Risk vs. Riches - can accounting standards change pension plans?

HOT OFF the press, the International Accounting Standards Board's newly revised IAS 19 Employee Benefits has significant implications for those pension schemes that have recently graced the press due to widespread public sector strikes.

A number of changes have been made to render pension schemes more transparent and comparable: chief among these is the requirement for the scheme's asset returns to be measured as if they were corporate bond yields, otherwise known as the AA-discount rate. These assets offer lower returns than high-risk investments such as equities but are considered more secure.

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Pensioners to get carbon tax compensation

Pensioners will be given an up-front increase to their payments as part of the Federal Government's carbon tax package.

The Government is understood to have settled on a carbon price starting at $23 per tonne, but a key focus of the plan will be household compensation.

It is expected to announce that nearly two million pensioner households will be overcompensated for the effects of the carbon tax.

The ABC understands that will leave them about $210 per year better off on average.

Pensioners will be given an up-front increase to their payments as part of the Federal Government's carbon tax package.

The Government is understood to have settled on a carbon price starting at $23 per tonne, but a key focus of the plan will be household compensation.

It is expected to announce that nearly two million pensioner households will be overcompensated for the effects of the carbon tax.

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The Economic Implications of Aging Societies: The Costs of Living Happily Ever After

The world is getting older and no one knows exactly what life will be like in tomorrow's older societies.

But we do know that age dependency ratios--the ratio of retirees to workers--will be much higher than we see today.

The combined effects of fewer workers, more retirees and longer retirement periods threaten not only the sustainability of pension systems but also the broader economic prospects of many developed countries.

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Pensions chief demands reform of accounting

Campaign needed to reform accounting for pension funds says NAPF chairman

The chairman of the National Association of Pension Funds (NAPF) has described the current accounting for pensions as "unsatisfactory" and said he wants to see the policy reformed.

Writing in a letter for today's Financial Times Lindsay Tomlinson said: "We still believe that continuously marking to market funds, which should be in existence for our lifetimes, is not the best approach. That is why we wish to stir up a campaign to change pension accounting."
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Tomlinson made clear he did not blame accounting alone for the difficulties faced by defined benefit schemes. He said pension funds needed government to address the fiscal deficit by issuing long-dated index-linked and conventional gilts with decent long-terms yields would give them the securities they to invest in.

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Pensions: Out of pocket

PENSIONS are another casualty of the recent global economic turmoil. Public-pension schemes are under pressure as output falls and unemployment rises. Private funds in OECD countries, meanwhile, lost $5.4 trillion last year, or 23% of their value. Countries differ in the importance of private pensions for the retired. In five OECD countries, private capital makes up over 40% of retirement income. This includes all private savings (mainly pensions) and excludes income from work, which accounts for about a fifth of the income of people aged over 65.

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The red ink of a greyer future

The next decade was always going to be difficult. As retirement beckons for the middle-aged “bulge” in many national populations, governments have been facing an expensive demographic transformation. Now, the economic crisis makes the outlook only worse.

Once the recession passes, countries will need to work on closing their gaping fiscal deficits without triggering further collapses in output. They will also need to service bloated national debts. The International Monetary Fund estimates that among the Group of 20 nations whose leaders meet in London this week, the industrialised members will have increased their national debts by an average equivalent to nearly 25 per cent of gross domestic product between 2007 and 2014.

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Accounting regulations modified for pension funds

A new plan to align Brazilian pension fund administrators’ (EFPCs) accounting rules to international standards was approved on January 26, 2009. The new regulation, which comes into effect in January 2010, aims to boost transparency, a key concern given the recent growth in Brazil’s pension sector.
Key details:

The new regulation establishes procedures for EFPCs as follows:

* Balance sheets must be kept separate for funds’ two different business lines: pension administration and health insurance.
* Plans must share information accurately and simply with both fund members and third parties, particularly explaining benefits plans offered by the fund and their historic financial results.
* The amount EFPCs charge to create new benefits plans can now be amortized in the 60 months following the approval of the Managing Council of Complementary Social Security.

