Financial Crisis & Pension Funds: An Analysis

2,175 views

Published on

Financial market experts in Germany and Switzerland recently analyze the consequences of the financial crisis on pension funds and pension provision.

Published in: Education
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
2,175
On SlideShare
0
From Embeds
0
Number of Embeds
4
Actions
Shares
0
Downloads
48
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Financial Crisis & Pension Funds: An Analysis

  1. 1. No. 2|2009International Pension PapersHow the financial crisis affects pensionfunds: What analysts expect
  2. 2. Allianz Global Investors International Pension Papers No. 2|2009 Content Critical issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Proposition 1: The financial crisis has demonstrated that retirement income security can essentially only be reached by public pay-as-you-go systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Proposition 2: Pension funds stabilize the financial markets thanks to their long-term investment horizon . . . . . . . . . 5 Proposition 3: Pension funds will increasingly apply the criteria of socially responsible investing in investment decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Proposition 4a: The trend that firms fund their pension liabilities will continue (only Germany) . . . . . . . . . . . . . . . . . . . 7 Proposition 4b: The financial crisis will accelerate the shift from defined benefit to defined contribution plans (only Switzerland) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Proposition 5: Companies will reduce (voluntary) contributions for occupational pensions as a consequence of the financial crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Proposition 6: Employees will reduce contributions to occupational / private pension schemes as a consequence of the financial crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Recent publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Imprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
  3. 3. Allianz Global Investors International Pension Papers No. 2|2009How the financial crisisaffects pension funds:What analysts expectCritical issuesFinancial market experts in Germany and Switzerland recently were asked to sharetheir views on the consequences of the financial crisis on pension funds and pensionprovision. The survey was conducted by the Centre for European Economic Research(ZEW) on behalf of Allianz Global Investors. Here are the key findings:• Most analysts in both countries do not think that the financial crisis proves that public pay-as-you-go systems are superior to funded pensions• German analysts tend to believe that pension funds play a stabilizing role on the financial markets; Swiss analysts tend to disagree• A large majority of German analysts expects that the funding of unfunded pension promises in Germany will continue• Most Swiss analysts believe that the financial crisis will accelerate the shift from defined benefit to defined contribution plans in Switzerland• Analysts are split on whether pension funds will increasingly invest according to socially responsible investment criteria• Most German and Swiss analysts think that employers will reduce their pension contributions due to the financial crisis; a slight majority believes that employees will reduce their contributions 3
  4. 4. Allianz Global Investors International Pension Papers No. 2|2009How the financial crisis affects pensionfunds: What analysts expectT he financial crisis is now in its second year and it is unclear how severe itsfuture consequences will be. One of the To get answers to these questions, the Centre for European Economic Research (ZEW), on behalf of Allianz Global Investors,crucial questions is: How will the downturn asked financial market experts for their viewsaffect retirement income, specifically the and expectations on these issues. The ZEW’sfuture development of funded pensions monthly Financial Market Test asks expertsand pension systems? The financial crisis from banks, insurance companies and indus-could affect pension provision in many trial companies for their near- to medium-ways on many levels. For the purpose of this term economic expectations. Participantsstudy we looked at a number of key areas. were asked to answer several supplementary questions that measured how much they On a systemic level, the downturn could agree or disagree with statements coveringspark political efforts to strengthen the pub- the impact of the financial crisis on pensions.lic pay-as-you-go system, which might push The survey was conducted in Germany, wherepeople away from funded pensions. When it 230 analysts responded, and Switzerland,comes to the future of financial markets, two where 41 analysts participated.crucial questions are: Do pension funds playa stabilizing role and will the trend toward When analyzing the results one shouldsocially responsible investing among pen- note that the German and Swiss pensionsion funds continue? markets differ substantially. The German pension system is dominated by the pub- Other pension market trends could be lic pay-as-you-go pillar, although recentaffected by the crisis as well. Will there be reforms have tried to foster funded pen-a continued shift from defined benefit to sions to achieve a higher diversification ofdefined contribution plans? Will there be retirement income in the future. The levelcontinued funding of unfunded pension of public pension provision in Switzerlandpromises? Regarding the adequacy of future is much lower; occupational pensions arepension provision, an open issue is whether mandatory and contribute a major sharethe financial crisis makes employers and of a person’s income in retirement.employees contribute less to pension plans.4
