition and choice, and could even put weaker providers out of business, so undermining public confidence in the system. There is also evidence that charge ceilings can become de facto floors as well. This limits price competition, at least in the short term, as companies seek only to meet the regulatory requirement. Among Latin American countries, only Argentina, Bolivia, Colombia, Costa Rica, and El Salvador have capped the fees that pension funds can charge (see Table 4.6). In Bolivia a bidding contract between the regulator and the pension fund administrators stipulates that commissions cannot exceed 0.5% of salaries. In Colombia, the only restriction set by law is that total commissions, including the premiums charged for disability and survivor insurance, may not exceed 3% of salaries. In El Salvador pension companies may charge fees of up to 5% of investment returns – though not exceeding 1.5% of a member’s average salary over the last 12 months in which contributions were made – for the purpose of administering individual accounts that have lain dormant for more than one year (e.g. if members cease any employment and do not contribute), and whose balances exceed 100 times the minimum wage.35 Similarly, in Costa Rica commissions charged on investment returns may not exceed 8% of returns, while those levied on contributions may not account for any more than 4% of total contributions. Chile, Mexico, Peru, and Uruguay do not cap fees. In Chile, for instance, there are no legal rules governing fees, except that they must be the same for all members and based on their salaries. The authorities have not imposed any controls on fee and commission levels, relying on competition (and presumably on the threat of future regulations, too) to provide ceilings. Unlike Latin American countries, mandatory pension systems in Central and Eastern European countries have usually relied on legislative restrictions to keep charges in check. With the exception of Latvia, all the countries covered in this publication rely on price caps

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Poland has successfully used price caps to lower fees. Prior to 2004, management fees were subject to an upper limit of 0.6% of individual account balances, whilst contribution fees were not capped. Changes that came into effect in 2004 capped the management fee at 0.54% and the up-front fee at 7%. Moreover, legislation provides for the maximum up-

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in some form or the other.36 Bulgaria, for instance, caps management fees for mandatory pension funds at 1% of assets, and fees on contributions at 5%. Similarly, in Estonia, unit redemption fees may not exceed 1% and management fees are limited to 2%. Hungary has reformed annual fees for asset management services (with the exception of trading expenses), which could not exceed 0.9 % in 2007 and 0.8 % in 2008. The ceiling on contribution fees was lowered from 6 % in 2007 to 4.5 % in 2008.

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u front fee to be further lowered from 7% to 3.5% by 2014. Additional limits, L related e ctotthe

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overall size of assets under management, were placed on management fees. The fixed component of the management fee must be lower than 0.045 % of net assets, while the variable component (which depends on investment returns) may not exceed 0.005 % of net assets per month. In Sweden there are no limits on fees. However, fund managers are – under the terms of their agreement with the Premium Pension Authority (PPM), the system’s public clearing house – under the obligation to provide retail investors with rebates on their ordinary fees. The rebates are calculated individually, i.e. all rebates received from one fund are reinvested for those participants who have or have had holdings in that fund during the period for which the rebate is given. The rebate model is progressive, so the size of a rebate depends on the size of the fund’s fee and on the PPM’s total holdings in the fund. Consequently, the more capital there is, the bigger the rebate. Fund managers are invoiced on a quarterly basis, while rebates are distributed to pension savers only once a year. The rebates for 2006 were paid out in May 2007. The premium pension system’s discount model therefore plays a central role in limiting costs. The model is designed to give participants a reasonable share of the profits from the economies of the scale in investment management – a prerequisite if the system is to be considered internationally cost-effective in the future.

Comparing fee levels Table 4.7 below shows the average fee level in each country in 2007, classifying the fees actually charged by pension providers by type. As fee structures differ across countries, it is not possible to compare fees by simply looking at these numbers. It should also be noted that some fees may not be fully reported. For example, in Chile pension funds that invest in international mutual funds deduct management fees directly from the fund. Such fees are not reported separately by pension fund administrators (AFPs). Figure 4.14 shows the aggregate administrative charges per member in 2007 expressed in US dollars. Members in Chile paid over USD 180 per capita in administrative charges in 2007. Peru came next with USD 134 per member, followed by Colombia with USD 95, and Mexico at USD 93. Among Central and Eastern European countries, each participant in Hungary – one of the most highly developed countries in the region – contributed USD 81 to administrative costs. In Poland, on the other hand, administrative charges accounted for less than USD 40 per capita. The lowest charges per member were observed in Sweden with USD 37 and Bolivia with USD 29. In order to draw conclusions as to the relative cost of different systems, these figures need to be related to the size of contributions or assets under management.


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Fees on return (as a % of returns)

Fixed fee

El Salvador1

ea

se

No limit 4% of contributions

No limit

8

3% of salary

5

Mexico

No limit

No limit

Peru

No limit

Uruguay

No limit

Bulgaria

5% of contributions

1

Estonia2

3% of contributions

2

Hungary

6% of contributions (4.5% in 2008)

0.9 (0.8% in 2008)

Latvia3

No limit

No limit

Poland

7% of contributions (3.5% by 2014)

0.54

Slovak Republic

1% of contributions

0.70

e

Costa Rica

R

Chile

0-0.223

3% of salary

O

Colombia1

1% of salary 0.5% of salary

EC

Bolivia

An

Argentina

d

Latin American countries

u le

O

Fees on assets (as a % of assets)

D Br o

Fees on contributions

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Table 4.6. Limit on fees in selected OECD and non-OECD countries, 2007

u Lect

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No limit

Central and Eastern European countries

Kazakhstan

BGN 20

0.05

15 0.05

OECD countries Australia

If the account balance falls below A$1000 (US$ 850), special fee provisions may apply which will limit the fees which can be charged to the individual balance.

Sweden

No limit, but rebates are paid back to members’ accounts

No limit

1. Fees on contributions include disability and survivors’ insurance. 2. Fees on contributions were abolished in 2007. 3. Until the end of 2005, fees on contributions were capped at 2.5%. Source: Tapia and Yermo (2008).

1 2 http://dx.doi.org/10.1787/517004017744

In order to compare fees across countries, two main metrics may be used: charge ratio and reduction in yield. The charge ratio measures the impact that any type of administrative charge can have on the final balance (e.g. after 25 or 40 years) of an individual retirement account, compared to the hypothetical balance that could be obtained if no administrative fees were charged at all. Reduction in yield, on the other hand, shows the effect of charges on the rate of return, given a set of assumptions as to rate of return, the time profile of contributions, and the terms of the plan.37 The use of the charge ratio can provide a misleading picture of the cost of a private pension system when commissions are set as a percentage of the accumulated fund.38 On the other hand, the charge ratio is a more useful and appropriate measure of the cost-efficiency of those systems where commissions are charged only on contributions or salaries. It is also important to note that charge ratio calculations require assumptions as to the length of a typical contribution period and that charges remain constant until pensions are withdrawn. Various papers have looked at both charge ratio and reduction in yield in different countries.39 A recent study by the International Organisation of Pension Supervisors (Gómez Hernández and Stewart, 2008) has calculated charge ratios for various countries

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1.40

Mexico2, 3

1.10

Peru

1.81

Uruguay

1.79

0.39

u le

El Salvador

7.50

se

3.28

0.43 (monthly)

0.02

e

1.71

Costa Rica

ea

Chile

0-0.223

R

1.58

O

0.50

Colombia

EC

1.00

Bolivia

An

Argentina

Fixed fee (in USD)

d

Latin American countries

nl y

Fee on return (as a % of over profit)

O

Fee on assets (as a % of individual account balances)

D Br o

Net fee on contributions (as a % of salary)1

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Table 4.7. Average administration fee in selected OECD and non-OECD countries, 2007

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0.10 (monthly)

Central and Eastern European countries Bulgaria

0.25

Estonia2 Hungary2

1.00 1.54

0.44

0.57

Kazakhstan4

0.05

Latvia4

1.49

Poland

0.40

0.42

Slovak Republic

0.09

0.85

0-4.50

0.70-2.53

15.00

OECD countries Australia Sweden5

38 (annual)

0.42-1.21

1. Only part of the total fees on contributions constitutes net income for the pension company (net fee). A certain fraction of it is transferred to the life insurance companies as a premium for the disability and survivorship insurance used to provide coverage for contributors. The data shown excludes insurance premia. 2. Data refer to the year 2005. 3. In Mexico the disability and survivor insurance premium is paid by the Government. 4. Data refer to the year 2006. 5. Investment management fee before the application of discounts negotiated with the PPM. The average investment management fee after rebates amounted to 0.33% of assets under management in 2007. In addition, the PPM charges an administration fee which represented 0.12% of assets in 2007. Source: Tapia and Yermo (2008). 1 2 http://dx.doi.org/10.1787/517048246843

with defined contribution pension systems, both mandatory and voluntary. They find the highest charge ratios in voluntary pension systems. For present purposes, a simple, annual calculation of reduction in yield (annual fees divided by total assets under management) has been used, as it is the one most commonly employed in OECD countries to compare the cost of fund management. It is also relatively easy to calculate, as it only requires adding up the various fees and combining them into a single average figure. This metric can be used to compare countries only if the system’s maturity is taken into account. Figure 4.15 shows administrative charges in 2007 in OECD and non-OECD countries expressed as percentages of total assets. At 2.04%, Costa Rica practised the highest charges of all the countries considered. This was due to the high fees levied on nominal and real returns of assets under management. This kind of charge on returns is one that most affects a pension fund’s final balance. The average fee on nominal returns in 2007 was 7.5%, whereas the average fee on real returns was 15.38%. The lowest fee levels were observed in Sweden and Bolivia, at less than 0.5% of assets under management. OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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120

u le

O

O

140

R

160

ea

EC

180

d

D Br o

In USD 200

n

Figure 4.14. Administrative charges per member in selected OECD and non-OECD countries, 2007

e

100

An

80 60

u Lect

r

40 20

Sw

Bo

ed

li v

en

ia

1

nd Po

la

ua ug Ur

Hu

Sa El

Ar

y

y1 ar ng

ad lv

nt ge

ex M

Co

or

a in

o ic

bi m lo

Ch

Pe

il e

ru

a

0

1. Data refer to the year 2006. Source: Tapia and Yermo (2008).

1 2 http://dx.doi.org/10.1787/517052344408

Figure 4.15. Administrative charges in selected OECD and non-OECD countries, 2007 As percentage of total assets 2.0

1.5

1.0

0.5

en Sw

ed

ia li v Bo

il e Ch

y ug

ua

ru Ur

lv Sa

Pe

ad

or

lia 1 st

ra El

Au

nt ge Ar

La

tv

in

a

ia

1

nd la Po

a ni to

bl pu Re ak

Sl

ov

Es

ic

o ic ex M

ar ng Hu

Co

st

aR

ic

a

y1

0

1. Data refer to the year 2006. Source: Tapia and Yermo (2008).

1 2 http://dx.doi.org/10.1787/517080144881

The highest fees after Costa Rica were in Hungary, Mexico, and the Slovak Republic with overall fees of between 1.5% and 2% of total assets, followed by Estonia, Poland, and Latvia where they accounted for approximately 1.5%. Australia stands mid-way with an average overall fee of 1.26% of total assets. Nevertheless, fees in the Australian Superannuation system do vary greatly, according to the type of fund. Public sector and corporate funds charge the lowest overall fees at around

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0.78% and 0.7% respectively. With 1.13%, industry funds were about average, while retail funds for individuals (retirement saving accounts) were the most expensive at around 2.3% of total assets.

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Finally, the figure also shows that administrative charges in Latin American countries were, on average, lower than in Central and Eastern Europe. Excluding Mexico, all Latin American countries practice overall fees of between 0.5% and 1.4% of total assets, while in Central and Eastern Europe administrative charges were over 1.5%.

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Figure 4.16 shows the historical evolution of fees expressed as shares of assets in six countries included in the report, since they introduced their systems. This comparison reveals that total average fees have decreased significantly in all the countries considered, but in particular in those countries which charge contribution-based fees. This sharp drop is typical of young pension systems and reflects the rapid growth of assets relative to contributions.

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Bolivia and, in particular, Sweden stand out for having introduced systems with much lower costs at their inception than the other countries. Even the most mature systems still have some way to go before they catch up with the fee levels of these two countries. For instance, at the end of 2007, 26 years after Chile introduced its mandatory private pension system, fees in that country accounted for around 0.6% of assets under management.40 In contrast, fees represented 0.45% of assets under management only seven years after the inception of the Swedish premium pension system.41

Figure 4.16. Evolution of total fees since the inception of each system As a percentage of total assets Chile

Mexico

Argentina

Hungary

Poland

Sweden

Bolivia

14 12 10 8 6 4 2 0 1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25 26

Note: Argentina made data available five years after it introduced its system, and Bolivia three years. Source: Tapia and Yermo (2008)

1 2 http://dx.doi.org/10.1787/517114610422


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Notes

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1. These sources include administrative data, household survey data and administrative data adjusted by an estimated factor to control for double counting.

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2. Some countries with high levels of labour-market informality (e.g. Chile, Mexico) show low coverage from mandatory private pensions.

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3. While high coverage is important in determining retirement income adequacy, it is not enough. High levels of contributions and benefit accrual rates are also needed. This issue is taken up in the next section.

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4. See Antolin, P. (2008), “Coverage in funded pension plans”, Working Paper on Insurance and Private Pensions No. 19, OECD for a full analysis.

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5. In Australia, it is compulsory for employers to contribute to the superannuation fund. However, contributions are voluntary for employees. Therefore, it is interesting to assess coverage in Australia by looking at employees’ actively contributing to their superannuation fund. In Chile, participation in DC private pension plans is mandatory. However, coverage is not widespread. Results for Finland and Norway refer to participation in voluntary private pension plans.

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6. The data for the United States allows the coverage in occupational private pensions to be divided between defined benefit (DB) and defined contribution (DC) funded plans (Antolin, 2008). Despite the large shift to DC plans in recent years, there still remains more people enrolled in occupational DB plans than in occupational DC plans, around four percentage points more. 7. The Riester pensions were introduced in Germany in 2002. These are defined contribution personal plans that complement public pension benefits. Contributions to them are entitled to a flat government subsidy or a tax deduction. 8. Income data correspond to individual labour income (earnings) as defined in each country labour force survey. 9. Assuming a nominal rate of return of 6%, inflation at 2%, productivity at 1.75% (so wage growth at 3.8%), a discount rate (the riskless nominal rate of return) at 4.5%, and a working life from age 25 to 65. 10. The calculations in this section assume that the representative individual earns the average wage in each respective country. Another measure that could be considered is the median earner. The median earner typically earns about 75% to 80% of the average earner in most OECD countries. 11. The quasi-mandatory plans typically required by collective bargaining agreements in some countries are considered as voluntary occupational pensions and are presented as such in all the results shown in this section. 12. The typical severance pay plan has been included in the appropriate country estimates for Japan, Italy and Korea. Finland’s TEL pension plan has been considered a mandatory private pension plan. 13. The averages encompass all 36 sets of country results. This includes the 30 OECD countries, with two sets of results for Ireland, three for Norway, two for Sweden, two for the United Kingdom and two for the United States. The five countries with more than one set of results are in a particular state of change with respect to their voluntary occupational pension systems. They have therefore been modelled using more than one typical voluntary occupational pension plan. It should be noted that, in all five countries with more than one set of results, defined contribution modelling results (termed “DC” in the charts) are the most representative of newly established pension plans. For a description of the typical and mandatory plans for each country, refer to the country profiles later in this publication. 14. BBVA, the Dutch Association of Industry Wide Pension Funds (VB), and ING Groep N.V. The support of the American Council of Life Insurers and the UK Department Work and Pensions is gratefully acknowledged. 15. See Antolin, P. (2008), “Pension Fund Performance”, OECD Working Papers on Insurance and Private Pensions, No. 20, and references therein. 16. This project is currently in its second stage developing system and country specific benchmarks against which pension funds should evaluate their long-term performance; benchmarks that would allow assessing the impact of pension design and different regulatory environments on the investment performance of privately managed pension funds across the world.

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17. Marketing and advertising costs arise mainly in retail pension systems (i.e. personal pension plans).

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18. Most of the other costs depend on the type of private pension system in place. For example, pension funds in countries where participation in private pension funds is quasi-mandatory and employment agreements already assign individuals to different pension funds, have small costs related to attracting people, such as promotion and advertising. On the other hand, pension funds in countries with compulsory systems where individuals are relatively free to choose among different pension funds available, have large costs in attracting members. Therefore, netting out total costs leads to comparing pension systems’ performance instead of investment performance of privately managed pension funds.

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19. Pension funds tend to charge members a fee to cover all their costs. However, different pension systems charge fees in different ways. For example, in most Latin American countries, pension funds charge a fee to cover overall costs as a percentage of member’s contributions. In some OECD countries, e.g. the Netherlands, the fees are a percentage of the amount of assets under managements.

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20. The annual mean return reported in column 3 corresponds to the actual return of the pension funds in each country. 21. The global index and all data used in our study is from Thomson Financial’s Datastream database. All data has been examined at the group level. 22. Multi-employer pension plans are reported as if they were defined contribution plans under US accounting rules. Multi-employer pension plans must be reported as defined benefit under international accounting rules. However, if sufficient data is not available in order to report these plans as defined benefit, then under international accounting standards rules, they can be reported as defined contribution. 23. A complete analysis of fees should also take account of the burden of administrative charges during the “decumulation” phase, when retirement benefits are paid out. Usually, individuals have to use the balance accumulated in their pension account at the time of retirement to buy an annuity from a life insurance company. International studies show that the costs of buying annuities range from 0.25 to 0.5% of the capital to be annuitised. 24. For an analysis of these factors, see Tapia and Yermo (2008). 25. The official Chilean figures for fees are biased downwards as they do not include the management fees charged by international mutual fund providers on pension funds. If these additional charges are included the actual level of fees paid by members to the pension fund providers is closer to 0.9% of assets under management, about twice the Swedish level. 26. For evidence on this argument, see Tapia and Yermo (2008). 27. Chlon (2000). 28. Martinez and Sahm (2005). 29. Universidad de Chile (2004). 30. Arenas de Mesa et al. (2006). 31. Fees on contributions are also known as up-front fees. 32. A third type, the unit issue fee, was abolished in 2007. 33. Up-front fees were collected in Kazakhstan until 2003 but were then disallowed. 34. As a result of these new regulations, specific entry- or switch-fee regulations have been abolished. Members are allowed to switch funds provided that they have been with their current fund for at least three months. 35. Disability and survivor insurance coverage is not required for members who qualify for old-age benefits but continue contributing. Pension fund administrators (AFPs) may charge such members fees up to 1.5% of their salaries. 36. Recently, Latvia abolished the cap on administration fees. Other fees, such as asset management fees, are not regulated, but each management company must publish fee levels in its literature. No minimum or maximum limits on fees are set by law. 37. For example, if the gross return assumed were 5% a year and the reduction in yield 1.5%, then the net return would be 3.5% a year.


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38. As discussed by Whitehouse (2001).

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39. See for example James et al. (2001), Whitehouse (2001) and Rusconi (2004).

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40. Fees in the Chilean pension system are calculated as income from commissions minus the cost of disability and survivor insurance divided by total assets. They exclude asset management fees charged by international mutual fund providers. These fees amounted to approximately 0.3% of pension fund assets in 2007, raising total fees in the Chilean pension fund system to about 0.9% of assets under management.

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References

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41. Including both the Premium Pension Authority (PPM) fee and the asset management fee.

tu AIOS (Asociación International de Organismos de Supervisión de Fondos de Pensiones) L(2007), e cBoletin

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Estadistico AIOS, Numero 18 – Diciembre de 2007, available at www.aiosfp.org/estadisticas/ boletines_estadisticos/boletin16.pdf.

Annual Superannuation Bulletin June 2006 (APRA), available at www.apra.gov.au/Statistics/upload/June2006-Annual-Superannuation-Bulletin.pdf. Arenas de Mesa, A., D. Bravo, J.R. Behrman, O. Mitchell and P. Todd (2006), “The Chilean Pension Reform Turns 25: Lessons From the Social Protection Survey” NBER Working Papers 12401, National Bureau of Economic Research, Inc. Chlon-Dominczak, A. (2000), “Pension reform and public information in Poland”, in: Schmollers Jahrbuch (Journal of Social Science Studies), 120(3), 489-533. Chlon-Dominczak, A (2004), “Evaluation of Reform Experiences in Eastern Europe” in: Pension Reforms: Results and Challenges, FIAP. CONSAR (Comisión Nacional del Sistema de Ahorro para el Retiro, Mexico), www.consar.gob.mx. Devesa-Carpio, J.E., R. Rodriguez-Barrera and C. Vidal-Melia (2002), Assessing Administrative Charges for the Affiliate in Individual Account Schemes, Instituto Valenciano de Investigaciones Económicas, S.A. Dobrogonov, A. and M. Murthi (2005), Administrative Fees and Costs of Mandatory Private Pensions in Transition Economies, Journal of Pension Economics and Finance, Vol. 4, pp. 31-55. FIAP (Federación International de Administradoras de Fondos de Pensiones) (2007), Informe Semestral No. 21, available at www.fiap.cl/prontus_fiap/site/artic/20070605/asocfile/20070605111456/ informe_semestral_n.pdf. Gómez Hernández, D. and Stewart, F. (2008), “Comparison of Costs and Fees in Countries with Defined Contribution Pension Systems”, IOPS Working Paper No. 6, May 2008. Impavido, G and R. Rocha (2006), Competition and Performance in the Hungarian Second Pillar, World Bank Policy Research Working Paper 3876. James, E., J. Smalhout, and D. Vittas (2001), “Administrative Costs and the Organization of Individual Account Systems: A Comparative Perspective.”In Private Pension Systems: Administrative Costs and Reforms, Private Pensions Series No. 2, pp. 17-83, Paris, OECD. Martinez, C.; C. Sahm (2005), Knowledge and Retirement Savings with Personal Accounts in Chile. Párniczky Tibor A. (2006), Reporting Costs and Expenses in Mandatory Individual Account Pension Systems, Budapest. Primamerica (2007), Tasas de Cotización y Topes Imponibles en los Países con Sistemas de Capitalización Individual, Serias Regulaciones Comparadas, publication for FIAP, March 2007, Santiago, available at www.fiap.cl/prontus_fiap/site/artic/20070608/asocfile/20070608111120/ asocfile120070404111944.doc. Rice, M. (2007), Superannuation fees report, Paper prepared by Rice Walker Actuaries Pty Ltd. for IFSA. Rozinka, E. and W. Tapia (2007), Survey of Investment Choice by Pension Fund Members, OECD Working Paper on Insurance and Private Pensions No. 7, January 2007. Rusconi, R. (2004), “Costs of Saving for retirement: Options for South Africa”, paper presented at the 2004 Convention of the Actuarial Society of South Africa, October 2004, Cape Town, South Africa, August 2004, mimeo.

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Tapia, W. and Yermo, J. (2008), “Fees in Individual Account Pension Systems: A Cross-Country Comparison”, OECD Working Paper on Insurance and Private Pensions No. 27, September 2008.

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Universidad de Chile (2004), Encuesta “Historia Laboral y de Seguridad Social”, Economics Department, Universidad de Chile, Santiago, Chile.

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Valdés Prieto, S. (1999), Costos Administrativos en un sistema de Pensiones Privatizado, Development Discussion Paper No. 677, Harvard Institute for International Development, Harvard University, available at www.hiid.harvard.edu.

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Weaver, R. (2005), Lesson from Sweden’s Individual Pension Account, Policy Brief 140, The Brooking Institutions.

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Whitehouse, E. (2001), “Administrative charges for funded pensions: comparison and assessment of 13 countries”, in Private Pension Systems: Administrative Costs and Reforms, Private Pensions Series No. 2, pp. 85-154, Paris, OECD.

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Country Profiles

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5. HOW TO READ THE COUNTRY PROFILES

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Pension funds data overview

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Private pension system’s key characteristics

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Reference information

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Overview of private pension system by type of plan and financing vehicle

Australia Demographics and macroeconomics Nominal GDP (AUD bn)

45 003.6

Population (000s)

21 017.0

Labour force (000s)

11 000.4

Employment rate

95.7

Population over 65 (%)

13.1

Dependency ratio1

25.1

Source: OECD, various sources.

Country pension design Structure of private pension system

3

Mandatory/Quasi-mandatory, occupational Occupational trustee managed superannuation fund: corporate Occupational trustee managed superannuation fund: industry Public sector occupational pension plans, often compulsory for public sector employees

60 Mandatory/Quasi-mandatory, personal Trustee managed public offer superannuation fund: retail funds Trustee managed superannuation fund: small APRA funds Trustee managed superannuation fund: self-managed superannuation fund (SMSFs) Trustee managed superannuation fund: approved deposit fund

40

20

Voluntary, personal Retirement savings accounts (RSAs): capital guaranteed individual savings account or policy

0 Source: OECD Global Pension Statistics. Note: Additional pension income may come f r o m o t h e r s o u rc e s s u c h a s v o l u n t a ry occupational pension, personal pension, general savings or investments, etc. Source: OECD estimates.

4

Pension funds data overview 2003

Total investments (AUD bn)

2004

2005

2006

2007

537.8

602.7

720.6

874.4

1 100.4

Total investments as a % of GDP

68.9

71.6

80.4

90.4

105.4

Total contributions as a % of GDP

6.849

7.2

7.8

8.8

11.7

Total benefits as a % of GDP Total number of funds

4.3

3.6

3.7

3.9

3.9

264 614

290 917

306 553

324 789

366 567


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PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

Demographics and macroeconomics

➊ The first section presents a selection of key demographics and macroeconomics indicators that provide a sense of the size of the country and its economy. GDP figures are from the OECD Reference

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after a full working lifetime. It is expressed as a percentage of the earnings the pensioner had just before retirement. These figures draw and expand on a mi c ro e c o n om ic a p p roa ch u s e d i n t h e publication Pensions at a Glance, looking at future individual pension entitlements under 2004 parameters and rules. The pension incomes projected here, however, should be considered only as broad indications of what may happen, as they are conditional on a number of assumptions. It is assumed that individuals are covered by public pension plans throughout their careers. For the countries where occupational pension plans are common, averageearning individuals are assumed to be covered throughout their careers by occupational pension plans that are typical of market practice in that country. In countries where private pension accounts are compulsory, they are assumed to have participated in the compulsory system throughout their careers. Those with shorter, or periodically interrupted, careers should expect lower benefits than those which are set out in this figure.

1 044.5

GDP per capita (USD)

Note: Data from 2007 or latest available year. 1. Ratio of over 65-year-olds to the labour force.

Public pension – Means-tested pension

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5. AUSTRALIA

Mandatory occupational pension – Superannuation funds

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The figure below shows how the first three sections are organised on the first page of each country profile.


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➋ Potential average pension benefit

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Potential average pension benefit

Country pension design This section is split into two parts:

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Series database. Population figures are from the OECD Population and Labour Force database.

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This section provides country profiles, describing private pension arrangements in individual OECD countries. Each pension country profile is divided into six main sections:

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A public pension can be an earnings-related pension (a pension computed by reference to a rate of emoluments, whether actual emoluments or not and whether final or average emoluments), a flat rate pension (a pension payable at a rate fixed otherwise than by reference to a rate of emoluments or to the rate of another pension), a minimum pension (the minimum level of pension benefits the plan pays out in all circumstances), a basic state pension (a nonearnings related pension paid by the State to


5.

For five countries, several projections are presented as private pension systems are in a particular state of change.

➌ Structure of private pension systems The second part displays a bulleted list summarising the structure of private pension systems according to the pension plans currently in place in the country.


➍ The third section presents selected pension fund indicators from 2003 to 2007 from the OECD Global Pension Statistics project (www.oecd.org/daf/ pensions/gps). For further data and analysis, readers can refer to Chapter 2 of this publication.

●

Coverage

●

Typical plan design

●

Contributions

●

Benefits

●

Fees

●

Taxation

●

Market information

D e p e n d i n g o n d a t a av a i l a b i l i t y, t h e s e characteristics are developed for each existing category of pension plan (mandatory vs. voluntary pension plan, occupational vs. personal pension plan). Information provided in this section refers to December 2007 or to the latest available year.

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This last section gives a detailed description of the various private pension plans found in each country as well as the statistical data coverage of the OECD Global Pension Statistics.

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The following figure gives an example of such an overview. The first two columns provide the name and the description of each pension plan. Pension plans included in the OECD GPS database are marked with a tick in the next column, excluding OECD estimates. Under the column headings “Type of plan” and “Financing vehicle” are given the correspondence of each pension plan with the OECD Classification by funding vehicle and by type (see OECD (2005), Private Pensions: OECD Classification and Glossary, OECD, Paris). Overview of private pension system by type of plan and financing vehicle Type of plan Included in Mandatory/ OECD GPS OccupaQuasidatabase Voluntary tional mandatory Occupational trustee managed superannuation fund: corporate

Sponsored by a single nongovernment employer, or group of employers. Either defined benefit, defined contribution, or hybrid. Employer contributions may comprise or exceed the mandatory 9% contribution. Benefits can be pension, lump sums, or combinations thereof. Trustees are independent or comprise of equal numbers of employer and employee representatives.

Occupational trustee managed superannuation fund: industry

Established under an agreement between the parties to an industrial award. Multi-employer sponsored. Defined contribution. Employer contributions comprise the mandatory 9% contribution. Benefits generally lump-sum or allocated (account-based) pensions. Trustee comprised of equal numbers of employer and employee representatives.

Trustee managed public offer superannuation fund: retail funds

Pooled superannuation products sold commercially and competitively through intermediaries, including master trusts (private pension investments) and personal superannuation products. Trustee must meet capital requirements. Often sponsored by financial institutions such as life insurance companies or banks.

Trustee managed superannuation fund: small APRA funds

Superannuation funds, regulated by the prudential regulator, that have less than five members and are operated by an independent trustee that meets capital requirements. Can pay lump-sum or allocated (account based) pension benefits.

Retirement savings accounts (RSAs): capital guaranteed individual savings account or policy

Retirement savings accounts (RSAs): these are non-trust-based superannuation accounts that are offered directly off the balance sheets of either life companies or Approved Deposit Taking Institutions (banks, credit unions, friendly societies). RSAs are governed by separate legislation (the Retirement Savings Account Act 1997). The liabilities represented by these accounts are liabilities of the institutions concerned.

The information provided in this section covers eight private pension system key characteristics: Overview

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Overview of private pension systems by type of plan and financing vehicle


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This section includes references to key legislation reforms, provides the name of regulatory and supervisory authorities and displays official statistical references and sources on private pensions.

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D a t a c ov e r p u b l i c p e n s i o n s a n d o t h e r mandatory or quasi-mandatory private pension plans. Voluntary plans are also included if they cover at least 30% of the working population. Additional pension income may come from other sources, such as individual savings, but these are not included in the data.

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individuals with a minimum number of service years), or a means-tested pension (pension granted to a person after examination of his/her financial state).

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HOW TO READ THE COUNTRY PROFILES

Financing vehicle

Personal

Pension fund

Book reserve

Pension Banks or insurance investment contract companies



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Australia

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5. AUSTRALIA

Population over 65 (%) Dependency ratio1

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21 017.0 11 000.4 95.7 13.1 25.1

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1 044.5

45 003.6

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Population (000s)

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Nominal GDP (AUD bn)

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Structure of private pension system


Mandatory/Quasi-mandatory, occupational

Mandatory occupational pension – Superannuation funds

Occupational trustee managed superannuation fund: corporate Occupational trustee managed superannuation fund: industry ● Public sector occupational pension plans, often compulsory for public sector employees ● ●

Public pension – Means-tested pension 60

Mandatory/Quasi-mandatory, personal Trustee managed public offer superannuation fund: retail funds Trustee managed superannuation fund: small APRA funds ● Trustee managed superannuation fund: self-managed superannuation fund (SMSFs) ● Trustee managed superannuation fund: approved deposit fund ● ●

40

20

Voluntary, personal ●


0 Source: OECD Global Pension Statistics. Note: Additional pension income may come f r o m o t h e r s o u rc e s s u c h a s v o l u n t a ry occupational pension, personal pension, general savings or investments, etc. Source: OECD estimates.

Pension funds data overview 2003 Total investments (AUD bn)

2004

2005

2006

2007

537.8

602.7

720.6

874.4

1 100.4


68.9

71.6

80.4

90.4

105.4


6.8

7.2

7.8

8.8

11.7

Total benefits as a % of GDP

4.3

3.6

3.7

3.9

3.9

264 614

290 917

306 553

324 789

366 567

Total number of funds Source: OECD Global Pension Statistics.

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Overview

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Occupational/Personal mandatory

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There are a range of types of superannuation funds in Australia: corporate funds which are employer-sponsored superannuation funds, generally restricted to employees of the sponsoring employer; industry superannuation funds which are usually open only to employees within a certain industry; public-sector funds implementing schemes that cover public-sector employees; retail funds which are offered to the public and to employers by financial service providers; and small superannuation funds which are funds with fewer than five members, where each member is also a trustee of the fund.

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The superannuation fund system was made mandatory in 1992. This is a defined contribution system that requires a minimum contribution to a superannuation fund.

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Since 2005, most individuals have been allowed to select their superannuation fund and investments.

Coverage The system of superannuation funds is mandatory for employed persons older than 17 and younger than 70 earning more than AUD 450 a month, while the self-employed participate on a voluntary basis.

Contributions The required contribution is 9% of payroll up to a maximum of AUD 30 560 per quarter (approximately 2.5 times average indexed earnings), paid solely by sponsors, although employees may make voluntary contributions. Employer contributions are subject to an annual cap of AUD 50 000 (or AUD 100 000 for employees over the age of 50). The government will match by a factor of 1.5 additional employee contributions up to AUD 1 000 per year. This matching contribution is made for employees earning less than AUD 58 980 and is reduced by AUD 0.05 for each dollar of earnings above AUD 28 980. These earnings limits are increased in line with average wages.

Benefits Though some defined benefit schemes do still exist, most funds are now defined contribution occupational pension plans. Benefits are fully funded and portable. Payment is made in the form of a lump sum or annuity once members reach the age of 55 (scheduled to rise to 60 by 2025) and are permanently retired.

Fees In 2006 the fee on contributions was around 6.5%, with retail funds charging the highest fees.

Taxation Employer contributions are tax-deductible up to certain limits, while employee voluntary contributions are entitled to a concessional tax within limits. Pension payments, too, are entitled to a concessional tax rate which is currently subject to a limit, but which the government is proposing to remove.


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Occupational voluntary

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Personal voluntary

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Voluntary saving personal superannuation contributions may also be paid into existing employer superannuation funds or into separate plans.

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Occupational/personal mandatory In June 2007 the total number of participants was 29 million, and total assets within the superannuation fund system were AUD 1 100 billion (USD 921 billion). Among the different types of schemes retail funds had the largest share at 32% of assets, while the small funds – the second largest market player – represented 25%. Small funds account for 99.8% of the total number of entities. By June 2007 there were 365 992 small funds, while the figure was 289 for corporate funds and 172 for retail funds.

