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PhD THESIS ABSTRACT

The focus of this dissertation is on a pension reform approach applicable to various schemes including PAYGO plans in distress. The thesis is integrated in pension related areas carefully chosen and thoroughly revisited. As a theoretical framework, “Life Cycle Hypothesis” best captures saving patterns observed during active years to maintain consumption in retirement. Institutionalizing this behaviour forms the basis for pension schemes in a non-paternalistic manner. Historically, the existence of rudimentary pensions dates back to ancient civilizations. Developing over millennia, the first national social welfare scheme was adopted in Germany under Otto von Bismarck. This important piece of legislation crossed boundaries of place and time, spreading throughout the world as PAYGO pension schemes. In particular, it inspired the U.S. social security program, a scheme unparalleled in scale.

Economical, socio-cultural and demographical changes have since challenged PAYGO schemes globally, to which countries have responded differently. In an initial step, these real-world examples of reform efforts are analyzed and briefly outlined. Additionally, we comb through the existing body of knowledge on pension reform for best practices and the ideal model. Our contribution is two-faceted with a focus on the reform process as well as ensuing management issues. Contrary to the “narrow” definition of reforms used among researchers and policymakers, our proposal represents a holistic yet simple approach to capture any scheme’s current state and identify future steps in its reform process. Based on an axial representation of pension plans, we acknowledge the crucial role of a funding component and evaluate management styles applied to funded schemes. This roadmap approach ultimately culminates in identifying a publicly managed reserve fund as the superior pension arrangement. Since the full potential of this pension delivery vehicle is only realized through ongoing management, the thesis is concluded with a glimpse into governance and financial engineering matters as success drivers of modern pension fund management.

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ON PENSION REFORM & OUR APPROACH TAKEN

……“DB Plans Nationwide in Dire Straits”……“Retirement Assets Wiped Out in Market Meltdown”……“Pensions – Confusion and Uncertainty for Workers”……“ABC Airline Files for Chapter 11”……“Three in Four Feel Retirement Dreams Out of Reach”……”Pension Time Bomb in Developed Nations”……“DC Accounts in Peril”……

Even though these headlines are fictitious, you have probably seen similar ones in the media. Without doubt, the objective of providing the lifestyle maintenance function is in the forefront of political debates and seems to matter. Throughout history, pensions were offered in ancient Greece, in the height of the Roman Empire, during Medieval times, pre- and post Industrial Revolution, reaching their zenith at the turn of the century in Germany and the United States. Be it through stockpiling agricultural goods, offering land, charity, affiliation to guilds or fraternal organizations (forerunners of trade unions), these were some of the collective responses to this common problem. Pooling health and retirement risk has persisted to this day and serves as the underlying principal in any social welfare program.

Today, different types of pension arrangements are established at the national, occupational or private level. Under the umbrella of this industry, transactions, savings and expenditure figures have grown to prodigious levels, only comprehensible in GDP scales. These arrangements are not negligible on an individual basis either as they provide a fair share of income in retirement. Although this desire for security is a primordial human trait and methods of securing it date back to early civil societies (as we know of), remarkably enough we are still confronted with very basic – yet crucial – questions. Do I get a pension when I retire? Will pension schemes still be around or go extinct? How much will that pension payment be? Will my benefits be worth anything in times of high inflation? And so on…A plethora of reform activities supported by findings of academia and pressed ahead by an armada of consultants are working towards answering these questions. At its core, our efforts are aimed at reviewing and evaluating reform measures transparently and creating a platform to initiate and lead the transition process.

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PARS PRO 
TOTO: 
On
 Pension Reform in Canada Re CPP
 Enhancement

“The 
CPP, 
which 
is 
designed 
to 
replace 
about 
25%
 of 
your 
average 
pre‐retirement
 employment
 earnings 
up 
to 
a
maximum 
amount
 [$51,100 
as 
of
 2013],

is 
one 
part 
of 
your 
retirement 
plan”
 Service
 Canada,
 CPP 
Factsheet

The
 Political 
Pension 
Debate 
Cycle



Given
 CPP’s
 clearly
 defined
 mandate,
 it
 is
 indeed
 remarkable
 to
 observe
 the
 media
 buzz
 surrounding
 the
 recent
 meeting
 of
 federal,
 provincial
 and
 territorial
 finance
 ministers
 at
 Meech
Lake: “….CPP
 reform
 put
 back
 on
 the
 agenda”,
 “….Way
 Forward”
 and
 “….Praise
 for
 developments
 as
 an
 important
 step
 with
 a
 future
 report
 that
 will
 move
 the
 yardstick
 considerably”

