Private pension systems and policy issues

397 Pages·2000·2.242 MB·English

by  OECD

«
Private Pensions Series
Private Pension
Systems and
Policy Issues
INSURANCE AND PENSIONS
No. 1
 OECD, 2000.
 Software: 1987-1996, Acrobat is a trademark of ADOBE.
All rights reserved. OECD grants you the right to use one copy of this Program for your personal use only.
Unauthorised reproduction, lending, hiring, transmission or distribution of any data or software is prohibited.
You must treat the Program and associated materials and any elements thereof like any other copyrighted
material.
All requests should be made to:
Head of Publications Service,
OECD Publications Service,
2, rue Andre´-Pascal, 75775 Paris
Cedex 16, France.
Private Pensions Series
Private Pension Systems
and Policy Issues
No. 1
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
Histo_gen_a_16x23.fm Page 2 Thursday, March 9, 2000 7:41 AM
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960,
and which came into force on 30th September 1961, the Organisation for Economic
Co-operation and Development (OECD) shall promote policies designed:
– to achieve the highest sustainable economic growth and employment and a
rising standard of living in Member countries, while maintaining financial
stability, and thus to contribute to the development of the world economy;
– to contribute to sound economic expansion in Member as well as non-member
countries in the process of economic development; and
– to contribute to the expansion of world trade on a multilateral, non-
discriminatory basis in accordance with international obligations.
The original Member countries of the OECD are Austria, Belgium, Canada,
Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United
Kingdom and the United States. The following countries became Members
subsequently through accession at the dates indicated hereafter: Japan
(28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New
Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic
(21stDecember1995), Hungary (7th May 1996), Poland (22ndNovember1996)
and Korea (12th December 1996). The Commission of the European Communities
takes part in the work of the OECD (Article 13 of the OECD Convention).
© OECD 2000
Permission to reproduce a portion of this work for non-commercial purposes or classroom
use should be obtained through the Centre français d’exploitation du droit de copie (CFC),
20, rue des Grands-Augustins, 75006 Paris, France, Tel. [phone], Fax [phone],
for every country except the United States. In the United States permission should
beobtained through the Copyright Clearance Center, Customer Service, [phone],
222Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: http://www.copyright.com/. All
other applications for permission to reproduce or translate all or part of this book should be
made to OECD Publications, 2, rue André-Pascal, 75775 Paris Cedex 16, France.
FOREWORD
In June 1999 the Working Party on Private Pensions was created as a
specialised discussion group of the OECD’s Insurance Committee. The group’s
main activities consist of surveying and monitoring private pension systems in
OECD member countries, analysing related policy and technical issues, and
formulating appropriate policy recommendations.
This new series will consist of documents submitted and discussed in the
meetings of the Working Party and, from time to time, other meetings organised
by the OECD.
The first aim of the series is to provide a detailed description of the private
pension arrangements of OECD Member countries as well as of non-Member
economies. The second aim is to examine critical policy issues that affect
private pension plans.
The present volume contains three parts: Part I comprises a description of
private pensions systems in selected OECD countries (Hungary, Mexico, United
Kingdom and United States); Part II contains an analysis of institutional
investors in Latin America and Part III includes a series of analytical papers on
various private pensions issues (actuarial issues, solvency issues and bankruptcy
risks).
This publication has been conducted by the Private Pensions and Insurance Unit
of the Directorate for Financial, Fiscal and Enterprise Affairs. It was prepared
by Juan Yermo, with the technical co-operation of Edward Smiley.
The views expressed here are the sole responsibility of the authors and do not
necessarily reflect those of the OECD or its member governments. This book is
published on the responsibility of the Secretary-General of the OECD.
3