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Social protection in the European Union

This "Statistics in Focus" describes and analyses the expenditure and the receipts of Social Protection in different European countries. In 2004, social protection expenditure accounted for 27.3% of GDP in EU 25. This average masks high disparities between countries. Expenditure on old-age and survivors' benefits account for a large part of social benefits in most countries. Different countries have markedly different systems for financing social protection.

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Savings gap even bigger than the pay gap

Women’s savings are worth 33% less than men’s, according to new research from the Fawcett Society. This gender savings gap is even bigger than the much better documented 17% gender pay gap.

Fawcett’s research uncovered a worrying picture: women’s saving is much more likely to be disrupted than men’s by life events such as childbirth or divorce.

Key findings

* Young women save at relatively equal levels to young men.
* Divorce is particularly catastrophic for women’s savings. Our research showed the now widespread idea that women now have the advantage in divorce to be a myth. In fact, men’s saving levels recover after divorce, women’s don’t.
* Mothers are less likely to be saving for themselves than fathers, particularly in the early years of a child’s life

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Pensions slashed in OECD states

The generosity of state pension systems has been slashed in many advanced countries, says the Organisation for Economic Co-operation and Development.

An OECD report says the value of compulsory pension systems will drop by an average of 22% in 16 member states.

The average pension promised has improved in only two of those countries - the UK and Hungary.

The study says pension changes that started in the 1990s mean that people will have to save more for retirement.

Raising retirement ages has been the main way of reducing pension promises.

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People will need to save more as reforms cut pension promises

People in OECD countries will have to save more for their retirement as a result of the major pensions reforms carried out in recent years, according to a new OECD report. The average pension promise in 16 OECD countries studied was cut by 22%. For women, the reduction was 25%.

Pensions at a Glance 2007 notes that in only two countries, Hungary and the United Kingdom, did pension promises increase on average. In France, Germany, Italy, Japan and Sweden, future benefits will be cut by between 15 and 25% and in Mexico and Portugal by over 30% from what people would have been entitled to before the reforms.

The impact on workers varies widely across the OECD. Several countries moved towards greater targeting of benefits on poorer pensioners, notably Mexico, Portugal and the United Kingdom. Austria, France, Germany and Sweden also protected low earners.

Reforms have worked in the opposite direction in other countries. Poland and the Slovak Republic, for example, have tightened the link between pension entitlements and earnings when working, without putting in place any new social safety nets for low earners. This may increase the poverty risk for retirees who have not been covered by the system over their full career, the report finds.

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Ask the economists: The pensions challenge - financing retirement

See below the questions and answers from this online debate that took place on Thursday 5 April with OECD economists Monika Queisser, Ed Whitehouse, Fiona Stewart and Pablo Antolin.

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OECD to study pension costs and returns

The Organisation for Economic Cooperation and Development is to commission two reports covering pension funds’ costs and returns.

It has tendered for studies into schemes’ investment management costs as well as a comparison on how investment returns differ across the world.

The first report is to assess private pension funds' investment management and total costs while the second will compare initial risk-adjusted measures of investment returns.

The studies are planned as an integral part of a general study coordinated by the OECD and the World Bank.

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2007 Intergenerational Report Highlights the Need for Long-Term Reform Planning

Business today welcomed the release of the federal government’s 2007 Intergenerational Report, saying the report showed the importance of strategic policy action in tackling the challenges of an ageing population.

BCA Chief Executive, Katie Lahey, said the report’s finding that proactive workplace participation policies had led to increased workforce numbers was particularly significant, given this was the biggest barrier to reducing the projected fiscal deficit.

But at the same time, the issue of the ageing population required constant attention, with a number of important policies still to be put in place.

“Australia has a unique opportunity to set its sights higher to depart from past economic cycles that have seen the nation’s fortunes decline because of a failure to manage prosperity effectively,” Ms Lahey said.

“To sustain growth in the future, governments today need to shift their thinking to better manage long-term, supply-side challenges. These challenges are intergenerational. To deal with them, governments must depart from ‘just-in-time’ fixes and adopt a mindset that involves more strategic decision making.

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Ask the economists: The pensions challenge - financing retirement

See below the questions and answers from this online debate with OECD economists Monika Queisser, Ed Whitehouse, Fiona Stewart and Pablo Antolin.

