international forum on pension reform june, 2007 (re)designing regulatory framework for pension...
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International Forum on Pension Reform
June, 2007
(Re)designing regulatory framework for (Re)designing regulatory framework for pension reform and development ofpension reform and development of
financial markets: Estonian experiencefinancial markets: Estonian experience
Veiko Tali Ministry of Finance of Estonia
Impact of pension reform for development of financial markets
the earlier you will start with reform – the the earlier you will start with reform – the higher the impact - higher the impact - comparing with the relative level of development of financial markets
the bigger the potential financial volumes the bigger the potential financial volumes – the higher the impact - – the higher the impact - mandatory character and level of contributions
the smaller the country – the higher the the smaller the country – the higher the impact ? impact ?
Impact of pension reform for development of financial markets
the long term (30) impact is more the long term (30) impact is more important than short (5) and medium (10-important than short (5) and medium (10-15) term one 15) term one (adaptivity is crucial)
redesigning possibilities can be restricted redesigning possibilities can be restricted (eg. justified expectations of voluntary switchers)
Flexibility versus reliability ?
Reformed pension system
FIRST
publicly managed
compulsoryPAYG
ER-16 %
1999/2000
SECOND
privatelymanagedOptional/
compulsoryfunded
4(ER)+2 (EE)
2002
THIRD
privately managedvoluntaryfunded
1998
Preconditions for implementation of pension reform (II pillar)
Regulatory frameworkRegulatory framework
Supervisory capabilities Supervisory capabilities
Market infrastructure (registration, Market infrastructure (registration, central depository (1995), stock central depository (1995), stock exchanges (TSE in 1996)exchanges (TSE in 1996)
Level of market development (banks, Level of market development (banks, insurance)insurance)
Financial Supervisory Authority
Financial Supervisory Authority (2002)
Banking Inspectorate
(dep of BoE)
SecuritiesInspectorate
(dep of MoF)
InsuranceInspectorate
(dep of MoF)
DepositaryBanks
ManagementCompanies
Insurance companies
Reform of financial supervision - FSA
Integrated (at Bank of Estonia) Integrated (at Bank of Estonia)
Independent (special two-level Independent (special two-level management structure, 3/4 appointment) management structure, 3/4 appointment)
Financed by market participants Financed by market participants (budget ca 3 million euro) (budget ca 3 million euro)
Competent and capable (70 staff)Competent and capable (70 staff)
Impact of pension reform design
For development and structure of financial For development and structure of financial services services INDUSTRY INDUSTRY – – (higher level of competition, higher volumes, more diversified and viable financial sector)
For development of capital For development of capital MARKETS MARKETS (new instruments; more issue(r)s; deeper, more liquid and stable markets, domestic long-term investments, higher savings rate)
Impact for industry 1
Product design Product design pension fund structure parallel products or not (II vs III pillar) differentiation of accumulation and decumulation stages annuity vs. programmed withdrawal
Provider design Provider design asset managers vs. insurance companies vs. banks centralized or decentralized provision fully or partly specialized providers role of depositories (conflict of interests)
Impact for industry 2
Choice options Choice options product options (unified, restricted) switching conditions (full or partial switch or starting with new fund)
Fee structure Fee structure single or several fees (entry, exit) restrictions –ceilings disclosure requirements (incl expenses)
Capital requirements, marketing rules etc Capital requirements, marketing rules etc
General framework of II pillar
Employer
Employee
Tax BoardECSD
Accounts
FSA
LIC
Pension funds
DB
II phase
Guarantee fund
PFMC
I phase
Pension fund management company
Management company
Investment funds
Individual portfolios
Depositary bank
Pension funds(II+III pillar)
unit holders
Initial results for financial services industry
Real boom of asset management and Real boom of asset management and investement funds (incl. PF-s) industry investement funds (incl. PF-s) industry More diversified financial services More diversified financial services sector – but clearly dominated by sector – but clearly dominated by banking sectorbanking sector Increased competition (new providers) Increased competition (new providers) but (still) highly concentrated, lack of but (still) highly concentrated, lack of competition in pension fund competition in pension fund management (fees unchanged)management (fees unchanged) Export of financial services Export of financial services (Competence center – FC?)(Competence center – FC?)