  5. 5. Allianz Global Investors International Pension Papers No. 2|2009Proposition 1: The financial crisis has demonstrated that retirement incomesecurity can essentially only be reached by public pay-as-you-go systemsThe first proposition aims to shed some Overall, the analysts disagree with thelight on the future development of pension view that the financial crisis has proved thesystems. It can be assumed that the financial superiority of public pay-as-you-go systems.crisis has reduced the confidence many peo- This is very much in line with economicple have in the financial markets. If that is the reasoning on the benefits of a multi-pillarcase, people may demand a reorientation pension system that consists of unfundedof pension policy toward public pensions be- and funded elements to diversify the expo-cause they are not exposed to financial market sure to different of types of risk.risks. Also, politicians might exploit theuneasiness about financial markets to pro-mote a greater reliance on public pensions. “The financial crisis has demonstrated that retirement income security can essentially only be reached by public pay-as-you-go systems” The polled financial market expertsdeny that this would be a useful approach. 40% 37.5 D 37In Germany, 20 percent would agree/agree 35% 35 CHstrongly with the thesis that the financial 30%crisis has demonstrated that public pay- 25as-you-go systems are superior. A majority 25% 21 22of 59 percent disagree/disagree strongly. 20%Among the Swiss participants, only 2.5 15%percent are in favour of this thesis, while 1260 percent reject it. The share of undecided 10% 8participants is nevertheless quite high in 5% 2.5Switzerland as 37.5 percent do not hold 0 0%strong views. In Germany 21 percent are Agree Agree Undecided Disagree Disagreeundecided. strongly stronglyProposition 2: Pension funds stabilize the financial marketsthanks to their long-term investment horizonWith the next question we wanted to deter- crucial for financial market trends becausemine how much pension funds affect finan- the funds belong to the main actors on thecial markets. The popular assumption is that financial markets. The OECD estimates thatpension funds have a long-term investment 60 percent of assets held by institutionalhorizon and therefore stabilize the markets investors worldwide are retirement-related;during a financial crisis because they do not pension funds in a narrow sense managed * OECD 2009. Privatehave to sell securities in a downturn. The assets of USD 18.6 trillion in 2007*. Pensions Outlook 2008.investment behaviour of pension funds is OECD, Paris. 5
  6. 6. Allianz Global Investors International Pension Papers No. 2|2009 There is some dissent among Germanand Swiss analysts on this question. While 49 “Pension funds stabilize the financial markets”percent of the polled German analysts agree/strongly agree that pension funds stabilize 45% 42 Dfinancial markets and only 29 percent disa- 40% 37 CHgree/strongly disagree, Swiss analysts are 35%much more pessimistic. Only 22 percent 29agree and 49 percent disagree. This differ- 30%ence is a very interesting result as pension 25% 22 20 21funds in Switzerland are more mature and 20%play a bigger role than their counterparts in 15% 12Germany. Thus, it could be assumed thatthe Swiss analysts have a longer-standing 10% 8 7experience with pension fund behaviour and 5% 2that experience seems to suggest that there 0%is no substantial stabilizing role. Agree Agree Undecided Disagree Disagree strongly stronglyProposition 3: Pension funds will increasingly apply the criteriaof socially responsible investing in investment decisionsThe trend toward socially responsible invest- will include SRI considerations in theiring (SRI) among pension funds started before decisions, while roughly another third of thethe financial crisis. SRI seeks to maximize both respondents do not expect that. The restfinancial return and social good by requiringthat environmental, social and governance “Pension funds will increasingly apply the criteria of socially responsiblecriteria be considered in the investment investments (in investment decisions)”process. This trend has several drivers. Theyinclude national and international initia- 40% 38 Dtives, such as the Global Reporting Initiative, CH 35% 32changing societal and political expectations 29 29 29toward pension funds, and the belief that 30% 24this investment strategy can reduce risk or 25%generate excess returns. The current crisis 20%has the potential to “mainstream” SRI strate- 15%gies and make investors aware of the poten-tial benefits of considering extra-financial 10% 7 5 5factors, particularly governance structures. 5% 2 0% The survey results were mixed. Slightly Agree Agree Undecided Disagree Disagreemore than a third of analysts in both coun- strongly stronglytries expect that pension funds increasingly6
