doris schonemann
TRANSCRIPT
Swiss Federal Social Security FundsAVS/AI/APG
TBLI Conference Asia 2011Challenges for the social security system
The experience of the Swiss Federal Social Security Funds AVS/AI/APG.
Dr. Doris M. SchönemannVice-Chairperson of the Board of Directors of the Swiss Federal Social Security Fund AVS/AI/APG.
Swiss Federal Social Security Funds AVS/AI/APG
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Table of Contents
1 Introduction to the Swiss Federal Social Security Funds
2 Forces of change and adapting
3 Corporate Governance
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1 Introduction to the Swiss Federal Social Security Funds
The Overall Picture of Swiss Social Security
Three Pillar Concept
1. Pillar 2. Pillar 3. Pillar
AVS/AI/APG Social
Security
Mandatory for everybody
Securing the meansof existence
Pension Fund
Mandatory for employers and
employees
Private Pension
optional
Securing living standard
Individualbenefits
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Established by Law in 1948 in the context of post-war period, where no material safety net existed.
Values • Providing minimum pensions for old age, widows and orphans• Intergenerational solidarity (pay as you go)
1 Introduction to the Swiss Federal Social Security Funds
Swiss Federal Social Security Funds
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Social contract between: • generations• social classes • man and woman (inter-gender)
Contribution ExpensesFunds
1 Introduction to the Swiss Federal Social Security Funds
The 1. Pillar: "Pay as you go"-System
Asset under Management27 bn CHF
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Old Age InsuranceSince 1948
Disability InsuranceSince 1960
Income CompensationSince 1953
Role:Payment of benefits to the elderly people i.e. CHF 3'480 for couple or 2'320 for single per month
Beneficiaries (2010):2’205’218
Assets (2011):20.3 bn CHF
Role:Payment of benefits to disabled people
Beneficiaries (2010):375’484
Assets (2011):4.5 bn CHF
Role :Temporary compensation for the loss of income due to military duty or maternity leave.
Beneficiaries (2010):279’178 Military67’329 Maternity
Assets (2011):0.4 bn CHF
1 Introduction to the Swiss Federal Social Security Funds
Three Funds AVS/AI/APG
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1. To ensure that the AVS, AI and APG benefits canbe paid at all times. In case of insufficient fundingof payments between two pension dates, the bufferfund has to bridge this gap in order to fulfill legal obligations (payments in time) of the AVS/AI/APG.
1 Introduction to the Swiss Federal Social Security Funds
Objectives
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2. To invest assets safely while providing reasonable risk-adjusted returns.The Swiss Federal Social Security Funds are the central asset managers of the assets of the Federal Old Age and Survivors' Insurance (AVS), the Federal Disability Insurance (AI) and the Income Compensation Scheme (APG).
Plus:• Financial accounting for AVS/AI/APG• Annual report to the Swiss Federal Council
1 Introduction to the Swiss Federal Social Security Funds
Objectives - continued
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APG
AI
AVS
Inflows46’409 bn CHF
APG
AI
AVS
Outflows47’265 bn CHF
1 Introduction to the Swiss Federal Social Security Funds
Presentation of Inflows and Outflows
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Employers and Independents
Swiss Federal Social Security Funds
Confederation
Value added Tax
Casino Tax
Return of Investments
~ 100 Compensation
Offices
1 Introduction to the Swiss Federal Social Security Funds
AVS/AI/APG Inflows
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The driving Forces are:• Demographics• Economic Growth• Financial Markets
2 Forces of Change and Adapting
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Source: BFS ( in ‘000 )
2 Forces of Change and Adapting
Age Pyramid Switzerland 2005
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1 Pensioner for 6.5 Contributors
1948
1 Pensioner for2 Contributors
2038
1 Pensioner for 3.6 Contributors
2008
2 Forces of Change and Adapting
Ratio Pensioner / Contributors
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The Swiss Social Security System is one of the pillars of stability in Switzerland, therefore it would be alarming, if the Swiss population would loose faith in this institution.
Basic Values are still shared:• Intergenerational solidarity• Broad consensus that old age should be secured by minimum means of existence
Up to now 10 revisions to the law governing the Swiss Social Security, with focus on amendments.