Reference information Key legislation 2006: Future Fund Act. Legalised the establishment of the Future Fund (strategic pension reserved fund) in Australia, with details as to objectives, investment strategies, structure of the board, etc., www.futurefund.gov.au/about_the_future_fund/legislation. 1998: Australian Prudential Regulation Authority Act. Established the functions and powers of the Australian Prudential Regulation Authority, http://bar.austlii.edu.au/au/legis/ cth/consol_act/apraa1998477. 1992: Superannuation Guarantee (Administration) Act. Forms the basis of Australia’s mandatory superannuation system and establishes the superannuation guarantee system, http://bar.austlii.edu.au/au/legis/cth/consol_act/sga1992430/.

Key regulatory and supervisory authorities Australian Prudential Regulation Authority, http://apra.gov.au. Australian Taxation Office, www.ato.gov.au. Australian Securities and Investment Commission, www.asic.gov.au.

Key official statistical references and sources on private pensions APRA (2007), Annual Superannuation Bulletin, June, www.apra.gov.au/statistics. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

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Established under an agreement between the parties to an industrial award. Multi-employer sponsored. Defined contribution. Employer contributions comprise the mandatory 9% contribution. Benefits generally lump-sum or allocated (account-based) pensions. Trustee comprised of equal numbers of employer and employee representatives.

✓

✓

Trustee managed public offer superannuation fund: retail funds

Pooled superannuation products sold commercially and competitively through intermediaries, including master trusts (private pension investments) and personal superannuation products. Trustee must meet capital requirements. Often sponsored by financial institutions such as life insurance companies or banks.

✓

✓

✓

✓

Trustee managed superannuation fund: small APRA funds

Superannuation funds, regulated by the prudential regulator, that have less than five members and are operated by an independent trustee that meets capital requirements. Can pay lump-sum or allocated (account based) pension benefits.

✓

✓

✓

✓


Retirement savings accounts (RSAs): these are non-trust-based superannuation accounts that are offered directly off the balance sheets of either life companies or Approved Deposit Taking Institutions (banks, credit unions, friendly societies). RSAs are governed by separate legislation (the Retirement Savings Account Act 1997). The liabilities represented by these accounts are liabilities of the institutions concerned.

✓


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✓

Book reserve

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✓

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Pension fund

Sponsored by a single nongovernment employer, or group of employers. Either defined benefit, defined contribution, or hybrid. Employer contributions may comprise or exceed the mandatory 9% contribution. Benefits can be pension, lump sums, or combinations thereof. Trustees are independent or comprise of equal numbers of employer and employee representatives.

Occupational trustee managed superannuation fund: corporate

✓

Financing vehicle

Personal

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Type of plan Included in Mandatory/ OECD GPS OccupaQuasidatabase Voluntary tional mandatory

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✓

✓

✓

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Trustee managed superannuation fund: approved deposit fund

A fund which has an approved trustee and into which eligible termination payouts received may be invested until age 65.

✓

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Sponsored by government or government-owned entity. Some funded on emerging basis, some fully funded. Generally defined benefit schemes that pay lifetime pensions.

✓


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Public sector occupational pension plans, often compulsory for public sector employees

✓

Book reserve

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✓

Pension fund

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Superannuation entities with fewer than five members, all of whom must be trustees or directors of the trustee company and involved in the management of the fund. These funds are regulated by the Australian Taxation Office (i.e. not prudentially regulated). They can pay lump-sum or allocated (account-based) pension benefits.

Trustee managed superannuation fund: selfmanaged superannuation fund (SMSFs)

Financing vehicle

Personal

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✓

✓


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Employment rate

8 315.0 4 213.5 95.6 17.0 33.6

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Labour force (000s)

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Population (000s)

272.7

44 872.7

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Voluntary, occupational

Public pension – Earnings linked pension – Flat-rate pension

Pensionskassen Direct commitments (Direktzusagen) ● Direct insurance (Direktversicherung) ● Support funds (Unterstutzungskasse) ● ●

100

80


60

Pensionsversicherung gem. §108b EStG, (PZV)


40 20 0 Note: Additional pension income may come from other sources such as mandatory and voluntary occupational pension, personal pension, general savings or investments, etc. Source: OECD estimates.


2004

2005

2006

2007

Total investments (EUR bn)

9.3

10.4

11.7

12.7

12.9


4.1

4.4

4.8

4.9

4.7


0.3

0.3

0.3

0.3

0.3


0.2

0.2

0.2

0.2

0.2

Total number of funds

20

21

20

20

19


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Overview

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Austria applies a severance pay system. It is occupational and participation has been mandatory since 2002. Severance contributions are paid into so-called “staff provision funds”. The system was reformed in 2003, turning it from a defined benefit type of severance pay scheme into an individual defined contribution plan.

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Employers may choose their own staff provision fund. If they do not do so, they are allocated one by the Main Association of Austrian Social Security Institutions by means of an automated procedure that uses a formula based on the share of market held by the different funds.

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Staff provision funds are of the defined contribution type and the financing vehicles in which they invest contributions are collective investment undertakings.

Coverage The new mandatory severance pay system applies to all employment relationships that commenced after 31 December 2002. Employers and employees can choose to incorporate it into existing terms of employment by written agreement. The coverage rate in 2006 was 43.19% of employees.

Contributions Employers pay a mandatory contribution equivalent to 1.53% of an employee’s salary. Employees, however, cannot make contributions.

Benefits Employees may choose to receive the benefit of their individual defined contribution accounts as a lump sum or as an annuity when they reach the normal retirement age for public pension benefits.

Taxation The mandatory portion of employer contributions (1.53% of the payroll) is not taxable, but any additional voluntary contributions are taxed. Employee benefits are tax-free if paid out as annuities, but lump sums are liable to a 6% income tax.

Occupational voluntary Overview Voluntary occupational pension plans in Austria can be either defined benefit or defined contribution in nature and may be instituted by employers or groups of employers. Employers may either set up a Pensionskasse or use another financing vehicle, e.g. book reserves, pension insurance contracts, or pension support funds. The information below applies only to Pensionskassen. Employers enter into contracts with Pensionskassen to provide pension benefits for their employees. Since 2005 they have also been able to purchase life insurance contracts for their employees, acting as their group life insurance policy holders. This occupational provision is available from the main insurance companies, and employers can offer it in

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Coverage

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addition to the Pensionskasse arrangement. Contracts guarantee a 2.25% interest rate, but have not so far proved very popular.

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Typical plan design

O

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Collective bargaining agreements can require employers to enter into a pension contract with a Pensionskasse. Pensionskassen manage plans for groups of at least 1 000 beneficiaries and in 2006 they covered around 13.2% of the labour force.

An

Defined benefit plans typically define pensionable earnings as the final salary or final average salary. A typical accrual rate is between 0.1% and 0.3% of pensionable earnings up to the social security ceiling, and between 1% and 2% of pensionable earnings for salaries above that ceiling for each year of service.

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r

A typical defined contribution plan offers contribution rates ranging from 1% to 3% of pensionable earnings below the social security ceiling, and between 5% and 15% of pensionable earnings above the social security ceiling. Plans are funded by employer contributions. Employees may make additional contributions on a voluntary basis. They must not, however, exceed the sum of annual employer contributions, the level of which is set in the pension contract between the employer and Pensionskasse. The average annual contribution per active member was EUR 1 290 in 2005. Benefit levels are laid down in the pension contract signed by employer and Pensionskasse. Benefits are generally paid out as life-long pensions or as lump sums if total benefits are below EUR 10 500 (from 1 January 2009). The Pensionskassen themselves pay out benefits. The normal retirement age in occupational pension plans is 65.

Taxation For pension-saving purposes, employer and employee contributions are held in separate funds and governed by different taxation rules. Employer contributions are income-tax deductible up to a ceiling of 10% of the payroll. As regards defined benefit plans, however, the only tax-deductible contributions are those that go towards pensions that yield benefits of 80% of an employee’s income. Employee contributions are tax-deductible as special expenses. Investment income, too, is tax-exempt. Benefit payments financed by employee contributions are taxed at a quarter of the ordinary income tax rate, while the portion of benefit payments financed by employer contributions is also liable to taxation.

Personal voluntary Overview The Austrian market includes a personal, voluntary, state-sponsored retirement provision (prämienbegünstigte Zukunftsvorsorge), known by the acronym PZV.

Coverage Any taxpayer under the age of 62 may join the state-sponsored retirement provision arrangement. OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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Contributions

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5. AUSTRIA

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Benefits

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Contribution levels are set forth in the contract between contributor and provider. The state tops up contributions by a percentage which varies each year until the contributor reaches 62. The 2007 percentage was 9%, or a maximum state top-up of EUR 190. Participants must make payments for at least 10 years, during which time their savings are locked in.

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Benefits can be paid out from the age of 40 in the form of a taxable lump sum or taxexempt annuity. In the latter case, the accrued benefits must first be transferred to a Pensionskasse. Benefits can also be reinvested on a tax-exempt basis.

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Taxation Contributions and investment income are tax-exempt, while benefit payments are not taxed if they are paid out as a monthly annuity after retirement age. Benefits and capital gains are taxed if paid out before retirement.

Market information Occupational mandatory On 31 December 2007 there were nine staff provision funds on the market: APK, BAWAG Allianz, BONUS, BUAK, Niederösterreichische, ÖVK, Siemens, VBV, and VictoriaVolksbanken. Each fund manages one collective investment undertaking. There are approximately 319 400 membership contracts, according to the Financial Markets Authority. Total assets in the severance pay system amounted to approximately EUR 1.6 billion. Staff provision funds must guarantee a minimum severance pay – a so-called “capital guarantee” – and are free to promise higher guarantees. The capital guarantee obligation tends to drive staff provision funds to choose conservative investment options, but participants in severance pay systems can switch to other staff provision funds, pension funds (Pensionskassen), or to pension annuity insurance accounts.

Occupational voluntary In December 2007, the total number of participants was 542 388. There were 19 Pensionskassen, 15 of which served only one employer, managing assets worth EUR 12.9 billion (USD 18 billion). The market is dominated by the three largest market participants, namely APK-Pensionskasse AG, ÖPAG Pensionskassen AG, and VBV Pensionskasse AG, which account for approximately two-thirds of the market.

Personal voluntary The PZV product has proved popular – over 988 000 people had joined by the end of 2006. PZV contracts are offered by over 20 different insurance companies and pension investment funds (Kapitalanlagegesellschaften). Though legislation requires contracts to have a duration of at least ten years, they run for 20, 30, or even 45 years, in practice. Total contributions amounted to EUR 690 million in 2006. Providers must appoint a guarantor (except where they have established an internal risk model) and may be required to hold additional reserves.

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2006: Regulations relaxing investment limits for Pensionskassen passed.

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Key legislation

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2004: The Harmonisation of Austrian Pension Systems Act reforms the state pension system.

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1990: The Pensionskassen Act regulates the Pensionskassen system.

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Key regulatory and supervisory authorities

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2002: The Act on Corporate Staff Provision (amended in 2006) introduces the new severance pay system. It regulates the setting-up and management of staff provision funds (investment limits, capital requirements).

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The Ministry of Social Affairs and Consumer Protection: chiefly responsible for supervising the Austrian public pension system, www.bmsk.gv.at/cms/siteEN/. The Ministry of Finance: regulates private pensions, http://english.bmf.gv.at/. The Financial Market Authority (FMA): Austria’s chief financial supervisory body. It carries out risk-based supervision of pension entities, www.fma.gv.at.

Key official statistical references and sources on private pensions FMA (2007), “Supervision of Staff Provision Funds”, Annual Report of the Financial Market Authority, FMA, Vienna, www.fma.gv.at/JBInteraktiv/2007/EN/_index_frame.htm. FMA (2007), “Pension Company Supervision”, Annual Report of the Financial Market Authority, FMA, Vienna, www.fma.gv.at/JBInteraktiv/2007/EN/_index_frame.htm. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

Overview of private pension plans by type of plan and financing vehicle Type of plan Financing vehicle Included in Mandatory/ Pension Banks or OECD GPS OccupaPension Book insurance investment Personal database Voluntary Quasitional fund reserve mandatory contract companies Pensionskassen

Pension entity established according to the Pensionskassen Act. Supervised by the Financial Market Authority (FMA). Quarterly report submitted by pension funds to the OeNB. Pensionskassen Pensionskassen for government workers. These funded arrangements represent a very small part of all claims from government workers. Direct commitments Book reserves – The employer acts as the (Direktzusagen) pension institution, making a direct pension promise financed by book reserves. At least 50% of a company's book reserves must be secured by government bonds. Direct insurance Insurance contract between employer and (Direktversicherung) insurance company in favour of employees. The employer acts as policyholder, taking out an individual or group life insurance policy for the employee. Included in insurance statistics. Support funds A pension reserve (autonomous legal entity) (Unterstutzungskasse) established by employers to finance plan benefits. Pensionsversicherung Personal annuity insurance contract with gem. §108b EStG, preferential tax treatment. Included in insurance (PZV) statistics.

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Belgium

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5. BELGIUM


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Employment rate

10 622.6 4 733.3 92.5 17.1 38.3

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e

Labour force (000s)

ea

Population (000s)

330.8

42 624.3

R


O


EC


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Voluntary occupational pension – Company and sectoral plans – Social pension plans – Employer-sponsored individual pension savings plans

Instellingen voor bedrijfspensioenvoorziening, or institutions de retraite professionnelle, or institutions for occupational retirement ● Group life insurance schemes ●

Public pension – Earnings linked pension – Minimum pension


80

●

Collective pension savings account Individual pension savings account


60

40

20

0 Note: Additional pension income may come from other sources such as personal pension, general savings or investments, etc. Source: OECD estimates.



2003

2004

2005

2006

2007

10.8

11.6

13.3

13.4

13.3


3.9

4.0

4.4

4.2

4.0


0.3

0.4

0.3

0.3

0.2


0.3

0.3

0.3

0.3

0.2


268

267

..

258

258

. .: means not available. Source: OECD Global Pension Statistics.

1 2 http://dx.doi.org/10.1787/517204022670

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Traditional defined benefit (DB) plans have historically been dominant in Belgium. In 2006 they accounted for approximately 60% of occupational pension plans financed through pension funds. However, defined contribution (DC) plans are becoming increasingly popular.

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Overview

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Company and Sectoral Plans

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_it E d it5. BELGIUM e io s

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There are three types of occupational pension plans: company schemes, sectoral plans, and individual pension promises. Some can act as “social protection plans”. Occupational pensions can be provided by a pension fund, a group pension insurance policy administered through a life insurance company, a collective pension savings account administered via a collective investment institution, or by an individual pension savings plan.

Coverage Company pension plans cover all or specific categories of company employees. In the case of sectoral pension plans, the terms of coverage are laid down in the collective bargaining agreement. Employers in the sector concerned must join the plan unless the agreement allows them to opt out. Those who do opt out must put in place a plan providing benefits at least equal to those of the sectoral plan. By 2006, 51% of the active population was covered.

Typical plan design Occupational DB pension plans tend to target retirement replacement rates of between 60% and 75%, including state pension benefits. Since 2004 defined contribution plans are required to provide an annual minimum return of 3.75% on employees’ contributions and 3.25% on employers’ contributions. The vast majority of sectoral pension schemes are of the DC type, with the total contribution rate varying from 0.6% to 4.2%. They are funded exclusively by employer contributions. Most of the schemes are administered by insurance companies, but the two largest are administered by a pension fund. The collective bargaining agreement specifies the funding vehicle and how the plan will be managed. The standard benefit payout practice is the lump sum, though it can take the form of annuities. The normal retirement age is 65 for men and 62 for women (though it will gradually be raised to 65 by 2009), while most plans provide a retirement age of 65 for both men and women.

Taxation Employer contributions are tax-deductible if the sum of statutory and supplementary pension benefits does not exceed 80% of gross annual wages. Employee contributions are taxed at 4.4%, but employees do receive tax relief on them. Pension fund assets are taxed at 0.17% and investment income at 15% (or 25% on dividends from shares). Benefits are


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taxed as income, but retirees do receive tax credits. Lump sum payments are subject to a flat-rate tax.

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❖ waive a saver’s contributions during periods of unemployment

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A company or a sectoral pension plan can act as a “social pension plan” if it contains a “solidarity clause”, which includes commitments to:

❖ provide at least 4.4% of pension contributions ❖ pay out investment income to members

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❖ index benefits

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❖ make regular pension payments in the event of permanent invalidity or severe illness

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❖ cap administrative costs at a set ceiling. Social pension plans are exempt from the 4.4% insurance contract tax. They can be instituted by collective agreement or by other special procedures. In the case of a collective agreement all workers covered by the agreement must benefit from the plan. ●

Individual pension savings plans

Employers may offer employees individual pension savings plans to supplement a collective pension savings plan. Such plans can be put in place at any time up to three years before a beneficiary’s (early) retirement. It is prohibited to establish different individual pension savings plans for workers of a single category. Employers may deduct only a limited proportion of their contributions from their tax bills and the pension promises must be funded externally.

Personal voluntary Overview Personal pension saving schemes are offered through pension insurance and pension savings funds. Life insurance is another option for saving for retirement, but is not discussed here.

Coverage Anyone between 18 and 64 years of age can open a pension savings account.

Contributions Contribution levels are set out in the contract between saver and provider. The law sets a maximum annual contribution of EUR 810 (figure established in 2007). Contracts have a duration of at least ten years and contributions must be made for at least five of the ten years.

Benefits Benefits become available from the age of 60, while any early withdrawal is liable to a penalty.

Fees Insurance companies tend to charge 5-6% entry fees, while banks usually levy contribution and management fees of 2-3%.

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Taxation

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Market information

EC

Depending on a saver’s taxable income, he or she can benefit from tax deductions of between 30% and 40% on contributions up to a ceiling of EUR 780 per annum (in 2005).

e

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According to the supervisory authority, there were 20 sectoral pension schemes covering a total of 633 000 workers at the start of 2007. At the end of 2007, 258 pension funds provided occupational pensions, covering 463 700 participants. They managed assets worth EUR 13.3 billion (USD 18.1 billion). During the same period, group pension insurance schemes covered 1.9 million participants.

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Personal voluntary Pension savings contracts are provided by insurance companies (pension insurance contracts) and banks and capital asset management companies (pension savings funds). Insurance companies must offer a minimum return of 3.75% per year, while banks and capital asset managers, who are not subject to this obligation, may offer more aggressive investment options. Capital asset managers tend to offer higher returns than banks’ pension saving schemes. Most of the assets in pension savings funds are invested in shares. Savings in pension insurance contracts revert to the saver’s beneficiaries in the event of his or her death, unlike pension fund savings, which do not.

Reference information Key legislation 2006: La loi relative au contrôle des institutions de retraite professionnelle (the Supervision of Occupational Retirement Institutions Act) lays down the supervisory powers of the Commission Bancaire, Financière et des Assurances, or Banking, Finance and Insurance Commission. 2003: La loi sur les retraites complémentaires (Complementary Pensions Act) sets out a framework for occupational pension provisions. La loi sur les pensions complémentaires des travailleurs indépendants (LPCI), or the Self-Employed Complementary Pensions Act, regulates supplementary pension provision for the self-employed.

Key regulatory and supervisory authorities Commission Bancaire, Financière et des Assurances (CBFA), www.cbfa.be.

Key official statistical references and sources on private pensions CBFA (2006), Statistique des opérations des institutions de retraite professionnelle (Statistics on the Transactions of Occupational Pension Institutions), CBFA, Brussels, www.cbfa.be/fr/ bpv/stat/sta.asp. CBFA (2007), Rapport bisannuel concernant les régimes de pension sectoriels (Twice-Yearly Report on Sectoral Pension Schemes) www.cbfa.be/, CBFA, Brussels, www.cbfa.be/fr/ publications/ver/pdf/cbfa_sp_2007.pdf. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


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CBFA (2007), Rapport bisannuel concernant la pension complémentaire libre des indépendants (Twice-Yearly Report on the Voluntary Supplementary Pension Scheme for the Selfemployed) www.cbfa.be/, CBFA, Brussels, www.cbfa.be/fr/publications/ver/pdf/ cbfa_sp_2007.pdf.

Instellingen voor bedrijfspensioenvo orziening, or institutions de retraite professionnelle, or institutions for occupational retirement provision

Institutions for private sector employees, civil servants or selfemployed workers, as defined by the law of 27 October 2006 on the supervision of institutions for occupational retirement provision. Regulated by the Ministry of Economic Affairs and the Banking, Finance and Insurance Commission. Supervised by the Banking, Finance and Insurance Commission. Pension funds of public-law enterprises governed by the law of 17/7/1975 have been included starting from the reference year 2004.

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Group life insurance schemes

Group insurance policy that acts as retirement pension scheme administered by life insurance companies. Included in insurance statistics.

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Pension fund ✓

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Financing vehicle Book reserve


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Collective pension Collective pension savings account savings account (held in collective investment institutions).

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Canada

_it E d it5. CANADA e io s


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Employment rate

32 976.0 18 008.0 94.0 13.4 24.6

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Labour force (000s)

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Population (000s)

1 531.7

43 237.5

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Nominal GDP (CAD bn)

EC


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Voluntary occupational pension – Registered pension plan – Retirement compensation arrangements

Occupational registered pension plans (RPPs): trusteed pension funds Occupational RPPs: insurance company contracts funds ● Occupational RPPs: consolidated revenue funds ● ●

Public pension – Basic pension – Guaranteed income supplement

Voluntary, personal

60

●

Personal registered retirement saving plans (RRSPs)


40

20



Total investments (CAD bn)

2003

2004

2005

2006

2007

574.5

621.2

691.1

779.2

847.1


47.4

48.1

50.3

53.9

55.3


2.2

2.3

2.2

2.6

1.9


2.1

2.2

2.0

2.2

2.2

3 045

3 816

3 816

5 036

5 036

Total number of funds Source: OECD Global Pension Statistics.

1 2 http://dx.doi.org/10.1787/517215257551


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Overview

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5. CANADA

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Registered pension plans: In order to receive tax advantages, complementary occupational pension plans must be registered with the Canada Revenue Agency and meet the requirements of the Income Tax Act and either the Federal Pension Benefits Standards Act or the relevant provincial pension benefits legislation.

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Occupational pension plans may be sponsored by employers on a voluntary basis and may or may not be established pursuant to a collective agreement between employer and employee representatives. Both single and multi-employer plans are possible.

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Unregistered plans: Plans that do not meet the requirements of the Income Tax Act or the relevant pension standards legislation are not accorded tax benefits.

●

Other retirement savings plans, including individual and group registered retirement savings plans (RRSPs) and employer-sponsored deferred profit sharing plans, also benefit from tax-deferred treatment under the Income Tax Act.

r

Registered pension plans may be in the form of defined benefit or defined contribution. Some hybrid plans incorporate features of both basic plan designs. Moreover, some plans offer “flexible” arrangements whereby members can purchase additional benefits such as indexation or early retirement.

Typical plan design Defined benefit plans are the most common type of voluntary occupational plan in Canada, although defined contribution is becoming more popular in the private sector. A typical defined benefit plan would be based on final average earnings with an accrual rate of 2% per year in the public sector and less than this in the private sector.1 Pension plans are typically integrated with Canada/Quebec pension plans (CPP/QPP) and require employee contributions. A common design for a defined contribution plan would have an employer contribution of approximately 5% of earnings.2

Coverage Employers may define categories of employees covered by a plan and may institute different plans for different categories of employees. Discrimination on the basis of age, sex, or marital status is not permitted but employers may discriminate between high- and low-income employees. The self-employed are not covered by registered pension plans but may contribute to registered retirement savings plans. According to Statistics Canada, approximately 32.5% of the labour force was covered by a registered pension plan in 2005.

Fees There are no legal rules concerning fees for registered pension plans. The terms concerning payment of fees from the fund or by the employer are set forth in the plan documents.

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Taxation

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Individuals can save for their retirement on a voluntary basis through Registered Retirement Savings Plans (RRSPs). Contributions made to RRSPs as well as investment income in these types of accounts are tax-favoured. There are predefined limits to the amount of contributions that individuals are allowed to make to their RRSPs each year.

Market information

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Personal voluntary

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Both contributions subject to certain limits and investment returns for the above schemes are tax exempt, while retirement benefit is taxed.

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Occupational voluntary In December 2007 there were 5.7 million Canadian workers participating in employer pension plans and about 4.6 million were active members of trusteed plans. The remaining 1.1 million workers with employer pension plans were covered principally by insurance company contracts. Assets in these pension funds closed 2007 with a market value of CAD 918 billion (USD 855 billion).

Personal voluntary In December 2007 RRSPs managed assets worth CAD 503 billion (USD 469 billion).

Reference information Key legislation 1997: Canada Pension Plan Investment Board Act (1997), http://198.103.98.49/en/ showdoc/cs/C-8.3///en?page=1. 1985: Pension Benefits Standards Act 1966: Legislation on the Canadian Pension Plan (CPP), www.hrsdc.gc.ca/en/isp/cpp/ cppinfo.shtml. 1952: Old Age Security Act, http://laws.justice.gc.ca/en/O-9/index.html.

Key regulatory and supervisory authorities Human Resources and Social Development Canada, www.hrsdc.gc.ca/en/home.shtml. Canada Revenue Agency, www.cra-arc.gc.ca/menu-e.html. Régie des Pensions du Québec, www.rrq.gouv.qc.ca/. Revenu du Québec, www.revenu.gouv.qc.ca/eng/ministere/index.asp. Office of the Superintendent of Financial Institutions, www.osfi-bsif.gc.ca/osfi/ index_e.aspx?articleid=3.

Key official statistical references and sources on private pensions Statistics Canada (2008), “Quarterly Estimates of Trusteed Pension Funds”, Income, pensions, spending and wealth, http://cansim2.statcan.ca/cgi-win/ cnsmcgi.pgm?Lang=E&SP_Action=Theme&SP_ID=3868. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


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Statistics Canada (2008), “Preliminary Results of the Pension Satellite Account, 1990 to 2007”, Income, pensions, spending and wealth, www.statcan.ca/english/freepub/13-605XIE/2008002/pdf/psa_e.pdf.

Occupational registered pension plans (RPPs): trusteed pension funds

A pension fund operated under a trust agreement where a group of individuals or a trust company acts as a trustee.

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Occupational RPPs: insurance company contracts funds

An RPP operated under an insurance company contract.

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Occupational RPPs: consolidated revenue funds

A financing arrangement for RPP sponsored by the public sector where most of the money from contributions is paid into the consolidated revenues of the appropriate government and used for general government expenditures.

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Personal registered retirement saving plans (RRSPs)

A capital accumulation programme designed to encourage saving for retirement. Contributions are taxdeductible within prescribed limits.

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Czech Republic

_it E5. d CZECH REPUBLIC iti e s o


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Employment rate

10 322.7 5 198.3 94.7 14.5 28.8

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Labour force (000s)

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Population (000s)

3 556.7

16 982.0

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Nominal GDP (CZK bn)

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Voluntary, personal

Public pension – Basic pension – Earnings-related pension – Minimum pension

●

Personal pension plan


60

40

20



Total investments (CZK bn)

2003

2004

2005

2006

2007

80.2

99.8

123.4

145.9

167.2


3.1

3.5

4.1

4.5

4.7


0.6

0.6

..

..

1.0


0.2

0.2

..

..

0.3


12

11

11

11

10


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Overview

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Personal voluntary

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5. CZECH REPUBLIC

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The Czech Republic is one of the few Eastern European countries not to have implemented a compulsory supplementary pension pillar. Rather, its public pension system is supported by a voluntary supplementary personal pension savings scheme, run on a defined contribution basis. Life insurance products are available as an alternative to a supplementary pension.

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The supplementary scheme is administered by supplementary pension insurance funds, which can only offer defined contribution plans and take the form of joint-stock companies. Pension companies are not authorised to offer more than one pension plan at the same time, nor is any minimum return guaranteed by law. However, if, in any single year, there are losses, they must be covered by the undistributed profits from previous

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years or by share-capital reductions. There is also a reserve fund.3 Members are allowed to switch their pension savings to other fund managers. They should give their current fund two months’ notice and do not have to pay a switching fee.

Coverage Voluntary personal pensions are available to all Czech or European Union residents aged 18 or over participating in the basic pension insurance scheme or public health insurance scheme. According to a 2008 report published by the Association of Pension Funds of the Czech Republic, approximately 60% of economically active people have supplementary pension insurance, not including individuals over the age of 60 – the minimum retirement age in the Czech Republic. Furthermore, approximately 25% of participants receive contributions to the supplementary plan from their employers.

Contributions Employees make contributions which the state matches up to a certain threshold. Employers can choose to pay all, or part, of an employee’s contribution if he or she consents, while collective bargaining agreements may also stipulate that employers contribute. When entrants sign a contract with a pension fund, they commit to pay a minimum monthly contribution of CZK 100 (USD 4.6). The total contribution level is set forth in the pension plan and in the contract with the pension fund managing company. The state contributes CZK 50 to the pension plans of individuals who pay the minimum monthly contribution. Its maximum contribution is CZK 150, which goes to individuals paying CZK 500 or more. Employee contributions represent, on average, approximately 2% of the average wage. Around 27% of all employers pay into voluntary pension plans, which translates into an average monthly contribution per employee of just over CZK 400.

Benefits Pension contracts must state how pension benefits are to be paid in the absence of statutory rules to that effect. They are usually paid out as lump sums.

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While investment income and pension benefits are taxed at a 15% rate, pension plan contributions are not taxable and are not included in the calculation of employees’ income tax or social security contributions. Nor, indeed, are state and employee contributions. Additional recent measures have eased the burden of social security, general health insurance, and state employment policy contributions for both employees and employers.

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Market information

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Employers may deduct from their tax base the contributions they make to their employees’ pension plans without a limit. An employee may deduct the contributions of the employer to his/her pension plan or life insurance up to CZK 24 000 per year.

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Personal voluntary In December 2007 there were 10 pension funds in the Czech market, managing assets worth CZK 167.2 billion (USD 8.2 billion), with 3.96 million participants contributing to private pension accounts.

Reference information Key legislation 1994: Act 42/1994, which sets out issues related to contributory supplementary personal insurance. 1992: Act 86/1992, including amendments relating to income tax, which sets forth tax rules.

Key regulatory and supervisory authorities Czech National Bank, www.cnb.cz/en/.

Key official statistical references and sources on private pensions Ministry of Finance, Office of State Supervision in Insurance and Pension Funds, www.mfcr.cz/cps/rde/xchg/mfcr/xsl/pension_funds.html. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

Overview of private pension system by type of plan and financing vehicle Type of plan Included in Mandatory/ OECD GPS OccupaQuasidatabase Voluntary tional mandatory Personal pension plan

Defined contribution system: pension funds are legal persons and clients are their creditors. Pension funds' assets and clients are not separated. Some elements of occupational systems: employers can contribute to participants' accounts; contributions bring tax advantages; the state contribution is added to clients’ accounts if the conditions required by law are met.

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Denmark

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d

se

5 457.4 2 893.0 96.0 15.5 29.2

An


e

Employment rate

ea

Labour force (000s)

1 696.2

57 069.0

R

Population (000s)

O


EC

Nominal GDP (DKK bn)

O


u Lect

r






Voluntary occupational pension – Occupational pension schemes often mandated by collective agreements

Company pension funds Public sector pension funds ● General pension funds ● Specialised life insurance companies ● Pension funds held in life insurance companies ● Supplementary earnings-related pension Scheme (ATP) ● Special pension savings scheme (SP) ● Public-sector employee capital pension fund (LD Pensions) ● ●

Public pension – Means-tested pension 80

60 Voluntary, personal

40

●

Pension funds held in banks


20

0 Note: Additional pension income may come fro m ot her sou rc es su ch as mand at ory occupational pension, personal pension, general savings or investments, etc. Source: OECD estimates.


Total investments (DKK bn)

2003

2004

2005

2006

2007

398.9

451.0

521.9

532.3

549.0


28.5

30.8

33.7

32.4

32.4


1.1

0.5

0.5

0.5

0.5


0.6

0.6

0.5

0.5

0.6

..

..

..

..

..

Total number of funds . .: means not available. Source: OECD Global Pension Statistics.

1 2 http://dx.doi.org/10.1787/517274124430

180


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R

The statutory occupational component of Denmark’s pension system comprises two schemes: a supplementary earnings-related plan (ATP) and the special pension (SP), both of which are of the defined contribution type. Contributions to the SP, under which members can choose their fund managers and investment portfolios, were suspended by law from 2004 to 2008.

O

u le

O d

Overview

ea

ATP and SP

D Br o

●

EC


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_it E d i5.t DENMARK e io s

u Lect

r

An

Coverage Participation in ATP and SP is mandatory for most employees aged 16 to 65. In 2006, 85.5% of the population aged 16 to 65 and 98% of over-50s were contributing to the ATP.

Contributions One-third of ATP contributions are paid by the employee and two-thirds by the employer. The former pay up to DKK 976 per annum, while the latter contribute a yearly maximum of DKK 1 951, depending on the employment sector, working hours, and type of contribution. Altogether, contributions represent 1% of wages, but only employees contribute their 1% of earnings to the SP scheme.

Benefits Benefits from the ATP plan are paid in annuities or, if the balance of a retirement account is small, as a lump sum. Early and deferred pensions are allowed, although they are subject to benefit adjustments. Benefits from the SP plan are paid as a lump sum if the balance is less than DKK 15 000, or in programmed withdrawals if it exceeds DKK 15 000.

Taxation Contributions by both employee and employer to the ATP and SP schemes are taxdeductible, while pension payments are considered taxable income.

Occupational quasi-mandatory Overview Occupational pension plans – almost exclusively of the defined contribution type in Denmark – have been made effectively mandatory for companies bound by industry-wide collective agreements.

Coverage The quasi-mandatory occupational pension pillar is chiefly funded by employees paying into a supplementary scheme. Technically, they do so on a voluntary basis. In reality, however, collective bargaining agreements have made participation practically mandatory for both employers and employees, and in 2006 supplementary pension plans covered 76% of the working population.


181

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Typical plan design

_it E d it e io s

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u le

O

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ea

EC

Typical contribution rates are 9% for blue-collar workers, 15% for white-collar workers, and 12% for public-sector employees. In the private sector, employees pay one-third of contributions and employers two-thirds. The government bears full contribution costs for public sector employees.

se

e

Taxation

R

O

The usual retirement age in Denmark is 65, with retirees receiving benefits as annuities and/or lump sums.

u Lect

An

Neither employee nor employer contributions are taxable, while capital gains and pension payments are considered taxable income.

r

Market information Occupational mandatory By 2007 mandatory pension funds (i.e. ATP, SP, and the public-sector employee pension fund LD) were managing accumulated assets of DKK 505.8 billion (USD 99.9 billion). In 2006, ATP and SP plans covered around 2.5 million workers.

