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[TITLE]
June 2017Tomoyuki Kubo, Ph.D.
Certified Pension Actuary of Japan(Teaching Professor of Nihon University)
E-mail: [email protected]
1PBSS/IACA Colloquium Cancun 2017
Necessary adjustment of pensionsunder aging societies
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Dr. Tomoyuki Kubo
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1952 Born at Ehime prefecture in Japan1974 Graduated from Kyoto University (Mathematics)1974-2004 Sumitomo Trust & Banking CO LTD
Pension Trust department etc.2004-2013 Nissan Motor CO LTD
Expert Leader of Global Pension Management1999 Doctor’s degree from Tama University
(Management Information Science) 2007- Teaching Professor of several universities
(Tentative – Waseda, Keio, Tokyo Science etc.)2016-Current Teaching Professor of Nihon University
(“Pension system”, Faculty of Economics)
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Index
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Ⅰ The philosophy of public pensions
Ⅱ The influence of aging on public pensions
Ⅲ The influence of aging on private pensions
Ⅳ Desirable adjustment of pensions under aging societies
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Ⅰ The philosophy of public pensions
Characteristics of (pure) public pension plans
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CompulsoryEnforcementBy a government (a governmental agency)Management
Everyone in a countryCoverageDescriptionItem
Quasi public pensions:Occupational pensions are sometimes deemed as public pensions.
They may be compulsory and be managed by a government.
However, I refer to pure public pensions as those coverage is everyone in a country in this presentation/paper. In my definitions, those occupational pensions should be considered in a category of compulsory private pensions.
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Misunderstanding for public pensions
There are some who insist that public pensions should be managed by a funding method.Their concept seems to be as follows:
Earning while active
Spending while active Spending after active(Old age, after retirement)
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Misunderstanding for public pensions
There are some who insist that public pensions should be managed by a funding method.There concept seems to be as follows:
Earning while active
Spending while active Spending after active(Old age, after retirement)
Spending before active(Infant/immature period)
However, this concept is inadequate because of the lack of consideration of infant or immature period.
Lack of consideration
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Necessity of Intergenerational consideration
Therefore, their concept should be changed as follows.
Earning while active
Spending while active Spending after active(Old age, after retirement)
Spending before active(Infant/immature period)
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Necessity of Intergenerational consideration
Therefore, their concept should be changed as follows.
Earning while active
Spending while active Spending after active(Old age, after retirement)
Spending before active(Infant/immature period)
However, it is impossible for any one to support his/her infant period spending by oneself.
Here, there emerges the necessity of intergenerational consideration.
Impossible
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Earning distribution under Intergenerational chain
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The role of public pensions for Intergenerational chain
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Ⅱ The influence of aging on public pensionsIn an era of original intergenerational care chain
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Earning while active
Spending while active
Spending after active(Old age)
Spending before active(Children) Earning while active
Support by children in return of child care
Self support by savings
Spending after active(Parents)
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In an era after inducement of a public pension
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Earning while active
Spending while active
Spending after active(Old age)
Spending before active(Children) Earning while active
Benefits
Spending after active(Parents)
Contributions
Public pension
<Fictional Right>
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In an era after inducement of a public pension
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PubliEarning while active
Spending while active
Spending after active(Old age)
Spending before active(Children) Earning while active
Benefits
Self support
Spending after active(Parents)
Contributions
Public pension<Real Right>
(Old age cares are socialized)
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Influence of ‘Fewer children’ for public pensions
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PubliEarning while active
Spending while active
Spending after active(Old age)
Spending before active(Children) Earning while active
Benefits
Self support
Spending after active(Parents)
Contributions
Public pension
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Influence of ‘Fewer children’ for public pensions
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PubliEarning while active
Spending while active
Spending after active(Old age)
Spending before active(Children) Earning while active
Benefits
Self support
Spending after active(Parents)
Contributions
Public pension
Smaller burden Weakened support
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Influence of ‘Longer life expectancy’ for public pensions
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PubliEarning while active
Spending while active
Spending after active(Old age)
Spending before active(Children) Earning while active
Benefits
Self support
Spending after active(Parents)
Contributions
Public pension
Larger needs
Larger needs
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Adjustment of public pensions against aging
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PubliEarning while active
Spending while active
Spending before active(Children) Earning while active
Benefits
Spending after active(Parents)
Contributions
Public pension
Increase Earning
Prolong active period (working longer) is the key solution
Spending after active(Old age)
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The effect of (voluntary) raising pensionable age
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PubliEarning while active
Spending while active
Spending after active(Old age)
Spending before active(Children) Earning while active
Benefits
Spending after active(Parents)
Contributions
Public pension
In addition, (voluntary) raising pensionable age is more desirable
Increase benefits
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Therefore, private pensions should be understood as a kind of savings, although they may have some function of insurance among the segment of people (participants).
Ⅲ The influence of aging on private pensions
The role/function of private pensions
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On the other hand, private pensions are the instrument that part of earning will be distributed to old age (after retirement).
Earning while active
Spending while active Spending after active(Pension part)
Private PensionContributions
Benefits
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The category of private pensions
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Realized returnRealized returnPure DC
Variable interestsVariable interestsCash Balance
Variable interestsDesignated benefitCash Balance like
Guaranteed returnDesignated benefitTraditional DB
(Realized return )Designated benefitLump-sum
After retirementWhile activeCategory
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Influence of aging for private pensions
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Fewer children would not directly affect to private pensions.Longer life expectancy would affect to them immediately by the increase of spending after retirement.