TABLE OF CONTENTS
The Pensions System in the United Kingdom
by The Association of British Insurers (ABI).....................................................9
General.............................................................................................................9
First pillar.......................................................................................................10
Second pillar...................................................................................................10
Third pillar......................................................................................................11
Suppliers of pension schemes.........................................................................13
Description of the first pillar..........................................................................13
Description of the second pillar......................................................................16
Description of the third pillar.........................................................................18
Future developments......................................................................................20
Recent UK legislation affecting pensions.......................................................20
Supervision.....................................................................................................20
Minimum funding requirement......................................................................20
Investment of scheme assets...........................................................................21
Compensation scheme....................................................................................21
Other provisions.............................................................................................21
Welfare Reform and Pensions Act 1999........................................................21
Overview of the United States Private Pension System
by Richard Hinz.................................................................................................23
Sources of retirement income.........................................................................23
Characteristics of the private pension system.................................................24
Development of the private pension system...................................................26
Reasons for lack of growth in pension coverage............................................27
Shift from defined benefit to defined contribution plans................................27
Growth in pension plan sponsorship...............................................................28
Non-covered workers.....................................................................................29
Financing and payment of pension benefits...................................................30
Pension law and regulations...........................................................................33
Tax treatment of private pensions...................................................................34
Fiduciary provisions.......................................................................................36
Summary.........................................................................................................40
5
An Overview of the New Pension System in Mexico
by Jaime A. Villaseñor-Zertuche.......................................................................43
Executive summary........................................................................................43
The Mexican Social Security system..............................................................44
The old pension system..................................................................................45
The IMSS reform in 1997...............................................................................51
Relevant statistics of the recently reformed system.......................................57
Investment guidelines.....................................................................................59
Fund valuation................................................................................................60
Risk analysis in the pension system................................................................62
Fund performance...........................................................................................66
The Three Pillars and other pension schemes.................................................70
Integration of “reforming countries”..............................................................70
Appendix A Abbreviations used in the Mexican pension system.................72
Appendix B Collection process....................................................................74
Appendix C Ownership of fund management companies by nationality......75
Appendix D SIEFORES performance report................................................78
Case Study of the Three-Pillar Pension System in Hungary
by Tibor Parniczky............................................................................................87
Executive summary........................................................................................87
Brief overview of the pension reform.............................................................91
Voluntary private pension system (third pillar)..............................................95
The new mandatory funded private pension system (second pillar)..............98
Guarantees....................................................................................................103
Supervisory framework................................................................................105
Mandatory private pension funds in practice................................................106
Annex 1 Regulations governing pension funds investment in Hungary....113
Annex 2 Administrative, record-keeping and reporting obligations
of pension funds...........................................................................121
Institutional Investors in Latin America: Recent Trends
and Regulatory Challenges
by Juan Yermo.................................................................................................125
Overview of institutional investors...............................................................127
The development of the regulatory and supervisory framework..................130
Pension funds................................................................................................131
Insurance companies.....................................................................................154
Investment companies..................................................................................170
Main regulatory and supervisory challenges................................................177
The role of institutional investors as holders of financial assets..................205
Conclusion....................................................................................................214
6
Private Pension Systems
by Jean-Jacques Gollier...................................................................................223
Introduction..................................................................................................223
General features of a private pension system...............................................224
Definition of private pension systems.......................................................224
Why private pension schemes?.................................................................225
Typology of private pension systems. Design of plans.............................228
Financing mechanisms of private pension systems..................................231
Regulations applicable to private pension funds.......................................237
The role of financial institutions...............................................................239
Private pension funds in the countries studied.............................................240
Structural options for the first pillar..........................................................240
Interaction between the three pillars.........................................................247
Second-pillar schemes and control rules in the countries studied................253
Statistics on funding provisions................................................................253
The relative proportion of insurers in private pension schemes................258
Applicable supervisory standards.............................................................267
Technical standards...................................................................................270
Tax standards............................................................................................273
Accounting standards................................................................................277
Selected information about the third pillar................................................278
Some specific points.....................................................................................288
The switch from defined benefit to defined contribution schemes...........288
Commutation of benefits. Property aspects.............................................293
Methods of adjustment..............................................................................299
A dynamic approach to private pension management..................................301
General Considerations.............................................................................301
Prudential standards and asset liability management................................307
Current issues -- Conclusions.......................................................................324
Review of current issues...........................................................................324
Synthesis of main trends...........................................................................328
By way of conclusion................................................................................331
Note No. 1 The meaning of the parameter B ...........................................333
1
Note No. 2 Use of regression lines............................................................334
The Containment of Bankruptcy Risk in Private Pension Plans
by James E. Pesando.......................................................................................337
Introduction..................................................................................................337
Regulatory responses to bankruptcy risk:
Overview and economic rationale................................................................338
International experience...............................................................................340
United States.............................................................................................340
Canada.......................................................................................................344
7
United Kingdom........................................................................................346
Germany....................................................................................................352
Japan.........................................................................................................355
Other countries..........................................................................................358
Policy recommendations...............................................................................359
Overview...................................................................................................359
Minimum funding (Advance funding) requirements................................361
Plan termination insurance........................................................................362
Actuarial Issues Related to the Regulation of Pension Schemes
and Life Insurance
by Phillip Booth...............................................................................................371
The purposes of actuarial, accounting and regulatory valuations.................371
Life insurance............................................................................................371
Pensions....................................................................................................372
Actuarial frameworks for assessing solvency...............................................375
Life insurance companies..........................................................................375
Pension Funds...........................................................................................382
Valuation of liabilities: Bases and key assumptions.................................387
Safety margins/Capital adequacy..............................................................390
8