Occupational quasi-mandatory I n 2 0 0 7 q u a s i - m a n d a t o ry p e n s i o n s ch e m e s h a d a c c u mu l a t e d a s s e t s o f DKK 1 879.1 billion (USD 371.0 billion). In 2006, around 2.1 million participants were enrolled in quasi-mandatory pension schemes.

Reference information Key legislation 2007 ●

Capital Requirement (Consolidation) Act

●

(Consolidation) Act on Solvency and Insurance Company Operating Plans

●

Good Practices in Financial Institutions (Consolidation) Act

●

(Consolidation) Act relative to the transfer of insured moneys undertaken by Danish insurance companies or by branches thereof under the freedom to provide services. 2006

●

Insurance Contract Information (Consolidation) Act

●

(Consolidation) Act on Life Insurance Technical Constitution Reporting

●

The Principle of Contribution (Consolidation) Act

●

Asset Registration (Consolidation) Act.

Key regulatory and supervisory authorities Ministry of Welfare, http://eng.social.dk/. The Danish Labour Market Supplementary Pension Fund (ATP), www.atp.dk/X5/wps/ wcm/connect/atp/atp.dk. Danish Insurance Association, www. forsikringogpension.dk/english/Sider/ Danish_Insurance_Association.aspx.

182


nl y

Key official statistical references and sources on private pensions

d

R

ea

EC

O

u le

O

Finanstilsynet, or Danish Financial Authority, (2008), Key Figures 2003-2007 for Financial Undertakings under Supervision, www.dfsa.dk/graphics/finanstilsynet/mediafiles/newdoc/ s t a t i s t i k / 8 / Ke y F i g u r e s 2 0 0 3 - 2 0 0 7 . p d f, http://cansim2.statcan.ca/cgi-win/ cnsmcgi.pgm?Lang=E&SP_Action=Theme&SP_ID=3868.

e

OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

se

D Br o

w

n

Danish Financial Authority, www.ftnet.dk/sw1252.asp.

_it E d i5.t DENMARK e io s

r Overview of private pension system by type of plan and financing vehicle u

An

t LFinancing e cvehicle

Type of plan Included in Mandatory/ OECD GPS OccupaPension Personal database Voluntary Quasitional fund mandatory


✓

✓

✓

✓

✓

✓

✓

✓

✓

✓

Earnings-related pensions. Incorporated into collective wage agreements between employers and employees working in the same industry or field of activity. Contributions from employers and employees depend on income. Data included in "Pension funds held in life insurance companies".

✓

✓

✓

✓

Pension funds held Company pension plans and individual plans. in life insurance Data included in "Specialised life insurance companies companies".

✓

✓

✓

✓

✓

Pension funds held Company pension plans and individual plans. in banks

✓

✓

✓

✓

✓

Supplementary earnings-related pension scheme (ATP)

✓

✓

✓

Company pension funds

Autonomous legal entities, independent from the company where beneficiaries are employed, and which administer company pension plans. (Most company pension plans are, however, held in insurance companies, while some are managed by banks.)

Public sector pension funds

Public-sector pension funds have the same rules as private sector ones. In the 1950s Danish civil servants moved from a noncontributory employer-sponsored defined benefit arrangement to a defined contribution plan based on collective agreements.

General pension funds

Earnings-related pensions. Incorporated into collective wage agreements between employers and employees working in the same industry or field of activity. Levels of contributions depend on income. (Labour market pensions can also be managed by specialised life insurance companies).

Specialised life insurance companies

ATP covers all wage-earners in Denmark. Benefits are financed by contributions from employers and wage-earners. ATP contributions are also levied on social benefit paid in cash. ATP is a statutory pension scheme established by law in 1964. It is also the name of the independent, self-sufficient institution which administers ATP and SP. ATP, SP, and LD (public-sector pension fund) are included in private pension funds.

✓

Book reserve


✓

✓ ✓

183

5. DENMARK

w

_it E d it e io s

✓

nl y

u le


✓

✓

se

e

✓

d

✓

✓

Book reserve

ea

LD was founded at the end of the 1970s with the object of managing "frozen cost-of-living allowances". As part of the automatic indexation of wages to cover the cost of living, these allowances should have been paid to employees to offset inflation. However, the government decided to pay them as a supplementary lump sum pension upon retirement. LD is a statutory pension scheme.

✓

Financing vehicle

R

Public-sector employee capital pension fund (LD Pensions)

✓

O

Since 1999 all wage-earners, self-employed and recipients of cash benefits have paid 1% of their gross income into the scheme. SP is a statutory pension scheme. Contributions to SP were suspended from 2004 to 2008.

An

Special pension savings scheme (SP)

EC


O

D Br o

n

Overview of private pension system by type of plan and financing vehicle (cont.)

u Lect

r


184


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Finland

_it E d it5. FINLAND e io s


u le

d

se

5 289.0 2 695.0 93.2 16.5 32.4

An


e

Employment rate

ea

Labour force (000s)

178.8

46 265.6

R

Population (000s)

O


EC


O


u Lect

r






Mandatory occupational pension – e.g. TyEL career-average pension plan

The earnings-related statutory pension provisions for private sector workers, farmers and self-employed persons ● The earnings-related statutory pension provision for public sector workers ●

80


60

40

Company pension funds and industry-wide pension funds Group pension insurance contracts in life insurance companies ● Book reserve pension plans

20

Voluntary, personal

● ●

●

0

Personal pension insurance contracts in life insurance companies


Note: Additional pension income may come f r o m o t h e r s o u rc e s s u c h a s v o l u n t a ry occupational pension, personal pension, general savings or investments, etc. Source: OECD estimates.


2004

2005

2006

2007


78.6

94.2

108.0

119.1

127.0


53.9

61.8

68.6

71.3

71.0


10.1

10.1

10.0

10.8

10.7


9.1

9.1

9.3

8.8

8.7


144

153

174

129

120


1 2 http://dx.doi.org/10.1787/517280237212


185

nl y u le

●

Earnings-related provisions for public-sector workers.

ea

Earnings-related provisions for private-sector workers (known by its acronym TyEL), farmers, and the self-employed;

e

R

O

●

se

EC

There are two main types of statutory pension plans in Finland:

O

Overview

d


w

_it E d it e io s n


D Br o

5. FINLAND

The TyEL plan is a mandatory defined benefit arrangement, established through collective bargaining, which covers most of the private sector. Other types of plans provide for different categories of workers (see list of establishing acts below). TyEL was extensively reformed in 2005.

u Lect

r

An

Coverage Statutory earnings-related pension plans (TyEL and other schemes) cover employees aged 18 or older, people caring for children under three years old, and students attending degree courses of up to five years.

Contributions The TyEL plan is funded by contributions from employees at rates (in 2008) of 4.1% of earnings for those under 53, and 5.2% for those aged 53 and older. Under the terms of the Employee Pensions Act, the aggregate employer-employee contribution rate for privatesector companies with wage bills of less than EUR 1.5 million is 21.4%. For larger firms it varies between 21.26% and 22.26%, while for occasional employers it is 22.4%. For both employees and employers, the minimum earnings requirement for contribution purposes is EUR 47.08 a month, while there is no upper limit. The state covers the cost of contributions for students and people with children under three for those periods when they do not earn.

Benefits The TyEL plan is of the career average type. It is usually funded through insurance schemes, although some large employers sponsor company-specific pension funds. The retirement age in the TyEL plan ranges from 63 to 68. Benefit accrues at the rate of 1.5% of annual earnings between the ages of 18 and 52, at 1.9% between 53 and 62, and at 4.5% from 63. Pensionable earnings are adjusted for inflation with a 20% weighting and changes in earnings with an 80% weighting. Early and deferred pensions are allowed, but are also adjusted accordingly. Benefits, too, are indexed to earnings and inflation – changes in earnings are weighted at 20% and inflation at 80%. TyEL pension benefits are paid out in the form of a life annuity, but may be adjusted to increases in longevity.

Occupational voluntary Overview In addition to the TyEL plan, some employers offer additional pension schemes which can be either defined benefit or defined contribution in nature. Typically, these plans supplement TyEL by offering higher accrual rates or lowering the retirement age.

186


nl y u le

O

Contributions

D Br o

The current coverage rate is 8% of the labour force.

w

n

Coverage

_it E d it5. FINLAND e io s

d

se

ea

e

R

O Market information

An

EC

As a rule, employee contributions represent 5% of earnings, though in some cases only employer contributions are required. Employer contributions are tax-deductible up to a ceiling of 5% of employee earnings, or EUR 5 000 per year.

u Lect

In 2007 the aggregate assets in all mandatory and voluntary occupational pension plans were worth approximately EUR 127 billion (USD 174 billion), of which TyEL plans alone accounted for EUR 77 billion (USD 113 billion). Pension plans had a total number of 4.4 million members (2.5 million active participants and 1.9 million retired beneficiaries). The number of registered pension funds was 120.

r


The Employees Pensions Act (TyEL): the principal pension act covering employees in the private sector

●

The Self-Employed Persons’ Pensions Act (YEL)

●

The Farmers’ Pensions Act (MYEL) covers farmers, fishermen and reindeer herders

●

The Seamen’s Pensions Act (MEL)

●

The State Employees’ Pensions Act (VEL)

●

The Local Government Pensions Act (KuEL): covers local government employees

●

The Evangelical-Lutheran Church has its own pensions act: the Evangelical-Lutheran Church Pensions Act (KiEL).

Key regulatory and supervisory authorities Ministry of Social Affairs and Health, www.stm.fi/Resource.phx/eng/index.htx. Finnish Center for Pensions, www.etk.fi/Default.aspx?Lang=2, www.tyoelake.fi/ Default.aspx?Lang=2. The Social Insurance Institution of Finland, www.kela.fi/in/internet/english.nsf.

Key official statistical references and sources on private pensions Vakuutusvalvonta (2008), Key Figures Summary, www.vakuutusvalvonta.fi/en/statistics/ pension-insurance/key-figures-summary/key-figures-summary, http://cansim2.statcan.ca/cgi-win/ cnsmcgi.pgm?Lang=E&SP_Action=Theme&SP_ID=3868. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


187

5. FINLAND

w

_it E d it e io s

In Finland statutory earningsrelated pension plans cover the entire working population. Voluntary occupational and personal pension plans are supplementary pension plans, mainly used for lowering the retirement age and for raising the pension level of older age groups.

✓

Group pension insurance contracts in life insurance companies

The employer acts as policyholder.

✓

Book reserve pension plans

Sums entered in the balance sheet of the employer as reserves or provisions for pension plan benefits. Some assets may be held in separate accounts for the purpose of financing benefits.

Personal pension insurance contracts in life insurance companies

The employer or the member acts as policy holder. The plans are unitlinked or based on traditional withprofit policies.

nl y

d An

✓

✓

✓

✓

✓

✓

✓

✓

✓

✓

✓

u le

Company pension funds and industry-wide pension funds

✓

se

✓

✓

e

They are administered by the government. This category includes the pension plans regulated by the State Employees' Pension Act, by the Local Government Employees' Pensions Act, and by the other pension laws for specific groups of workers. The plans are partially prefunded and are part of the social security system.

✓


ea

The earningsrelated statutory pension provision for public sector workers

✓

Book reserve

R

✓

O

They are administered by pension insurance companies, company pension funds, industry- wide pension funds or separate pension institutions. This category includes the pension plans regulated by the Employees' Pensions Act (TyEL), by other employment pension laws for specific groups of workers, by the Farmers' Pensions Act and by the Self-Employed Persons' Pensions Act. The plans are partially pre-funded and are part of the social security system.

Pension fund

O

D Br o

The earningsrelated statutory pension provisions for private sector workers, farmers and self-employed persons

Financing vehicle

Personal

EC


n


u Lect

r

✓

✓

✓

✓


188


nl y

D Br o

w

n

France

_it E d it5. FRANCE e io s


u le

d

se

61 353.0 27 575.0 91.0 16.4 36.6

An


e

Employment rate

ea

Labour force (000s)

1 892.2

40 738.4

R

Population (000s)

O


EC


O


u Lect

r






Mandatory occupational pension – ARRCO – AGIRC

Book reserve pension plans Plan d’épargne retraite collective (PERCO) ● Institut de retraite supplémentaire (IRS) ● ●

Public pension – Earnings-linked pension – Minimum pension

Voluntary, personal

60 ● ●

Assurance vie à dénouement en rentes viagères à titre onéreux Plan d'épargne retraite populaire (PERP)


40

20

0 Note: Additional pension income may come f r o m o t h e r s o u rc e s s u c h a s v o l u n t a ry occupational pension, personal pension, general savings or investments, etc. Source: OECD estimates.


2004

2005

2006

2007

20.0

20.0

20.0

20.0

20.0

1.3

1.2

1.2

1.1

1.1


..

..

..

..

..


..

..

..

..

..


..

..

..

..

..

Total investments (EUR bn) Total investments as a % of GDP


1 2 http://dx.doi.org/10.1787/517286041017


189

nl y u le

O e

R

O

France operates two separate mandatory supplementary plans: ARRCO (Association des régimes de retraites complémentaires) for blue-collar workers and AGIRC (Association générale des institutions de retraites des cadres) for white-collar workers and management staff. The ARRCO and AGIRC acronyms designate both the pension schemes and the national federations that oversee them. Both are the products of collective bargaining agreements and cover nearly all workers under the general public pension plan. Equally, both are specific types of defined contribution plans, financed on a pay-as-you-go basis and administrated through pension institutions.

se

Overview

d

ARRCO and AGIRC

ea

●

EC


w

_it E d it e io s n


D Br o

5. FRANCE

u Lect

r

An

Coverage The ARRCO plan covers the majority of private-sector blue-collar workers, while pension provisions for most white-collar workers or employees in executive positions are governed by the AGIRC system.

Contributions ARRCO: benefits are earned on 6% of earnings below the social security ceiling and on 16% of earnings up to three times the social security ceiling. The social security ceiling was EUR 32 184 in 2007. AGIRC: benefits are earned on 6% of earnings below the ceiling of the general public pension scheme and on 16.24% of earnings up to eight times the social security ceiling. Contributions are converted into pension points. The number of points credited is calculated by dividing the amount of contributions by the cost of a pension point, adjusted annually to reflect the average earnings of covered employees. On 1 April 2007 the cost of a pension point under the ARRCO provision was EUR 13.5091 and EUR 4.7125 for AGIRC. An ARRCO point was worth EUR 1.1480 and an AGIRC point EUR 0.4073. Pension point value is jointly adjusted each year by the AGIRC and ARRCO federations in line with retail prices. All points are then converted into a pension by multiplying them by the value of points at the time of retirement.

Benefits Retirement age is 65. Full benefits are payable from the age of 60, as and when a member qualifies for a full pension under the public pay-as-you-go scheme. Pension benefits are generally paid out as annuities, though they can take the form of lump sums under certain circumstances. Companies must also provide a retirement indemnity plan called Indemnité de Fin de Carrière (IFC). The IFC is defined benefit in nature.

Taxation Employer and employee contributions to both ARRCO and AGIRC pension plans are tax-exempt. Benefits, however, are taxed as income.

190


O

Overview

nl y

Funded occupational pension plan (Plan d’épargne retraite)

u le

D Br o

●

w

n



d

se

ea

e

R

O

EC

Employers and groups of employers have been operating an occupational pension scheme, known by its acronym PERCO, since 2003. Before they established PERCO, however, they had first to put in place company savings plans (PEEs), which can be considered as the forerunners of PERCO. Several long-term PEEs have been converted into PERCO schemes. While there is no limit on investments in the company that funds PEE schemes, there is a limit of 10% on PERCOs. Employers must offer their employees at least three collective investment funds (usually managed by banks or insurance companies) with different portfolios for each.

u Lect

r

An

Coverage Collective agreements determine the coverage of each PERCO scheme. In general, all employees who have been with a firm for over three months are covered.

Contributions Employees can make contributions of up to 25% of their gross annual salary, which employers can match up to a ceiling of EUR 5 149 per year, or three times the employee contribution. Employer matches under PERCO are higher than those allowed under PEE plans. Employer contributions are compulsory, though no minimum level has been set.

Benefits PERCO schemes can be either defined benefit or defined contribution in nature. Benefits are paid out as annuities or as lump sums. In contrast to PEE schemes, contributions to PERCO plans are locked-in until retirement, which is usually 60 years of age, although life events may entitle employees to withdraw their savings earlier.

Taxation Employer contributions of up to EUR 4 600 are not considered part of an employee’s taxable income. Employer top-ups of employees contributions are tax-exempt up to a ceiling of EUR 2 300, though the portion between EUR 2 300 and EUR 4 600 is liable to an 8.2% employer’s tax. Voluntary contributions made by employees are subject to income tax at standard levels, while investment income and retirement benefits are exempt from income tax and social security contributions. ●

Other pension savings arrangements

There are a number of other supplementary occupational pension plans, which take different forms. They include book reserve systems administered directly by employers, insurance-type schemes managed by insurance companies, mutual funds, defined contribution type pension funds, and supplementary pension institutions (institutions de retraite supplémentaire), due to be phased out in 2008.

Personal voluntary ●

Individual retirement savings plan (Plan d’épargne retraite populaire)


191

w

_it E d it e io s n

Overview

D Br o

5. FRANCE

nl y

u le

O

d

se

ea

Coverage

EC

This individual pension insurance plan, known by the acronym PERP, provides additional retirement income in the form of personal annuities, which are paid out either when public pension benefits become payable or at the age of 60.

e

An

Contributions

R

O

Coverage is voluntary and does not depend on members’ employment status.

u Lect

The frequency and level of contributions are set out in the pension insurance plan. Regular and one-off contributions can usually be made under PERP plans.

r

Benefits PERPs are of the defined contribution type of pension savings plan. Benefits are usually paid out as annuities, though they may take the form of a lump sum if savings are used to purchase a primary residence. Benefits are locked in until the saver reaches retirement age, while the insurer must guarantee a progressively incremented minimum level of benefits over the course of the contract. As the saver approaches retirement, larger shares of assets are invested in safe investment categories – rising to 90% two years before retirement.

Fees Management and switch fees may be payable if the terms of the pension insurance plan so provide.

Taxation Contributions are tax-deductible up to a ceiling of 10% of the income from the previous year’s employment or up to eight times the social security ceiling. Where benefits are paid out as a lump sum, they are subject to income tax, which may be made as a one-off payment or spread over five years if the saver so chooses. Where benefits are paid out as annuities, they are taxed at rates identical to those of annuities from the ARRCO/AGIRC system.

Market information Occupational mandatory Pension institutions underlying the ARRCO and AGIRC federations are private, nonprofit entities established by collective agreements with the aim of implementing either the ARRCO or AGIRC schemes but not both at the same time. All pension institutions must join the appropriate national federation of pension institutions, i.e. ARRCO or AGIRC, which are private not-for-profit institutions, whose prime function is to supervise pension institutions. The ARRCO plan has some 18 million active members and 10 million beneficiaries managed by 36 pension institutions. AGIRC has 3.6 million active members and 2.1 million beneficiaries served by 23 institutions.

192


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nl y

se

e

R

An

O

Banks and insurance companies have offered PERPs since 2004. Surveillance committees supervise the implementation of each PERP contract and defend members’ interests.


u le

O

d ea

Personal voluntary

EC

At the end of the first quarter 2008 there were 60 786 companies operating PERCO plans. By 2007 total assets managed as part of the PERCO plan were worth EUR 1.39 billion (USD 2.05 billion).

u Lect

r

Key legislation 2003: The Pension Reform Act 2003-775 of 21 August 2003 regulates PERCO and PERP plans.

Key regulatory and supervisory authorities Ministry of Labour: approves collective pension agreements establishing AGIRC and ARRCO schemes, www.travail.gouv.fr/. The Inspection Générale des Affaires Sociales (General Inspectorate of Social Affairs) supervises the implementation of AGIRC and ARRCO, www.cohesionsociale.gouv.fr/. Autorité de Contrôle des Assurances et des Mutuelles (Insurance Company and Mutual Fund Surveillance Authority): supervises the PERP plans, www.ccamip.fr.

Key official statistical references and sources on private pensions Ministry of Economy and Finance, www.minefi.gouv.fr. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


193

5. FRANCE

nl y

Book reserve

ea

✓


u le

EC

✓

Financing vehicle

d


O

D Br o


✓

Plan d’épargne retraite collective (PERCO)

PERCO (funded occupational pension plan) and any other occupational plan that, during the saving phase, is subject to prudential standards applicable to other categories of financial undertakings (in particular investment services). Defined contribution in nature.

✓

Institut de retraite supplémentaire (IRS)

Supplementary pension institution. Defined benefit in nature.

✓

✓

✓

Group insurance contracts for workers

Compulsory plans for employers and voluntary plans for employees, the selfemployed and, in some cases, public-sector employees. These occupational insurance plans are subject to the prudential standards applicable to insurance undertakings (insurance companies governed by the Insurance Code; provident institutions governed by Book IX of the Social Security Code; mutual insurance companies governed by the Mutual Insurance Code). The benefits provided by these institutions may take a range of forms, the most common being: – Life insurance with annuities, in exchange for defined contributions. These include “Branch 26” schemes, i.e. group plans based on defined contributions and a point system linking contributions and benefits. – Group fund management, providing benefits within the limits of the fund.

✓

✓

✓

Assurance vie à dénouement en rentes viagères à titre onéreux

These individual insurance plans, commonly known as assurance vie à dénouement en rentes viagères à titre onéreux (purchased life insurance with annuities), are subject to the prudential standards applicable to insurance undertakings. Plans may take a range of forms. Members accumulate savings via defined contributions and receive annuities (life insurance with annuities). Such plans may also include “Branch 26” plans (see above).

✓

✓

✓

✓

Plan d'épargne retraite populaire (PERP)

This individual insurance plan based on defined contributions provides additional retirement income in the form of personal annuities, payable as soon as the first-pillar pension becomes payable.

✓

✓

✓

✓

R

✓

e

✓

se

The company pays out employee benefits directly and makes provision for them in its own accounts. Defined benefit in nature.

O

Book reserve pension plans

✓

n

w

_it E d it e io s

An

u Lect

r

✓

✓


194


nl y

D Br o

w

n

Germany

_it E d i5.t GERMANY e io s


u le

O d

se

Employment rate

82 257.0 41 685.0 91.4 20.2 39.9

An


e

Labour force (000s)

ea

Population (000s)

2 423.8

40 326.9

R


O


EC


u Lect

r






Voluntary occupational pension – Book reserves – Support funds – Pensionsfonds – Pensionskasse – Direct insurance Public pension – Earnings-linked pension – Minimum pension

Pensionskassen and Pensionsfonds Direct insurance (Direktversicherung) ● Support funds (Unterstutzungskasse) ● Direct commitments (Direktzusagen) ● ●


60

●

Annuities Riester pension plans


40

20




2003

2004

2005

2006

2007

78.7

83.8

90.6

97.8

99.6


3.6

3.8

4.0

4.2

4.1


0.2

0.2

0.3

0.3

0.5


0.1

0.1

0.1

0.1

0.1


177

182

178

175

178


1 2 http://dx.doi.org/10.1787/517306252111


195

nl y u le

Overview

O


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_it E d it e io s n


D Br o

5. GERMANY

d

e

As described below, employers are free to decide how the occupational retirement provision is to be structured. Many combine two or more of the following types:

O

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EC

Since pensions were reformed in 2001, employees have had a legal right to employerprovided retirement benefits. Occupational pension plans provided in Germany are defined benefit schemes.

u Lect

An

●

Direktzusage (book reserves): employers make provisions for promised pension benefits on the company balance sheet, but without legally separating assets. In effect, they act as the pension fund, paying the promised pensions from company assets as they fall due. If employers put in place pension reserves to fund their promise, thus reducing profit, this must be shown on the balance sheet. The Pensions-Sicherungs-Verein (PSV) provides protection for the benefits and claims in the event of insolvency of the employer.

●

Unterstützungskasse (support funds): an Unterstützungskasse is a legally independent institution which offers occupational retirement provision, but not the legal right to its benefits. The obligation to pay benefits to employees remains with employers, who must use the Unterstützungskasse to meet their pension commitments. Employees themselves do not receive a statutory benefit claim against the Unterstützungskasse, which is not subject to insurance supervision, but they have a claim against the employer. It may dispose freely of the accumulated capital, loaning it, for instance, to an employer. The PSV provides protection for the benefits and claims in the event of insolvency of the employer.

●

Direktversicherung (direct insurance): this takes the form of an insurance contract between employer and insurance company in favour of employees. The employer acts as policy holder, taking out an individual or group life insurance policy for employees.

●

Pensionskasse: Pensionskassen are pension institutions with legal personality which supply an occupational retirement provision and grant employees a legal right to pension benefits. Sponsored by one or more undertakings, they are a special type of life insurance company.

●

Pensionsfonds: Pensionsfonds are pension funds with legal personality which supply an occupational retirement provision and grant employees a legal right to pension benefits. They are sponsored by one or several undertakings. Pensionsfonds were introduced in 2002, with the intention of combining the security of a Pensionskasse with the yields of an investment fund. They are subject to more liberal investment conditions than those applicable to Pensionskassen and must purchase insurance cover against insolvency. The PSV provides protection for the benefits and claims in the event of insolvency of the employer.

r

Coverage In 2006 approximately 65% of all employees were covered.

196


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Contributions


d

u le

O

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Contribution levels are often determined by collective agreements. The employer’s contribution depends on plan rules. Employees may ask for deferred compensation of up to 4% of the social security contribution threshold.

se

ea

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Benefits

O

EC

Taxation is dependant on the scheme. In general, however, these types of plans are not taxed and not contributory.

All occupational pension plans may, and usually do, provide retirement, disability and survivor benefits.

u Lect

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An

Except in the case of Pensionsfonds, benefits can be paid out as a lump-sum or life-long annuity in order to benefit from tax exemption. Full lump-sum payments, however, are not allowed. Pensionsfonds benefits have to be paid out as a life-long annuity or according to a payment plan. The retirement age largely depends on the rules set out in plans. In 2006 the average retirement age was 60.8 years.

Taxation Since 2005 taxation legislation has treated Pensionskassen, Pensionsfonds and direct insurance identically. Contributions up to a ceiling of 4% of the maximum social insurance contribution and EUR 2 496 (in 2005), plus EUR 1 800 for new pensions plans since 2005, are tax-free. These pension plans are treated according to the EET formula: investment returns are tax-exempt, while benefits are taxed. Sums of money that the employer allocates to book reserves are tax-deductible and not considered as an employee’s taxable income.

Personal voluntary ●

Riester Pensions

Overview The Riester products are named after a former Minister of Labour and comprise annuities, endowments assurance, investment fund savings plans, and bank savings plans; the products were introduced in 2002. As of 2008, the Riester incentives are also extended to loan agreements for the purchase or construction of an owner-occupied residential property located in Germany or loan agreements for the acquisition of mandatory shares in a cooperative society for the own use of cooperative society apartments located in Germany.

Coverage Anyone covered by the social insurance system and who is subject to full tax liability may purchase Riester products, as well as civil servants, judges, soldiers, their spouses and disability pensioners.

Contributions While providers must offer a minimum benefit guarantee, contribution levels are determined in the terms of contracts with providers. Participants qualify for subsidies from the government, the level of which depends on the respective income and number of


197

5. GERMANY

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u le

O

d

se

ea

Benefits

e

Benefits cannot be paid out before the age of 60.

R

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EC

Retirement criteria

An

D Br o

children. To receive full state subsidies (EUR 1 575 in 2007), pension participants must invest at least 3% of their previous year’s income in a Riester plan. (The subsidy is due to rise in 2008 to a maximum of EUR 2 100 where participants pay 4% of their previous year’s income into the plan.) In 2007, the basic annual state supplement was EUR 114 (EUR 154 in 2008) for single persons, EUR 228 (EUR 308 in 2008) for married couples, and EUR 138 (EUR 158 in 2008) for every child. As of 2008, participants receive tax relief of EUR 300 for every new-born child.

n

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_it E d it e io s

u Lect

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Benefits are paid out in the form of a life annuity or a programmed withdrawal. Capitalisation of up to 30% of the annuity is possible. A partial annuitisation must be provided at the latest after the age of 85. Furthermore, the capital subject to tax relief and already saved may be withdrawn during the saving period for the purchase or construction of an owner-occupied residential property located in Germany or for the acquisition of mandatory shares in a cooperative society for the own use of cooperative society apartments located in Germany. At the beginning of the disbursement phase, funds can also be withdrawn for discharging debt on owner-occupied residential property.

Taxation Riester products are treated according to the EET formula: contributions and investment income are tax-exempt, while benefits are taxed. State grant aided capital tied up in residential property is taxed as a pension benefit. ●

Rürup Pensions (Basisrente)

Overview This type of old-age provision takes the form of a pension contract that provides for the payment of a life-long pension. It has been available since 2005.

Coverage Anyone can purchase a Rürup pension, although it is intended primarily for the selfemployed.

Contributions Contributions levels are laid down in the contract with the provider.

Benefits Benefits are paid out as an annuity at the earliest upon reaching the age of 60. One-off payments and early withdrawals are not allowed.

Taxation Contributions are gradually evolving towards greater tax exemption: while the tax-free portion of contributions was 60% in 2005, with a cap set at EUR 12 000, it will be possible to deduct EUR 20 000 (EUR 40 000 for married couples) against tax by 2025. Benefits are,

198


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At the end of 2007 Pensionskassen and Pensionsfonds’ assets were worth EUR 99.6 billion (USD 136 billion). There were 178 Pensionskassen and Pensionsfonds with a total of 6.4 million members and 1.4 million beneficiaries. Of the Pensionsfonds, there were 26 with 0.4 million members and 0.2 million beneficiaries. In the year under review, many Pensionsfonds continued to enlarge their menu of products which enabled corporate firms to transfer their pension obligations.

O

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EC


d

Market information

D Br o

however, liable to tax. People who retire in 2007 are to be taxed on 54% of their benefits. By 2040, benefits will be taxable in full for each new annual contingent of pensioners.

n

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u Lect

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An

Investments made in the name of and at the risk of Pensionsfonds in 2007 rose to approximately EUR 640 million, while investments made in the name of and at the risk of employees and employers increased from EUR 7.8 billion in 2006 to EUR 13.4 billion in 2007. The rise in such investments is attributable primarily to two major manufacturing corporations which, in 2007, transferred their pension obligations to Pensionsfonds they created.

Personnal voluntary In 2007 some eleven million participants had signed up to Riester contracts, while reform legislation in 2004 enhanced their portability. Rürup pensions have not been as popular as expected, because benefits cannot be inherited. However, survivor or disability benefits can be included in contracts.

Reference information Key legislation 2007: RV-Altersgrenzenanpassungsgesetz, Gesetz zur Anpassung der Regelaltersgrenze an die demografische Entwicklung und zur Stärkung der Finanzierungsgrundlagen der gesetzlichen Rentenversicherung. 2004: Alterseinkünftegesetz, or Retirement Income Act, (2004): regulates the taxation of pensions and amended some tax-related issues. 2001: Altersvermögensgesetz, or Retirement Savings Act (2001): introduced the personal pension savings arrangement, among other measures. 1992: Versicherungsaufsichtsgesetz, or Insurance Supervision Act (1992): regulates Pensionsfonds, Pensionskassen, and insurance companies. 1974: The Gesetz zur Verbesserung der betrieblichen Altersversorgung: a law to enhance occupational retirement pensions (1974), it sets out rules for occupational pension provision.

Key regulatory and supervisory authorities BaFin (Federal Financial Supervisory Authority): supervises Pensionskassen, Pensionsfonds, as well as insurance companies, www.bafin.de.

Key official statistical references and sources on private pensions BaFin (Federal Financial Supervisory Authority), www.bafin.de. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


199

5. GERMANY

nl y

u le

d ✓

se

e

✓


ea

✓

Book reserve

R

✓

O

Undertakings providing life insurance in the form of Pensionskassen and Pensionsfonds. Both are independent legal entities established by sponsoring employers to provide retirement benefits. The Pensionsfonds are legal funding vehicles for the Riester pension introduced on 1 January 2002.

Pension fund

An

Pensionskassen and Pensionsfonds

Financing vehicle

Personal

EC

Type of plan Included in Mandatory/ OECD GPS Occupadatabase Voluntary Quasitional mandatory

O

D Br o


n

w

_it E d it e io s

u Lect

Pensionskassen and Pensionsfonds

Funded pension arrangements for government workers. These are not widespread.

✓

✓

Direct insurance (Direktversicherung)

Insurance contract between employer and insurance company in favour of employees. The employer acts as policy holder, taking out an individual or group life insurance policy for the employee. Included in insurance statistics.

✓

✓

Support funds (Unterstutzungskasse)

A pension reserve instituted by employers to finance up to 40% of pension plan commitments.

✓

✓

✓

Direct commitments (Direktzusagen)

Book reserves: the employer acts as the pension institution, making a direct pension promise financed by book reserves.

✓

✓

✓

Annuities

Included in insurance statistics.

✓

✓

✓

Riester pension plans

Riester products (named after a former Minister of Labour): annuities, capitalisation operations, units, bank deposits. Officially introduced on 1 January 2002.

✓

✓

✓

r

✓

✓

✓


200


nl y

D Br o

w

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Greece

_it E d it5. GREECE e io s


u le

O d

se

Employment rate

11 149.0 4 917.9 91.9 18.5 42.4

An


e

Labour force (000s)

ea

Population (000s)

228.9

28 048.9

R


O


EC


u Lect

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Public pension – Earnings-related main pension – Earnings-related supplementary pension – Minimum pension – Means-tested solidarity benefit

● ●

Occupational insurance funds Occupational pension plans

Voluntary, personal

100

Simple personal pension plan Personal pension plan with profit sharing ● Personal pension plan with investment returns (unit-linked) ● ●

80


60 40 20 0 Note: Additional pension income may come f r o m o t h e r s o u rc e s s u c h a s v o l u n t a ry occupational pension, personal pension, general savings or investments, etc. Source: OECD estimates.


2004

2005

2006

2007


..

..

..

..

0.0


..

..

..

..

0.0


..

..

..

..

0.0


..

..

..

..

0.0


..

..

..

..

3


1 2 http://dx.doi.org/10.1787/517324273083


201

nl y u le

Overview

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_it E d it e io s n


D Br o

5. GREECE

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R

O

EC

Occupational and personal pensions are not currently widespread in Greece. Occupational Insurance Funds were introduced in 2002 and are expected to grow in the future. They may be established and operated as autonomous non-profit private entities with legal personality under the supervision of the Ministry of Employment and Social Protection and the financial control of the National Actuarial Authority.

An

The resources of Occupational Insurance Funds come from the regular and extraordinary contributions of their members and employers, income revenue, return on assets, reserves, and other revenues.

u Lect

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The purpose of Occupational Insurance Funds is to provide protection for their active members and beneficiaries – in addition to that furnished by mandatory social insurance – against the risks of old age, death, invalidity, industrial accidents, sickness, unemployment etc. They provide benefits in kind or in cash paid in monthly annuities or as a lump sum. Those that provide retirement benefits operate on a funded basis.