Financial sector framework
MINISTRY OFMINISTRY OF FINANCEFINANCE(DRAFTING LEGAL ACTS,
ISSUING SECONDARY LEGISLATION)
FINANCIAL SUPERVISIONFINANCIAL SUPERVISIONAUTHORITYAUTHORITY
(FINANCIAL SUPERVISION, ISSUING GUIDELINES)
BANK OFBANK OF ESTONIAESTONIA(ISSUING SECONDARY
LEGISLATION, MACRO-SUPERVISION)
• Investment firms (6)Investment firms (6)• Management Management companies (companies (99))• Investment fundsInvestment funds (24) (24) • Pension fundsPension funds (22) (22)
ASSET ASSET MANAGEMENT +MANAGEMENT +
• Insurance companies Insurance companies (1(144))• Branches (Branches (55))• Insurance brokers (Insurance brokers (2323))• Insurance agents (…)Insurance agents (…)
INSURANCEINSURANCE
• Credit institutions (7)Credit institutions (7)• Branches (Branches (88))
BANKINGBANKING
• Listed shares (1Listed shares (166))• Listed bonds (Listed bonds (44))
STOCK STOCK EXCHANGEEXCHANGE
I N D U S T R YI N D U S T R Y
Number of institutions inEstonian financial sector
2002 2003 2004 2005 2006Credit institutions 7 7 9 13 15
incl. foreign branches 1 1 3 6 8Management companies 7 7 7 7 9Investment funds 17 15 15 22 22Pension funds 19 21 22 20 22Investment firms 6 5 5 6 7
incl. foreign branches - - - - 1Insurance companies 13 13 13 15 19
incl. foreign branches - - - 3 5SE - - - - 1
Stock exchange issuers 14 18 18 25 21
Foreign ownership (end of 2006)
20%
40%
60%
80%
100%
% of sharecapital
% of total assets Listed sharesheld by non-
residents
All shares heldby non-residents
Banking Shares
* The biggest management companies of pension funds are subsidiaries of the foreign-owned banks
Financial market concentration(2006)
53%
Hansapank
27%
SEB
13%
Sampo ER
GO
LH
V
Investment Funds(by assets)
PensionFunds (by assets)
Banks(by loans to nonfinancial sec.)
Life insurance Companies(by gross premiums)
54% 22% 6%
Hansapank SEB
16%
Trigon
48% 30% 9%
Hansapank SEB
9%
Nordea Sampo
43%
Hansapank
25%
SEB
21%
Sampo
5%6%
ERGOSeesam
Estonian current account
-30
-25
-20
-15
-10
-5
0
5
10
15
1993 1995 1997 1999 2001 2003 2005 2007* 2009* 2011*
% GDP
Goods Services Income
Transfers Current account
Investments by sectors in Estonia
19,7
10,2
7,77,88,3
14,012,7
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007* 2008* 2009* 2010* 2011*
% of GDP
-5
0
5
10
15
20
25
Private enterprises Public sector Financial sector
Households Total growth
Financial structure of Estonia (% of GDP)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Debtsecurities
Insurance Assets ofinvestment
funds*
Stock marketcapitalisation*
Loans andleasings***
2003 2004 2005 2006
* Incl. pension funds' assets
** Stocks listed on Tallinn Stock Exchange
*** Loans and leasings to households and non-financial undertakings
Financial deepening (growth rates)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
2004 2005 2006
GDP growthGrowth of debt securitiesGrowth of insurance premiumsGrowth of investment funds assetsGrowth of stock market capitalisationGrowth of loans and leasings
Profitability of financial institutions:(ROE in solo basis)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2003 2004 2005 2006
Credit institutions
Management companies
Investment firms
Payments by payment instruments
0%
20%
40%
60%
80%
100%31
.12.
