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.
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.
PARS PRO TOTO: On Pension Reform in Canada Re CPP Enhancement
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!
WP: THE IMPACT of regulatory leeway when measuring longevity risk in Canadian corporate DB pension plans
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.
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.