Coverage Occupational Insurance Funds are established on a voluntary basis in companies or sectors of employment, on the initiative either of employees or employers, or by a collective agreement. The self-employed, professionals, farmers, and their trade or professional associations may also institute funds on the condition that their insured members number over 100. As mentioned above, occupational and personal pensions are not currently widespread in Greece.

Contributions Existing voluntary occupational pensions are defined contribution in nature.

Taxation According to Law 3029/2002, article 7, paragraph 17, the tax incentives and the tax exemptions applied in Occupational Insurance Funds are set out by the tax legislation. The competent authority on the tax treatment of Occupational Insurance Funds is the Ministry of Economy and Finance. The tax legislation in Greece provides that the totality of contributions paid in Occupational Insurance Funds by members is exempt from income tax, while contributions from the employer are deductible from gross revenue. Pension investments are not taxed, while pension benefits are.

Market information Occupational voluntary Since the introduction of Occupational Insurance Funds in 2002, three Occupational Insurance Funds providing for retirement had been established in Greece. Their combined total assets at the end of 2007 were EUR 24 602 300 (USD 33 702 000), while membership stood at 11 789.

202


nl y

D Br o

Key legislation

w

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_it E d it5. GREECE e io s

d

u le

O

Ministerial Decision F.epag.asf./oik.16/09.04.2003 (FEK 462 B/17.04.2003) on the operating conditions of occupational insurance funds.

e

Ministerial Decision F.51010/1821/16/16.02.2004 (FEK 370 B/24.02.2004) on administrative sanctions.

O

se

ea

R

EC

Ministerial Decision F.epag.asf./43/13.11.2003 (FEK 1703 B/19.11.2003) on successive insurance in occupational insurance funds.

u Lect

An

Law 3029/2002, articles 7 and 8 (FEK 160 A/11.07.2002), which introduced occupational insurance (second pillar) in Greece.

r

Law 3385/2005, article 12 (FEK 210 A/19.08.2005), which replaced article 7, paragraph 15 of Law 3029/2002.

Key regulatory and supervisory authorities Ministry of Employment and Social Protection: the main pension regulator and supervisor. G e n e ra l S e c r e t a r i a t o f S o c i a l S e c u r i t y, h t t p : / / g g k a . c i t ro n . g r / f ro n t o f f i c e / portal.asp?cpage=NODE&cnode=1&clang=1. National Actuarial Authority: exercises the financial control of Occupational Insurance Funds, www.eaa.gr. Ministry of Economy and Finance: in charge of regulation related to tax treatment of occupational insurance funds; General Accounts Office, www.mof-glk.gr/en/home.htm.

Key official statistical references and sources on private pensions Ministry of Employment and Social Protection, www.ggka.gr. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


203

5. GREECE

nl y

✓

u le

d ✓

se

e

✓


ea

✓

Book reserve

R

✓

O

These plans come under the supervision of the Ministry of Employment and Social Protection and the control of the National Actuarial Authority. The purpose of occupational insurance funds is to provide supplementary insurance protection to their members and beneficiaries, in addition to that provided by mandatory social insurance, against the risks of old age, death, invalidity, industrial accident, sickness, interruption of employment, etc. These funds provide benefits in kind or in cash that are paid as monthly annuities or as a lump sum. Occupational pension plans that provide retirement benefits operate on a funded basis.

Pension fund

An

Occupational insurance funds

Financing vehicle

Personal

EC


O

D Br o


n

w

_it E d it e io s

u Lect


✓

Simple personal pension plan

✓

✓

✓

Personal pension plan with profit sharing

✓

✓

✓

Personal pension plan with investment returns (unit-linked)

✓

✓

✓

r

✓


204


nl y

D Br o

w

n

Hungary

_it E d i5.t HUNGARY e io s


u le

O

d

se

Employment rate

10 056.0 4 238.1 92.6 16.1 38.1

An


e

Labour force (000s)

13 758.9

ea

Population (000s)

25 405.8

R


O

Nominal GDP (HUF bn)

EC


u Lect

r





Mandatory/Quasi-mandatory, personal

Mandatory personal pension – Mandatory personal pension savings accounts

●

Public pension – Earnings-linked pension – Minimum pension


80

●

60

Mandatory private pension funds (magánnyugdíjpénztar)

Voluntary private pension funds (önkéntes nyugdíjpénztar) Individual retirement account: voluntary private pension plan (nyugdíj elő-takarékossági számla)


40

20

0 Note: Additional pension income may come from other sources such as voluntary personal pension, general savings or investments, etc. Source: OECD estimates.

Pension funds data overview 2003 Total investments (HUF bn)

2004

2005

2006

2007

986.3

1 416.0

1 863.2

2 309.9

2 766.3


5.2

6.8

8.5

9.7

10.9


1.3

1.4

1.5

1.6

1.1


0.1

0.1

0.2

0.1

0.2


100

93

90

88

87


1 2 http://dx.doi.org/10.1787/517374265333


205

nl y u le

Overview

O

Personal mandatory

w

_it E d it e io s n


D Br o

5. HUNGARY

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se

ea

R

O

Coverage

EC

Mandatory pension funds were introduced in 1998. They take the form of mutual savings associations and are defined contribution in nature.

An

Contributions

e

All workers under the age of 35 must join the mandatory pension system, which by 2006 covered 60% of the labour force.

u Lect

r

The contribution rate to the mixed pension system is 26.5% of the employee’s taxable income, of which the employer pays 18% and the employee 8.5%. All employer contributions are allocated to the state pension scheme, while 0.5% of employees’ contributions go to the state scheme and 8% to their individual account. Voluntary contributions are limited to a ceiling of 2%, which can be shared by employer and employee. Supplementary voluntary contributions to mandatory pension funds are allowed and can be paid by employer and/or employee. Total contributions are limited to 10% of the contribution base, including voluntary top-up contributions.

Benefits Individual accounts are defined contribution and benefits are paid as annuities. Twenty years of service are required for a full pension at the ordinary retirement age – currently 62 for men and, from 2009, for women, too. However, many Hungarians, especially men, choose to retire early and accept a corresponding decrease in pension benefits. In 2004, the average retirement age for men was 60.2 years and 58 for women.

Fees Asset management fees for mandatory pension funds are set at 0.9% (0.8% in 2008).

Taxation Employer contributions, investment income, and benefits from the mandatory scheme are tax-exempt. Until 2004 employees could deduct 25% of their contributions to the state-funded pension scheme from their income tax base.

Personal voluntary Overview Voluntary pension funds are independent of the social security pension system and are fully funded. They are defined contribution funds managed independently, or by administrators, and must be founded by a group of at least 15 persons. Membership criteria are laid down in each fund’s charter.

Coverage Any tax payer under the age of 62 may contribute to voluntary pension funds. They cover about 32% of the labour force.

206


nl y

D Br o

Plans are defined contribution in nature.

w

n

Typical plan design


se

e

R

An

O

Benefits are paid as a lump sum at any age after 10 years of membership, or as an annuity, depending on the member’s choice. The voluntary pension is expected to account for 8-10% of pension earnings.

Taxation

u le

O

d

ea

EC

Contributions can be paid by the employer or the employee or both, with contribution levels set by fund rules. In 2004, the average contribution was 3.6% of gross earnings, of which two-thirds were paid by employers (who receive tax and social security contribution incentives).

u Lect

r

Employees receive tax credits of 30% on contributions (up to HUF 100 000 per annum), while employer contributions are tax-exempt up to 100% of the minimum wage. Investment income, too, is tax-exempt. After 10 years of membership, the assets generated by returns on investment may be withdrawn tax-free, while, in each of the following years, 10% of the capital can be cashed-in free of tax. After 20 years of membership, savers may withdraw benefits, again exempt from taxation.

Market information Personal mandatory Workers select a mandatory pension fund (open or closed), which may have a contract with a pension administrator. In 2007 there were 20 mandatory pension funds operating. In 2007, the membership of mandatory pension funds reached 2.7 million, with total assets estimated at HUF 1 979.4 billion (USD 11.5 billion). The five largest mandatory pension funds – which are subsidiaries of financial groups, e.g. banks, specialized credit institutions and insurance companies – manage 80% of total assets. If other main players are also taken into account, the funds handle 91% of all private pension assets. The year 2007 saw the introduction of a life-cycle portfolio system for mandatory individual accounts, offering three different portfolios – conservative, balanced and growth. The system will be compulsory from 2009, but in the middle of October 2008 the deadline for restructuring the portfolios was delayed until 2011.

Personal voluntary Pension management companies that administer voluntary funds have the same institutional framework as those managing mandatory funds. In 2007 portfolio choice was currently available in about five of the 68 voluntary pension funds (though life-cycle funds are due to be introduced). There are no restrictions on how often a saver may switch funds, while switching fees (which may not exceed HUF 4 000) are set forth in legislation. Voluntary pension funds are not required to yield a minimum rate of return. In 2007 the estimated total membership of voluntary pension funds was 1.3 million and total assets amounted to HUF 718.7 billion (USD 4.2 billion). Individuals can also purchase a life insurance with a pension savings component.


207

5. HUNGARY

nl y

Government decree 223/2000 on the special features of reporting and book-keeping obligations of voluntary pension funds;

●

Government decree 282/2000 on investment activities by mandatory funds;

●

Government decree 222/2000 on the special features of reporting and book-keeping obligations of mandatory pension funds.

ea

An

1997

e

R

O

u le

●

d

Government decree 281/2000 on investment activities by voluntary pension funds;

EC

●

se

2000

O

D Br o

Key legislation

w

n


_it E d it e io s

u Lect

●

Act LXXXII on the establishment and the institutional framework of mandatory private pension schemes;

●

Act LXXX on the coverage and entitlements under the publicly managed social security and mandatory private pension schemes.

r

1993 ●

Act XCVI on Voluntary Mutual Insurance Funds;

●

Act CXVII on the tax treatment of contributions and benefits.

Key regulatory and supervisory authorities Hungarian Financial Supervision Authority (PSZAF), www.pszaf.hu.

Key official statistical references and sources on private pensions Hungarian Financial Supervisory Authority; www.pszaf.hu. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

208


This new alternative was registered in 2006. It is available through banks. It provides a choice of investments for members. The state provides tax relief for this plan.

nl y

d

u le

Individual retirement account: voluntary private pension plan (nyugdíj előtakarékossági számla)

✓

se

✓

✓


e

Employee participation is entirely voluntary. Supplementary pensions are provided only by defined contribution plans via voluntary pension funds promoted by the state with changing tax allowances. Voluntary pension funds must be founded by a minimum of 15 persons.

Book reserve

ea

Voluntary private pension funds (önkéntes nyugdíjpénztar)

✓

Financing vehicle

R

✓

O

Mandatory pension funds may be funded by employers (separately or jointly), chambers of commerce (separately or jointly), professional associations (jointly or separately,or with chambers of commerce), employees´ interest organisations (i.e. trade unions), and voluntary pension funds. All new labour market entrants are required to join. Employee contributions are determined by law. There are no separated funded pension arrangements for government workers.

An

Mandatory private pension funds (magánnyugdíjpénztar)

EC


O

D Br o


n

w


✓

✓

✓

✓

u Lect

r

✓

✓



209

5. ICELAND

nl y

D Br o

w

n

Iceland

_it E d it e io s


ea

se

Employment rate

311.4 181.5 97.7 11.5 19.8

An


e

O

Labour force (000s)

R

Population (000s)

u le

1 279.4

64 108.1

EC


d

Nominal GDP (ISK bn)

O


u Lect

r






Mandatory occupational pension

●

Public pension – Basic pension – Targeted pension

Occupational pension funds

Voluntary, personal

80

●

Personal pension funds


60

40

20



Total investments (ISK bn)

2003

2004

2005

2006

2007

826.8

989.9

1 227.1

1 514.9

1 714.0


98.3

106.6

119.6

129.7

134.0


8.8

7.8

8.5

8.2

11.4


3.4

3.4

3.4

3.4

3.6


50

48

46

41

38


1 2 http://dx.doi.org/10.1787/517377082446

210


nl y u le

O

Overview

D Br o


w

n


_it E d it5. ICELAND e io s

d

e

An

All employed and self-employed persons aged 16 to 70 are covered.

Contributions

se

ea

R

Coverage

O

EC

The mandatory pension fund system was introduced in 1974 (in 1980 for the selfemployed). It is administrated on a collective defined contribution basis, designed to provide a minimum replacement rate on retirement.

u Lect

r

The total contribution rate should be at least 12% of payroll. Normally, 4% is paid by the employee and 8% by the employer. Total contributions are paid into two kinds of accounts – defined benefit and defined contribution. Each of Iceland’s authorised pension funds decides individually how to allocate contributions between the two schemes, on the condition that the defined benefit account provides at least the minimum benefit level on retirement.

Benefits The defined benefit plan must, for 40 years of contributions, yield a minimum pension of 56% of average earnings, paid for life. The benefit is adjusted according to the financial position of the funds, but must, at the least, be linked to the consumer price index. Defined contribution benefits depend on the amount of assets accumulated. The normal retirement age is 67 for private-sector employees and 65 for those in the public sector. Both earlier (i.e. age 65) and later (maximum age 70) retirement is possible, with benefits adjusted accordingly.

Taxation Employee contributions up to 4% are tax-deductible, while there is no tax deduction ceiling on public-sector employer contributions. Pension investment income is not taxed, while pension payments are.

Personal voluntary Coverage All employed and self-employed people aged 16 to 70 may be covered by the system.

Contributions Both employers and employees pay contributions and, although in principle there is no limit on contributions, there is a tax-deductible ceiling.

Benefits The benefits are of the defined contribution type.


211

5. ICELAND

D Br o

w

n

Taxation

_it E d it e io s

nl y

u le

O

d

ea

se


e

O

Market information

R

EC

Four per cent of employee and 0.4% of employer contributions are tax deductible if they are paid into the pension schemes authorised by the Ministry of Finance. Employers’ contributions to voluntary individual accounts may receive matching reductions in social security contributions.

In 2007 there were 38 authorised pension funds organised along occupational lines. The estimated total membership in occupational mandatory funds was 268 000, while total assets amounted to ISK 1 548.8 billion (USD 24.9 billion).

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Personal voluntary In 2007 there were 17 authorised pension funds organised along personal lines. The estimated total membership in personal voluntary funds was 123 000, while total assets were ISK 220.8 billion (USD 3.5 billion).

Reference information Key legislation 1997: Act No. 129 on Mandatory Pension Insurance and the Activities of Pension Funds, http://eng.fjarmalaraduneyti.is/media/laws_regulations/Act_no_129_1997.pdf. 2007: Act No. 78 on Occupational Retirement Funds, http://eng.fjarmalaraduneyti.is/ media/laws_regulations/Act_no_78_2007.pdf.

Key regulatory and supervisory authorities Financial Supervisory Authority, www.fme.is. Ministry of Health and Social Security: oversees the public pensions, http:// eng.heilbrigdisraduneyti.is/. State Social Security Institute: administers the social security programmes through local offices, www.tr.is/english. Ministry of Finance: oversees the public pensions, while the 52 independent pension funds administer the mandatory occupational pension programmes, www.ministryoffinance.is/.

Key official statistical references and sources on private pensions Financial Supervisory Authority; www.fme.is. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

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Legislation on tax incentives for voluntary private pension saving was adopted only in 1998 as a part of the general pension reform but the tax incentives have been increased since. These plans are in most cases defined contribution individual accounts and have to be authorised by the Ministry of Finance.

✓

Book reserve

ea

Personal pension funds

✓

R

✓

O

Membership of occupational pension funds was made compulsory for wage-earners in 1974. In 1980 this obligation was extended to the self-employed.

Pension fund

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Occupational pension funds

Financing vehicle

Personal

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Ireland

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5. IRELAND


u le

O d

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Employment rate

4 339.0 2 201.9 95.4 10.8 21.4

An


e

Labour force (000s)

ea

Population (000s)

185.8

58 608.0

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O


EC


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Voluntary occupational pension – Defined benefit plans – Defined contribution plans

●


Voluntary, personal

Public pension – Flat rate pension – Means-tested pension for low-income elderly

● ●

80

Retirement annuity contracts Personal retirement savings accounts (PRSAs)


60

40

20

0 DB

DC

Note: Additional pension income may come from other sources such as personal pension, general savings or investments, etc. Source: OECD estimates.


2004

2005

2006

2007


55.5

62.3

77.9

87.7

86.6


39.8

42.0

48.3

50.2

46.6


..

..

..

..

..


..

..

..

..

..


..

..

..

..

..


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Pension plans in Ireland have historically been defined benefit in nature, but there has been a major shift towards defined contribution. According to the Pensions Board, 68% of occupational voluntary plan members belonged to defined benefit plans in 2006. However, 98% of the total number of occupational voluntary plans are defined contribution in nature.

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Company pension plans lay down eligibility criteria. Those enrolled in an occupational pension plan cannot take out a retirement annuity contract (RAC) or a personal retirement savings account (PRSA), unless the PRSA is funded by additional voluntary contributions (AVC), or the person has a separate source of earnings, e.g. a separate job or income. In 2006 around 55% of the employed population was covered.

Typical plan design Occupational pension plans can be defined benefit or defined contribution in nature. A typical defined benefit pension plan would be tied to final average earnings and may have an accrual of 1/60 for each year of service. Employees are generally required to contribute to defined benefit plans. Average contribution rates to defined contribution plans are approximately 10% of earnings, with employers and employees contributing half each. Additional voluntary employee contributions are only permitted if the rules of the plan permit AVC. If they do not, then a member has the right to pay AVC to a PRSA. Benefits usually become payable upon reaching the normal retirement age of 65. Many company pension plans allow employees to take early retirement benefits from age 50. Benefits are paid out as a regular pension, or as a tax-free lump sum and a reduced pension. A plan member with AVC may, if the rules of the plan permit, use their AVC to provide: ●

All or part of the tax-free lump sum.

●

Additional pension.

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A payment to certain types of pension funds.

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A taxable lump sum.

All benefits paid from a company plan are subject to maximum limits set by the Revenue. Benefits at the normal retirement age may amount to: ●

A maximum two-thirds of the member’s final salary if he or she has completed 10 years of service.

●

A tax-free lump sum of 1.5 times the final salary, if the member has completed 20 years of service and supplemented a reduced pension.

Taxation Both employers and scheme members receive tax relief on their contributions as they pay them. In addition, the amount the employer pays is not treated as employee earnings for tax purposes. The pension fund pays no tax on the investment income that it makes in


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the shape of dividend income and capital gains. Most of the benefits are taxed under the PAYE system. To qualify for beneficial tax treatment, a scheme must be approved by the Revenue Commissioners, who police the maximum benefits that can be provided.

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Personal Retirement Savings Account (PRSA)

Overview

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EC

The maximum contribution rate (as a percentage of total pay) on which one can receive tax relief is 15% of total pay for those under age 30, increasing up to 40% of total pay for those aged 60 and over, with the maximum earnings cap set at EUR 262 382. Pensions in payment are taxable as income. National health insurance levies must also be paid.

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The PRSA is a personal pension contract introduced in 2003. It is a defined contribution type of pension plan that takes the form of a contract between an individual and an authorised PRSA provider.

Coverage Any individual under the age of 75 can take out a PRSA, irrespective of whether he or she has taxable earnings. This includes employees who are excluded from joining a company pension plan. The PRSA contract may stipulate a minimum age. The normal retirement age is 65 for both men and women. Most pension plans (i.e. 82% of defined benefit and 64% of defined contribution plans) set a normal retirement age of 65.

Contributions Contributions are made by individuals, employers, or both. In the case of “excluded employees”, the employee makes contributions via the employer’s payroll. Employees who participate in a company pension plan may only make contributions to a PRSA if company pension plan rules prohibit them from making additional voluntary contributions.

Benefits Benefits normally become available between the ages of 60 and 75. They can be claimed upon retirement from employment at age 50 or over, or at any time in the event of serious ill-health. Twenty-five per cent of the PRSA accrued benefits can be paid as a taxfree lump sum (non-AVC PRSAs only). The balance of the fund can be used to purchase a lifetime annuity, receive a tax-free lump sum, or to take benefits from the PRSA and continue to make further contributions.

Taxations Individual contributions benefit from income tax relief, as do employee contributions made via the employer’s payroll. The tax relief limit varies from 15% of net relevant earnings for those under 30 to 40% of net relevant earnings for those aged 60 and over, with the earnings cap set at EUR 262 382. Limits for tax relief include AVCs to a company pension plan and any contributions paid to an RAC. Investment income is tax exempt. Annuities are subject to PAYE tax. Apart from the tax-free lump sum, benefits are subject to PAYE tax and health levies. Benefits of AVC PRSAs are subject to the rules of the company pension plan, including the tax rules applicable to it.

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Retirement Annuity Contracts (RAC)

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Anyone with earnings can open an RAC, except those who are enrolled in a company pension plan.

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An RAC is a particular type of insurance contract approved by the Revenue. It is a defined contribution type of pension plan.

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The RAC policy determines a minimum contribution level for the insured person. Employers may choose to contribute to the RAC.

Benefits Benefits are payable at any time after age 60 but before age 75. Retirement is not a prerequisite. Upon retirement, 25% of the funds can be paid as a tax-free lump sum, with the remaining funds used to purchase an annuity or paid out as a taxable lump sum.

Taxations Contributions are tax-exempt up to 15% of net relevant earnings for those under age 30, and up to 40% for those aged 60 and over. The net relevant earnings cap stands at EUR 262 382 and covers both RAC and PRSAs. Employer contributions are taxable on the part of the employee as “benefits in kind”. The employee can then claim income tax relief on these contributions as if he of she had paid them. Investment income is exempted from income tax and capital gains tax. Benefits in payment are subject to PAYE tax and health insurance levies.

Market information Occupational voluntary Occupational pension schemes take the form of trusts. Upon leaving a company pension plan with a preserved benefit, members may move the value of their benefits to their new employer’s pension plan. This plan may be a PRSA for an employee with less than 15 years of service in the company pension plan, and subject to its acceptance by the PRSA provider. Alternatively, an employee may purchase a buy-out bond, which is a life assurance policy designed to receive transfer values from company pension plans. In December 2007 occupational pension plans managed assets worth EUR 86.6 billion (USD 118.6 billion). As of 2007, there was a total active membership of 800 398 in occupational pension plans.

Personal voluntary Each PRSA offers several investment options, including a legally required default investment option. There are two types of PRSA contract: a standard PRSA, which is a contract that has a maximum fee of 5% on the contributions paid and 1% on assets under management. Investments are only allowed in pooled funds which include unit trusts and life company unit funds. A non-standard PRSA is a contract that does not have maximum limits on fees and/or allows investments in funds other than pooled funds. PRSAs are OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

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transferable and can also be transferred to a company pension plan. Switching fees are prohibited. The total number of PRSA contracts was 130 709. The total value of assets amounted to EUR 1.25 billion.

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RACs are offered by insurance companies, which offer different investment options. All RACs taken out after 6 April 1999 can be transferred to another RAC, or paid into a PRSA by mutual agreement between the person and the insurance company concerned.

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As of 2005, around 287 000 Irish people were covered by a personal voluntary plan.

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2002/1990: The Pensions Acts 1990 and 2002 relative to occupational pension plans and personal retirement savings accounts (PRSAs). 1993: The Trust Act, relative to occupational pension plans.

Key regulatory and supervisory authorities Pensions Board: responsible for occupational pension plans, including civil and public service arrangements and personal retirement savings account (PRSA) products, www.pensionsboard.ie. Revenue Commissioners: approve retirement annuity policies, www.revenue.ie/. Irish Financial Services Regulatory Authority (IFSRA): responsible for prudential supervision of providers of personal retirement savings account (PRSA) products, www.isfra.ie.

Key official statistical references and sources on private pensions Irish Association of Pension Funds, www.iapf.ie. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

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Retirement annuity Retirement annuity policy issued by contracts a life insurance company to an individual. Plans are approved by the Revenue Commissioners and the providers are prudentially regulated by the Financial Regulator.

✓

Personal A PRSA is a new type of personal retirement savings pension contract introduced accounts (PRSAs) in 2003. It is a contract between an individual and an authorised PRSA provider. The Pensions Board and the Revenue jointly approve PRSA products. The Board supervises the PRSA providers in relation to their approved products and the Financial Regulator is responsible for the prudential supervision of these providers.

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Occupational pension plans, including civil and public service arrangements. Regulated by the Pensions Board.

Personal

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Financing vehicle

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Italy

D Br o

5. ITALY


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Employment rate

58 880.0 24 728.0 93.9 19.7 46.9

An


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Labour force (000s)

ea

Population (000s)

1 535.5

35 429.6

R


O


EC


u Lect

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Voluntary occupational pension – Occupational pension schemes often based on collective agreements

Contractual pension funds (fondi pensione negoziali) Open pension funds (fondi pensione aperti) ● Pre-existing autonomous pension funds (fondi pensione preesistenti autonomi) ● Pre-existing non-autonomous pension funds (fondi pensione preesistenti non autonomi) ● ●

Public pension – Notional defined contribution 100


80

●

60

Open pension funds (fondi pensione aperti) Individual pension plans provided through life insurance contracts (PIPs)


40 20 0 Note: Additional pension income may come from other sources such as TFR payments, p e r s o n a l p e n s i o n , g e n e r a l s av i n g s o r investments, etc. Source: OECD estimates.



2003

2004

2005

2006

2007

32.6

35.7

39.8

44.4

50.1


2.4

2.6

2.8

3.0

3.3


0.3

0.3

0.3

0.3

0.4


0.2

0.2

0.2

0.2

0.2


470

458

431

432

418


1 2 http://dx.doi.org/10.1787/517406716484

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In July 2004 the Italian Parliament approved a law reforming certain aspects of the public pension system, vesting the Government with delegated powers to implement a new reform of the private pension system. Under this mandate, the Government issued the Legislative Decree No. 252 of 5 December 2005, which entered into force on 1 January 2007, and replaced previous law disciplining private pension provision. The new law provides that, starting from January 2007, employees have to choose whether to invest their annual severance pay provision (so called Trattamento di Fine Rapporto – TFR henceforth)4 in a pension plan or to keep it in their firm. If employees do not explicitly make a choice over a six-month period, the TFR will be automatically paid into an occupational pension plan (typically, the industry-wide occupational pension plan); for new employees, the choice period runs from their hire date.

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In 2006, the 2007 Budget Law No. 296 of 27 December provides that if an employee does not choose to transfer the TFR into a pension plan, the TFR will remain in the firm (if the firm has less than 50 workers) or will go to INPS – National Social Security Institute – (if the firm has more than 50 workers), with no changes in employees’ rights.

Coverage Coverage has increased since the recent pension reform. At the end of 2007 pension funds covered about 30% of the private sector employees that are mainly involved in the diversion of the TFR. The coverage of the labour force (including self-employed) is about 20%.

Typical plan design Private pension plans are both occupational and personal. Membership is not mandatory. As a result of the Decree No. 252 of 2005, an automatic enrolment mechanism has been introduced: if an employee does not make an active choice after a six-month period (counting from 1 January 2007 for old employees and from their hire date for new employees), the TFR will be automatically paid into an occupational pension plan (typically, the industry-wide occupational plan). Private pension plans can be implemented through pension funds or insurance-based contracts and have to be based on the defined contribution method. Fondi pensione negoziali or contractual pension funds: they are the result of collective bargaining between employers’ associations and trade unions and they offer occupational plans. These funds are independent legal entities: in fact it is envisaged a legal separation between the fund and the sponsoring employers. Membership is only open to employees or self-employed workers fulfilling conditions set in the collective agreements establishing the pension fund. Contractual pension funds are not allowed to manage directly their assets: the governing board must, therefore, delegate such activity to professional managers (banks, insurance companies, investment firms and asset management companies). The governing board and board of auditors are composed of employer and employee representatives on a paritarian basis. The so-called Responsabile del Fondo, appointed by the


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Fondi pensione aperti or open pension funds: they are promoted by banks, insurance companies, investment firms and asset management companies; they can offer both occupational and personal plans. These funds do not have independent legal status; however, their assets are required to be separated with respect to those of the financial company promoting them. The financial company must appoint the Responsabile del Fondo, meeting the independence requirements established by Law (see above for his/her tasks). The Responsabile del Fondo also provides the necessary information to a supervisory board

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governing board, has the role of verifying that the fund is managed according to the interests of members and beneficiaries and in compliance with legal and statutory provisions (investment rules, conflicts of interest rules, etc.).

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c tu (so-called Organismo di Sorveglianza); the latter must be appointed by L thee financial

r

institutions managing pension funds open to collective membership and has the role to oversee that the activity of the pension fund is put in place in the sole interest of members, also with a whistle-blowing role with respect to the Supervisory Authority. When at least 500 members belong to the same firm/group, the Law requires that components of the Organismo di Sorveglianza are appointed by workers and by the firm/group on a paritarian basis. Fondi pensione preesistenti or pre-existing pension funds: they were already operating before the Legislative Decree No. 124 of 1993. They are both autonomous and non autonomous (book reserve) and they offer occupational plans. They are structured as defined contribution and defined benefit schemes. All existing defined benefit plans were closed to new members while many of them have been wound up and converted into defined contribution schemes. As a result of the recent pension reform, pre-existing pension funds are expected to become an ever-shrinking share of the private pension system since the new legislation does not allow them to expand further their membership area. Individual pension plans based on life insurance contracts, so-called PIPs, have been introduced by Law No. 47 of 2000. They are offered by insurance companies and they can collect only individual adhesions. PIPs compliant with the Legislative Decree No. 252 of 2005 can receive the TFR diverted by private sector employees on an individual basis. Plans’ assets are required to be separated with respect to those of the insurance company managing PIPs. As open pension funds, insurance companies offering PIPs must appoint the so-called Responsabile del PIP.

Taxation Employee contributions are tax-deductible up to an upper limit on total employee and employer contributions of EUR 5 164 a year. TFR is excluded from this limit. Net investment income of the plan is taxed at an annual rate of 11%. Pension benefits (annuity or lump sum), net of the amount on which tax has already been paid, are taxed in a more favourable manner with regard to general tax income. The tax rate is 15%, with a reduction of 0.3% for every year of participation after 15: a maximum reduction of 6% is established. Benefits received as a cash advance for buying house or for other reasons or as a lump sum in case of voluntary left employment are taxed less favourably.

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At the end of 2007, all private pension plans counted 4.6 million members. Total resources for retirement provision amounted to EUR 58.0 billion (USD 79.5 billion).

Reference information Key legislation

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PIPs counted 1.1 million members and the total value of assets amounted to EUR 5.8 billion (USD 7.9 billion).

se

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EC

There were 418 registered autonomous pension funds with 3.4 million members and EUR 50.1 billion (USD 68.7) assets worth.

u Lect

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2005: Legislative Decree 252/2005 passed on 24 November 2005 reformed the TFR system by introducing automatic enrolment and opt-out arrangements. 2000: the legal framework for PIPs was laid down in Legislative Decree No. 47. 1993: Legislative Decree No. 124 allowed the establishment of open and closed pension funds.

Key regulatory and supervisory authorities Comissione di Vigilanza sui Fondi Pensione (COVIP), or the Pension Fund Supervision Commission: oversights the Italian private pension system, www.covip.it.

Key official statistical references and sources on private pensions Commissione di Vigilanza sui Fondi Pensione (2007), or Pension Fund Supervision Commission, Annual Report, www.covip.it/RA%202007%20_20080624_.pdf. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


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Instituted by Legislative Decree No. 124 of 1993. They are promoted by banks, insurance companies, asset management companies, and investment companies. They serve both occupational and personal plans and are structured as defined contribution pension plans. They have no legal personality, but their assets are required to be separate from those of the financial company managing them.

✓

✓

✓

Pre-existing autonomous pension funds (fondi pensione preesistenti autonomi)

Instituted before the legislation passed in 1993. They serve occupational pension plans and are structured both as defined benefit and defined contribution pension plans. Most are sponsored by banks, insurance companies, and by industrial companies in favour of their employees. After 1993, all existing defined benefit plans were closed to new members, while many have been wound up and converted into defined contribution plans.

✓

✓

✓

Pre-existing nonautonomous pension funds (fondi pensione preesistenti non autonomi)

Instituted before the legislation passed in 1993. Almost all of them are sponsored by banks and insurance companies in favour of their employees, although there are also a few small-sized funds sponsored internally by non-financial firms. They are mostly structured as defined benefit pension plans and are established in the form of book reserves in the companies' balance sheets.

✓

✓

✓

Individual pension plans provided through life insurance contracts (PIPs)

Instituted by Legislative Decree No. 47 of 2000. They are regulated by the Pension Fund Supervision Commission (COVIP) and by the Private Insurance Supervision Commission (ISVAP). They are offered by insurance companies through traditional life insurance contracts or unitlinked contracts. They serve only personal plans.

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Open pension funds (fondi pensione aperti)

Book reserve

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EC

Instituted by Legislative Decree No. 124 of 1993. These funds are set up under the terms of collective bargaining agreements between employers’ associations and trade unions at several levels: company or group of companies, industrial or economic sectors, geographical areas. They serve only occupational plans and are structured as defined contribution pension plans. They have legal personality and there is a legal separation between fund and sponsor.

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Contractual pension funds (fondi pensione negoziali)

Financing vehicle

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Japan

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Employment rate

127 771.0 66 690.0 96.1 21.5

e

Labour force (000s)

34 277.7

ea

Population (000s)

515 747.3

R


O

Nominal GDP (JPY bn)

EC


41.2

An


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Voluntary occupational pension – Employees’ pension fund – Tax qualified pension plan (being phased out) – Other defined benefit and defined contribution plans Public pension – National pension – Employee pension insurance (with contracting out option)

The Employees' Pension Fund (EPF) (kosei nenkin kikin) Defined benefit corporate pension funds (kakutei kyufu kigyo nenkin) ● Corporate defined contribution funds ● Tax-qualified pension funds ● Mutual aid associations (MAAs) ● ●

Voluntary, personal

60

● ●

Individual defined contribution funds (kakutei kyoshutsu nenkin [kojin-gata]) National pension funds (kokumin nenkin kikin)


40

20



2004

92 173.8

91 457.6

109 731.6

114 934.1

102 971.5

18.8

18.4

21.9

22.6

20.0


..

..

..

..

..


..

..

..

..

..


..

..

..

..

