Longevity Risk: Public and Private Sector Solutions and

Longevity Risk: Public and Private Sector Solutions and

Longevity Risk: Public and Private Sector Solutions and the Governments Role Ross Jones Deputy Chairman, Australian Prudential Regulation Authority September 2010 1 The impact of the financial crisis Despite substantial recovery funding levels for pension funds at the end of 2009 was significantly lower than two years before. Funding levels for pension funds of OECD members had median funding deficit (gap between assets and

liabilities) at 26 per cent at end of 2009. Decreasing band yields (which are used to calculate liabilities) in many countries meant that liabilities went up, offsetting the equities recovery. 2 The impact of the financial crisis Pension funds nominal investment rate of return in selected OECD countries, 2008-2009 (%). Source: OECD Global Pension Statistics and OECD estimates. 3 Policy responses to the crisis

(OECD and IOPS) Some governments are being pressured to retreat from private pensions but public PAYG systems have sustainability issues due to aging population and now higher levels of unemployment. Emphasis on long term nature. There has been a tendency in a number of countries to allow greater flexibility in access during crisis but this risks creating longer term deficits. Safety net should address issues of insufficient income at retirement e.g. top ups; for DC accounts but incentives may be needed to deep people working and to increase non compulsory contributions. 4 Policy responses to the crisis

(OECD and IOPS) Improve the design of DC plans including default e.g. flexibility in timing of annuity purchase, guarantees for DC (but who pays). Improved pension fund governance and risk management. Improved disclosure, communication and financial education. Funding and solvency rules for DB plans should be counter-cyclical with greater flexibility in funding requirements. 5 Three problems of longevity risk Funding of DB plans

Adequacy of retirement savings Lack of financial instruments for hedging 6 Funding of DB Plans extent of the problem depends on the structure of retirement system Defined Benefit Public Private Austria, Belgium, Canada, Czech

Republic, Finland France, Greece, Hungary, Japan, Korea, Luxembourg, Portugal, Spain, Switzerland, Turkey, UK, US Iceland, Netherlands, Switzerland Defined Contribution, or Germany, Italy, Norway, Australia, Denmark, Notional DC Poland, Slovak Hungary, Mexico, Republic, Sweden Norway, Poland, Slovak

Republic, Sweden Source: OECD Pensions at a Glance 2009 7 Australian system has reduced reliance on DB in the last decade Source: APRA Data, Total Superannuation Assets includes APRA-regulated funds and self-managed superannuation funds 8 The GFC has highlighted investment risk in DB funds and created severe underfunding problems

9 Source: Yermo and Severinson, OECD, July 2010 OECD Policy Recommendations Need to strengthen regulation of solvency issues Focus on counter-cyclical funding allowing over-funding in good economic times Limiting contribution holidays and sponsor access to surplus Stability of contribution patterns is important Regulators should incorporate flexibility into funding rules to reflect the overall volatility of funding valuations Source: Yermo and Severinson, OECD, July 2010

10 APRAs focus Supervisory attention on recovery plans for underfunded DB plans 11 Longevity Risk and DB under-funding Under-funding problems are larger than currently measured Netspar research suggests fully-funded DB plans need a surplus of 4-5% to cover longevity risk over five year period (De Waegenaere, Melenberg, Stevens, 2010) More countries moving from DB to Notional DC frameworks (Netherlands)

[Role of Government Insurers (PBGC in the US, PPF in UK) topic to be covered by Martin Clarke] 12 Three problems of longevity risk Funding of DB plans Adequacy of retirement savings Lack of financial instruments for hedging 13 Australian context Three pillar retirement framework Social security safety-net Universal superannuation Tax-advantaged voluntary additional savings

Mandatory employer superannuation contributions introduced in 1992 3% in 1992, 9% in 2002 Current proposal 12% Average balance of 55-64 year old is only $72,000 (ABS,2009) 14 Relative size of retirement savings Australia has large assets compared to other countries 15 Source: OECD Global Pension Statistics Australian Treasury projections of adequacy

suggest the system will provide for retirement Source: Treasury Projections from the Henry Tax Review Australias Future Tax System The retirement income system: report on strategic issues, May 2009 16 However projections of adequacy vary widely based on assumptions Source: NATSEM microsimulation results from Keegan, Harding, Kelly (2010) 17 What Retirement Products are used? Lump sum only

Lump sum or PW Lump sum, PW or annuity Hong Kong Indonesi a

Australia Luxembou Germany Argentina China Canada India Brazil Luxembou rg (SEPCAV)

Malaysi a Phillippin es Lump sum or annuity Partial PW or lump sum annuity or annuity rg

Spain Denmark Greece Belgium Japan Czech Republic Hungary (voluntary funds) Switzerla nd (voluntary funds)