  7. 7. Allianz Global Investors International Pension Papers No. 2|2009were undecided. This could be interpreted future of SRI among pension funds andas a substantial degree of insecurity among could indicate that the financial crisis willfinancial market participants about the not automatically favour SRI.Proposition 4a: The trend that firms fund their pension liabilitieswill continue (only Germany)Unfunded book reserves were the tradition-al way of occupational pension provision in “Trend to fund pension promises will continue”Germany. This picture has been changingover the last few years as many firms, es- 70% Dpecially larger ones, choose to fund their 59 60%pension promises through, for example,Contractual Trust Arrangements (CTAs). 50%According to the survey respondents, this 40%development is very likely to continue as a 30%strong majority of 73 percent agrees/strongly 20agrees with the proposition. Only 7 percent 20% 14of the surveyed analysts thinks that the trend 10% 7toward funding will not continue. These re- 0 0%sults are a strong indication that the role of Agree Agree Undecided Disagree Disagreefunding in occupational pension provision strongly stronglyin Germany is set to rise further.Proposition 4b: The financial crisis will accelerate the shift from definedbenefit to defined contribution plans (only Switzerland)There is a worldwide shift from defined is reason to believe that the financial cri-benefit to defined contribution plans. This sis might accelerate this shift. The mainchange takes place at many speeds and driver for the change could be the betterin many forms. Pure defined contribution calculability of contributions for the planplans, which would imply free investment sponsor. This benefit is appealing to firmschoice for the member and individual ac- that have been hit by the recession. * Allianz Global Investorscounts, are not possible in Switzerland. 2009. Funded PensionsThere is no investment choice and pension The survey results show that the trend in Western Europe 2008.funds have to achieve a certain minimum toward defined contribution continues. Munich. http://publica-return. Nevertheless, over the last few More than half – 58 percent – of the polled tions.allianzgi.com/years there has been a slow shift toward Swiss analysts think that the financial crisis en/PensionResearch/defined contribution plans in Switzer- will hasten the shift from defined benefit Documents/AllianzGI_land. Today, most members and assets to defined contribution plans, about a third Western_Europe_Study.are in defined contribution plans*. There of the respondents is undecided while only pdf 7
  8. 8. Allianz Global Investors International Pension Papers No. 2|20098 percent disagree and 0 percent disagreestrongly. Based on these results, there “The financial crisis will accelerate the shift from DB to DC”is strong evidence that the developmenttoward defined contribution plans will 40% 35 34 CHaccelerate. 30% 23 20% 8 10% 0 0% Agree Agree Undecided Disagree Disagree strongly stronglyProposition 5: Companies will reduce (voluntary) contributionsfor occupational pensions as a consequence of the financial crisisOccupational pensions are a major compo-nent of retirement income in Switzerland, “Companies will reduce voluntary contributions for occupational pensions”where they are mandatory. In Germany,occupational pensions are set to deliver a 70% Dhigher share of future retirement income 62 60% CHdue to political reforms and decreasingbenefits from public programs. The finan- 50% 46cial crisis and the current recession may 40%force companies to reduce their voluntary 30%employer contributions to occupational 20pensions as way of cutting costs. 20% 15 16 17 9 11 10% 2 2 Concern that employers will lower their 0%contributions to pension plans seems to be Agree Agree Undecided Disagree Disagreejustified. The survey shows that 71 percent strongly stronglyof German analysts and 66 percent of Swissanalysts agree/agree strongly that this willhappen. Less than 20 percent of the polledanalysts in both countries disagrees. If thatassessment materializes, and if it is morethan a temporary trend, the consequencesfor future pensioners could be severe. Thepension gap would widen and the retirementincome from occupational plans would fall.8