97
31.0
5.98
31.1
0.98
31.0
3.99
31.0
8.99
31.0
1.00
30.0
6.00
30.1
1.00
30.0
4.01
30.0
9.01
28.0
2.02
31.0
7.02
31.1
2.02
31.0
5.03
31.1
0.03
31.0
3.04
31.0
8.04
01/3
1/05
06/3
0/05
11/3
0/05
04/3
0/06
09/3
0/06
02/2
8/07
Cash payments Card payments Direct debit
Mobile phone payments Standing order Paper based credit order
Telebank credit order Internet bank credit oders Other
Investment funds sector
Total investment funds
– 46 funds (18 equity, 15+7 pension, 6 debt)
– 9 fund management companies
– assets: 30,2 billion EEK (2 billion EUR,14% of GDP) in march 2007
II Pillar pension funds
– 15 mandatory pension funds
– 5 pension fund management companies
– assets: 9 billion EEK (0,6 billion EUR, 4% of GDP) in may 2007
– ca 530 000 investors
Investment funds assets
0
5000
10000
15000
20000
25000
30000
1998 1999 2000 2001 2002 2003 2004 2005 20060,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
14,0%
Assets M EEK % of GDP
Market share of investment funds
2002 2003 2004 2005
87%
14%
71%
14%
31%
44%
23%
46%
24%
27%
Debt funds
Equity funds
II pillar funds
III pillar funds
2001
94%
4,4 b EEK3,0 b EEK 7,2 b EEK 10,9 b EEK 18,1 b EEK
51%
19%
28%
2006
26,9 b EEK
Asset Management (% of GDP)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Debt funds Equity funds Mandatorypension funds
Voluntarypension funds
Individualportfolios
2004 2005 2006
Total size of asset management in the end of 2006 – 2 781 mln EUR
Size of II pillar assets (mln EUR)
0
2 000
4 000
6 000
8 000
10 000
12 000
14 00020
04
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
* 2007 – 2025: estimation
II pillar pension fund’s fees in practice
Management fee
Unit issue fee
1%
2%
3%
SE
B 00
SE
B 50
ER
GO
00
ER
GO
50
Han
sa K
1
Han
sa K
2
Han
sa K
3
Sam
po
00
Sam
po
25
Sam
po
50
LH
V D
V
LH
V M
A
LH
V K
V
LH
V T
S
LH
V U
T
Unit redemption fee
Management fees by fund type and country
Balanced Bond EquityAustria 0,7% 0,4% 1,1%Belgium 0,7% 0,4% 0,8%Czech Rep. 1,8% 1,1% 2,1%Denmark 1,1% 0,7% 1,2%Estonia 1,4% 0,9% 1,7%Finland 1,7% 0,6% 1,5%France 1,2% 0,9% 1,3%Germany 0,6% 0,5% 1,0%Greece 2,4% 1,6% 2,8%Hungary 1,9% 1,5% 2,0%Italy 1,5% 0,9% 1,6%Netherlands 0,6% 0,6% 0,8%Poland 2,9% 2,0% 2,9%Portugal 0,9% 0,8% 1,4%Slovakia 1,4% 0,9% 1,7%Spain 1,6% 0,7% 1,7%Sweden 1,1% 0,7% 1,2%UK 1,3% 1,0% 1,3%
Source: ZEW/OEE database. Data from Feri FMI Fund File, ZEW calculations; the data refer to the maximalfees included in the prospectus.
III pillar in practise
PENSION FUNDS:
– 7 pension funds
– 31 984 members (5% of employed)
– 866 million EEK (0,4% of GDP)
– average nominal investment return around 20% (yearly basis, from beginning)
PENSION INSURANCE:
– 5 life insurance companies
– 81 463 contracts (13% of employed)
– 1651 million EEK (0,78% of GDP)
III pillar assets
Pension funds
Pension insurance
0,5
1,5
2,0
1,0
2,5
Billion EEK
2002 2003 2004 200520012000
0,25%
0,75%
1 %
% GDP
0,50%
2006
Impact for markets
Investment rules Investment rules Quantitative vs. prudent man rule Diversification rules Instrument based restrictions (equity, non-listed, non UCITS funds, real estate etc) Country based restrictions (home, EEA, third countries) Self-investment restrictions (same group)
Switching rules, taxation etc. (long-termism)Switching rules, taxation etc. (long-termism)
Investment restrictions – main asset class rules
into equity (incl. equity funds) – up to 50%
into non-listed securities – up to 10%
into bank deposits – up to 35%
into money market instruments – up to 35%
into non-UCITS funds – up to 30%
into real estate – up to 10%
Main three types of pension funds
DDebt pension funds – all assets must be invested into debt instruments. Each pension fund manager must have at least one this type of fund under management.