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Total investments (JPY bn) Total investments as a % of GDP

2005

2006

2007


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the Tax Qualified Pension Plan (TQPP), due to be phased out by 2012;

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new defined contribution plans;

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“fund-type” and “contract-type” defined benefit corporate pension plans.

e

the Employees’ Pension Fund (EPF) for the contracted-out portion of the public pension scheme Employee Pension Insurance (EPI);

An

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R

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The most common type of occupational pension plan in Japan is the termination indemnity plan that offers a lump sum benefit upon termination of employment or retirement. Four other types of supplementary occupational pension schemes are also currently operated on a voluntary basis in Japan. They are:

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Coverage EPFs, TQPPs, defined benefit and defined contribution plans cover only private sector employees, with EPFs designed only for private sector employees who are part of the EPI public pension system. Public sector employees benefit from separate arrangements. In 2000, approximately 90% of firms with at least 90 employees offered occupational pension provision: book-reserved termination indemnity plans, EPFs, or TQPPs. Approximately 50% of these firms provided EPFs or TQPPs. In 2000, the Employees’ Pension Fund covered about one third of the labour force.

Typical plan design A typical plan design in Japan is a severance-pay defined benefit plan. Benefit is often taken up as a lump sum and is equal to the final salary multiplied by a pre-specified coefficient, which depends on an individual’s years of service and the reason for his or her termination of employment. Under EPF schemes, employees and employers each contribute one-half of total contributions to substitution benefits, while employees usually pay less than one-half of total contributions to additional benefits and employers more than one-half. Employees do not usually contribute to defined benefit plans or TQPPs. Employers generally pay the total contribution, with the rate varying greatly from company to company. Employers pay the total contribution to defined contribution plans, as employee contributions are prohibited. Benefit payments can be lump sums or annuities in all five types of plans. The normal retirement age is 60.

Taxation There is no limit to the percentage of employee contributions that can be claimed as tax-deductible. Nor is there any tax-deduction ceiling on employer contributions, as long as the amount is based on the proper actuarial funding standard. Employee contributions to defined benefit plans and TQPPs are tax-deductible up to a limit of JPY 50 000. If an employee pays a life insurance premium, the cap of JPY 50 000 is

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reduced by the amount of the premium. There is no limit to the tax-deductible share of employer contributions, as long as the amount is based on the proper actuarial funding standard.

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Under defined contribution plans, the maximum yearly amount deductible from the contribution of an employer sponsoring only one occupational plan is JPY 552 000 per employee. If the employer also sponsors a defined benefit plan, the maximum yearly tax deduction from the employer’s contribution to the defined contribution plan is JPY 276 000 per employee. Assets in EPFs are taxed at an annual rate of 1.173% (1% national and 0.173% local tax), if they exceed the amount needed to cover liabilities of 3.23 times the accrued substitutional benefits. Assets in all plans other than EPFs are taxed at a yearly rate of 1.173% (1% national and 0.173% local tax).

u Lect

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An

Pension benefits from all plans are taxed as income at a rate of between 5% and 40%.

Market information Occupational voluntary Total voluntary occupational pension assets amounted to JPY 85.8 trillion in 2007 (USD 728.6 billion). In 2007 there were approximately 600 EPFs and 35 000 TQPP contracts, their respective numbers having declined rapidly in recent years. In the same year there were over 2 000 contract-type and fund-type defined benefit plans, and over 2 500 defined contribution plans.


The Defined Benefit Occupational Pensions Act: established two new types of plans as of 1 April 2002 – the fund-type and contract-type defined benefit plans – and provides for the phasing-out of TQPPs by 2012.

●

The Defined Contribution Occupational Pensions Act: introduces the possibility of establishing defined contribution plans and provides for the establishment of both occupational and personal defined contribution plans.

Key regulatory and supervisory authorities Ministry of Health, Labour and Welfare, www.mhlw.go.jp. Pension Fund Association of Japan.

Key official statistical references and sources on private pensions Bank of Japan Social Insurance Agency, Annual Report FY2005 Pension Fund Association (2007), The Basic Statistics about Company Pensions, December. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


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Financing vehicle

✓

Defined benefit Corporate defined benefit pension corporate pension funds that have developed since funds (kakutei April 2002. kyufu kigyo nenkin)

✓

✓

✓

Corporate defined They were introduced in contribution funds October 2001.

✓

✓

✓

Individual defined They were introduced in contribution funds October 2001. (kakutei kyoshutsu nenkin [kojin-gata])

✓

✓

✓

✓

National pension funds (kokumin nenkin kikin)

They are individual defined contribution funds. They are established for the self-employed.

✓

✓

✓

✓

Tax-qualified pension funds

They are corporate defined benefit funds. They will be abolished by 2012.

✓

✓

✓

✓

Mutual aid associations (MAAs)

National Public Service Personnel Mutual Aid Associations; Pension Fund for Local Government Officials; the Mutual Aid Corporation of Private School Personnel.

✓

✓

✓


✓

An

✓

e

R

se

ea

✓

The EPF is a defined benefit corporate pension fund. It manages a part of the public pension plan and also provides its own supplementary benefits. At the end of 2003 there were 1 541 EFPs.

O

✓

The Employees' Pension Fund (EPF) (kosei nenkin kikin)

Book reserve

u le

Pension fund

d

Personal

EC


O

D Br o


n

w

_it E d it e io s

u Lect

r

✓


228


nl y

D Br o

w

n

Korea

_it E d it 5. KOREA e io s


u le

d

se

Employment rate

48 456.4 24 216.0 96.8 19.9

9.9


e

O

Labour force (000s)

20 013.8

ea

Population (000s)

901 188.6

R

EC


An

Nominal GDP (KRW bn)

O


u Lect

r





Mandatory, Occupational

Mandatory occupational pension – Retirement pension plans – Retirement pay schemes

● ●

Public pension – National pension system

Retirement pension plans (since December 2005) Retirement pay schemes


100

●

80

Personal pension insurance Personal pension trust


60 40 20 0 Note: Additional pension income may come from other sources such as personal pension, general savings or investments, etc. Source: OECD estimates.


Total investments (KRW bn)

2003

2004

2005

2006

2007

11 771.1

13 188.4

15 007.0

25 341.4

27 684.6


1.6

1.7

1.9

3.0

3.1


0.1

0.2

0.2

1.7

0.8


0.0

0.0

0.0

0.6

0.6


116

116

138

..

..


1 2 http://dx.doi.org/10.1787/517475134867


229

nl y u le

Overview

O


w

_it E d it e io s n


D Br o

5. KOREA

d

se

ea

e

An

Coverage

R

O

EC

The mandatory occupational scheme that covers employees working in the private sector in Korea is the retirement benefit system (RBS). The RBS provides choices, including retirement pension plans (RPP) and retirement pay schemes (RPS), which corporations can form. There are two types of RPP, defined contribution (DC) plans and defined benefit (DB) plans, while RPS is DB in nature.

u Lect

r

Employers who employ five or more employees are required to provide them with an RBS. From 2010, the RBS will also cover those enterprises with less than five employees.

Contributions For DC plans, minimum contributions from employers are equal to one-twelfth of the annual payroll, with additional contributions from employees being allowed. However, there are no specific details regarding employer contribution to DB plans and the RPS, because the amount of contributions depends on the performance of the fund management by employers. The RPS allows assets to be administered not only externally by insurance firms (retirement insurance) and banks and asset management companies (retirement trust), but also by companies in-house (i.e. book reserves).

Benefits Under DC plans, the amount of benefits depends on the performance of the fund management by employers. Under DB plans and the RPS, employees who have completed one year of continuous employment are entitled to benefits equal to one month’s pay or more for every full year of employment, calculated on their final three monthly salaries. Under the RPP, benefits are paid in the form of annuities or a lump sum if an employee retires at age 55 and has at least ten years of service. If an employee does not meet these two requirements, he or she can transfer the accrued benefits to an individual retirement account (IRA). Benefits are payable as a lump-sum only under the RPS, regardless of types of funding vehicles. Benefits in an individual’s retirement account will continue to vest even if he or she changes employer.

Taxation Employers may qualify for tax relief of up to 100% of their external reserve liabilities placed outside the company, and for 35% of their reserve liability set aside internally. The investment returns are tax-exempt, while benefits are liable to taxation. The new income tax law became effective on 1 January 2006. The ceiling on tax-exempt contributions by employees was raised from KRW 2.4 million per annum to KRW 3 million, and on taxdeductible annuities from KRW 6 million to KRW 9 million per year.

Personal voluntary Coverage Voluntary personal pension arrangements have been available in Korea since June 1994 in the form of IRAs.

230


nl y u le

O d ea

e

In 2006 the ceiling on tax-exempt contributions was raised from KRW 2.4 million per annum to KRW 3 million.

An

Market information

se

O

Taxation

R

Fully funded.

D Br o

Benefits

EC

No limit.

w

n

Contributions

_it E d it 5. KOREA e io s

u Lect

r

Occupational mandatory In 2007 RPS managed KRW 24.9 trillion (USD 26.8 billion). Participants in these arrangements numbered 4.3 million in total. In December 2007, participants of RPP numbered 481 000 in total. KRW 2.8 trillion (USD 2.9 billion) were managed under this system.

Personal voluntary In December 2007 the total number of participants was 3.6 million, and total assets within the voluntary personal pension system were KRW 43.7 trillion (USD 47.0 billion).

Reference information Key legislation 2005: the Employee Retirement Benefit Security Act (ERBSA) sets out the principles and guidelines for establishing and managing occupational pension plans. 1999: the Act Establishing Financial Supervisory Organisations creates the Financial Supervisory Service.

Key regulatory and supervisory authorities The Ministry of Labour, www.molab.go.kr/. Ministry of Finance and Economy, http://english.mofe.go.kr/. Financial Supervisory Service, http://english.fss.or.kr/fsseng/index.jsp.

Key official statistical references and sources on private pensions Financial Supervisory Service, http://english.fss.or.kr/fsseng/index.jsp. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


231

5. KOREA

w

_it E d it e io s

nl y

d

✓

Retirement insurance/ Retirement trust

Voluntary pension plans designed not for book reserves, but for appropriate reserves held in funds outside companies. Products provided by insurance companies are called “retirement insurance plans”, while those held by banks and asset management companies are called “retirement trust funds”.

✓

✓

Personal pension insurance

Personal pension insurance with guaranteed yield ratio are provided by insurers.

✓

✓

✓

Personal pension trust

Personal pension funds with guaranteed yield ratio are provided by bank trust accounts.

✓

✓

✓

✓

Personal pension trust

Personal pension funds with no guaranteed yield ratio are offered by investment trust management companies.

✓

✓

✓

✓

e

R An

✓

✓

se

Voluntary pension plans, similar to private occupational pension plans in other countries. They comprise defined benefit plans, defined contributions plans and individual retirement accounts.

ea

✓


u le

Book reserve

Retirement pension plans (since December 2005)

O

✓

Pension fund

O

D Br o

✓

Financing vehicle

Personal

EC


n


u Lect ✓

r

✓

✓


232


nl y

D Br o

w

n

Luxembourg

_it E d 5. LUXEMBOURG iti e s o


u le

O d

se

Employment rate

476.2 343.4 97.0 14.0 19.5

An


e

Labour force (000s)

ea

Population (000s)

36.1

102 976.9

R


O


EC


u Lect

r






Public pension – Earnings-related pension – Minimum pension

Association d'Épargne-Pension (ASSEP) and Société d'Épargne-Pension à Capital Variable (SEPCAV) ● Pension funds ● Group insurance contracts (traditional and unit-linked) ● Book reserve schemes ●

100 80

Voluntary, personal

60

●

40

Individual pension savings contracts


20 0 Note: Additional pension income may come from other sources such as occupational and p e r s o n a l p e n s i o n , g e n e r a l s av i n g s o r investments, etc. Source: OECD estimates.


2004

2005

2006

2007


..

0.1

0.3

0.4

..


..

0.3

1.1

1.0

..


..

0.0

0.2

0.1

..


..

0.0

0.1

0.1

..


..

3

16

18

..


1 2 http://dx.doi.org/10.1787/517476384858


233

nl y e

An

Coverage

u le

d

ea

R

O

EC

Employers who wish to offer their employees a pension provision may choose between three types of plans: pension funds, group insurance, or book reserve schemes. Pension funds may be established as Sociétés d’Épargne-Pension à Capital Variable (SEPCAVs), Associations d’Épargne-Pension (ASSEPs) or other types of pension funds. The SEPCAV is similar to an investment trust, while the ASSEP is a new type of company inspired by mutual insurance associations and organised like a partnership.

se

Overview

O


w

_it E d it e io s n


D Br o

5. LUXEMBOURG

u Lect

r

A single employer or a group of employers may establish a voluntary occupational pension plan for their employees. The self-employed may also set up their own occupational plans. Employees newly hired by a sponsoring employer on or after 1 January 2000 and eligible for plan membership must become members. Civil servants are covered by separate public-sector plans, which are not discussed here. Employers may restrict plan membership to employees with earnings above the social security ceiling. The minimum age limit for admission to an occupational pension plan is usually 25. In 2006 the coverage rate was 5.4% of the economically active population.

Typical plan design Voluntary occupational pension plans can be defined benefit or defined contribution in nature, or a hybrid of the two. In 2006, approximately half of all privately managed pension funds financed defined benefit plans and the other half defined contribution schemes. However, defined benefit plans, which are typically linked to final salary earnings, covered approximately 87% of pension plan members. Defined contribution plans typically require employer contribution rates of between 2% and 5% of a salary. Employee contributions to pension funds and group insurance plans are voluntary. As for group insurance, employees usually contribute between 3% and 5% of a salary under both defined benefit and defined contribution plans, although book reserve systems are non-contributory for employees. Employer contributions may not exceed 20% of a salary. All pension schemes operated by SEPCAVs are of the defined contribution type and offer several investment options to their members. ASSEPs offer any type of pension arrangements, i.e. schemes with defined contributions or defined benefits, as well as hybrid schemes. For schemes with defined contributions, it is generally foreseen that the benefits are allocated in the form of a lump-sum payment. Similarly, in most schemes with defined benefits, the payment of the retirement capital can be made as a lump sum. In some defined benefit schemes, members may nevertheless opt for benefits in the form of a lump sum or annuity. If a member opts for an annuity, the benefit is either externalised with an insurance undertaking or the pension fund itself bears the risk of the lifelong pension. Group insurance and book reserve schemes usually aim to provide a benefit target, which often integrates social security benefits.

234


nl y

se

ea

Overview

e

R

An

O

Employee and employer contributions enjoy tax relief if employer contributions or allocations to book reserves do not exceed 20% of the annual payroll, and if the total benefit target for old-age pensions under defined benefit plans does not exceed 72% of final pensionable salary. Investment income from pension funds is tax-exempt.

Personal voluntary

u le

O d

EC

Taxation

D Br o

The retirement age is usually 65 for both men and women, though in 2006 the average actual retirement age was 62. Provision for early retirement from age 60 is common, though actuarial reductions apply.

n

w


u Lect

r

Individual pension savings contracts can be agreed with banks and insurance companies.

Coverage Anyone may enter into an individual pension savings contract.

Contributions Contribution rates are set out in the contract terms and conditions.

Benefits Individual pension saving contracts are defined contribution in nature. Half of an insured person’s benefits can be paid out as a lump sum.

Taxation The portion of benefits paid out as a lump sum is tax-free, while the remaining annuity is taxable at a low rate.

Market information Occupational voluntary At the end of 2007 there were 13 occupational pension funds on the market, of which four were SEPCAVs and nine were ASSEPs. The CSSF (see below) reported that it expects a slow but steady development of the pension market in coming years. SEPCAVs, offering defined contribution plans only, propose plan members various investment portfolios. Most pension plans offer survivor benefits in addition to old-age pensions, while some also provide disability benefits. Those employers who offer book reserve schemes must obtain credit insurance. In December 2007, there were 8 354 participants in ASSEPs and SEPCAVs in total. Total assets were worth EUR 242.1 million (USD 331.7 million).

Personal voluntary Policy holders have various investment options, including unit-linked products.


235

5. LUXEMBOURG

nl y

D Br o

Key legislation

w

n


_it E d it e io s

u le

O

d

ea

EC

2005: The Law of 13 July governs occupational retirement institutions which take the form of pension savings companies with variable capital (SEPCAVs) and pension savings associations (ASSEPs).

se

R

O

2000: Grand Ducal Regulation of 31 August, adopted under the terms of the Insurance Law, relates to the supervision of insurance companies.

e

1999: The Complementary Pensions Act regulates three types of complementary occupational pension plans. It provides for their registration and supervision, regulates minimum requirements for the vesting and transferability of accrued rights, prohibits discrimination between men and women, and determines the tax treatment of contributions, investment income, and benefits. It covers pension plans, group insurance and book reserve schemes.

u Lect

r

An

1991: The Insurance Sector Act provides for the authorisation and supervision of insurance companies, including those administering group insurance contracts. It regulates minimum requirements for such administration. 1967: Article 111bis of the amended Law on Revenue Taxation is concerned with individual pension savings contracts.

Key regulatory and supervisory authorities The Ministry of Social Security, which provides supervision of the public pension scheme, www.mss.public.lu. The Commissariat aux Assurances carries out prudential supervision of insurance organisations, including pension funds, and is responsible for licensing, www.commassu.lu. The Inspection Générale de la Sécurité Sociale, or Social Security Inspectorate, is responsible for complementary occupational pension plans. The Commission de Surveillance du Secteur Financier (CSSF) is the competent authority for the supervision of pension funds governed by the Law of 13 July 2005 relating to institutions for occupational retirement provision that take the form of pension savings companies with variable capital (SEPCAVs) and pension savings associations (ASSEPs).

Key official statistical references and sources on private pensions Commissariat aux Assurances, www.commassu.lu. Commission de Surveillance du Secteur Financier (2007), Annual Report, www.cssf.lu/ uploads/media/RA2007_chap03_eng.pdf. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

236


Group insurance contracts: – traditional – unit-linked Book reserve schemes

✓

Insurance Sector Act (amended) of 6 December 1991.

✓

✓

The Complementary Pensions Act of 8 June 1999 on supplementary pension schemes.

✓

✓

Individual pension Article 111bis of the Amended Law savings contracts of 4 December 1967 on Revenue Raxation.

✓

nl y

d An

✓

u le

✓

✓

se

Pension funds controlled by the Commissariat aux assurances (Insurance Commissariat) under the terms of Article 26(3) of the Amended Law of 6 December 1991.

✓


✓

e

Pension funds

✓

Book reserve

ea

✓

Pension fund

R

Grand Ducal Regulation of 31 August, adopted under the terms of the Insurance Law, relates to the supervision of ASSEPs (retirement savings entity) and SEPCAVs (pension savings companies with variable capital).

O

Association d'Épargne Pension (ASSEP) and Société d'Épargne Pension à Capital Variable (SEPCAV)

Financing vehicle

Personal

EC


O

D Br o


n

w


u Lect

r

✓

✓

✓

✓

✓



237

nl y

w

_it E d it e io s n

Mexico

D Br o

5. MEXICO


u le

O d

se

105 790.7 44 047.6 96.6 13.1

5.5


e

Employment rate

8 437.4

ea

Labour force (000s)

9 754.8

R

Population (000s)

O


An

Nominal GDP (MXN bn)

EC


u Lect

r






Mandatory personal pension – Mandatory individual pension accounts

●

Public pension – Minimum pension


40

● ●


SIEFORES: mandatory contributions ISSSTE: mandatory contributions


20

●

SIEFORES: voluntary contributions ISSSTE: voluntary contributions


0 Note: Additional pension income may come f r o m o t h e r s o u rc e s s u c h a s v o l u n t a ry occupational pension, general savings or investments, etc. Source: OECD estimates.


Total investments (MXN bn)

2003

2004

2005

2006

2007

401.5

481.9

832.1

1 051.8

1 181.5


5.8

6.3

10.0

11.5

12.1


0.9

0.8

0.8

1.1

0.9


0.1

0.1

0.1

0.2

0.2


12

26

1 331

1 342

1 378

. .: means not available. Note: The break in series in 2005 is due to the inclusion of occupational plans, not included in previous years. Source: OECD Global Pension Statistics. 1 2 http://dx.doi.org/10.1787/517551817532

238


nl y u le

O

Overview

D Br o


w

n


_it E d it5. MEXICO e io s

d

se

ea

e

R

O

Coverage

An

EC

Occupational pension plans may be established by employers or groups of employers. They are either book reserved or financed through trusts administered by financial institutions. Seventy per cent of plans are defined benefit in nature, 20% are hybrid, and 10% defined contribution.

u Lect

r

Employers may establish an occupational pension on a voluntary basis, while employees are usually automatically enrolled in a plan as part of their employment contract. In 2007 the occupational pension system covered less than 3% of the labour force.

Typical plan design Defined benefit plans are usually based on final salary – the last month or year prior to termination of employment. Retirement ages vary, but in most plans (over 60%) the age is over 60. Benefits may be paid in any form, with 80% of plans paying out benefits in annuities and 20% in lump sums.

Taxation Contributions are tax-exempt up to a ceiling of 12.5% of payroll, while benefits are exempt up to nine times the annual minimum wage and the remainder is taxed at standard income rates.

Personal mandatory Overview A new system of mandatory pension funds based on defined contribution individual retirement accounts was introduced in July 1997. These funds (SIEFOREs) are managed by specialised providers (AFOREs).

Coverage Participation in the private scheme is mandatory for all employees, whether they contributed to the old pension system or not. The self-employed are not required to participate. Public employees were included in the new system after legislation was reformed in 2008.

Contributions Under the mandatory retirement account system, employers (5.15%), employees (1.125%), and the government (0.225%) together contribute a total of 6.5% of taxable income to individual accounts plus the social fee, which is a fixed amount, paid by the government, equivalent to 5% of 1997’s minimum wage (this amount is updated in accordance with changes in the Consumer Price Index). Unlike many other Latin American countries, where disability and old-age survivor insurance schemes are separate private contracts funded solely by employees, Mexico’s IMSS (the country’s old social security system) administers these programmes, financed by contributions totalling 2.5% of taxable income (0.625% from employees, 1.75% from employers, and 0.125% from the government).


239

w

_it E d it e io s n

nl y

u le

O

d

ea

e

R

O

EC

The system is defined contribution in nature for retirement benefits, but it is defined benefit for disability and old-age survivor insurance. Retirement benefits become available at the age of 65 after 1 250 weeks of contributions, and disability and life insurance benefits after 250 weeks of contributions. Employees who reach retirement age without having contributed for the required number of weeks may withdraw the entire balance of their retirement account as a lump sum. If after 1 250 weeks of contribution an employee does not have a sufficient balance in his/her account to get a minimum pension, the government pays the minimum pension.5 Employees may retire early when the balance of their account can yield benefit equal to, or greater than, 130% of the minimum pension in force at the time. Upon retirement, workers may either use the proceeds of their account to purchase an annuity from an insurance company, or make programmed withdrawals.

se

Benefits

D Br o

5. MEXICO

u Lect

r

An

Employees who contributed under the old pay-as-you-go (PAYG) pension plan may choose either to receive their benefits in accordance with that system, or to use their savings under the defined contribution scheme. If they choose the PAYG benefit arrangement, the balance of their individual account is transferred to the government.

Fees As of 2008, fees may be determined only as percentages of assets under management. In 2007, they accounted for over 2%.

Taxation Investment income is tax-exempt. Members’ contributions are taxed, while employers’ contributions may be deducted from profits for tax purposes. Benefits are taxexempt up to a ceiling set at nine times the annual minimum salary. Benefits above this limit are taxed as income.

Personal voluntary Overview Voluntary pension funds are defined contribution funds managed by AFOREs and financial institutions, such as insurance companies and mutual funds. AFOREs that administer voluntary pension funds have the same institutional framework as those managing mandatory funds. Since the beginning of the system in 1997, voluntary contributions were allowed. In December 2002, AFOREs have been allowed to manage savings sub-accounts for voluntary contributions, which are independent of the mandatory individual capitalisation accounts. These additional sub-accounts were created for long-term voluntary contributions and complementary retirement contributions.

Coverage Both employees and the self-employed may participate in the voluntary pension scheme. Federal state employees and those who work for certain public organisations and municipalities may also make voluntary contributions.

240


D Br o

w

n

Contributions

_it E d it5. MEXICO e io s

nl y

u le

O

d

se

ea R

O

Benefits

EC

Supplementary contributions to a mandatory pension fund are permitted and can be paid by employers and/or employees, either regularly or on an ad hoc basis. Voluntary contributions by employees are tax deductible up to a ceiling of five times the annual minimum salary or up to 10% of the annual income, whichever results smaller.

e

Members can transfer all, or part of, their savings to an individual capitalisation account when they retire in order to increase the size of their pensions. Additionally, they may withdraw their voluntary social security savings at any point in their working life, and not only on retirement, depending on the sub-account.

u Lect

r

An

Market information Occupational voluntary In 2007 there were over 1 700 occupational pension plans with a total of more than 1.1 million members. Half of these plans were administered by banks, accounting for over 80% of total assets under management, or over MXN 330 billion (USD 30 billion).

Personal mandatory In December 2007, the mandatory private pension system had 38.6 million members, and 21 AFOREs were managing its assets. Individuals are free to choose their AFOREs, which are regulated and supervised by the National Commission for the Retirement Savings System (CONSAR). A law passed in 2007 instituted an individual retirement account programme for civil servants and created a special AFORE, called the PensionISSSTE, to manage the scheme for its first three years. Public employees may switch to another AFORE only once the three-year period has elapsed. Since 2008, each AFORE has been allowed to offer five SIEFOREs (SIEFORE 1 to 5) with different types of investment strategies and risk levels based on life cycle funds. In December 2007 pension fund management companies had accumulated assets equivalent to over MXN 831.4 billion (USD 76.2 billion), or 8.5% of Mexico’s GDP. There are no legal requirements for a minimum rate of return to be credited to a member’s individual account.

Personal voluntary At the end of 2007 around 3 million workers had some kind of voluntary savings in the AFOREs, with pension funds having accumulated assets equivalent to MXN 2.7 billion (USD 241 million).

Reference information Key legislation The Retirement Savings System Law of 1996 defines the structure and powers of CONSAR and regulates the establishment, operation, and supervision of AFOREs and SIEFOREs. The 2007 reform set the balance fee as the only valid fee allowed; it also introduced the net return index as the main competition driver between AFOREs. Secondary regulation allowed the creation of three new funds (SIEFOREs).


241

5. MEXICO

w

_it E d it e io s

nl y

se

ea

An

Key official statistical references and sources on private pensions

e

R

The Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR), or National Commission for the Retirement Savings System, regulates and supervises the private fund management companies (AFORES), www.consar.gob.mx/.

O

u le

O

d

D Br o

EC


n

The CONSAR Circular 15-19 of 2007 authorised changes in investment regulation, which included the approval of new types of investment instruments (share certificates, participation certificates, structured bonds and REITS) and the allocation limits to the new funds.

u Lect

r

Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR), or National Commission for the Retirement Savings System, www.consar.gob.mx/. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

Overview of private pension system by type of plan and financing vehicle Type of plan Included in Mandatory/ OECD GPS OccupaQuasidatabase Voluntary tional mandatory SIEFORES: mandatory contributions

Contribution pension scheme comprising individual retirement accounts in open funds (SIEFORES), privately administered by specialised institutions (AFORES).

✓

SIEFORES: voluntary contributions

Individuals can make additional voluntary contributions. The selfemployed may also open special accounts to make voluntary contributions.

✓

✓

✓

✓

ISSTE: mandatory Federal government employees contributions retirement saving system (ISSSTE), administered by the Central Bank (Banco de México). As of mid2008, the assets of federal government employees will be managed by a public pension fund manager. Occupational pension plans

Private occupational pension plans sponsored by non-government employers must be registered with CONSAR. They comprise defined benefit, defined contribution, and hybrid plans. Benefit can be a pension, lump sum, or a combination of both.

✓

✓

✓

✓

Financing vehicle

Personal

Pension fund

✓

✓

✓

✓

✓

✓

✓

Book reserve


✓

✓

✓


242


nl y

D Br o

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n

Netherlands

_it E 5.dNETHERLANDS iti e s o


u le

d

se

16 346.0 8 741.4 96.8 14.4 27.4

An


e

Employment rate

ea

Labour force (000s)

559.5

46 761.9

R

Population (000s)

O


EC


O


u Lect

r






Quasi-mandatory occupational pension

Sector- or industry-wide pension plans Company pension funds ● Pension funds for professions ● Other pension funds ● Pension funds not under supervision ● Insured occupational plans ●

Public pension – Flat rate pension

●

100 80

Voluntary, personal

60

●

Annuities

40 Source: OECD Global Pension Statistics.

20 0 Note: Additional pension income may come from other sources such as personal pension, general savings or investments, etc. Source: OECD estimates.


2004

2005

2006

2007


482.6

531.1

619.6

671.9

739.8


101.2

108.1

121.7

125.7

132.2


4.4

4.6

5.0

4.4

4.2


3.2

3.4

3.5

3.6

3.6


876

843

800

768

713


1 2 http://dx.doi.org/10.1787/517604384401


243

nl y u le

Overview

O

Occupational quasi-mandatory

w

_it E d it e io s n


D Br o

5. NETHERLANDS

d

ea

se

O

Coverage

R

EC

Occupational pension plans are financed primarily via company and industry-wide pension funds.

e

Participation in a sectoral pension plan becomes mandatory if the sector’s employers request the Ministry of Social Affairs and Employment to declare membership obligatory, and if the employer organisations making the request represent at least 60% of employees in the sector. With over 90% of the working population covered, the system can be described as quasi-mandatory.

u Lect

r

An

Employers may opt out of a sectoral plan if they offer a provision that promises equal or better benefits.

Typical plan design Occupational pension plans can be defined benefit or defined contribution. The vast majority of employees (over 90%) are covered by defined benefit plans, although collective defined contribution plans and hybrid schemes are gaining popularity. Defined benefit plans can be final salary plans or lifetime-average earnings, while a small number of plans combine the two or provide fixed amounts. Most plans were switched to career-average defined benefit schemes after 2000. Benefits generally vest after one year of membership. Most final salary plans give 1.75% of earnings for each year of service, yielding a replacement rate of 70% for a 40-year career. In most average-earnings plans, the accrual rate varies between 1.75% and 2% per year of service. The indexation of pension benefits is typically conditional, being at the discretion of the funds themselves and depending, in practice, on funding levels. Pension funds are obliged to inform their members of their indexation expectations. Half of all pensions in payment are adjusted for wage growth in the relevant sector or industry, 27% are price-indexed, and just under one-quarter use other means of benefit adjustment. Occupational plans are fully funded. Contribution levels for employers and employees are determined by collective bargaining, though the employers’ share generally represents three-quarters of total contributions. There is no ceiling on pensionable earnings. The official retirement age for men and women is 65, which is the average age at which people actually do retire. Benefits can be paid out as a lump sum or as annuities, which enjoy tax relief.

Fees Members do not pay fees to pension funds, whose estimated administrative costs are about 0.18% of total assets per year.

244


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n

Taxation


d

se

e

R

O

ea

Plans must comply with the fiscal limitations on them. Taxation levels depend on benefit levels: final pay plans may have an accrual rate of no more than 2% per year, leading to a 70% replacement rate after 35 years. Career-average plans may apply a maximum accrual rate of 2.25% per year. If, on a member’s retirement, his or her benefits exceed 100% of final pay (including public pension benefits), the surplus is taxed at a progressive rate.

EC

u le

O

nl y

Employer contributions to an occupational plan are tax-deductible and employee contributions are not considered taxable income. Assets and investment returns are taxexempt, while benefits paid out as annuities are subject to ordinary taxation.

u Lect

r

An

Personal voluntary Overview Personal voluntary plans are also offered in the Netherlands in order to meet the growing demand for greater flexibility in terms of participation requirements, contributions, etc.

Coverage Anyone may enter into a contract for any type of personal pension savings plan.

Contributions Providers specify contribution levels in their contracts. Members may pay their contributions as a lump sum when they sign a contract, or at regular or flexible intervals thereafter.

Benefits Benefits can be paid out as a fixed or unit-linked annuity and, in some circumstances, in a fixed number of withdrawals. If an insured person dies before taking his or her benefits, they generally revert to one or more beneficiaries.

Taxation Contributions to annuity policies are tax-deductible up to a ceiling of EUR 1 036. Contributions made to bridge a gap in the accrual of occupational plan assets may also benefit from tax relief. Investment income is tax-exempt, while benefits are subject to income tax at a rate of 30%.

Market information Occupational quasi-mandatory There are four types of pension providers: ●

company pension funds (730).

●

industry-wide pension funds (71).

●

insurance providers, who administer 30 000 group insurance contracts for separate companies.

●

pension funds for professional groups such as dentists and doctors (11).


245

5. NETHERLANDS

nl y

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O

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ea

R

O

EC

D Br o

Some 80% of all occupational pension plan members are covered by mandatory sectorwide plans, while pension insurance providers supply around 850 000 employees with occupational pension coverage. Total pension investments in 2007 stood at over EUR 725 billion, making the Dutch pension market one of the largest in the world. The civil servants’ fund, known by the acronym ABP, and the medical sector fund PGGM are the largest industry-wide funds in the Netherlands. Ninety-one per cent of occupational plans were defined benefit in nature.

n

w

_it E d it e io s

An

Personal voluntary

e

Pension rights are transferable when members change employers.

c tu Personal pension savings policies are provided by insurance companies. L eAnnuity

r

insurance contracts must offer a minimum return of 3-4%.

Reference information Key legislation 2006: the Pensions Act sets forth the rules governing occupational pensions, while the Income Tax Act and the Earnings Tax Act specifies the tax rules governing pensions. 1956: Algemene Ouderdoms Wet (AOW), or Pensions Act, lays down the rules governing the public retirement pension system.

Key regulatory and supervisory authorities Ministry of Social Affairs and Employment: regulates and supervises the public pension system, www.employment.gov.nl/. De Nederlandsche Bank (DNB): responsible for prudential supervision, it is an integrated supervisory institution which carries out principle-based, risk-oriented supervision, www.dnb.nl. The Autoriteit Financiële Markten (AFM): polices the financial market’s compliance with the law, www.afm.nl.

Key official statistical references and sources on private pensions Statistics Netherlands, http://statline.cbs.nl/. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

246


nl y

A company pension fund is a separate legal entity and is not liable for an employer's debts. The fund/employer supplies supplementary pensions to the employees of a specific company. A company is not obliged to join a sectoral or industry-wide pension fund. The Pensions Act governs all company pension funds.

✓

✓

✓

✓

Pension funds for professions

Under the terms of act requiring professionals to join a pension scheme (Wet betreffende verplichte deelneming in een beroepspensioenregeling [Wet BPR]) the government may compel groups of professionals to enrol in a plan.

✓

✓

✓

✓

Other pension funds

Based on special arrangements.

✓

✓

✓

✓

Pension funds not Based on special arrangements. under supervision

✓

✓

✓

✓

✓

✓


u le

d

Company pension funds

✓

se

e

R An

Insured Occupational pension plans occupational plans administered by life insurance companies. Included in insurance statistics.

Book reserve

ea

✓

O

✓

Pension fund

A pension fund covering a branch or industry implements a pension plan agreed by labour and employer organisations in a specific sector or industry, including the public sector. Participation is compulsory. The Pensions Act governs all occupational pension schemes.