  9. 9. Allianz Global Investors International Pension Papers No. 2|2009Proposition 6: Employees will reduce contributions to occupational/privatepension schemes as a consequence of the financial crisisFirms are not the only ones under pressure reduce their contributions (Proposition 5)when it comes to funding pension plans. The than employees. There are a number offinancial crisis could also affect employees’ possible reasons for this result: 1) Workerswillingness and/or ability to contribute to might be more reluctant to make changesfunded pensions. In times of economic crisis, because those changes could affect theirpeople who are worried about losing their retirement security; 2) Companies couldjobs might choose to invest in short-term, be quicker to react because they face biggermore liquid and easily accessible financial financial challenges from the recessionassets rather than long-term pension plans. than individual employees; 3) Individual be-Also, rising unemployment reduces income havioural factors could play a role.and absolute overall savings, which in turncuts retirement savings. On the other hand,given the declining public pension benefits “Employees will reduce contributions to pension schemes”in Germany and the relatively modest levelof public pension benefits in Switzerland, 50% 45 46 Dvoluntary retirement savings are crucial to CHsecuring one’s standard of living after leav- 40% 32ing the work force. 28 30% More than half the analysts in both Germa- 18 20%ny (51 percent) and Switzerland (53 percent) 13 10% 6 7expect that employees will reduce their con- 3 2tributions to pension plans. Roughly a third 0%of the respondents in the two countries disa- Agree Agree Undecided Disagree Disagreegree/disagree strongly with this view. Inter- strongly stronglyestingly, more analysts expect companies to 9
  10. 10. Allianz Global Investors International Pension Papers No. 2|2009ConclusionsT he survey results point to several impor- tant developments. The polled analystsexpect some trends to continue, such as the The survey provided worrying results regarding the impact of the financial crisis on employers’ and employees’ contribu-move toward funding occupational pensions tions to retirement plans. Analysts expectin Germany and the shift from defined ben- both to contribute less than before. If thatefit to defined contribution in Switzerland. happens and this leads to a permanentThere is also a high degree of consensus that reduction, retirement income could beit would be unsuitable to rescind pension re- affected substantially. Given that fundedforms and primarily rely on public pensions. pensions are a crucial component of re-Meanwhile, the analysts provided an unclear tirement income in Switzerland and thatview on the future of socially responsible they are supposed to play a more impor-investments and were split on whether pen- tant role in Germany, reducing pensionsion funds help stabilize financial markets. contributions should be considered very carefully and only be done as a last resort.10
  11. 11. Allianz Global Investors International Pension Papers No. 2|2009Recent publicationsInternational Pension Studieshttp://publications.allianzgi.com/en/PensionResearch/Pages/PensionStudiesandPapers.aspxPrivate household financial assets: the golden days of the past are a long way off August 2009Investment Regulations and Defined Contribution Pensions July 2009Funded Pensions in Western Europe 2008 Feb 2009Retirement at Risk: The U.S. Pension System in Transition Jan 2009Pension Trends in Emerging Markets – The Rise of DC Plans and Its Consequences Nov 2008Funding Unfunded Pensions: Governance and Investments of Asian Reserve Funds Sept 2008Evaluating the Impact of Risk Based Funding Requirements on Pension Funds May 2008International Pension Issueshttp://publications.allianzgi.com/en/PensionResearch/Pages/Internationalpensionsissues.aspxPension funds and the financial crisis July 2009Western Europe: Fiscal pressures-ageing costs still on the horizon April 2009United States: Severe setback in financial and retirement assets March 2009Germany: Households financial assets dive Jan 2009ImprintPublisher: Allianz Global Investors AG, International Pensions, Seidlstr. 24-24a, 80335 Munich, Germany | International.Pensions@allianzgi.comhttp://www.allianzglobalinvestors.com | Author: Dr. Alexander Börsch, Senior Pensions Analyst, Allianz Global Investors AG, alexander.boersch@allianzgi.comLayout: volk:art51 GmbH, Munich | Printing: Christian Döring GmbH, Munich | Closing Date: August 20, 2009The entire content of this publication is protected by copyright with all rights reserved to Allianz Global Investors AG. Any copying, modifying, distributingor other use of the content for any purpose without the prior written consent of Allianz Global Investors AG is prohibited. The information contained in thispublication has been carefully verified by the time of release, however Allianz Global Investors AG does not warrant the accuracy, reliability or completenessof any information contained in this publication. Neither Allianz Global Investors AG nor its employees and deputies will take legal responsibility for anyerrors or omissions therein.This publication is intended for general information purposes only. None of the information should be interpreted as a solicitation, offer or recommendationof any kind. Certain of the statements contained herein may be statements of future expectations and involve known and unknown risks and uncertainties,which may cause actual results, performance or events to differ materially from those expressed or implied in such statements. 11
  12. 12. www.allianzglobalinvestors.comAllianz Global Investors AGInternational PensionsSeidlstr. 24 -24a80335 Munich, Germany

×