Equity pension funds – up to 50% of assets can be invested into equity.
Balanced (mixed) pension fundsBalanced (mixed) pension funds, which can invest up to 25% of assets into equity.
Assets of II pillar pension funds
2002
0,17
2003
0,99
2004
2,48
2005
4,65
2
1
3
4
5
Billion EEK
50% debt - 50% equity
75% debt - 25% equity
100% debt
6
2006
7,43
1%
2%
3 %
% GDP
4 %
Investment rules – country based investment restrictions
no restrictions for EEA or OECD investments
securities issued by third country issuer – up to 30%
securities traded only in third country – up to 20%
currency matching rule – not less than 70% in EUR or EEK
II pillar investment by asset type (2006)
Equities
Units of equity
funds
Units of other
investment
funds
Money market
instruments
Bonds
Bank accountsReal estate Other
41,1%
3,1% 14,8%
12,4%3%
24,5%
II pillar investment by asset type
0%
20%
40%
60%
80%
100%30
.06.
2004
30.0
9.20
04
31.1
2.20
04
31.0
3.20
05
30.0
6.20
05
30.0
9.20
05
31.1
2.20
05
31.0
3.20
06
30.0
6.20
06
30.0
9.20
06
31.1
2.20
06
31.0
3.20
07
Equities
Units of equity funds
Units of other investment funds
Money marketinstruments
Bonds
Bank accountsOther
II pillar investment by region (2006)
USA
EU-10 (except
Estonia)
RussiaOther
Estonia
EU-15
54,5%
9,8%
2,5%
19,1%
3,3%11%
II pillar investment by region
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%3
0.0
6.2
00
4
30
.09
.20
04
31
.12
.20
04
31
.03
.20
05
30
.06
.20
05
30
.09
.20
05
31
.12
.20
05
31
.03
.20
06
30
.06
.20
06
30
.09
.20
06
31
.12
.20
06
31
.03
.20
07
Other
Estonia
Russia
EU-10 (except Estonia)
EU-15
USA
Investments into Estonia (2006)
0
200
400
600
800
1000
1200
1400
1600
180030
.06.
200
4
30.0
9.20
04
31.1
2.20
04
31.0
3.20
05
30.0
6.20
05
30.0
9.20
05
31.1
2.20
05
31.0
3.20
06
30.0
6.20
06
30.0
9.20
06
31.1
2.20
06
31.0
3.20
07
5%
10%
15%
20%
25%Assets M EEK % of assets
Investments into Estonia (2006)
Equities and units of funds
34%
Money market
instruments
8%
Bonds
38%
Real estate2%
Bank accounts
17%
Other
1%
3/4 of investments into Estonia are in real economy 1/4 is actually invested outside of Estonia
Growth of Estonian GDP and TSE index
6 000
7 000
8 000
9 000
10 000
11 000
12 000
13 000
14 000
1.01.00 1.01.01 1.01.02 1.01.03 1.01.04 1.01.05 1.01.06 1.01.07
0
100
200
300
400
500
600
700
800
900
GDP (mln EUR)
Tallinn Stock Exchange index
Investments to Tallinn Stock Exchange (end of 2006)
Sweden20%
UK5%
Estonia52%
Latvia4%
USA3%
Other countries7%Finland
3%
Luxembourg6%
Tallinn Stock Exchange (2001 – 2006):incl. shares and bonds
* Incl. de-listing of Hansapank’s shares
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
4 500
5 000
2001 2002 2003 2004 2005* 2006
0
10 000
20 000
30 000
40 000
50 000
60 000
70 000Market capitalization (mln EUR)
Turnover (mln EUR)
No of transactions (on the right scale)
Nordic-Baltic Capital Markets Relative Size, End-2006
Denmark 181 606 83% 413 202 188%Iceland 27 375 219% 13 371 107%Sweden 467 072 152% 207 631 68%Norway 232 556 87% 117 71 44%Finland 234 691 140% 55 864 33%Estonia 4 521 35% 392 3%Lithuania 7 724 33% 1 170 5%Latvia 2 039 13% 649 4%