Q. Among all of the market failure arguments for government intervention in the area of pension provision, the most convincing one in my mind is the dearth of annuities available through private providers. Without mandates, the problems of adverse selection along with preference for flexibility among most consumers are enough to drive this product to extinction. Add the supply side factor of a lack of long term instruments for hedging the risk that life expectancy will continue to increase to unprecedented levels and there seems little hope for the market to satisfy those who value longevity insurance. Thus, the mandates in DC schemes that aim ensure that the public policy objective of consumption smoothing is not compromised at the end of the game when the retirement savings of a lifetime are gambled, spent or lost long before the end of consumption.

Accepting that a mandate makes sense, at least to a minimum level, what is the rationale for private provision? Insurance companies still don’t have appropriate hedging instruments.

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Prospects for the Future

Wealth Generation in the Years Ahead

How will wealth be generated in the years ahead? Eamonn Kelly, CEO of Global Business Network, points to four potential areas that, while very uncertain in their timing and scale, are well worth monitoring. This piece is excepted permission from Barclays Wealth Insights Volume 1: The Future of Wealth, 2006, in cooperation with the Economist Intelligence Unit.

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The Importance of Governance Investment

Pension funds around the world are striving to improve their efficiency across all aspects of their operation – administration, services to members and investments. The establishment of effective decision making processes is an essential part of the search for improved efficiency. In this paper we look at the steps, which can be taken to improve investment efficiency in particular looking at:

§ asset allocation

§ manager structure and

§ the risk/reward trade off.

Various studies have shown that the way pension funds arrive at and implement investment decisions could have a significant cost. In their recent book "The New Excellence Paradigm", Ambachtsheer and Ezra estimate that performance shortfall – the gap between policy and implementation – was costing pension funds worldwide a colossal $60 billion a year.

Our own studies suggest that this shortfall arises from organisational inefficiencies and the way in which decisions are taken. Often there is a mismatch between a fund's objectives and the strategy it adopts which I then compounded by the implementation and monitoring of that strategy.

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Pension Reform, Our response to the White Paper on UK pension reform

A clearer picture emerges

After more than a year of debate, the latest Pension Reform White Paper clarifies a number of uncertainties that have been of concern to insurers but leaves several questions unanswered. It suggests a number of opportunities for insurers to explore, while raising critical strategic issues.

Overall level of savings will increase
The latest Pensions White Paper largely endorses the central recommendations of the Pensions Commission. Apart from significant changes in the state pension system, it proposes creation of Personal Accounts into which most employees in all companies will be auto-enrolled, unless that company seeks exemption and auto-enrols employees in an existing pension scheme.

As a result of the introduction of Personal Accounts, it is expected that the number of private sector firms contributing to employees’ pensions will rise from approximately 132,000 to close to 1 million. Deloitte estimates that the number of private sector employees in workplace pension schemes could grow by around 50% from 5-6m to 7-8m with approximately 4-5 million joining Personal Accounts. The precise mix will depend upon the number of existing schemes that either remain open to auto-enrolment or close. The additional savings of £8bn will similarly be spread between workplace pensions and Personal Accounts. Some of the £8bn is expected to be a recycling of existing savings from ISAs and other sources.

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Pension costs prompt employers to cut back benefit

The golden years for retiring workers are looking less golden with each passing year.

A survey by Mercer Human Resource Consulting finds that 18% of 200 Canadian employers surveyed have reduced non-pension benefits to retired employees in the past three years and nearly 25% plan similar steps in the next three years.

The costs of life, medical and dental benefits are rising too quickly to sustain existing levels, especially for future retirees, employers say.

Non-pension benefits differ from pension benefits. Employers have no legal obligation to maintain them. However, new accounting standards, enforced since 2000, do require companies to include such benefits as a liability in financial statements.

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CBI says pensions could shut 20% of companies

Proposed new rules and guidance on how quickly companies should shed their pension fund deficits could put one in five UK companies out of business, the CBI employers' organisation warned yesterday.

The Pensions Regulator has produced for consultation new rules intended to allow trustees and employers to agree how to eliminate pension fund deficits estimated at nearly £70bn for FTSE 100 companies alone.

The regulator is looking for certain schemes to eliminate deficits over a decade and has set out various accounting "trigger points" that should lead trustees to insist that deficits are addressed.

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