Sector- or industry-wide pension plans

✓

Financing vehicle

Personal

EC


O

D Br o


n

w


u Lect

r

✓

Annuities

Deferred annuity insurance, defined benefit.

✓

✓

✓

Annuities

Deferred annuity insurance, defined contribution.

✓

✓

✓

Annuities

Annuity insurance.

✓

✓

✓



247

5. NEW ZEALAND

nl y

D Br o

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New Zealand

_it E d it e io s


u le

d

se

4 228.0 2 245.0 96.4 12.5 23.5

An


e

Employment rate

ea

Labour force (000s)

178.1

30 960.3

R

Population (000s)

O


EC

Nominal GDP (NZD bn)

O


u Lect

r






Quasi-mandatory occupational pension – Kiwi-saver schemes

●

Public pension – Flat-rate pension


80

●

Kiwisaver

Superannuation: employment-related

Voluntary, personal

60

●

40

Superannuation: other


20



2004

2005

2006

2007

Total investments (NZD bn)

15.7

16.8

17.7

20.2

19.8


11.2

11.3

11.3

12.2

11.1


1.3

1.2

1.2

1.3

1.5


1.8

1.4

1.3

1.5

1.3

..

..

..

..

..


1 2 http://dx.doi.org/10.1787/517633885036

248


nl y u le

O

Overview

D Br o


w

n


_it E 5.dNEW itiZEALAND e s o

d

se

ea

R

O

Coverage

EC

A quasi-mandatory work-based occupational pension plan was first announced in New Zealand in 2005. Known as the KiwiSaver, it actually came into effect in 2007.

e

New Zealand citizens and individuals with the right to live in New Zealand indefinitely who are under the age of 65 are entitled to join a KiwiSaver plan. Newly hired employees who are over 18 are automatically enrolled and have eight weeks to opt out.

u Lect

r

An

Typical plan design KiwiSavers are defined contribution plans. An individual may choose which KiwiSaver to join and may change plans at any time. The contribution rate is 4% or 8% for an employee, but is subject to agreement with the service provider if the member is not an employee. In order to encourage participation each member receives a NZD 1 000 tax-free kick-start and subsidised payment from the government, a tax credit of up to NZD 1 042.86 per year, and a fee subsidy of NZD 20 every six months. From April 2008, employers will be required to make matching contributions. Employees have the right to make lump-sum contributions to their KiwiSaver plan and, on certain conditions, to defer tax on additional earnings by investing them in the plan. Since 1 April 2008 employers have been required to contribute to the KiwiSaver plans of employees who are over 18 and are paying contributions. The contribution required from an employer is 1% of the payroll, but that will increase to 4% by 2011. If employers are in agreement, their contributions can count towards the minimum employee contribution requirement of 4%. KiwiSaver savings can be accessed at age 65 or after five years’ membership, whichever is later.

Fees The fees charged by plan providers vary across institutions.

Taxation Tax treatment is TTE, with both contributions and investment returns being taxed, while pension withdrawals are exempt. Investment is taxed at a flat rate of 33% if the plan is the Widely-Held Superannuation Fund. The same flat rate also applies to the Portfolio Investment Entity (PIE) if a member’s taxable income in the previous two fiscal years exceeded NZD 38 000, while savers who earned less than that amount in the previous two years pay a 19.5% rate.

Occupational voluntary According to the Ministry of Economic Development, the KiwiSaver program is intended to supplement existing superannuation plans, which can be either defined benefit or defined contribution in nature. Employers may apply for exemption from providing their employees with a KiwiSaver plan, if their existing superannuation plans


249

5. NEW ZEALAND

nl y

u le

ea

An


e

R

O

If an employer has chosen a KiwiSaver plan, employees are automatically enrolled in it. Otherwise, they must make their own choice from among default KiwiSaver providers, which normally offer a range of investment options with different combinations of risks and returns. The government has, to date, approved six financial institutions as default KiwiSaver providers, while 26 others also operate in New Zealand.

se

EC


O

Market information

d

D Br o

meet certain criteria, such as providing benefits that are equal to or greater than the KiwiSaver plan’s minimum benefit requirements.

n

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_it E d it e io s

u Lect

r

At the end of 2007, participants in occupational voluntary plans numbered 288 388 in total. Assets managed reached NZD 12.6 billion (USD 9.3 billion).

Reference information Key legislation 2001: the New Zealand Superannuation and Retirement Income Act sets out details establishing the New Zealand Superannuation Fund, www.legislation.govt.nz/ browse_vw.asp?content-set=pal_statutes. 2006: the KiwiSaver Act lays downs rules governing the establishment of KiwiSaver plans in order to facilitate individuals’ savings, www.taxpolicy.ird.govt.nz/publications/files/ 200640.pdf. 2007: the Taxation (KiwiSaver) Act sets forth rules governing tax issues on superannuation funds and KiwiSaver plans, www.taxpolicy.ird.govt.nz/publications/files/ assent110.pdf.

Key regulatory and supervisory authorities The Ministry of Social Development: is mainly responsible for the public pension plans, www.msd.govt.nz/. The Ministry of Economic Development’s Insurance and Superannuation Unit: incorporates the Government Actuary and is chiefly responsible for registering and supervising the KiwiSaver plans, www.isu.govt.nz/. Inland Revenue: responsible for receiving contributions for the KiwiSaver plans, www.ird.govt.nz/kiwisaver/. Guardians of New Zealand Superannuation: administrates the New Zealand Superannuation Fund, www.nzsuperfund.co.nz/.

Key official statistical references and sources on private pensions Ministry of Economic Development. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

250


Superannuation: other

Includes all funds collected and managed under a registered superannuation plan, where there is no employer involvement.

✓

✓

nl y

d An

✓

✓

✓

✓

✓

u le

✓

✓

se

✓


e

Includes all funds collected in a registered superannuation plan where an employer is involved with the plan. Employer involvement does not have to mean employer contribution, but it does mean where workplace or employment status controls eligibility.

✓

Book reserve

ea

Superannuation: employmentrelated

✓

O

New automatic enrolment, nationwide plan. Defined contribution. From 1 April 2008 members receive an employer subsidy starting at 1% and increasing to 4% by 1 April 2011.

Pension fund

R

✓

Kiwisaver

Financing vehicle

Personal

EC


O

D Br o


n

w

_it E 5.dNEW itiZEALAND e s o

u Lect

r

✓



251

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_it E d it e io s n

Norway

D Br o

5. NORWAY

Dependency ratio1

u le

d

se

Population over 65 (%)

2 507.0 97.5 14.6 27.5

An


e

Employment rate

4 709.0

ea

Labour force (000s)

2 276.8

82 536.0

R

Population (000s)

O


EC

Nominal GDP (NOK bn)

O


u Lect

r






Voluntary occupational pension – DB occupational pension plans that exceed the minimum requirements – DC occupational pension plans that exceed the minimum requirements

Pension funds (pensjonkassen): private pension funds Pension funds (pensjonkassen): municipal pension funds ● Norwegian Public Service Pension Fund ● ●

Mandatory occupational pension – Minimum occupational defined contribution pension


Public pension – Flat rate basic pension – A special supplement – Earnings-related pension

●

●

Pension funds (pensjonkassen): private pension funds Pension funds (pensjonkassen): municipal pension funds


80

●

Individuelle pensjonsavtaler (IPA), or individual pension scheme Livrente or annuity


60

40

20

0 DB

DC

Minimum DC



Total investments (NOK bn)

2003

2004

2005

2006

2007

103.1

114.2

130.5

146.7

160.4


6.5

6.6

6.7

6.8

7.0


0.5

0.5

0.5

0.5

0.6


0.2

0.2

0.2

0.2

0.2


135

125

119

122

109


1 2 http://dx.doi.org/10.1787/517642368453

252


nl y u le

O

Overview

D Br o

Occupational mandatory and voluntary

w

n


_it E d i5.t NORWAY e io s

d

se

ea

R

O

EC

Until 2006, occupational pension plans in Norway were provided predominantly by medium-sized and, in particular, large employers, and were mainly defined benefit (DB) in nature. Most large employers still offer their employees traditional DB occupational plans, which can be financed only via life insurance companies or pension funds.

e

In 2006 new legislation widened the obligation to provide certain minimum occupational pension plan requirements, which most large employers, in fact, already exceeded (they are described below). It became a statutory duty to contribute to a pension plan for employees in companies employing:

u Lect

An

●

at least two people, each with working hours and wages representing 75% or more of a full-time position;

●

at least one person without ownership interest but with working hours and wages representing 75% or more of a full-time position;

●

people, each with working hours and wages representing 20% or more of a full-time position and, taken together, representing at least two man-labour years’ worth of work.

r

The obligation to establish occupational pension plans did not apply to private-sector companies that had already implemented pension plans, or operated schemes in accordance with legislation or with collective local or national public-sector agreements. Although the 2006 legislation compelled existing plans to meet the minimum requirements of mandatory pension plans, it is thought that it had little impact on their sponsors due to the fact that the majority of these plans already exceeded the minimum requirements. Since the introduction of mandatory occupational pensions, the number of defined contribution (DC) plans – first authorised by law in 2000 – has grown rapidly among small employers implementing plans for the first time. Pensions in Norway are linked to the social security base amount, termed Grunnbeløpet or “G” for short. On 1 May every year, G is indexed on the basis of a calculation that combines price and wage inflation. G’s value was NOK 66 812 in 2007-8.

Coverage In 2007 the mandatory occupational pension system covered over 90% of the labour force.

Typical plan design Under the terms of the 2006 legislation, employers who set up DC plans must make contributions of at least 2% of employee earnings ranging from 1 G to 12 G (i.e. up to 12 times the social security base amount). Those employers that offer DB plans must make contributions which guarantee benefits of at least the same level as those that can be expected under the mandatory contribution system. Employees may also be required to contribute to the plan. A large employer’s pension plan would typically yield a replacement rate of 60-70% of final earnings, inclusive of state pension, after 30 years of service and payable as of age 67.


253

5. NORWAY

nl y

D Br o

Contributions are capped at 5% of earnings between 1 G and 6 G and at 8% of earnings ranging from 6 G to 12 G.

n

w

_it E d it e io s

u le

O

d

se

ea

R

O

EC

DC plans are becoming increasingly popular in Norway, although the cap on contributions often makes them less attractive to employees than the more lucrative traditional DB plans that have historically dominated Norwegian occupational pension plans. Employers who switch from DB to DC plans generally pay in the highest allowable contributions.

e

The vast majority of new occupational pension plans established in the wake of the legislation introducing mandatory pension plans have been defined contribution in nature. They have generally been implemented by small or medium-sized companies with no prior pension plans.

u Lect

r

An

Benefits are payable at the age of 67 and must be withdrawn over a period of at least 10 years.

Taxation Employers enjoy generous tax relief in the form of premiums deducted from their taxable income. Plans must, however, be in accordance with the Defined Contribution Occupational Pension Act or the Defined Benefit Occupational Pension Act. The entire amount of a pension is taxed as income when paid out. ●

Early Retirement Plan (AFP)

Coverage The Contractual Early Retirement Plan (AFP) is a collectively bargained early retirement plan that covers approximately 60% of the Norwegian workforce. It allows retirement from age 62. There are five different AFP plans covering different sectors of the Norwegian workforce. The rules governing AFP pension plans differ according to the terms of collective agreements. Most of the private sector is covered by the AFP plan instituted by a collective bargaining agreement between the Norwegian Confederation of Trade Unions (LO) and the Confederation of Norwegian Business and Industry (NHO). The description below refers to the AFP plan established by LO and NHO.

Contributions The LO-NHO AFP plan is financed mainly by employers and partially by the state, which covers 40% of benefit payments made to AFP pensioners from the ages of 64 to 67. Employers finance the remainder of the plan’s cost as follows: by paying a monthly contribution of NOK 310 per full-time employee into the collective AFP fund, and approximately 25% of the benefit payments made to AFP pensioners.

Benefits Pension levels are broadly comparable to those of the ordinary old-age state pension that is normally payable from 67 years of age, plus a tax-free supplement of NOK 11 400 per annum.

254


D Br o

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n

Personal voluntary

_it E d i5.t NORWAY e io s

nl y

u le

O

d

se

ea

e

R

Occupational mandatory and voluntary

O

Market information

EC

A new legislation instituting voluntary pension plans undertaken by individuals through life insurance companies, banks, or securities funds has been passed. Such plans enjoy tax relief if they comply with certain requirements. The law came into force on 27th June 2008.

Private pension funds are funded, independent, legal entities established by a private enterprise, or group of enterprises, in order to provide occupational pensions. Municipal workers' funded pension funds are independent, legal entities established by a municipality or a municipal enterprise to provide occupational pensions. Occupational pension arrangements for central government employees are operated on a (partially prefunded) pay-as-you-go basis, but are not discussed here.

u Lect

r

An

It is estimated that between 550 000 and 600 000 people previously without occupational pension coverage were brought into the new system when it was introduced in January 2006. Companies bear the costs of administering plans. In addition to retirement pension plans, they must offer compulsory insurance policies that provide exemption from contributions during periods of disability (depending on the degree of disability). There are currently 84 private pension funds, 30 municipal pension funds, and 17 private pension plans.

Reference information Key legislation 2006: the Mandatory Occupational Pensions Act comes into force. 2005: the Insurance Act of 10 June (No. 44) is passed. It comes partially into force on 1 July 2006. The act’s Chapter 7, on pension undertakings, and Chapter 9, on life insurance activities and appurtenant regulations, becomes law on January 2008. In the interim, Chapters 7 and 8 of the Insurance Activity Act of 10 June 1988 (No. 39) continued to apply to pension funds. 2005: the Insurance Act, Sections 2-4, forms the basis of Regulation No. 827 of 22 September 1995, governing Insurance Services and the Establishment of Branches of Insurance Companies and Pension Undertakings having their Head Offices in another EEA Area State. 2001: The Defined Benefit Plans Act and the Defined Contribution Plans Act further regulate pension plans.

Key regulatory and supervisory authorities Kredittilsynet, or the Financial Supervisory Authority: supervises the private pension system, www.kredittilsynet.no.

Key official statistical references and sources on private pensions Kredittilsynet, or the Financial Supervisory Authority, www.kredittilsynet.no/. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps. OECD PRIVATE PENSIONS OUTLOOK 2008 – ISBN 978-92-64-04438-8 – © OECD 2009

255

5. NORWAY

Occupational pension arrangements for central government workers are operated on a PAYG basis. The public service pension fund is partially prefunded.

nl y

d An

✓

u le

Norwegian Public Service Pension Fund

✓

se

✓

✓


✓

✓

✓

✓

✓

✓

e

Municipal workers' funded pension arrangements are supervised by Kredittilsynet. They are funded, independent, legal entities, established by a municipality, or a municipal enterprise, for providing occupational pensions (pillar 2).

✓

Book reserve

ea

Pension funds (pensjonkassen): municipal pension funds

✓

Pension fund

R

✓

O

Private pension funds are supervised by Kredittilsynet, or the Financial Supervisory Authority. They are funded, independent, legal entities, established by a private enterprise or group of private enterprises for providing occupational pensions (pillar 2).

Pension funds (pensjonkassen): private pension funds

Financing vehicle

Personal

EC


O

D Br o


n

w

_it E d it e io s

u Lect

Individuelle Annuity. pensjonsavtaler (IPA), or individual pension scheme

✓

✓

✓

Livrente or annuity Annuity.

✓

✓

✓

r


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Poland

_it E d it5. POLAND e io s

Employment rate Population over 65 (%) Dependency ratio1

u le

d

38 116.0

se

O

Labour force (000s)

16 909.0 90.4 13.4 30.3

An


e

Population (000s)

1 162.9

11 022.4

ea

EC


R

Nominal GDP (PLN bn)

O


u Lect

r






Mandatory personal pension – Mandatory individual pension accounts

●

Public pension – Notional defined contribution accounts

Mandatory, Personal

80

●

Employee pension plans (PPE)

Open pension funds (OFE)

Voluntary, personal

60

●

40

Individual retirement account (IKE)


20



Total investments (PLN bn)

2003

2004

2005

2006

2007

45.0

62.6

85.7

117.8

141.3


5.3

6.8

8.7

11.1

12.2


1.2

1.2

1.4

1.5

1.5


0.0

0.0

0.0

0.0

0.0


20

21

20

20

20


1 2 http://dx.doi.org/10.1787/517713003167


257

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Typical plan design

R

In 2006, almost 2% of the active population was covered.

O

Coverage

EC

Voluntary occupational pension plans (PPE) were introduced in 1999.

e

Overview

O


w

_it E d it e io s n


D Br o

5. POLAND

u Lect

r

PPE membership is established by a mutually agreed contract between employer and employees. Employers are restricted in plan design, with minimum requirements including a legally defined “basic employer contribution”. Employees pay a supplementary contribution, which is also limited by law. The plan must be offered to more than 50% of employees in the company and registered with the Polish Financial Supervision Authority (KNF). Several kinds of financial institutions are responsible for asset management of PPE in Poland. Voluntary occupational pension plans may be managed by investment funds, life insurance companies, specially established employee pension funds, or foreign management companies. The relative unpopularity of this voluntary form of pension capital saving, coupled with problems in transferring capital between PPEs or withdrawing it when a new employer had not established a PPE, prompted the government to propose a new form of voluntary personal pension plan, known by its acronym IKE (see below). Employer contributions are exempt from the social security levy up to a ceiling of 7% of an employee’s salary. Employees may make additional contributions that supplement those of their employer. Employee contributions are capped at three times the maximum amount that can be paid into an IKE: e.g. 3 x 150% = 450% of the average monthly salary.

There are no restrictions on how pension benefits should be paid out. A member may not, however, withdraw benefits before reaching retirement age.

Fees The fees of the pension plans are set by the financial institution responsible for asset management of PPE. They therefore vary widely. PPE management entities may not charge fees on contributions.

Taxation Employee contributions are based on after-tax earnings, while employer contributions are liable to taxation. Investment income and benefits are tax-exempt.

Personal mandatory Overview A mandatory personal pension system was introduced in 1999 and has, together with state pensions, become pensioners’ main income source.

258


nl y

u le

O

d

ea

e

R

O

EC

Any person covered by the national social security system and born after 31 December 1968 is required to join a mandatory personal pension plan, i.e. an OPF. People born between 1 January 1949 and 31 December 1968 were allowed to choose whether or not to opt into the new mandatory system introduced in 1999. Their decision was, however, irreversible. Those who made the transition to the new system (but not necessarily became the members of OPFs) were credited with “start-up capital” on their notional accounts in the Social Insurance Institution (ZUS) based on an actuarial valuation of their social insurance contributions on the transition date. Employees born before 1 January 1949 were not eligible for the new pension system and therefore remain in the old system. The selfemployed must also participate in the new system, but may pay lower contribution rates.

se

D Br o

w

n

Coverage


u Lect

r

An

People who did not select an OPF were randomly allocated to a qualifying pension fund by the regulator. (In order to qualify funds had to have less than a 10% share of the asset-weighed market and a higher-than-average rate of return over the previous 36 months.) In 2006, the OECD and the KNF, estimated that some 12.4 million people – or 77.1% of the labour force – were members of OPFs. Individuals may belong to only one fund.

Contributions In total, contributions to an OPF account for 19.52% of employees’ taxable income, with employers and employees each paying half. Of that amount, 12.22% goes into the public notional defined contribution plan, with 9.76% paid by employers and 2.46% by workers. The remaining 7.3% is credited to a private individual account, which is paid entirely by the employee. Annual contributions are limited. In a given year, they can be levied only on salaries up to 30 times the average Polish monthly salary.6

Benefits An institutional structure for the payment of benefits is due to be established in 2008. Benefits will be paid out as annuities and a minimum pension – in the form of a percentage of the average gross wage in the quarter preceding retirement – will be guaranteed. The effective retirement age in 2007 was 59.4 years for men and 56.1 for women, making the average age 57.2. Pension benefits will be paid from 2009 onwards.

Fees OPFs can charge three types of fees: ●

Distribution fees, calculated as a predetermined percentage of contributions paid. It is capped at 7% and will fall to 3.5% by 2014.

●

Management fees which cover a fund’s administration costs. They comprise a fixed and a variable component. The fixed portion does not exceed 0.045% of monthly contributions (an annual cap of 0.54%). The fixed component is calculated on the basis of regressive ratio. For example, for the first PLN 8 billion assets, the monthly management fee amounts to 0.045% of assets, but for the assets above PLN 65 billion, the fee is only 0.015% a month. The variable component depends on investment returns generated by the fund, but may not exceed 0.005% of net assets per month. A management fee is charged proportionately to investment returns. A pension fund management company with the highest rate of return may charge the full variable


259

5. POLAND

Overview

nl y

u le

d

se

ea An

Personal voluntary

e

O

EET taxation treatment applies.

R

Taxation

O

Transfer fees are charged if an OPF member changes fund within 24 months. The fee ranges from PLN 160 to PLN 80, depending on the length of the membership period.

EC

●

D Br o

portion of the fee, while a company whose fund generated the lowest rate of return may not even charge the variable component.

n

w

_it E d it e io s

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Personal voluntary pension arrangements are available in Poland. Their prime purpose is to meet the needs of people who want the protection of additional income when they are retired.

Coverage Personal voluntary plans (IKEs) are defined contribution plans with individual accounts managed by private financial institutions. Individual pension plans started to operate in September 2004. Any person age 16 or above can join an IKE.

Contributions Contributions to IKE are based on after-tax earnings, and may not exceed 150% of the average monthly wage in order to qualify for tax exemption.

Benefits Pre-retirement withdrawals are allowed, but are liable to penalties. There are no regulations regarding loans to members.

Fees Fee levels are stated in IKE providers’ contracts. There are no regulations or caps, so fees can vary widely.

Taxation Contribution to IKE are based on after-tax earnings and paid individually by members. Investment income and benefits are tax-exempt.

Market information Occupational voluntary Voluntary occupational pension plans are managed by investment funds, life insurance companies, specially established employee pension funds, or foreign management companies. All managed plans must be based in Poland. Switching from a PPE to an open pension fund (OPF) is not allowed, although it is possible to move to an IKE. There can be one PPE in one company, but a financial institution may manage more than one PPE. The occupational pension plans investment regime is similar to that of the OPFs, although more liberal in some respects. The default product and default portfolio are provided for in PPE’s statutes. Disclosure and information requirements between a PPE and

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its members are specified in the legal regulations, statutes and agreements between the employee and the institution that manages the PPE.

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Personal mandatory

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In December 2007 participants numbered 312 133 in total. There were 5 registered pension funds managing assets worth PLN 1.05 billion (USD 0.3 billion), but the total assets of pension plans reached PLN 3.8 billion (USD 1.3 billion). In addition to the five occupational pension funds, occupational pension plans were managed by fifteen investment fund companies and eight insurance companies.

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Individual accounts are privately administered by specialised pension fund management companies –private joint-stock companies, called general pension companies and known by their acronym PTE. Individuals may switch between pension providers in search of the portfolio of their choice. A PTE is separate from the assets it administers, which are owned by the OPF’s members. Starting an asset management company requires securing a license from the regulatory authority, the KNF. OPFs must achieve a minimum return on investment.

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In 2007, the 15 registered PTEs counted 13.1 million participants in total. They managed PLN 140.3 billion (USD 50.7 billion).

Personal voluntary Personal pension plans are administered by investment funds, brokers, insurance companies, and banks. IKEs can offer a choice of portfolios and pension products. An IKE’s statutes set out quantitative limits on investments and state its default product and portfolio. They do not provide any guarantees. Members can switch from one IKE to another, or to a PPE. Providers may charge a switch fee for transfers within the first 12 months of a contract. Disclosure and information requirements between an IKE and its members are established by contract.

Reference information Key legislation 2004: the Individual Pension Accounts Act of 20 April 2004; 2004: the Employee Pension Programmes Act of 20 April 2004; 1997: the Organisation and Operation of Pension Funds Act of 28 August 1997 (as subsequently amended).

Key regulatory and supervisory authorities Polish Financial Supervision Authority (KNF): supervises the private pension system, www.knf.gov.pl.

Key official statistical references and sources on private pensions Insurance and Pension Funds Supervisory Commission (KNUiFE), www.knuife.gov.pl/ english/. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


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Individual Individuals may invest a part of retirement account their net income in purely voluntary (IKE) plans established by financial institutions, e.g. insurance companies or investment funds.

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Employee pension Privately managed pension funds funds (PPE) that may be established by employers on a voluntary basis. Up to the equivalent of 7% of monthly salary may be paid in by the employer and contributions are exempt from the social security levy. Additional payments by an employee are possible. The whole contribution is subject to an income tax.

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Pension fund

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Pension funds privately managed by pension fund companies (PTE). One PTE may manage only one OFE. Membership in OFE is mandatory for people born after 31 December 1968.

Open pension funds (OFE)

Financing vehicle

Personal

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Portugal

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Employment rate

10 604.4 5 618.0 92.0 17.3 32.7

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Labour force (000s)

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Population (000s)

162.8

20 998.5

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Public pension – Minimum pension – Earnings-related pension – Flat rate pension

Fundos de Pensões Fechados (closed pension funds) Fundos de Pensões Abertos (open pension funds) ● Pension insurance contract: collective insurance ● ●

60 Voluntary, personal Fundos de Pensões Abertos (open pension funds) Personal retirement saving funds: Fundos Poupança Reforma (PPR) and Fundos Poupança Acções (PPA) ● Pension insurance retirement contracts ● ●

40


20



2004

2005

2006

2007


16.3

15.2

19.0

21.2

22.4


11.8

10.5

12.7

13.6

13.7


1.0

1.2

2.3

1.1

0.6


0.7

0.7

0.7

0.7

0.7


240

221

223

227

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5. PORTUGAL

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The occupational pension market in Portugal is relatively small, mostly as a result of the generous public pension system. However, recent reforms to the public pension system will significantly reduce benefits, so occupational pensions are expected to grow in importance.

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Occupational pension provision is provided by open and closed funds and through direct insurance. Closed pension funds may be set up at the initiative of a company, groups of companies, groups of social or professional associations, or by agreement between employers’ associations and trade unions. There are no public employees funded pension arrangements.

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Typical plan design Pension plans can be defined benefit, defined contribution, or hybrid in nature. The number of defined contribution plans already matches the number of existing defined benefit plans, which reflects the trend towards defined contribution plans. However, 98.5% of the assets still belong to defined benefit plans. Typical defined benefit plans are based on final earnings, while typical accrual rates would be 2% per year for plans that are integrated with social security, and 0.5% per year for non-integrated plans. Benefits generally accrue over 40 years and are payable when members become entitled to public pension benefits. Employer contributions to defined contribution plans are usually around 3% of salary. Employee contributions depend on plan rules, but in most cases employees do not contribute. Benefits are usually paid out as regular pensions, but in some circumstances one-third of the present value of benefits can be paid out as a lump sum. The normal retirement age is 65 in the private sector and 60 for public employees. The normal retirement age for public employees will increase by 0.5 every year until 2015 to converge with the private sector.

Coverage In order for contributions (to the pension fund) to be tax qualified (favourable tax treatment rules), pension plans must cover all sponsor employees with a permanent contract after the probationary period of 6 months. Employees with short-term contracts of up to 2 years may be excluded from coverage. Banks and other credit institutions under the “Banking collective labour agreement” need to have their pension plan financed through a pension fund. The collective labour agreement sets out the pension benefits for the employees of the banking sector, which are substitutive to the Public Social Security system. In other words, these particular pension funds are part of the public pension system. In 2007 around 3.8% of the labour force was covered by occupational pensions.

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Taxation


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Employees may deduct from their taxable income 20% of their contributions to an occupational pension scheme up to an annual ceiling (EUR 400 per year for persons aged less than 35 years, EUR 350 per year for persons aged between 35 and 50 years, and EUR 300 per year for persons aged over 50 years).

Calculate benefits objectively and equally for all members;

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Pay benefits from the social security retirement age.

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Cover all permanent employees;

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In order for employer contributions to receive favourable tax treatment (i.e. EET tax treatment), the plan must comply, inter alia, with the following requirements:

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In plans that comply with these requirements and that do not provide for vesting, employer contributions are tax-deductible up to a limit of 15% of the salary (25% if the employee is not covered by the social security scheme). Employer contributions in plans not providing vesting are not taxable as fringe benefits for employees. Employer contributions in plans providing vesting are taxable as fringe benefits for employees if they exceed 15% of salary (25% if the employee is not covered by the social security scheme).

Personal voluntary Personal pension saving arrangements take one of the following forms: ●

Fundos de pensões abertos (individual acquisition of open pension fund units) ;

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Pension insurance retirement contracts: collective insurance contracts in which the individuals make contributions to the retirement vehicle in exchange for which they are entitled to the corresponding benefits receivable upon achieving the retirement age;

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Personal retirement saving funs: Fundos de Poupança Reforma (PPR), which can be financed by three different financing vehicles (pension funds, insurance contracts or investment funds), and Fundos Poupança Acções (PPA), which can be financed by two financing vehicles (investment funds and pension funds).

Market information Occupational voluntary On 31 December 2007 there were 199 pension funds on the market with a total of 302 209 members. Total assets in the occupational system amounted to EUR 21.8 billion (USD 29.8 billion).

Personal voluntary On 31 December 2007 there were 55 personal retirement saving funds on the market with a total of 441 183 members. Total assets in the personal system amounted to EUR 3.5 billion (USD 4.8 billion).

Reference information Key legislation and regulation CMVM regulation No. 8/2007 defines, inter alia, rules on marketing of open pension funds with individual adhesions.


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Decree-Law 357-A/2007 amends Decree-Law 12/2006, in particular, as a result of the legal transfer of supervisory and regulatory competences (from the Instituto de Seguros de Portugal to Comissão do Mercado de Valores Mobiliários) covering some aspects of conduct of business rules (distribution and marketing) related, inter alia, to individual adhesions to open pension funds.

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ISP regulation No. 9/2007 governs investment policy, as well as composition and evaluation of assets.

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Law 4/2007 approves the basis of the social security system and defines general principles for complementary occupational pension plans. Further to this Law, DecreeLaw 187/2007 defines and regulates the legal framework applicable to protection due to old age or invalidity under the general social security regime.

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Framework Pension Law (Decree-Law 12/2006), passed in 2006. This Decree-Law introduces a general revision of the legal regime applicable to pension funds, transposing EU Directive 2003/41/EC, of the European Parliament and of the Council, of 3 June, on the activities and supervision of institutions for occupational retirement provision into the Portuguese legal framework. Decree-Law 180/2007 amends Decree-Law 12/2006, in particular, as far as the monitoring committee of the pensions scheme and information to members and beneficiaries are concerned. The Individual Income Tax Code and Corporate Tax Code regulate the tax treatment of contributions, investment income, and benefits. The Tax Benefits Act regulates issues related to tax deductions and exemptions. Decree-Law 94-B/98 governs the establishment and supervision of insurance companies and sets out rules for the protection of rights.

Key regulatory and supervisory authorities The Instituto de Seguros de Portugal, or Portuguese Insurance Institute: regulates the occupational pension system, except for the regulatory competences that were transferred to the Comissaõ do Mercado de Valores Mobiliários, www.isp.pt. The Comissão do Mercado de Valores Mobiliários (CMVM), or Portuguese Securities Market Commission: regulates some aspects of conduct of business rules (distribution and marketing) related, inter alia, to individual adhesions to open pension funds, www.cmvm.pt/.

Key official statistical references and sources on private pensions Instituto de Seguros de Portugal, or Portuguese Insurance Institute, www.isp.pt. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

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Personal retirement saving funds: Fundos Poupança Reforma (PPR), Poupança Educação (PPE), Fundos Poupança Acções (PPA)

Retirement saving funds (third pillar) established as pension funds.

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Personal retirement saving funds: PPR, PPE, PPA

Retirement saving funds (third pillar) established as collective investment schemes managed by investment companies.

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Pension insurance Individual insurance contract that specifies contract: PPR, PPE pension plan contributions to an insurance undertaking, in exchange for which pension plan benefits will be paid when the members reach a specific retirement age, or on early exit of members from the plan. Included in insurance statistics.

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Pension insurance Collective insurance contract that specifies contract: collective pension plan contributions to an insurance insurance undertaking in exchange for which pension plan benefits will be paid when members reach a specific retirement age, or on early exit of members from the plan. Included in insurance statistics.

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A pension fund is held to be an open fund when no bound between those joining to the fund is necessary and membership of the fund is solely dependent on acceptance by the pension fund manager. Open pension funds may be set up at the initiative of any entity entitled to manage pension funds. Collective membership of an open pension fund arises when sponsors wishing to join the fund initially acquire units.

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Fundos de Pensões (open pension funds)

Book reserve

R

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A pension fund is held to be a closed fund when it relates to only one sponsor or, if there are a number of sponsors, when there is a business, associative, professional or social connection between them and their approval is needed for new sponsors to join the fund. Closed pension funds may be set up at the initiative of a company, groups of companies, groups of social or professional associations, or by agreement between employers' associations and trade unions. There are no government workers' funded pension arrangements.

Fundos de Pensões (closed pension funds)

Financing vehicle

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Slovak Republic

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Employment rate

5 391.2 2 649.2 89.0 11.8 24.0

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Labour force (000s)

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Population (000s)

1 823.9

10 220.5

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Nominal GDP (SKK bn)

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Mandatory personal pension

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Public pension – Earnings-related pension

Privately managed mandatory pension system

Voluntary, personal

60

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Voluntary personal pension plans


40

20

0 Note: Additional pension income may come from other sources such as voluntary personal pension, general savings or investments, etc. Source: OECD estimates.


2004

2005

2006

2007

Total investments (SKK bn)

0.3

..

9.1

45.6

76.9


0.0

..

0.6

2.8

4.2


0.1

..

0.1

..

..


..

..

..

..

..


5

..

24

24

33


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Personal mandatory

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d i REPUBLIC _it E 5. SLOVAK e tio s

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Coverage

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Since 2005 the Slovakian private pension provision has included a system of mandatory individual retirement accounts, which serve as an important source of income for pensioners. They are administered by private-sector, joint-stock, pension asset management companies (PAMCs), created solely to that end.

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The mandatory pension system covers everyone who has entered the labour market since 2005. Coverage is voluntary for the self-employed and employees who arrived on the labour market before 2005. In 2006 around 71.7% of the employed population was covered.

Contributions Social insurance contributions account for 18% of an employee’s salary. Of that percentage 9% goes into the public pension scheme (5% from the employer, 4% from the employee), while the other 9%, paid in its entirety by the employer, goes to the PAMC chosen by the member. Employees do not, therefore, make contributions to their individual accounts.

Benefits Benefits are paid to savers who have reached retirement age and saved for fifteen years. Retirement – and early retirement – benefits can be paid as a programmed withdrawal with a life annuity, or as a life annuity. A programmed withdrawal with life annuity is a mode of payment whereby a PAMC pays the balance of the (early) retirement account at regular intervals for an agreed, programmed duration, while an insurance company pays the life-long retirement pension benefits. Early retirement benefits are paid if a saver has been granted early social security retirement benefits and has saved enough to yield a life-long pension of no less than 0.6 times adult “subsistence minimum” (a benchmark below which a person is considered in material need).