Bond MarketsStock Markets
CountryOutstanding
Stock (mln €)% of GDP
Capitalization
(mln €)% of GDP
General government debt
70,9
7,6 6,4 5,7 6,2 4,7 4,4 5,3 5,3
70,469,269,470,472,874,274,975,1
5,0
0
20
40
60
80
1996 1997 1998 1999 2000 2001 2002 2003 2004
% of GDP
Euro area Estonia
69,4
4,5
70,8
4,0
2005 2006
Loans and leasings (% of GDP)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1999 2000 2001 2002 2003 2004 2005 2006
Households Debt/GDP
Non-financial corporations Debt/GDP
Annual interest rates of loans granted to individuals
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%30
.04.
97
31.0
8.97
31.1
2.97
30.0
4.98
31.0
8.98
31.1
2.98
30.0
4.99
31.0
8.99
31.1
2.99
30.0
4.00
31.0
8.00
31.1
2.00
30.0
4.01
31.0
8.01
31.1
2.01
30.0
4.02
31.0
8.02
31.1
2.02
30.0
4.03
31.0
8.03
31.1
2.03
30.0
4.04
31.0
8.04
31.1
2.04
30.0
4.05
31.0
8.05
31.1
2.05
30.0
4.06
31.0
8.06
31.1
2.06
30.0
4.07
Consumer credits EEK Consumer credits EUR Housing loans EEK Housing loans EUR
Financial deepening (growth rates)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
2004 2005 2006
GDP growthGrowth of debt securitiesGrowth of insurance premiumsGrowth of investment funds assetsGrowth of stock market capitalisationGrowth of loans and leasings
Savings in Estonia
%GDP
0
10
20
30
40
50
2000 2001 2002 2003 2004 2005 2006 2007* 2008* 2009* 2010* 2011*
Domestic privatesavings
Domestic public savings
Foreign savings
Investment return of II pillar PF’s
Debt instr PF
3% 3,5%
Mixed PF’s
6,6%9,3%
Equity PF’s
11%
15,5%
5%
15%
20%
10%
From beginning
Last 12 months
Investment return of II pillar PF’s
2002 2003 2004 2005
100
150
120
130
110
140
EPI 100
EPI 75
EPI 50
EPI
2006
160
Initial conclusions for capital market development
Overregulated – too strict quantitive Overregulated – too strict quantitive investement restrictions – negative real investement restrictions – negative real rate of returns of debt pension funds.rate of returns of debt pension funds.
Lack of long-term views in investment Lack of long-term views in investment strategies (short-termism) strategies (short-termism)
Moderate level of impact to domestic Moderate level of impact to domestic capital market (no corporate and capital market (no corporate and mortgage bond market boom, no new mortgage bond market boom, no new long-term instruments) long-term instruments)
Redesigning regulatory framework
Removing investment restrictionsRemoving investment restrictions- real estate and real estate funds up to 40% - venture capital funds up to 50%(+20%)- ? increasing 50% equity ceiling (70% or 100% for equity funds) for III pillar funds already 100% - ? allowing 10 % equity for most conservative fund (10 %, 40%, 70% instead of 0,25,50)
Making fee structure more transparent Making fee structure more transparent
removal of entry fee removal of exit fee if 5 years before retirement regressive ceilings for management fee
Payment phase (annuities etc) Payment phase (annuities etc)