. Such
 headlines
 were
 visibly
 spotted
 in
 every
 major
 media,
 decidedly
 forming
 public
 opinion
 on
 this
 issue.
 What
 makes
 it
 that
 much
 more
 astonishing
 is
 the
 stance
 the
 Finance
 Minister
 himself
 took
 on
 the
 enhancement
 efforts
 by
 stating
 beforehand: “….plans
 are
 expected
 to
 be
 placed
 on
 the
 table
 for
 discussion
 but
 not
 for
 implementation”
 and
 “….there
 will
 be
 no
 national 
consensus
 and therefore 
no 
deal”

.

This
 lack
 of
 action
 –
 even
 for
 an
 enhancement

 of 
a 
relatively 
small 
scale 
– 
is
 usually 
blamed 
on
 a
 fragile
 economy
 based
 on
 a
 host
 of
 unfavourable
 macroeconomic
 data
 such
 as
 the
 unemployment
 rate,
 budget
 deficits
 and
 inflation 
to 
name 
a 
few. 
And 
these
 days,
 it 
can

 also
 be
 linked
 to
 the
 uncertainty
 over
 the
 so‐called
 fiscal‐cliff
 negotiations
 in
 the
 US
 or
 the
 unstable
 economic
 picture
 in
 Europe.
 Ostensibly,
 this
 course
 of
 inaction
 buys
 more
 time 
for 
reform 
while 
surreptitiously keeping 
an
 eye 
on 
future 
election 
dates.

 This 
pattern 
is 
not 
novel 
at 
all 
and 
a 
key 
national
 policy issue
 is
 in
 this
 fashion
 metamorphosed
 into
 a
 subject
 that
 disappears
 from
 the
 public
 debate
 only
 to
 be
 periodically
 brought
 up
 into
 the
 spotlight
 by
 some
 major
 event
 such
 as
 pension
 shortfalls
 made
 explicit,
 boomers
 retiring,
 the
 demographic
 time
 bomb
 or
 dismal
 stock
 market
 returns.
 And
 no
 later
 than
 that
 point
 in
 time,
 the
 functioning
 of
 the
 entire
 pension
 system
 is 
questioned 
again 
and
experts
 are
 asked
 to
 re‐evaluate
 the
 system
 and
 come
 up
 with
 ground‐breaking
 recommendations
 such 
as
…
a
 CPP
 enhancement!

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WP: THE IMPACT of regulatory leeway when measuring longevity risk in Canadian corporate DB pension plans

Abstract



Pension fund solvency has become a key challenge for both the public and private sector. There are numerous instances, current and past, where pension fund deficits have distressed the financial standing of an organization. A genuine concern to the health of DB plans is the uncertainty in future changes to human mortality. In some cases this major risk factor manifests itself in underestimation of increased longevity. In others, where such trends are well known and quantifiable, regulations governing pension plans provide sponsors with some leeway to disregard the latest findings in making key assumptions.

We measure the effects of changes in mortality on Canadian DB pension plans. We introduce a model company pension plan to perform various simulations with the objective to estimate bounds for actuarial calculations. The outcome of this study highlights the capacity for plan sponsors to camouflage funding levels through the latitude given by the respective regulatory regime. Finally, our results shall reveal the potential impact on sponsors when policymakers tighten regulation as a result of an increased demand for transparency and accountability.

Background

Powered by a notable increase in life expectancy, there are active debates on the limits to human longevity with previous upper bounds having been surpassed1. Canada is no exception to this global trend with ample evidence that people are living longer. Male life expectancy at age 65 has increased from 14 years in 1975 to 17.8 years in 2005, and is forecast to reach 22.4 years in 2075. These trends will inexorably lead to an expanding elderly age group thereby creating a structural demographic shift clearly depicted in the population pyramid of Figure 1. We compare the census- adjusted demographics numbers for 2013 with the top-heavier formation of the projected 2050 population data.

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