Fees PAMCs may charge a management fee of up to 0.065% of monthly assets for every fund that they administer. However, not all fund managers levy such a fee. During the first three years of a PAMC’s existence, it may charge the slightly higher fee of 0.075%. The fee for administering personal pension accounts is 1% of the amount of monthly contributions, regardless of the type of fund. A PAMC may not charge any other fees, such as switch fees, and members can change provider once every two years free of charge.

Taxation The mandatory private pension system enjoys EEE tax treatment: contributions, investment income, and pension benefits are all tax-exempt.


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Coverage

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In addition to the mandatory personal pension system, employees and individuals in the Slovak Republic may also join the newly established voluntary personal account system, administered by supplementary pension management companies (SPMCs). Introduced in 2006, the scheme is a fully funded defined contribution pension plan, based on the principle of voluntary saving.

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The scheme is open to anyone over the age of 18 or anyone who is eligible for being an employee according to the Social Security Act (including 15 year olds).

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Contributions Employees and employers can contribute to voluntary savings accounts, with most employers making contributions under the terms of collective agreements. Employees and employers sign separate contracts with an SPMC. The self-employed and individuals whose employers do not contribute may also take out a voluntary pension arrangement, independently of their employment arrangements.

Benefits A supplementary retirement pension is paid out to a participant when: ●

He or she completes the minimum supplementary pension saving period and reaches the age stipulated by the plan (at least 55). The minimum period of supplementary pension saving may not be shorter than 10 years.

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He or she completes the minimum period of supplementary pension saving for occupations recognised by legislation as hazardous, and has reached the necessary age stipulated by the benefit plan (at least 40). The minimum period of supplementary pension saving may not be shorter than five years.

A supplementary retirement pension is paid in the form of a life annuity, or as a fixedterm supplementary retirement pension. A lump sum may be paid upon a member’s request, or in a limited number of special circumstances. Participants receive a termination settlement if they have not fulfilled the conditions for payment of a supplementary retirement pension. The amount of a termination settlement is determined by the benefit plan, and is at least 80% of the balance of the participant’s personal account on the date the request for payment was submitted.

Fees An SPMC may charge fees:

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For managing a supplementary pension fund. The maximum fee is 3% of the average net value of assets in the supplementary pension fund in each year that the company managed the fund.

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When savers transfer their accounts to other SPMCs. If a saver switches within three years of taking out a contract, the fee can be as much as 5% of the balance on his or her personal account on the day of the switch. It is 1% if the switch is made after the threeyear period has elapsed.


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For a termination settlement. The fee can be up to 20% of the balance of a participant’s personal account on the date he or she submitted a request for payment of the termination settlement.

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Personal mandatory

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Market information

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Employee contributions are tax-deductible up to a ceiling of SKK 12 000 per year, while employer contributions of up to 6% of an employee’s salary enjoy tax relief.

tu c their L e in All PAMCs must offer the following funds (each of which has its own statutes)

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growth fund (high risk, high return)

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balanced fund (moderate risk)

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conservative fund (low risk).

Employees may be members of one fund only, but they are free to choose the one they wish – as long as they are not within 15 years or less of the legal retirement age, i.e. under 47. Members over 47, with 15 years to go before retirement, may no longer place their assets in a growth fund, and when they are seven years from retirement, they are required to invest their assets in a conservative fund. The Social Insurance Agency also assigns a conservative fund, administered by a PAMC, to members who fail to make a choice. The market currently comprises six PAMCs: Allianz (30% market share in terms of numbers of savers), Winterthur (27%), VUB Generali (13%), Aegon (13%), ING (10%), and CSOB (7%). In December 2007 participants numbered 1.6 million. Total assets managed by PAMCs were SKK 51.6 billion (USD 2.1 billion).

Personal voluntary Licences were granted to five SPMCs in 2006 and 2007. They are: ING Tatry-Sympatia (40% market share in terms of savers at the end of 2007), Tatra Banky (27%), Stabilita (20%), Axa (former Winterthur) (13%), and Aegon (0%). SPMCs must provide at least two funds. One is an accumulation, or contributory, fund, where contributions earn interest, and the other is a distribution fund, which handles benefit payouts. The investment strategy for an accumulation fund is determined by an asset management company, in compliance with the investment regulations prescribed by law. Life insurance companies offer products which are similar to supplementary pensions (and include tax relief on contributions of up to SKK 12 000). In 2007, SPMCs covered 792 368 participants in total and managed SKK 25.2 billion assets (USD 1.0 billion).

Reference information Key legislation 2004: ●

the Old-Age Pension Savings Act (No. 43/2004 Coll.) regulates the mandatory pension tier;


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the Income Tax Act (No. 595/2003) regulates the tax-related aspects of the pension system;

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the Social Insurance Act (No.461/2003 Coll.), reformed the public pension system.

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the Supplementary Old-Age Pension Savings Act (No. 650/2004 Coll.) regulates the voluntary pension system.

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The National Bank of Slovakia: integrated financial regulator in charge of supervising pension funds and insurance companies;

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Before transformation of pension companies (SPMCs), pension companies were supervised by the Ministry of Labour and the Ministry of Finance, www.nbs.sk/INDEXA.htm.

Key official statistical references and sources on private pensions National Bank of Slovakia, www.nbs.sk/INDEXA.htm. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

Overview of private pension system by type of plan and financing vehicle Type of plan Included in Mandatory/ OECD GPS OccupaQuasidatabase Voluntary tional mandatory Privately managed Mandatory, fully funded mandatory contribution system (second pillar) pension system of individual retirement savings accounts. Its aim, together with the old-age insurance scheme governed by specific first-pillar legislation, is to ensure an income for savers in their old age, or, in the event of their death, for their beneficiaries. This new system effectively started in 2005.

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Voluntary personal Under third-pillar legislation, pension plans supplementary pension insurance companies converted into supplementary pension savings companies. The conversion process was completed in April 2007.

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Financing vehicle

Personal

Pension fund

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Book reserve



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Spain

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Employment rate

44 873.0 22 189.9 91.7 16.6 33.6

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Labour force (000s)

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32 020.9

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Public pension – Minimum pension – Earnings-related pension

Pension funds: occupational plans (Fondos de pensiones: planes de empleo) Mutual pension provident entities (entidades de prevision social or mutualidades de prevision social) ● Collective pension insurance plan (seguro colectivo) ● Non-autonomous funds (fondos de pensiones internos) ● ●

100 80

Voluntary, personal

60 Associated plans (planes asociados) Personal plans (planes individuales) ● Mutual pension provident entities (entidades de prevision social or mutualidades de prevision social) ● ●

40 20





2003

2004

2005

2006

2007

48.5

55.7

65.6

73.7

79.1


6.2

6.6

7.2

7.5

7.5


0.8

0.8

0.8

0.8

0.7


0.3

0.3

0.3

0.4

0.3


919

1 163

1 255

1 340

1 353


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Employers may, on a voluntary basis, conclude pension agreements with their employees. Under the terms of the Royal Decree of 1999, the obligations arising from such agreements may be implemented through group insurance contracts and/or the creation of a pension plan. Pension plans must be financed via pension funds, which have no independent legal status or purpose other than to implement pension plans. Pension agreements can, in exceptional cases, also be implemented through the establishment of book reserves. Arrangements implemented through group insurance contracts and book reserves are not referred to as pension plans and are not subject to pension plan legislation.

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Typical plan design Occupational pension plans are typically defined contribution (DC) in nature. About one-third of plan members belong to occupational pension plans that combine elements of defined benefit (DB) and DC. A small portion of pension plan members belong to occupational pension plans that are DB in nature. DB pension plans are typically final average pay plans, financed solely by the employer. DC plans are now dominant and employers typically provide between 65% and 80% of total contributions to these plans. Contributions by employees aged 52 or younger must not exceed EUR 8 000 a year – the ceiling is EUR 7 212 for employees aged 53, and gradually increases to a maximum of EUR 22 838 by age 65. These limits include any contributions made to individual pension plans. Employer contributions must not exceed EUR 8 000 a year for employees aged 52 or younger – the ceiling is EUR 7 212 for employees aged 53, and gradually increases to a maximum of EUR 22 838 by the age of 65. The retirement age is the same as the age under the social security scheme – 65 for both men and women. Early retirement is possible if a member is eligible for an early retirement pension under the social security scheme. Retirees may choose between three alternative benefit options: annuities, lump sums, or a combination of both. By 2006, 78% of total benefits were paid as lump sums and 22% as pensions.

Coverage In 2006 around 8% of the active population was covered. Occupational pension plans cover private-sector employees. Discrimination in coverage is prohibited, but differences in the contribution and benefit structure for different categories of employees are allowed, provided that they are based on objective criteria. Plans may be divided into sub-plans to provide for different categories of employees.

Fees There are no legal rules concerning administrative costs charged to plan members, but there is a maximum commission based on the size of pension funds’ assets. By the end

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Contributions paid by both employers and employees into the pension plans of employees under 52 years old are tax-deductible to a ceiling of EUR 7 212. The ceiling is raised by EUR 1 202 for each year over 52, with a maximum annual contribution of EUR 22 838 by the age of 65. Investment incomes are tax-exempt, while lump-sum benefits are tax-exempt up to 40% of the cash value of accrued benefits or accumulated capital.

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Taxation

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of 2005, the average commission charged by occupational pension plans was 0.21% of pension assets.

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Individuals can participate in tax-qualifying pension schemes set up as individual plans. These tax-qualifying schemes are offered by the same financial institutions and under the same rules as occupational pension plans.

Typical plan design Personal pension plans may only be DB in nature.

Coverage Individual employees, the self-employed, or the non-employed may participate in individual pension plans established by financial institutions.

Taxation The same tax regulations governing contributions apply to personal pension plans. The maximum tax-deductible limit applies to the total contribution from both an occupational pension plan and individual pension plan.

Market information Occupational voluntary Pension funds must be managed by fund administrators. An entidad gestora de fondos de pensiones (pension fund management entity) or authorised life insurance company may administrate a fund. The fund administrator is responsible for managing contributions and benefits. Pension fund management entities must be established as limited companies with the sole business aim of managing pension funds. They must comply with certain minimum capital requirements that depend on the value of pension funds managed and be authorised by, and registered with, the Ministry of Economy. Occupational pension funds had accumulated assets equivalent to EUR 30 476 millions (USD 38 238 million) in December 2006 (DB: EUR 1 136 millions; DC: EUR 8 722 millions; mixed: EUR 20 619) or 2.5% of GDP. The number of active participants rose to 1.7 million (DB 2%, DC 66%, mixed 32%), whereas the number of pension plans was 1 913 (DB 2%, DC 53%, Mixed 45%).


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Personal voluntary

_it E d it e io s

nl y

u le

O

d

se

O

Key legislation

ea


R

EC

In December 2007 individual pension plans had about 8.6 million participants with accrued assets of EUR 50.3 billion (USD 68.9 billion). The number of pension plans was 1 410.

e

2002: Royal Decree consolidates the Pension Plan and Pension Funds Law of 1987 and regulates the establishment of pension plans, pension funds, and pension fund management entities. It also defines maximum contribution limits, regulates tax treatment, and includes measures to protect rights.

u Lect

r

An

1999: Royal Decree provides the regulatory framework for the implementation of employers' pension agreements with employees and beneficiaries.

Key regulatory and supervisory authorities General Directorate of Insurance and Pension Funds (Ministry of Economy): oversees pension fund supervision.

Key official statistical references and sources on private pensions Banco de España, www.bde.es/homee.htm. General Directorate of Insurance and Pension Funds (Ministry of Economy), www.dgsfp.mineco.es/. Confederación Española de Mutualidades (CNEPS), www.cneps.es/. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

276


w


nl y

✓

Associated plans Associated plans are sponsored by (planes asociados) associations.

✓

✓

✓

✓

Personal plans (planes individuales)

Plans offered directly to individual members.

✓

✓

✓

✓

Mutual pension provident entities (entidades de prevision social or mutualidades de prevision social)

These institutions are subject to specific regulation, some are supervised at the regional level. It includes mutual funds for regional government workers, industrial and airlines industry-wide schemes, cooperatives, the police force, central bank. They operate in a similar way to some pension funds in the English-speaking world.

✓

✓

✓

✓

✓

✓

✓

✓

✓

se

e

R An

Non-autonomous funds are set up by certain banks, insurance companies, and financial companies (credit institutions), and nonfinancial corporations through contributions to provision funds or internal reserves. Their purpose is to pay pensions to their employees, supplementing those they may receive from the social security system. Royal Decree 1588/99 set a deadline of 1 January 2001 for non-financial corporations to convert their non-autonomous pension funds into autonomous ones. Subsequent provisions postponed this deadline until 31 December 2004. The deadline was newly postponed until 31 December 2006.

u le

✓


ea

Pension funds: A pension fund for central government occupational plans workers started operating at the end of 2004. (Fondos de pensiones: planes de empleo)

Non-autonomous funds (fondos de pensiones internos)

✓

O

✓

Collective pension Group insurance policy with retired benefit insurance plan purpose administered by life insurance (seguro colectivo) companies. Included in insurance statistics.

Book reserve

O

Pension fund

d

D Br o

Personal

Regulated by the Pension Schemes and Pension Entity Act, Royal Decree 1/2002 of 29 November and Royal Decree 304/2004 of 20 February, which approve pension plans and fund regulation and its implementing provisions supervised by the Dirección General de Seguros y Fondos de Pensiones (General Directorate of Insurance and Pension Funds). Occupational plans are set up by sponsoring employers.

Pension funds: occupational plans (Fondos de pensiones: planes de empleo)

✓

Financing vehicle

EC


n


✓

u Lect

r

✓

✓

✓

✓

✓



277

nl y

w

_it E d it e io s n

Sweden

D Br o

5. SWEDEN


u le

d

se

9 148.0 4 838.0 93.9 17.4 33.0

An


e

Employment rate

ea

Labour force (000s)

3 070.6

49 662.5

R

Population (000s)

O


EC

Nominal GDP (SEK bn)

O


u Lect

r






Voluntary occupational pension – Collectively-bargained occupational pension plans, defined benefit – Collectively-bargained occupational pension plans, defined contribution Public pension – Minimum pension – Cash-balance pension – Premium Pension Authority (PPM)

Benevolent societies (understödsföreningar) and pension foundations (pensionsstiftelser) ● Life insurance companies ● Occupational pension plans: book reserves ●

Mandatory/Quasi-mandatory, personal ●

180

Premium pension system (PPM)

Voluntary, personal

60

●

Individual pension saving (IPS)


40

20

0 DB

DC



2004

2005

2006

2007

189.5

193.7

248.2

268.4

266.6

7.5

7.4

9.1

9.3

8.7


..

..

..

..

..


..

..

..

..

..


..

..

..

..

..

Total investments (SEK bn) Total investments as a % of GDP


1 2 http://dx.doi.org/10.1787/517844735450

278


nl y O

u le

EC

Overview

d

Blue-collar workers

ea

●

D Br o


w

n


_it E d it5. SWEDEN e io s

An

Coverage

The occupational pension system covers over 90% of the workforce.

se

e

R

O

The occupational pension system in Sweden is overwhelmingly driven by collective agreements, and is effectively mandatory for most employers. Pension benefits for bluecollar workers are typically defined contribution in nature.

u Lect

r

Typical plan design The SAF-LO occupational pension plan – established by a collective bargaining agreement between the Swedish Employers’ Confederation (SAF) and the Swedish Trade Unions’ Confederation (LO) – is defined contribution in nature. The terms of the plan were improved in 2007, primarily in response to perceived unfairness in the terms of the pension provisions for blue-collar and white-collar workers. Employer contributions to members’ accounts as a percentage of their earnings will increase incrementally until 2012, as shown in the table below. Contributions are different depending on whether employees earn under or over the 7.5 income base amount (IBA).

Employer contributions to members’ accounts, 2007-2012 As a percentage of members’ earnings Earnings under 7.5 IBA

Earnings over 7.5 IBA

2007

3.5

2008

3.9

3.5 6.0

2009

4.0

12.0

2010

4.1

18.0

2011

4.3

24.0

2012

4.5

30.0

1 2 http://dx.doi.org/10.1787/517876858627

Contributions towards employees’ pensions commence at the age of 25 – raised in 2008 from the previous, younger, eligibility age of 21. The normal retirement age in the SAF-LO plan is 65, though early retirement is possible from age 55. ●

White-collar workers

Overview The main collectively bargained pension plan for white-collar employees, ITP, is defined benefit in nature for employees born before 1979, and defined contribution in nature for those born in 1979 and after.


279

5. SWEDEN

D Br o

w

n

Typical plan design

_it E d it e io s

u le

O

nl y

The ITP occupational pension plan was extensively upgraded in 2007 after a decade of negotiations between the employers and white-collar unions. It comprises two main parts.

se

ea

R

O

EC

d

Part I, introduced in 2007, is defined contribution in nature and covers all employees born in or after 1979. Employer contributions are 4.5% for earnings under 7.5 IBA (income base amount), and 30% for earnings over 7.5 IBA. Members are eligible to contribute as of age 25.

e

Part II has been in effect for years and covers all employees born before 1979. It is mainly defined benefit in nature and based on final earnings, although it does contain some defined contribution components. On reaching 65, a member with 30 years of service receives benefits as a life annuity, although the option of withdrawing a pension entitlement over a period as short as five years was introduced in 2007. A life annuity benefit may be broken down as follows.

u Lect

r

An

Life annuity benefit by level of earnings As a percentage of members’ earnings

Annual pension benefit available at 65 after 30 years of service

Portion of final earnings under 7.5 IBA

Portion of final earnings between 7.5 and 20 IBA

Portion of final earnings between 20 and 30 IBA

10% of final earnings within this earnings band

65% of final earnings within this earnings band

32.5% of final earnings within this earnings band

ITP Part II also entitles members to a defined contribution allocation of 2% of earnings up to 30 IBA per annum. The usual retirement age in ITP is 65, although early retirement is possible from the age of 55. ITP’s predominantly defined benefit Part II can be financed in one of three ways: ●

through life insurance provided by the insurance company Alecta;

●

a book-reserved provision on the sponsoring employer’s balance sheet;

●

through a pension fund.

Employers choosing to finance Part II of the ITP plan via book reserves or a pension fund must purchase credit insurance as protection in the event of bankruptcy. Approximately 1 500 employers finance their ITP Part II plans via book reserves or pension funds.

Personal mandatory Overview A new mandatory individual account system, known by its acronym PPM, was introduced in 1999. It is a defined contribution arrangement run by a public organisation.

Contributions PPM annually credits 2.5% of pensionable earnings to an individual’s self-directed defined contribution personal savings account.

280


D Br o

w

n

Benefits

_it E d it5. SWEDEN e io s

nl y

u le

O d ea

se

Personal voluntary

R

EET treatment applies.

O

Taxation

EC

PPM benefits are paid out in the form of life annuities. The normal retirement age is 65, but early retirement can be taken from age 61.

e

Employee contributions to employer-sponsored occupational pension plans are not allowed in Sweden. However, some employers offer their employees salary deferral plans.

u Lect

r

An

Market information Occupational voluntary The SAF-LO plan’s defined contribution accounts can be invested with some 25 different providers. There are approximately 1.8 million members. The main collectively bargained pension plan for white-collar workers has approximately 700 000 members. ITP Part I defined contribution accounts can be invested with eight different providers. Total occupational voluntary assets were worth SEK 1 120.8 billion at the end of 2007 (USD 165.9 billion).

Personal mandatory Savers are free to choose mutual funds to manage their PPM assets. Those who make no active investment decision have their PPM contributions invested in the Seventh AP Fund. In 2006, individuals had 779 funds to choose from in the PPM system. At the end of 2007, total assets in the PPM system reached SEK 309.6 billion (USD 45.8 billion).

Personal voluntary Individual pension saving, known by its acronym IPS, counted 1.5 million accounts in banks at the end of 2007. They managed assets of up to SEK 64.4 billion (USD 9.5 billion).

Reference information Key regulatory and supervisory authorities Social Insurance Agency: responsible for the supervision of public pensions, www.forsakringskassan.se. The Swedish Financial Supervisory Authority: Sweden’s integrated financial regulator, it is responsible for regulating insurance companies, www.fi.se.

Key official statistical references and sources on private pensions Statistics Sweden, www.scb.se/default____2154.asp. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


281

5. SWEDEN

✓

✓

Life insurance companies

Occupational plan for salaried employees, wage-earners, and employees in local and central government. Pension contracts with life-insurance companies.

✓

✓

✓

Individual pension saving (IPS)

The statistics cover IPS in banks and other institutes with autorization for IPS business (mutual funds, shares etc.). Not included in the statistics are personal pensions in life insurance plans.

✓

Occupational pension plans: book reserves

Book reserves in companies' balance sheets or in pension funds. Approximate adjustments made to statistics to avoid duplicating.

✓

✓

Premium pension system (PPM)

Funded portion of the national pension system: 2.5% of the pension base income is held for the premium pension, where the holder can choose from a wide selection of mutual funds.

✓

✓

nl y

d An

✓

✓

u Lect ✓

✓

✓

u le

✓

✓

se

Benevolent societies Government workers funded (understödsförening pension arrangements in pension ar) and pension funds. foundations (pensionsstiftelser)


e

✓

Book reserve

ea

✓

Pension fund

R

✓

O

Some workers associations and companies have created these as pension provision for their members or employers.

Benevolent societies (understödsförening ar) and pension foundations (pensionsstiftelser)

Financing vehicle

Personal

EC


O

D Br o


n

w

_it E d it e io s

r

✓

✓

✓

✓

✓

✓


282


nl y

D Br o

w

n

Switzerland

_it E 5.dSWITZERLAND iti e s o


u le

d

se

7 550.0 4 572.3 96.5 16.3 26.9

An


e

Employment rate

ea

Labour force (000s)

508.0

56 079.5

R

Population (000s)

O


EC

Nominal GDP (CHF bn)

O


u Lect

r






Mandatory occupational pension – Cash-balance plan (minimum)

●

Public pension – Minimum pension – Earnings-related – Means-tested supplement

Second pillar pension plans (institutions de prévoyance or Vorsorgeeinrichtungen)


60



40

20



2004

2005

2006

2007

Total investments (CHF bn)

450.3

484.0

542.6

583.3

606.4


102.9

107.2

117.0

120.0

119.4


7.3

7.5

7.8

7.9

7.9


5.1

5.3

5.3

5.3

5.4

3 050

2 934

2 770

2 667

..


. .: means not available. 2007 data are estimates. Source: OECD Global Pension Statistics.

1 2 http://dx.doi.org/10.1787/518005446235


283

nl y u le

Overview

O


w

_it E d it e io s n


D Br o

5. SWITZERLAND

d

se

ea

e

Coverage

R

O

EC

A mandatory occupational pension system, financed via pension funds, was introduced in 1985. Swiss law requires that, at a minimum, employers should provide a cash-balance plan (Berufliche Vorsorge [BV(G)] or Prévoyance Professionnelle [PP]).

An

Employees whose annual earnings exceed CHF 19 890 with the same employer are required to join the pension fund established by their employer. The system is voluntary for self-employed persons and those not eligible for mandatory insurance.

u Lect

r

Typical plan design Contribution rates for employees vary according to age and gender and are applied to earnings between CHF 23 205 and CHF 79 560. Employee contributions are determined as follows:

Contribution rates for employees by age and gender As a percentage of eligible earnings Men within age range

25-34

35-44

45-54

55-65

Women within age range

25-34

35-44

45-54

55-64

7%

10%

15%

18%

Employee contribution

1 2 http://dx.doi.org/10.1787/518025165184

Employer contributions must be at least equal to the employee’s contribution. From 1 January 2008, the minimum rate of return for mandatory occupational pensions was raised from 2.5% to 2.75%. The annual benefit in 2008 equals 7.05% (men) or 7.1% (women) of the accumulated funds, plus any interest in the individual account. Benefits are normally paid in the form of an annuity. Insured members can request that a quarter of their assets be paid out as capital. Moreover, the pension fund may grant a capital payment instead of a pension or annuity, if this amount is less than 10% of the minimal old age public pension for a member affected by old age or disability, less than 6% for widows’ and widowers’ pensions, or less than 2% for an orphan’s pension. Members may start withdrawing their pension benefits up on reaching the ordinary retirement age (65 for men, 64 for women). Both early and deferred retirement are possible, with benefits accordingly adjusted down for early retirees and up for those who retire later.

Taxation EET tax treatment applies: contributions and investment income are exempt, while benefit payments are taxable.

284


nl y

D Br o

Overview

w

n

Personal voluntary

_it E 5.dSWITZERLAND iti e s o

se

e

Anyone wishing to increase his or her level of pensions after retirement may participate.

An

Contributions

u le

O

d

ea R

O

Coverage

EC

Voluntary pension plans are available in the form of defined contribution arrangements run by Switzerland-based insurance companies and specially authorised banking foundations.

u Lect

r

Contributions made by individuals are capped. In 2007 the ceiling was CHF 6 365 for those with a pension fund, but CHF 31 824 (or 20% of earned income) for those without a pension fund.

Benefits Because benefits are based on defined contributions, a member’s total contributions plus any interest that has accrued are paid out, either when he or she reaches the statutory retirement age (65 for men, 64 for women), or in the event of disability or death. Early withdrawal of benefits is possible in certain circumstances, e.g. if a member starts his or her own business, or leaves Switzerland permanently. Benefits may be paid in the form of annuities or as a capital lump-sum.

Taxation EET tax treatment applies: contributions and investment income are exempt, while pension benefit is taxable, albeit separately from other income and at a lower rate.

Market information Occupational mandatory In December 2006 there were 2 667 occupational pension funds with about 4.4 million participants. Accrued assets were of CHF 606.4 billion (USD 505.4 billion) in 2007.

Reference information Key legislation Base pension plan 1946: Federal Law of 20 December on old-age and survivors insurance. 2000-2003: Federal Law of 6 October relative to social insurance, passed in 2000, but implemented in 2003.

Mandatory occupational pension plan 1982/1985: Federal Law of 25 June relative to occupational old age, disability, and survivor pensions; passed in 1982, but implemented in 1985.


285

5. SWITZERLAND

nl y

D Br o

Base pension plan

w

n


_it E d it e io s

d

u le

O

Federal Department of the Interior: provides general supervision and regulation, www.edi.admin.ch.

e

R

O

Central Compensation Office: maintains a register of all insured persons and pensioners, www.avs-ai-international.ch.

An

Mandatory occupational pension

se

ea

EC

Federal Social Insurance Office: supervises implementation of the base pension plan, www.bsv.admin.ch.

u Lect

r

Federal Social Insurance Office and Cantons: provide general supervision, while registered occupational pension institutes administer mandatory occupational pension schemes, www.bsv.admin.ch.

Key official statistical references and sources on private pensions Office Fédéral de la Statistique, www.bfs.admin.ch/bfs/portal/fr/index.html. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

Overview of private pension system by type of plan and financing vehicle Type of plan Included in Mandatory/ OECD GPS OccupaPension Personal database Voluntary Quasitional fund mandatory Second pillar pension plans (institutions de prévoyance or Vorsorgeeinrichtu ngen)

Supervised by Federal Social Insurance Office (Office fédéral des assurances sociales) and governed by the Federal Law on Occupational Benefit Plan for Old Age, Survivors, and Invalidity (LOB) SR 831.40 or loi fédérale sur la prévoyance professionnelle vieillesse, survivants et invalidité (LPP). The LOB is mandatory for salaried employees already covered in the first pillar. Mandatory schemes do not apply to some economically active categories, e.g. the self-employed. Based on contributions plans and the principle of collective financing (contributions to the employer must be at least equal to the sum of contributions paid by all the employees), the system set up by the legislator also introduced the principle of a minimum provision guaranteed by the law. It includes provisions applying to public-law institutions that serve public sector workers.


Individual retirement savings plans offered by life insurance companies and bank foundations.

✓

✓

✓

✓

Financing vehicle Book reserve


✓

✓

✓

✓


286


nl y

D Br o

w

n

Turkey

_it E d it5. TURKEY e io s


u le

d

se

ea

23 523.0 90.3 21.3

7.1


e

Employment rate

70 586.3

R

Labour force (000s)

O

Population (000s)

856.4

9 309.2

EC


An

Nominal GDP (TRY bn)

O


u Lect

r






Public pension – Minimum pension – Earnings-related – Means-tested supplement

●

Occupational pension plan: defined benefit, defined contribution


80 Occupational pension plans (first pillar substitute): defined benefit Occupational pension plan: defined benefit, defined contribution, or hybrid ● Occupational pension plan: defined contribution ● ●

60

Voluntary, personal

40 ●

Personal pension plans: defined contribution (unprotected)


20

0 Note: Additional pension income may come from other sources such as mandatory and voluntary occupational pension, personal pension, general savings or investments, etc. Source: OECD estimates.


2004

2005

2006

2007

Total investments (TRY bn)

..

2.2

4.3

5.7

10.3


..

0.4

0.7

0.7

1.2


..

..

..

..

..


..

0.0

0.1

0.0

0.0


..

83

98

105

108


1 2 http://dx.doi.org/10.1787/518030583328


287

nl y


w

_it E d it e io s n


D Br o

5. TURKEY

u le

O

d

se

ea

R

O

EC

The Former Social Insurance Act excluded institutions in the financial services sector such as banks, insurance companies, reinsurance companies, the stock exchange, and chambers of commerce from the mandatory social security system. These institutions have set up their own defined benefit (DB) occupational pension plans, which are commonly known as first-pillar substitute funds.

e

The total number of people covered by such plans is estimated at around 350 000. The number of first-pillar substitute funds currently stands at 18. In accordance with the recent social security reform in Turkey, these funds will gradually be transferred to the National Social Security System.

u Lect

r

An

There are also two occupational mandatory schemes for the armed forces and the mining industry.

Occupational voluntary Overview Numerous private sector corporations run voluntary occupational pension funds that operate as either DB or DC schemes, or combinations of both. They serve to top up employee benefits available under the public social security system. They are managed by non-profit foundations and are supervised by the General Directorate for Non-Profit Organisations. Additionally, a new occupational pension framework, which will allow the offering of occupational plans based on the individual account structure, has been established.

Coverage Occupational plans are established on a voluntary basis by employers.

Typical plan design The typical voluntary occupational pension plan in Turkey is DC in nature.

Personal voluntary Overview A new system is the fully funded, voluntary DC account scheme, introduced in 2001. It is open to all adult participants, who take out contracts with a pension company. They may, in fact, open accounts with more than one pension company. Employers are allowed to contribute to the personal pension accounts of their employees.

Coverage Anyone over the age of 18 may participate and there are no employment relationship requirements. By June 2008 participants accounted for about 6.5% of the total workforce.

Contributions Contribution levels for participants are laid down in the contract with the pension company. Employers may make voluntary contributions to group pension contracts but are

288


nl y

u le

O

Benefits

D Br o

not required to do so. As at the end of 2007, the average monthly contribution was TRY 112.4.

n

w


se

ea

EC

d

Members are entitled to retirement benefits when they reach the age of 56 and have been saving under the scheme for at least 10 years.

e

An

Fees

R

O

Benefits can take the form of a lump sum or a monthly annuity. The pay-out stage has not been reached yet.

u L participant ect Savers pay the pension company an entry fee (which may be waived if the

r

stays with the pension company for a certain period not exceeding 5 years) and a daily fund management fee of up to 0.010% (3.65% in annual terms), while contribution fees may not exceed 8%. Company-sponsored plans are liable to lower management fees. Fees are unregulated but quite low, due to the intense competition in the pension market. By the end of 2007, the average contribution fee was 3.3% and average annual fund management fee about 2.3%.

Taxation Participants may deduct contributions from their income tax base up to a ceiling of 10% of the gross monthly income. Total deductions in a year may not exceed the threshold of the annual minimum wage level. The total amount of employee and employer contributions for group pension plans is similarly capped. Employer contributions, including those to group contracts, are deductible as business expenses from the corporate tax base up to a ceiling of 10%, or TRY 7 020 (about USD 5 600) of an employee’s annual salary. Investment returns are tax-exempt. As for benefits, where a participant withdraws benefits and has contributed to the system for less than 10 years, they are taxed at a rate of 15%. Where the participant has contributed for more than 10 years, but is under 56, benefits are taxed at a rate of 10%. If the participant has contributed for more than 10 years and is 56 or older, benefits are taxed at 3.75%. (The government has the power to increase tax deductibility by up to twice the current rates.)

Market information Occupational mandatory There are two mandatory occupational schemes – Oyak, for the armed forces, and Amele Birliği, for the employees of the state-owned coal mining enterprise TTK. These schemes operate under separate legislation and combine defined benefit (DB) and defined contribution (DC) elements. They covered around 210 702 active participants and had assets under management of around TRY 5.7 billion (USD 4.4 billion) at the end of 2007.

Occupational voluntary There are some 200-250 voluntary occupational pension funds.

Personal voluntary Only licensed pension companies may offer personal private pension products. Funds are invested through pension mutual funds that serve as investment vehicles. Mutual


289

5. TURKEY

nl y

d

ea

EC

e

R

O

u le

O

There were some 1.7 million participants by the end of October 2008. There are currently 12 pension companies with 122 pension mutual funds. At end of October 2008 the total portfolio value of pension mutual funds amounted to approximately TRY 5.8 billion (USD 3.7 billion). The two largest funds in terms of total contributions are Anadolu Hayat Emeklilik and GarantiEmeklilik ve Hayat, which enjoy market shares of 21.4% and 19.6% respectively. There is clearly a high level of competition in the private pension market.

se

D Br o

funds are founded by the pension companies, but should be managed by portfolio management companies, not by the pension companies, which pay them commissions.

n

w

_it E d it e io s

u Lect

An

Individual participants may choose the pension company they wish and are entitled to change companies once a year. They also choose the funds that suit them and may switch between those offered by the same company up to six times a year. A pension company’s provision must include at least three funds, with different portfolios for each.

r

Reference information Key legislation 2001: the Private Pension Savings and Investment System Act (No. 4632), amended in 2007, lays down the terms and provisions of the personal private pension system.

Key regulatory and supervisory authorities The Undersecretariat of the Treasury: regulates and polices the individual account system, www.treasury.gov.tr/. The Capital Markets Board of Turkey: regulatory and supervisor body that fosters the development of capital markets, ensures fair trading in the capital markets, and protects investors, www.cmb.gov.tr/index.aspx. The Pension Monitoring Centre: plays an important role in the daily monitoring of the system and in making information available, www.egm.org.tr/about_EGM.asp.

Key official statistical references and sources on private pensions The Pension Monitoring Centre, www.egm.org.tr/about_EGM.asp. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.

290


Occupational pension plan: defined benefit, defined contribution

According to available information, there are two second-pillar occupational pension plans, in which employees participation is compulsory: OYAK and Amele Birligi. OYAK is a self-regulatory institution.