But: Today the world is changing rapidly
2 Forces of Change and Adapting
Adapting to Demographic ChangesBasic Values
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Responsibility lays with Politics:If income is the sole base for a pay as you go system there would be no other way out, than to increase contributions:
• Raise the pension age• Increase the percentage of contributions for the funding
or alternative funding, such as increase in Value Added Tax (VAT), the taxing of interest rate income, taxing capital gains
• More women in the working force
2 Forces of Change and Adapting
Adapting to Demographic Changes
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Role of the Board of the Social Security Funds:Influence the political discussion on demographic issues by drastically improving transparency:
• Be extremely transparent and clear in figures and messages• Define critical trigger points: Funds assets are reaching
a critical point, politics has to react The Board defined the Investment Horizon with 5 years. These 5 years should give politics time to react.
2 Forces of Change and Adapting
Adapting to Demographic Changes
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2 Forces of Change and Adapting
Economic Factors: GDP Growth 1960 - 2010
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The main difference between a buffer fund, financed through current contributions and a pension fund is that a buffer fund has to cope with pro cyclicality.
If the economy is on a downward trend, then the contributions go down also.
2 Forces of Change and Adapting
Correlation between Economic Growth and Funds Income
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2 Forces of Change and Adapting
Swiss GDP Growth and Development of Fund Assets
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2 Forces of Change and Adapting
Investment Results Social Security Funds1948 - 2010
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If the Portfolio Managers invest in risky asset classes, this can produce even more stress in times of declining growth rates for the economy.
The Lesson for the Board of Directors is:
Steer the Strategic Asset Allocation by risk not by return.
2 Forces of Change and Adapting
Adapting to Pro Cyclicality
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• Performance analysis per asset class
• Positioning in economic cycle• Tactical elements
• Planning of investment and liquidity (treasury function)
• Analysis of money market(short-term)
• Selection of investment products
Market Portfolio
Basic Portfolio
2 Forces of Change and Adapting
Creation of 2 synthetic Portfolios
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Nominally weighted Risk weighted(incl. Tactical assets)
2 Forces of Change and Adapting
Market Portfolio - Focus on Risk
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Mission of the funds: cover temporary deficits
Board decision:• Time horizon = 5 years• Funding Ration (Assets divided by maximum stress tested
outflows over 5 years)
2 Forces of Change and Adapting
Risk Tolerance:Time Horizon and Funding Ratio
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Depending on the pre-defined volatility target Funding Ratio of the combined portfolio, the ratio between market and basis portfolio is being determined• Market Portfolio• Basis Portfolio
Basic Portfolio
Market Portfolio
2 Forces of Change and Adapting
Portfolio Construction
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Strategic Updated 30. 06. 2011
2 Forces of Change and Adapting
Asset Allocation Swiss SocialSecurity Funds 2011
27 bn CHF
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2 Forces of Change and Adapting
Sustainable Equities
SustainableEquities
60%
OtherEquities
40%
Equities4.6 bn CHF
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Economy will be more volatile - Financial system will be more fragile and unstable.
Quality and Time are critical factors:• speed of updating information• ability to digest information (for digesting it is important
that information is coherent and transparent)
3 Corporate Governance
Higher Volatility: Information Systems
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The rebalancing process between the market and the basis portfolio is quite complex How to cope?
Install robust processes• how to rebalance • which kind of financial instruments are allowed• when to rebalance, Trigger Points can be helpful• how to monitor the results• who is responsible for reporting and controlling to the Board of Directors create the position of a Risk Manager
3 Corporate Governance
Higher Complexity:Install robust Processes
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Play by the Rules Set of Rules and Regulations
Transparent: Regulations are on the Internet
For Example: Voting Rules in General Assemblies
3 Corporate Governance
Define Responsibilities to the differentStakeholders
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At the proposal of the Federal AHV/IV Commission, the Federal Council appoints the 11 members of the Board of directors and elects the chairman and the vice-chairman. The insured, employers, employees, and Confederation must all be adequately represented on the Board of directors.
3 Corporate Governance
Role of Board of Directors of the Funds
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Board Committee: 6 members
Insured:
4
Employers:
3
Employees:
3
Confederation:
1
GovernmentRepresentatives:
3
Check and Balances in organizational Set up
3 Corporate Governance
Role of Board of Directors of the Funds
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In short:It boils down to people with commitment and visionand focus on implementation.
"Doing good" has to be done well. That’s the real challenge.
3 Corporate Governance
Good Governance