Earning while active
Spending while active Spending after active(Pension part)
Private PensionContributions
Benefits
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Influence of aging for private pensions
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Fewer children would not directly affect to private pensions.Longer life expectancy would affect to them immediately by the increase of spending after retirement.
Earning while active
Spending while active Spending after active(Pension part)
Private PensionContributions
Benefits
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Influence of longer life expectancy for Traditional DB plans
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Traditional DB lacks flexibility for aging (longer life expectancy).
Earning while active
Spending while active Spending after active(Pension part)
Private PensionContributions
Guaranteed Benefits
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Risk and additional cost should be financed by Earnings of younger participants, And ultimately under burden of share holders.
Influence of longer life expectancy for Traditional DB plans
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Traditional DB lacks flexibility for aging (longer life expectancy).
Earning while active
Spending while active Spending after active(Pension part)
Private PensionContributions
Guaranteed Benefits
Costincrease
Risk of market fluctuations
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Influence of longer life expectancy for pure DC plans
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Pure DC abandons the guarantee of benefits, and is irrelevant for aging.
Earning while active
Spending while active Spending after active(Pension part)
Private PensionContributions
Benefits fluctuated
Risk should be financed on the shoulder of beneficiaries,that would lead to unstable old age living.
Adjustment for market fluctuations
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Effective adjustment for private pensions against aging
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Here again, working longer is the effective adjustment against aging.
Earning while active
Spending while active Spending after active(Pension part)
Private PensionContributions
Benefits
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Remained critical risk for Traditional DB plans
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Earning while active
Spending while active Spending after active(Pension part)
Private PensionContributions
Benefits
Risk of market fluctuations
However in traditional DB plans, there remains the risk of market fluctuations that maybe critical under unforeseeable market situation.Furthermore, there remains the risk of future aging.
Risk of further longer life expectancy
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Remained critical risk for Traditional DB plans
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Earning while active
Spending while active Spending after active(Pension part)
Private PensionContributions
Benefits
Risk of market fluctuations
However in traditional DB plans, there remains the risk of market fluctuations that maybe critical under unforeseeable market situation.Furthermore, there remains the risk of future aging.
End of pensionsprovided byemployers
Risk of further longer life expectancy
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Ⅳ Desirable adjustment of pensions under aging societiesDesirable adjustment for private pensions
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Earning while active
Spending while active
Spending after active(Pension part)
Retirement Saving systemContributions
Pension Benefits
Risk of market fluctuations
RetirementLump-sum
Commingled funds
Benefit
Transfer
Shared by other members
PPO: Pension Payment Organization
PPO
Pure DC orCash Balance
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Desirable burden sharing under aging societies
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NormalRetirement age
ProlongedPension age
Public Pension
Pensionage
Delayed Retirement age
Working Private Pension
Public Pension(delayed)
LongerPrivate Pension
While working =responsibility of
Employers
Old age security =responsibility of Government
Before public pension = responsibility of
Individuals
(Retirement saving + PPO)
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Conclusions
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Public pensions should be understood as a part of Intergenerational Care chain.The influence of aging on private pensions is somewhat different from that on private pensions, although working longer is effective treatment for both of them.
There has been the trend that DB plans had changed to DC plans. The reason is that employers face difficulty to persuade young employees and share holdersabout undertaking risk to providing pension benefits for retired former employees under aging and volatile market situation.
The system of private pensions should be reviewed. One possible way is the combination of retirement savings and the Pension Payment Organization as a group insurance of transferred lump-sum to change into pension benefits.
It is important to make clear the burden sharing by dividing 3 phases. Employers: responsibility to provide their employees working opportunityIndividuals: responsibility to support themselves by using retirement savingsGovernment: responsibility to provide people old-age income security
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References
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Dan M. McGill et al. (1998): “Fundamentals of Private Pensions,(7th Edition)”University of Pennsylvania Press
James A. Wooten (2004): “The Employee Retirement Income Security Act of 1974 – A political history” University of California Press
Kubo, Tomoyuki (1999): “Taishoku kyūfu-seido no kōzō kaikaku: jukyūkenhogo wo chūkaku toshite” (Structural reform of Japan’s retirement benefit system:focusing on the protection of benefit rights) in Japanese Tōyō Keizai Shinposha.
Kubo, Tomoyuki (2008): “Pension Finance and the significance of Defined Benefitpension plans (Through considering the essence of Liability Driven Investment)”
Boston: the Joint Colloquium and Seminar of IAA, IACA ,PBSS and IAAHSM. Barton Waring and Laurence B. Siegel(2007):”Don’t Kill the Golden Goose”
The Investment Research Journal from Barclays Global Investorshttps://larrysiegeldotorg.files.wordpress.com/2014/07/barclays-goose.pdf
The Economist (2009/6/25): “The end of retirement”http://www.economist.com/displaystory.cfm?story_id=13900145
The New York Times (2005/10/30) “The End of Pensions”http://www.nytimes.com/2005/10/30/magazine/the-end-of-pensions.html?_r=0
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THANK YOU FOR YOUR ATTENTION!
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