Included in this issue:
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On May 25, the government released a white paper detailing proposals to reform the United Kingdom (U.K.) pension system and encourage workers to save more for retirement. "Security in Retirement: Towards a New Pension System" is the government's response to the Pensions Commission's recently released series of recommendations for reforming Britain's pension systems. (See the April 2006 issue of International Update.)
The U.K. provides two public pension benefits—a flat-rate basic state pension and an earnings-related second state pension. Workers may opt out of the second state pension and enroll in either an occupational defined benefit pension or a defined contribution pension.
The government's white paper identified the reform's objectives to be personal responsibility, affordability, simplicity, sustainability, and fairness. The proposals include:
The government is soliciting comments on the framework of the NPSS. The reform is expected to be submitted to Parliament for a vote in the fall 2006 session. The entire white paper is available at http://www.dwp.gov.uk/pensionsreform/pdfs/white_paper_complete.pdf.
In response to rising inflation, the government increased all retirement pensions under the public system beginning June 1, 2006. Since the devaluation of the peso in 2002, accumulated inflation has now reached 81 percent. According to Sergio Massa, head of the National Social Security Administration (ANSES), the cost to increase the pensions will be 2.0 billion pesos (US$666 million) in 2006 and 3.5 billion pesos (US$1.2 billion) in 2007. The additional cost will be financed by ANSES without general revenue funds.
The minimum monthly pension was raised by 20.5 percent to 470 pesos (US$154) and all other pensions were increased by 11 percent. (Argentina's official poverty line is 277 pesos or US$90). The maximum pension is now set at 3,441 pesos (US$ 1,127) and the average pension is 602.5 pesos (US$197).
Minimum pensions have been increased 8 times since 2003, by a total of 213 percent. However, all other pensions have lost value because those above 1,000 pesos (US$327) have not been adjusted since 1992, and those between the minimum and 1,000 pesos have been adjusted only once since then. Of the country's 3.3 million pensioners, more than 2 million receive the minimum benefit; about 850,000 pensioners receive between the minimum and 1,000 pesos; and 320,000 receive more than 1,000 pesos.
Workers contributing to the public pay-as-you-go pension system may also direct part of their contribution to an individual account. At retirement, they receive a combination of benefits from the public pension system and their account. (See also the July 2005 issue of International Update).
On May 2, the federal government issued Budget 2006, which includes temporary funding relief for some defined benefit (DB) pension plans. The proposed measures would give sponsors of pension plans that cover employees in sectors regulated by the federal government an additional 5 years to eliminate their unfunded pension liabilities.
Current regulations require certain DB plan sponsors to fund outstanding plan deficits over a 5-year period, but many sponsors are finding this funding requirement financially burdensome. The decline in long-term interest rates in recent years has significantly increased plan liabilities and created serious deficits for many DB plans. Higher life-expectancy estimates will likely increase pension plan liabilities further.
The temporary options outlined in Budget 2006 would allow pension plan sponsors that cover employees in federally regulated sectors to select one of the following:
Relief would be made available only to sponsors that have filed their plan valuation report between 2005 and January 2, 2008 and are current with their solvency funding payments. (Plan valuation reports indicate the funded status of plans and must be filed by federally regulated DB plan administrators at least every 3 years.) Detailed funding relief provisions were published on June 10, as draft regulations for comment. They will be submitted to the Cabinet for consideration later this summer.
The measures contained in Budget 2006 are derived from a May 2005 consultation paper on pension plan funding rules circulated by Canada's Department of Finance. (See also the August 2005 issue of International Update.) They are similar to provisions signed into law in the province of Quebec last year. In that province, more than two-thirds of the 950 registered DB plans reported solvency deficits in 2002.
The Office of the Superintendent of Financial Institutions (OSFI) has statutory jurisdiction over pension plans in federally regulated sectors, such as transportation, financial services, and communications. As of June 2005, 1,283 pension plans were regulated by the OSFI, including 428 DB plans. About 72 percent of those plans were underfunded at that time, and assets in the average DB plan were sufficient to cover only 91 percent of pension obligations—down from 100 percent at the end of 2004. Less than 10 percent of all registered private pension plans in Canada, covering about 15 percent of all plan assets, are regulated at the federal level by the OSFI. Provincial authorities regulate the remaining 90 percent of registered pension plans.
On May 10, the government released a plan to simplify the tax treatment of mandatory individual Superannuation pensions and provide additional incentives for workers to save and extend their working years. Under the proposed plan, the following changes to Superannuation would go into effect on July 1, 2007:
The government is soliciting suggestions and comments on its plan until August 9, 2006. The entire plan is available at http://simplersuper.treasury.gov.au/documents/outline/download/simpler_super.pdf.
On March 24, The United Nations (UN) Commission on Latin America released an assessment of the effectiveness of social protection programs in Latin America and the Caribbean entitled "Shaping the Future of Social Protection: Access, Financing and Solidarity." The report examines health care, pensions, and social programs for the indigent population in the region where 4 out of 10 people live in poverty.
Though pension reforms were enacted in many countries over the past 25 years, the study concludes that pension coverage is still not adequate in the region. A large portion of the working population, including seasonal and informal workers, does not participate in any pension system and thus is not eligible for any pension benefits. Only two countries in the region have noncontributory programs that provide benefits to a large segment of the elderly poor—Brazil's rural pension program and Bolivia's universal pension. In addition, since many workers covered by social security do not contribute on a regular basis, they are underinsured.
According to the UN report, in some countries, the transition costs from a pay-as-you-go system to individual accounts have "generated considerable short-term fiscal pressure." The report concluded that the "mixed" model, which maintains a public pay-as-you-go pension system supplemented by individual accounts has lower transition costs and allows for some redistribution to lower earners. Most of the countries that have replaced their pay-as-you-go systems with individual accounts provide a guaranteed minimum benefit targeted at lower earners but not workers with a limited number of contributions.
The study recommends:
On April 27, Principles for Responsible Investment (PRI) was endorsed by leading financial institutions from 16 countries with more than $2 trillion in assets under management. The principles were developed to encourage institutional investors to integrate environmental, social, and governance (ESG) best practices into their investment decisionmaking and ownership practices. The initiative, sponsored by the United Nations, is the result of a year-long collaboration of more than 20 pension funds, foundations and special government funds, supported by international experts from the investment industry, government, and academia.
The six principles recommend voluntary actions that institutional investors and their asset managers may take to integrate ESG best practices when managing pension fund and other assets. Signatories to the global PRI initiative pledged to:
The full text of the Principles for Responsible Investment, information about the global initiative, and a list of PRI supporters can be found at http://www.unpri.org.