Occupational pension plan: defined benefit, defined contribution, or hybrid

There are estimated to be around 250 occupational pension plans (second pillar), in which employee participation is voluntary. The Undersecretariat of the Treasury has recently been granted the authority to supervise such plans (limited to actuarial supervision).

Occupational pension plan: defined contribution

A new occupational pension framework has been designated to provide individual account occupational plans. The data regarding these plans will be available by the end 2008, as the first plans will be put in place from August 2008.

Personal pension plans: defined contribution (unprotected)

These plans include individual savings (retirement) accounts operated on a defined contribution basis. Employer contributions to these accounts on behalf of the employee are also possible.

✓

✓

✓

nl y

✓

✓

✓

✓

✓

✓

✓

✓

u le

d

se

ea

✓

✓

✓


e

O

✓

Book reserve

R

✓

Under the Social Insurance Act, (Provisional Article 20), these plans are established by banks, insurance and reinsurance companies, chambers of commerce, etc., whose employees are exempt from the mandatory social insurance system. In accordance with recent social security reform in Turkey, occupational pension funds will gradually be transferred to the national social security system.

Pension fund

An

Occupational pension plans (first pillar substitute): defined benefit

Financing vehicle

Personal

EC


O

D Br o


n

w


u Lect

r

✓



291

5. UNITED KINGDOM

nl y

D Br o

w

n

United Kingdom

_it E d it e io s


u le

O d

se

Employment rate

60 587.0 30 006.0 94.8 16.0 32.4

An


e

Labour force (000s)

ea

Population (000s)

1 384.8

45 586.9

R


O

Nominal GDP (GBP bn)

EC


u Lect

r






Voluntary occupational pension – Voluntary occupational defined benefit pension plans, contracted out – Voluntary occupational defined contribution pension plans, not contracted out

● ●

Occupational pension schemes Pension Act 1995 Occupational pension plans for government workers

Voluntary, personal

Public pension – Flat rate basic pension – Earnings-related pension, with contracting-out possibility – Pension credit 100

● ●

Personal pension plans Stakeholder pensions


80 60 40 20 0 DB

DC



Total investments (GBP bn)

2003

2004

2005

2006

2007

719.6

800.7

970.3

1 087.9

1 192.9


64.4

67.6

78.6

83.4

86.1


2.3

2.6

3.0

3.1

..


2.9

2.8

3.0

3.1

..

101 014

94 535

91 674

86 777

..


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Overview

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Occupational pension plans are common in the United Kingdom, as the benefits provided by the public pension plans are relatively low. Traditional final average-pay DB plans were the norm in the United Kingdom. However, many are now closed to new entrants and have been replaced by DC plans.

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While the State Second Pension (S2P) system is compulsory, employers can opt out and establish contracted-out occupational pension plans. Specific PAYG pension plans do exist for civil servants, but are not discussed in this profile.

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Occupational pension plans are set up by the employer and are always operated under trust, primarily to benefit from tax concessions, but also to ensure that assets are kept separate from the sponsoring employer.

Coverage Any worker who opts out of the S2P system may join an occupational pension plan. In 2006, 47.1% of the employed population was covered by occupational plans.

Typical plan design7 Typical defined benefit plans in the United Kingdom cover employees who have contracted out of the S2P system. A common accrual rate for such a plan would be 1/60th of final average earnings for each year of service. DB plans typically require employee contributions at an average level of 6% of earnings. Typically, defined contribution plans are not contracted out. Average contribution rates to DC plans would be 6% for the employer and 5% for the employee. Private-sector DB plans are almost always funded, since funding is a requirement for obtaining tax exemptions. Some public-sector DB plans are unfunded or only notionally funded, in contrast to those in the private sector which are always funded. Benefits take the form of a lump sum (maximum 25%) and/or annuities, while income drawdown arrangements are possible up to the age of 75. The normal retirement age is 65 for men and 60 for women, while in 2006 the average effective retirement age was 64.2 for men and 61.8 for women.

Taxation Employee contributions are tax-exempt. Investment returns are generally free from income and capital gains tax. Lump-sum payments are tax-free.

Personal voluntary Overview People may also participate in a personal pension plan and so-called “stakeholder pensions”. These plans are provided by life insurance companies and banks. Employers may offer personal pension saving plans to their employees by means of group personal pension plans. Personal pension plans are very similar to stakeholder pensions, but offer more flexibility. These are known as “contract-based DC plans” and operate on a different basis to occupational DC plans.


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Personal pension plans may offer substitute benefits to individuals who contract out of the S2P and stakeholder pensions.

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Employers who do not offer employees an occupational pension plan or a personal pension plan into which they contribute at least 3% of salary, must offer a stakeholder pension.

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Contributions

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Personal pensions are available to almost everybody under age 75, including people in employment, fixed-contract workers, the self-employed, and people who are not actually working, but can afford to make contributions.

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Contribution levels are laid down in the contract between the provider and the saver. There are no legal maximum contribution levels. Contributions can be paid on a weekly or monthly basis, or made as a one-off payment.

Benefits Personal pension plans, also called “money purchase plans”, are defined contribution in nature. Up to 25% of pension assets can be paid out as a lump sum, with the remaining assets being paid as annuities. The saver may appoint a beneficiary, who can receive the benefits from the moment the saver decides to withdraw his pension benefits. Benefits are generally available from age 50 (55 from 2010).

Fees Stakeholder pension providers may charge no more than 1.5% of asset value in charges per year. This goes down to 1% after 10 years of membership.

Taxation Tax relief can be obtained on contributions. For every pound paid in, the tax authorities will pay an extra 28 pence into the account up to the level of a person’s salary (subject to an annual limit of GBP 215 000). It is possible to contribute up to GBP 3 600 per year (GBP 2 880 plus tax relief) into a stakeholder pension plan even for people who are not earning. The lump sum is tax-free, while annuities are taxed.

Market information Occupational voluntary The distribution of pension plan sizes in the UK is somewhat skewed, with a large handful of very large plans and over 50% of plans with less than 100 members. Some 1 600 plans with over 1 000 members account for approximately 85% of membership. Current DB membership stands at 22.2 million. This is contrasted with 6.2 million DC members. It is estimated that only 56% of DB benefit plans remain open or partially open. At the end of 2006, total assets of occupational pension plans amounted to GBP 1 088 billion (USD 2 004 billion).

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Personal pension plans are similar to stakeholder pensions, but they offer a wider range of investment options.

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In 2004, around 5.3 million people were enrolled in a personal voluntary plan.

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Stakeholder plans must offer a default investment option, which has to include a lifecycle investment pattern – a less risky investment from five years before retirement. Plans must have either trustees or stakeholder managers (insurance company, bank, or building society). Those enrolled in occupational plans may additionally join a personal pension plan.

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Key legislation 2004 ●

The Pensions Act 2004, which gave the Pensions Regulator (TPR) its statutory powers and three specific core objectives: to protect the benefits of work-based pension plans, to promote good administration of work-based pension plans, and to prevent claims on the Pension Protection Fund.

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The Finance Act, which laid down relevant rules concerning the role of HMRC (the UK’s tax revenue collector) in enforcing tax-related aspects. 1999

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The Welfare Reform and Pensions Act 1999 laid down the rules on stakeholder pensions.

Key regulatory and supervisory authorities The Department for Work and Pensions: in charge of the overall design and regulation of the UK pension system, www.dwp.gov.uk. The Pensions Regulator (TPR): in charge of supervision of the occupational pension system, www.thepensionsregulator.gov.uk. The Financial Services Authority: in charge of supervision of the individual pension plans, www.fsa.gov.uk. HM Revenue and Customs: in charge of taxation issues relating pensions, www.hmrc.gov.uk/. OECD, Global Pension Statistics Project, www.oecd.org/daf/pensions/gps.


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Local government pension funds.

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Personal pension data are collected as part of data collection from insurance companies, but those companies cannot distinguish between investments linked to pension business and other investments.

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Stakeholder pensions

Stakeholder pensions are accessed via employers. Data included in insurance statistics.

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Occupational pension plans for government workers

Some government workers' funded schemes are not regulated by the Pensions Regulator. Information on central government pension funds is not available.

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Occupational pension schemes Pension Act 1995

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United States

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Employment rate

299 398.5 148 893.2 94.5 12.4 24.4

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Population (000s)

13 776.5

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Voluntary occupational pension – Voluntary occupational defined benefit pension plans – Voluntary occupational defined contribution pension plans Public pension – Minimum pension – Earnings-related pension, with contracting-out possibility – Means-tested supplement

Private pension fund: defined benefit plans Private pension fund: defined contribution plans ● State and local government employee retirement funds ● Federal government retirement funds: defined benefit plans ● Federal government retirement funds: defined contribution plans ● ●

Voluntary, personal Traditional individual retirement accounts (IRAs) Roth individual retirement accounts (Roth IRAs) ● Annuity reserves at life insurance companies ●

100

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80 Source: OECD Global Pension Statistics.

60 40 20 0

DB

DC



2004

2005

2006

2007

7 919.2

8 604.7

9 171.5

9 945.1

10 238.1

72.6

74.0

74.1

75.7

74.3


..

..

..

..

..


..

..

..

..

..


..

..

..

..

..

Total investments (USD bn) Total investments as a % of GDP


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Employers may offer their employees pension provision through a number of different mechanisms. The most common forms are private pension funds which are defined benefit (DB), defined contribution (DC), or hybrid. There also exist many state and local government employee retirement funds, which are largely DB pension funds sponsored by states and municipalities. Traditional DB plans were historically the main types of pension plan, but these have been overtaken by DC plans, including the 401(k) defined contribution type of plan.

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There are several DB types of federal government retirement funds, such as the National Railroad Retirement Investment Trust, and non-marketable government securities held by the civil service retirement and disability fund, Railroad Retirement Board, judicial retirement fund, military retirement fund, and the foreign service retirement and disability fund. An example of a DC Federal Government Retirement Fund is the Federal Employees Thrift Savings Plan. The federal and state pension funds are not discussed in this profile. There are many types of DC plans, of which the most important (which are overlapping) are:

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401(k) and similar plans: plans developed specifically under section 401(k) of the Internal Revenue Code, under which employees are allowed to make before-tax contributions from their salaries (which are subject to social security contributions, nevertheless) through salary reduction elections, which US law encourages to make on an automatic enrolment basis. 401(k) plans often include matching employer contributions, such as a match equal to 50% of the employee’s before-tax contributions up to 6% of salary.

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Profit-sharing and similar plans: plans established and maintained by an employer usually to provide for a specific contribution formula to be allocated among employees based on a specific allocation formula under the plan, such as a percentage of salary.

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Employee stock ownership plans (ESOPs): plans under which the employee accounts are primarily invested in shares of company stock. An ESOP is permitted to borrow money to purchase this stock. The loan is either from the employer or from a commercial lender with an employer guarantee, and with the purchased shares held in a suspense account to be allocated to employee accounts as the loan is repaid.

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Individual retirement arrangements (IRAs) are investment vehicles which are permitted to include contributions by the IRA owner, so-called “rollover” contributions for distributions from employer plans, or contributions under employer-sponsored plans. Under a savings incentive match plan for employees (SIMPLE), an employer with fewer than 100 employees may establish a SIMPLE through a contract with an IRA provider, to which employees earning at least USD 5 000 can contribute a portion of their salaries on a tax-deductible basis. The maximum employee contribution is USD 11 500 (USD 14 000 for employees age 50 or older) for 2009. Employers either match the employee contribution up to 3% of salary, or make a straight contribution of 2% of salary. Both employee and employer contributions vest immediately. The IRA is owned by the employee, so benefits are available at any time, with an additional 10% tax generally applicable if withdrawn before age 59.5.


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Single employers, or a group of employers, may voluntarily establish a complementary occupational pension plan for their employees. The plan sponsor decides what type of plan to establish (see below). If a private employer offers a DB plan, participation is automatic and thus compulsory for covered employees. In the case of DC plans, participation is typically automatic or may be voluntary for covered employees, depending on the type of plan and/or plan rules. Employers are not required to cover all employees, although they must meet minimum employee coverage and non-discrimination rules. It is estimated that 61% of private-sector workers have access to company-sponsored pension plans. Twenty-one per cent of private-sector workers have access to DB plans and 55% to DC plans.

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Typical plan design A typical DB plan might offer from 1% to 1.5% of final average earnings for each year of service. Plans are sometimes subject to a service maximum of 30-35 years and often include early retirement subsidies after a specified number of years of service or age. A typical 401(k) DC plan would allow employees to contribute any percentage of pay up to 25%, along with employer matching contributions of 50% of any employee contributions, up to 6% of pay. Private plans whether DB or DC are usually non-contributory for employees, except for 401(k) plans, which are limited in 2009 to USD 16 500 or USD 22 000 for employees aged 50 and over. Employers are required to contribute to all types of plans, except 401(k) plans, where employer contributions are not required and are often limited to matching contributions. There are maximum limits on aggregate contributions. Normal retirement is typically at age 65.

Taxation Employee contributions to 401(k) plans are subject to social security contributions, but not income tax. Beginning in 2007, a 401(k)-type plan can permit employees to choose to have their contributions be included in taxable income (called a “Roth” contribution, after former US Senator William Roth who popularised this idea), in which case separate accounts are kept and distributions from a Roth account are not subject to income tax if, for example, the distribution is made after age 59.5 and 5 years of participation in the Roth portion of the plan. For 2009 employee contributions to 401(k) plans are exempt from income tax up to a yearly ceiling of USD 16 500 (USD 22 000 for employees age 50 or older). Employer contributions to all DB plans in 2009 are tax-exempt up to a level that allows an annual pension of USD 195 000. Total employer and employee contributions to DC-type plans for 2009 are limited to USD 49 000 a year or, if lower, to 100% of salary. Employer contributions are not subject to social security contributions. Investment income is taxdeferred in all cases. Benefits in retirement from all types of plans are taxed as income (except for Roth contributions and any other benefits financed through taxable employee contributions).


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Roth IRAs, which are taxed much the same way as a Roth 401(k) plan.

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The most common individual retirement savings arrangements are individual retirement accounts and individual retirement annuities (IRAs), of which there are two different types.

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Most IRAs are self-directed, which allows the saver to make a wide range of investment decisions. A trustee or other custodian or an insurance company must own the IRA assets.

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IRAs can also receive “rollover” contributions of an amount distributed from an occupational retirement plan, in which case the distribution is not taxed until paid from the IRA. Approximately 45% of the funds held in IRAs are from rollovers. An amount held in a traditional IRA or distributed from a non-Roth plan can in some cases be put into a Roth IRA, in which case that amount is subject to income tax.

Coverage Eligibility rules for contributions vary by type of IRA and include the annual income of the saver (expressed as the Modified Adjusted Gross Income, or MAGI), membership in an occupational plan, and the family situation of the saver.

Contributions IRAs (traditional and Roth) allow contributions up to USD 5 000 per person in 2009. The maximum limit is USD 6 000 for those who are age 50 or older in 2008. In addition, assets from a traditional IRA can be transferred to a Roth IRA, though income tax must be paid over the transferred sum.

Benefits Savers must start withdrawing benefits by age 70.5. The required minimum withdrawal for each year is calculated by dividing the IRA account balance as of 31 December of the prior year by the applicable distribution period or life expectancy. For IRAs, benefits withdrawn before age 59.5 are subject to a 10% income tax penalty, unless withdrawn for various specific reasons.

Taxation Contributions to traditional IRAs are often tax-deductible. Transactions and earnings within the IRA have no tax impact, while withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted). Contributions to Roth IRAs are made with after-tax assets. No transactions within a IRA have any tax impact, and withdrawals after age 59.5 and 5 years of participation in the Roth IRA are tax-free. Investment income and benefits are generally tax-exempt.

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At the end of December 2007, total assets managed by occupational pension plans amounted to USD 10.2 trillion. The total number of participants in occupational voluntary plans was 142.5 million in 2005.

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Plans are implemented under a written trust agreement or through an insurance contract. The trustees may manage the contribution and benefit administration or contract it to a pension management or insurance company. Under an insurance contract, the insurance company manages the contribution and benefit administration.

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It is possible to have both a traditional IRA and a Roth IRA, but the maximum overall contribution limits apply to the saver. IRAs managed assets worth USD 6.8 trillion at the end of 2007. They covered 50.9 million participants in 2005.

Reference information Key legislation 2006: The Pension Protection Act, which is to be implemented over the course of the coming years, sets new funding requirements for DB plans, and lays down additional rules for underfunded DB plans. It further clarifies the status of cash balance and hybrid DB plans, and encourages automatic enrolment and a default investment option for 401(k) plan members. 2001: The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) relaxed constraints on the conversion of IRAs into other types of plans. 1978: The Revenue Act of 1978, which established 401(k) plans. 1974: The Employee Retirement Income Security Act (ERISA) is the most important complementary occupational pension plan law in the United States. It has been amended on several occasions.

Key regulatory and supervisory authorities The Social Security Administration: administers the public pension system, www.socialsecurity.gov. The Department of Labor: regulates and supervises the occupational pension system, www.dol.gov. The Treasury Department: supervises the collection of social security taxes through the Internal Revenue Service and supervises the payment of benefits and the management of social security funds, www.treasury.gov. The Internal Revenue Service (IRS): administers the Internal Revenue Code and determines the tax-qualified status of plans. It has jurisdiction over eligibility, vesting, and funding requirements under ERISA. The IRS is part of the Treasury, www.irs.gov. The Employee Benefits Security Administration (EBSA): enforces ERISA’s standards concerning reporting, disclosure, and fiduciary matters. It is part of the Department of Labor, www.dol.gov/ebsa.


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Overview of private pension system by type of plan and financing vehicler

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Pension fund

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Private pension 401(K) type plans and assets of fund: defined defined contribution private contribution plans pension plans held at life insurance companies (e.g. GICs, variable annuities).

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Individual retirement accounts (IRAs)

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Private pension fund: defined benefit plans

Include assets of defined benefit private pension plans held at life insurance companies (e.g. GICs, variable annuities).

Include Keogh accounts at depositories.

Roth individual retirement accounts (Roth IRAs) State and local government employee retirement funds

Defined benefit pension funds sponsored by states and municipalities.

✓

✓

✓

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Federal government retirement funds: defined benefit plans

National Railroad Retirement Investment Trust, and nonmarketable government securities held by the civil service retirement and disability fund, Railroad Retirement Board, judicial retirement fund, military retirement fund, and foreign service retirement and disability fund.

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Federal Federal Employees Thrift Savings government Plan. retirement funds: defined contribution plans

✓

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Annuity reserves at life insurance companies

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Excludes unallocated insurance contracts of private pension plans (e.g. GICs, variable annuities).

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3. The Reserve Fund is established with 5% of the pension company profits.

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4. The TFR is a sort of severance pay scheme that the employer has to pay to an employee in the case of his dismissal or retirement. Every month the employer sets aside 6.91% of the gross salary of the employee; every year the accumulated stock of the TFR, which is accounted as a book reserve in the balance sheet of the employer, is appreciated according to a CPI-linked formula.

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5. Minimum pension is equivalent to a 1997’s monthly minimum wage updated in accordance with inflation.

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6. The average monthly wage in Poland is PLN 2 869.69 (USD 1 025) before tax and social security contributions. The net wage is around 70% of the gross.

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7. Contribution rates and information on rates of contracting out were obtained from the Department for Work and Pensions’ report entitled Employers’ Pension Provision Survey 2005.


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Glossary

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Most of the definitions below draw on the publication Private Pensions: OECD Classification and Glossary. It can be downloaded at the following address: www.oecd.org/ dataoecd/0/49/38356329.pdf.

Term

Definition

Active member

A pension plan member who is making contributions (and/or on behalf of whom contributions are being made) and is accumulating assets or has accrued assets in the past and is not yet retired.

Annuity

A form of financial contract mostly sold by life insurance companies that guarantees a fixed or variable payment of income benefit (monthly, quarterly, half-yearly, or yearly) for the life of a person (the annuitant) or for a specified period of time. It is different from a life insurance contract which provides income to the beneficiary after the death of the insured. An annuity may be bought through instalments or as a single lump sum. Benefits may start immediately or at a pre-defined time in the future or at a specific age.

Asset allocation

The spread of fund investments among different investment forms.

Asset manager

The individual(s) or entity(ies) endowed with the responsibility to physically invest the pension fund assets. Asset managers may also set out the investment strategy for a pension fund.

Basic state pension

A non-earning related pension paid by the State to individuals with a minimum number of service years.

Beneficiary

An individual who is entitled to a benefit (including the plan member and dependants).

Benefit

Payment made to a pension fund member (or dependants) after retirement.

Book reserved pension plans

Sums entered in the balance sheet of the plan sponsor as reserves or provisions for occupational pension plan benefits. Some assets may be held in separate accounts for the purpose of financing benefits, but are not legally or contractually pension plan assets. Most OECD countries do not allow this method of financing. Those that do usually require these plans to be insured against bankruptcy of the plan sponsor through insolvency guaranty arrangement.

Closed pension funds

Funds that support only pension plans that are limited to certain employees (e.g. those of an employer or group of employers).

Contribution

A payment made to a pension plan by a plan sponsor or a plan member.

Contribution rate

The amount (typically expressed as a percentage of the contribution base) that is needed to be paid into the pension fund.

Deferred member

A pension plan member that no longer contributes to or accrues benefits from the plan but has not yet begun to receive retirement benefits from that plan.

Deferred pension

A pension arrangement in which a portion of an employee’s income is paid out at a date after which that income is actually earned.

Deferred retirement

A situation when an individual decides to retire later and draw the pension benefits later than their normal retirement age.

Defined benefit (DB) occupational pension plans

Occupational plans other than defined contribution plans. DB plans generally can be classified into one of three main types, “traditional”, “mixed” and “hybrid” plans.

“Traditional” DB plan

A DB plan where benefits are linked through a formula to the members' wages or salaries, length of employment, or other factors.


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A DB plan where benefits depend on a rate of return credited to contributions, where this rate of return is either specified in the plan rules, independently of the actual return on any supporting assets (e.g. fixed, indexed to a market benchmark, tied to salary or profit growth, etc.), or is calculated with reference to the actual return of any supporting assets and a minimum return guarantee specified in the plan rules.

“Mixed” DB plan

A DB plan that have two separate DB and DC components but which are treated as part of the same plan.

Defined contribution (DC) occupational pension plans

Occupational pension plans under which the plan sponsor pays fixed contributions and has no legal or constructive obligation to pay further contributions to an ongoing plan in the event of unfavourable plan experience.

Dependant

An individual who is financially dependent on a (passive or active) member of a pension scheme.

Dependency ratio

Typically defined as the ratio of non-active age to those of active age in a given population.

Final average earnings

The fund member’s earnings that are used to calculate the pension benefit in a defined benefit plan; it is typically the earnings of the last few years prior to retirement.

Fund member

An individual who is either an active (working or contributing, and hence actively accumulating assets) or passive (retired, and hence receiving benefits), or deferred (holding deferred benefits) participant in a pension plan.

Funded pension plans

Occupational or personal pension plans that accumulate dedicated assets to cover the plan’s liabilities.

Funding

The act of accumulating assets in order to finance the pension plan.

Funding level

The relative value of a scheme’s assets and liabilities, usually expressed as a percentage figure.

Funding rules

Regulation that requires the maintenance of a certain level of assets in a pension fund in relation to pension plan liabilities.

Gross rate of return

The rate of return of an asset or portfolio over a specified time period, prior to discounting any fees of commissions.

Group pension funds

Multi-employer pension funds that pool the assets of pension plans established for related employers.

Industry pension funds

Funds that pool the assets of pension plans established for unrelated employers who are involved in the same trade or business.

Mandatory contribution

The level of contribution the member (or an entity on behalf of the member) is required to pay according to scheme rules.

Mandatory occupational plans

Participation in these plans is mandatory for employers. Employers are obliged by law to participate in a pension plan. Employers must set up (and make contributions to) occupational pension plans which employees will normally be required to join. Where employers are obliged to offer an occupational pension plan, but the employees' membership is on a voluntary basis, these plans are also considered mandatory.

Mandatory personal plans

These are personal plans that individuals must join or which are eligible to receive mandatory pension contributions. Individuals may be required to make pension contributions to a pension plan of their choice normally within a certain range of choices or to a specific pension plan.

Minimum pension

The minimum level of pension benefits the plan pays out in all circumstances.

Multi-employer pension funds

Funds that pool the assets of pension plans established by various plan sponsors. There are three types of multi-employer pension funds: a) for related employers i.e. companies that are financially connected or owned by a single holding group (group pension funds); b) for unrelated employers who are involved in the same trade or business (industry pension funds); c) for unrelated employers that may be in different trades or businesses (collective pension funds).

Net rate of return

The rate of return of an asset or portfolio over a specified time period, after discounting any fees of commissions.

Normal pension age

Age from which the individual is eligible for pension benefits.


Access to such plans is linked to an employment or professional relationship between the plan member and the entity that establishes the plan (the plan sponsor). Occupational plans may be established by employers or groups thereof (e.g. industry associations) and labour or professional associations, jointly or separately. The plan may be administered directly by the plan sponsor or by an independent entity (a pension fund or a financial institution acting as pension provider). In the latter case, the plan sponsor may still have oversight responsibilities over the operation of the plan.

Open pension funds

Funds that support at least one plan with no restriction on membership.

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Overfunding

The situation when the value of a plan’s assets are more than its liabilities, thereby having an actuarial surplus.

Pension assets

All forms of investment with a value associated to a pension plan.

Pension funds

The pool of assets forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits. The plan/fund members have a legal or beneficial right or some other contractual claim against the assets of the pension fund. Pension funds take the form of either a special purpose entity with legal personality (such as a trust, foundation, or corporate entity) or a legally separated fund without legal personality managed by a dedicated provider (pension fund management company) or other financial institution on behalf of the plan/fund members.

Pension insurance contracts

Insurance contracts that specify pension plans contributions to an insurance undertaking in exchange for which the pension plan benefits will be paid when the members reach a specified retirement age or on earlier exit of members from the plan. Most countries limit the integration of pension plans only into pension funds, as the financial vehicle of the pension plan. Other countries also consider the pension insurance contract as the financial vehicle for pension plans.

Pension plan

A legally binding contract having an explicit retirement objective (or in order to satisfy tax related conditions or contract provisions the benefits cannot be paid at all or without a significant penalty unless the beneficiary is older than a legally defined retirement age). This contract may be part of a broader employment contract, it may be set forth in the plan rules or documents, or it may be required by law. In addition to having an explicit retirement objective, pension plans may offer additional benefits, such as disability, sickness, and survivors’ benefits.

Pension plan sponsor

An institution (e.g. company, industry/ employment association) that designs, negotiates, and normally helps to administer an occupational pension plan for its employees or members.


Access to these plans does not have to be linked to an employment relationship. The plans are established and administered directly by a pension fund or a financial institution acting as pension provider without any intervention of employers. Individuals independently purchase and select material aspects of the arrangements. The employer may nonetheless make contributions to personal pension plans. Some personal plans may have restricted membership.

Private pension funds

A pension fund that is regulated under private sector law.

Private pension plans

A pension plan administered by an institution other than general government. Private pension plans may be administered directly by a private sector employer acting as the plan sponsor, a private pension fund or a private sector provider. Private pension plans may complement or substitute for public pension plans. In some countries, these may include plans for public sector workers.

Projected Benefit Obligation (PBO)

The actuarial present value of vested and non-vested benefits attributed to the plan through the pension benefit formula for service rendered to that date based on employees’ future salary levels.

Protected pension plan

A plan (personal pension plan or occupational defined contribution pension plan) other than an unprotected pension plan. The guarantees or promises may be offered by the pension plan/fund itself or the plan provider (e.g. deferred annuity, guaranteed rate of return).

Public pension funds

Pension funds that are regulated under public sector law.

Public pension plans

Social security and similar statutory programmes administered by the general government (that is central, state, and local governments, as well as other public sector bodies such as social security institutions). Public pension plans have been traditionally PAYG financed, but some OECD countries have partial funding of public pension liabilities or have replaced these plans by private pension plans.

Rate of return

The income earned by holding an asset over a specified period.

Replacement rate

The ratio of an individual’s (or a given population’s) (average) pension in a given time period and the (average) income in a given time period.

Separate accounts

A pension fund that is legally segregated from both the plan sponsor and a financial institution that acts as the manager of the fund on behalf of the plan member.

Single employer pension funds

Funds that pool the assets of pension plans established by a single sponsor.

Trust

A legal scheme, whereby named people (termed trustees) hold property on behalf of other people (termed beneficiaries).

Trustee

A person or a company appointed to carry out the tasks of the trust.

Underfunding

The situation when the value of a plan’s assets are less than its liabilities, thereby having an actuarial deficiency.

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Unfunded pension plans

Plans that are financed directly from contributions from the plan sponsor or provider and/ or the plan participant. Unfunded pension plans are said to be paid on a current disbursement method (also known as the pay as you go, PAYG, method). Unfunded plans may still have associated reserves to cover immediate expenses or smooth contributions within given time periods. Most OECD countries do not allow unfunded private pension plans.

Unprotected pension plan

A plan (personal pension plan or occupational defined contribution pension plan) where the pension plan/fund itself or the pension provider does not offer any investment return or benefit guarantees or promises covering the whole plan fund.

Voluntary contribution

An extra contribution paid in addition to the mandatory contribution a member can pay to the pension fund in order to increase the future pension benefits.

Voluntary occupational pension plans

The establishment of these plans is voluntary for employers (including those in which there is automatic enrolment as part of an employment contract or where the law requires employees to join plans set up on a voluntary basis by their employers). In some countries, employers can, on a voluntary basis, establish occupational plans that provide benefits that replace at least partly those of the social security system. These plans are classified as voluntary, even though employers must continue sponsoring these plans in order to be exempted (at least partly) from social security contributions.

Voluntary personal pension plans

Participation in these plans is voluntary for individuals. By law individuals are not obliged to participate in a pension plan. They are not required to make pension contributions to a pension plan. Voluntary personal plans include those plans that individuals must join if they choose to replace part of their social security benefits with those from personal pension plans.

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OECD PUBLISHING, 2, rue André-Pascal, 75775 PARIS CEDEX 16 PRINTED IN FRANCE (21 2009 01 1 P) ISBN 978-92-64-04438-8 – No. 56431 2009

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This edition presents a special feature on the implications of the financial crisis for private pensions, as well as in-depth, international analyses of private pension arrangements across OECD and selected non-OECD countries. The publication focuses on the role of pension funds, and also provides evidence on public pension reserve funds which complement the financing of social security systems. r


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As the role of private pension systems grows in importance, there is a need to monitor their development and review their performance in an international context, especially following the crisis in the financial markets in 2008. This is the first edition of Private Pensions Outlook, a new OECD publication that guides readers through the changing landscape of retirement income provision.

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t on In addition to essential data on assets, investments, membership, and industry structure L e cbased the latest official statistics, this volume presents a framework for evaluating the trends shaping the pensions industry, based on the role of the private pensions in relation to the public pension system. The Outlook provides comprehensive country profiles, describing private pension arrangements in individual OECD countries. The Outlook can also be used in cross-country comparisons of key facets of retirement systems across OECD and non-OECD countries, using data acquired as part of the OECD Global Pension Statistics project. The performance of private pension systems can be evaluated according to key policy criteria using readily accessible information on the coverage of private pension systems, the adequacy of benefits, solvency, investment performance and administrative efficiency.


The full text of this book is available on line via this link: www.sourceoecd.org/finance/9789264044388 Those with access to all OECD books on line should use this link: www.sourceoecd.org/9789264044388 SourceOECD is the OECD’s online library of books, periodicals and statistical databases. For more information about this award-winning service and free trials ask your librarian, or write to us at [email protected].

www.oecd.org/publishing

ISBN 978-92-64-04438-8 21 2009 01 1 P

-:HSTCQE=UYYX]]:

OECD Private Pensions Outlook 2008

OECD Employment Outlook 2008

OECD Agricultural Outlook: 2003 2008

OECD Information Technology Outlook 2008

OECD Science, Technology and Industry Outlook 2008

Supervising Private Pensions: Institutions And Methods (Private Pensions Series)

OECD Information Technology Outlook

OECD Employment Outlook 2011

oecd Information Technology Outlook

OECD Communications Outlook 2009

Oecd Communications Outlook 2003

Private Pensions and Public Policies

OECD Environmental Outlook to 2030

The OECD Employment Outlook 2011

OECD Information Technology Outlook 2010

OECD Information Technology Outlook 2010

World Energy Outlook 2008

World Oil Outlook 2008

Private Pensions Series No. 07: Reform and Challenges for Private Pensions in Russia

Oecd Employment Outlook 2004 (O E C D Employment Outlook)

OECD-FAO Agricultural Outlook: 2006-2015

OECD Economic Outlook, Volume 2010 Issue 2

African Economic Outlook 2010 (OECD Development Centre)

OECD Employment Outlook: 2003 Edition: Towards More and Better Jobs (OECD Employment Outlook)

OECD-FAO Agricultural Outlook 2010-2019

Oecd Science Technology And Industry Outlook 2004

OECD Communications Outlook 2011 (08 July 2011)

OECD Science, Technology and Industry Outlook 2010

OECD-FAO Agricultural Outlook 2011-2020

OECD-Fao Agricultural Outlook 2005-2014

OECD Communications Outlook 2011 - Preliminary Version

OECD Private Pensions Outlook 2008

OECD Employment Outlook 2008

OECD Agricultural Outlook: 2003 2008

OECD Information Technology Outlook 2008

OECD Science, Technology and Industry Outlook 2008

Supervising Private Pensions: Institutions And Methods (Private Pensions Series)

OECD Information Technology Outlook

OECD Employment Outlook 2011

oecd Information Technology Outlook

OECD Communications Outlook 2009

Oecd Communications Outlook 2003

Private Pensions and Public Policies

OECD Environmental Outlook to 2030

The OECD Employment Outlook 2011

OECD Information Technology Outlook 2010

OECD Information Technology Outlook 2010

World Energy Outlook 2008

World Oil Outlook 2008

Private Pensions Series No. 07: Reform and Challenges for Private Pensions in Russia

Oecd Employment Outlook 2004 (O E C D Employment Outlook)

OECD-FAO Agricultural Outlook: 2006-2015

OECD Economic Outlook, Volume 2010 Issue 2

African Economic Outlook 2010 (OECD Development Centre)

OECD Employment Outlook: 2003 Edition: Towards More and Better Jobs (OECD Employment Outlook)

OECD-FAO Agricultural Outlook 2010-2019

Oecd Science Technology And Industry Outlook 2004

OECD Communications Outlook 2011 (08 July 2011)

OECD Science, Technology and Industry Outlook 2010

OECD-FAO Agricultural Outlook 2011-2020

OECD-Fao Agricultural Outlook 2005-2014

OECD Communications Outlook 2011 - Preliminary Version

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