Source: OECD * indicates mandatory funds USA Ireland Annuity only Austria Belgium* Colombia Italy Chile

Portugal Costa Rica Germany* South Africa Mexico UK Norway

Netherland s Peru Croatia Hungary* Poland Russia Sweden Switzerland* Uruguay 18

OECD policy recommendations on adequacy and longevity risk Need to save for a long time Contribution rates and length of contribution period are primary importance in determining adequacy Increase retirement age as population ages If retirement phase focuses on annuities Life cycle investing is optimal If retirement phase focuses on gradual/prescribed withdrawals Maintaining a high allocation to equities throughout retirement can provide higher retirement income 19 Australian context Most lump sums are small (less than $60,000) reflecting the

immature superannuation system Account-based pensions cover 88% of retirement products Retirees still exposed to investment and longevity risk Government pension is main protection against longevity risk Annuity products not active INGs Money for Life, AXA North Guarantee, Macquarie Lifetime Income Guarantee Barrier to pooled solutions: DC mentality in Australia, bequest motives, expensive products 20 Three problems of longevity risk Funding of DB plans Adequacy of retirement savings Lack of financial instruments for hedging

21 Private Solutions Many papers at this conference are exploring this problem Private market solutions appear to be the best approach Not an immediate concern in Australia due to DC focus 22 OECD Policy Recommendations Government can help by providing updated mortality tables that incorporates longevity risk

Governments can play a role by developing a longevity index that can be used for pricing Governments can issue inflation-indexed long dated bonds to facilitate asset liability management [highlight APRAs engagement with UNSW researchers?] 23 Summary Public solutions to longevity risk problems Reforming retirement industry structure Regulations that encourage product innovation but preserve safety of retirement assets Investment in research Private solutions to longevity risk problems Innovative products to hedge risks

Investment in research 24

Recently Viewed Presentations

  • The Outsiders - Monroe Township School District

    The Outsiders - Monroe Township School District

    Vocabulary for . Chapters 1- 2. The Outsiders. Rumble. To engage in a gang fight. Hesitation. The act of stopping or pausing because of uncertainty or indecision. Noun. Verb. Rebellious. Tending to fight against. Disobeying authority. Reputation.
  • Biochemistry - ScienceGeek.net

    Biochemistry - ScienceGeek.net

    All single bonds in the carbon chain. Solids at room temperature. Mono-unsaturated fats. One double bond in the carbon chain, the remainder single. Liquids at room temperature. Polyunsaturated fats. Two or more double bonds in the carbon chain. Liquids at...
  • Chapter 14 & 15

    Chapter 14 & 15

    Foramen Magnum. Superior and ... Etiology - Any direct impact to the upper or lower jaw or direct trauma can potentially fracture the teeth. 3 types of fractures can occur to the teeth: an uncomplicated crown fracture (no bleeding, no...
  • Poetry is nearer to vital truth than history. -- Plato

    Poetry is nearer to vital truth than history. -- Plato

    Near Rhyme. Sam Am Ham. Seen/been. Internal rhyme-an individual line of poetry contains one or more words that rhyme. Use for emphasis or additional unity. Rhyme Scheme - the pattern of rhyming words within a given stanza or poem; identified...
  • What is remote sensing? Remote sensing is defined

    What is remote sensing? Remote sensing is defined

    Major interest for the transfer of radiant energy is the value of absorption coefficient (spectroscopy). Total energy of a molecule consists of rotation, vibration, electronic, and translation. E=Erot+Evib+Eelc+Etrans Absorption or emmision occurs when molecule changes from energy level E1 to...
  • 1 Grade Open House 2017-2018 Welcome parents! st

    1 Grade Open House 2017-2018 Welcome parents! st

    1st Grade Open House 2017-2018 Welcome parents! Mrs. Cheaves' 1st grade class Our Team Jeanne Broadhurst Abby Cheaves Mandy Dixon Marilyn Brown Sarah Heller Kristen Kraemer Alana Owens Rene' Perry Early Intervention Program (EIP) & English Speakers of Other Languages...
  • State of Grad Ed Fall 2019 Julie Masterson,

    State of Grad Ed Fall 2019 Julie Masterson,

    67% of our master's degrees have accelerated tracks. Recruit more students into those paths. Develop accelerated tracks in remaining programs, as feasible. Completion rate is astonishing. CULTIVATE OUR OWN! MSU Undergrads Become MSU Grad Students. EVERYONE in this room plays...
  • What Do I already know about Prehistoric Cultures?

    What Do I already know about Prehistoric Cultures?

    . . . that is why the Preclassic Stage is defined by the presence of agriculture, orany other subsistence economy of comparable effectiveness, and by the successful integration of such an economy into well-established, sedentary village life.