Around the world, companies and individuals are being required to finance retirement benefits, taking over the burden from cash-strapped governments. But as this responsibility increasingly passes to the private sector, rules on the investment of these assets are being liberalized.
In the United Kingdom, Parliament is set to enact sweeping pension reform that would create a new regulator, minimum funding standards and a compensation fund to back up underfunded pension plans that have been subject to embezzlement or fraud.
In France, a bill encouraging private pension plans is expected to pass within a year.
Legislation before the Italian Parliament would reduce benefits under the beleaguered state system and create new incentives for private plans.
In Russia, a bill under consideration would create a pension regulator and would steer participants toward personal pensions that could be set up by individuals or employers.
In Japan, investment liberalization appears to be continuing; indeed, the Pension Fund Association hopes that pension investment rules eventually will be replaced by a prudent man rule.
In Hong Kong, legislation is expected imminently that would create a mandatory provident fund - Hong Kong's first retirement program for all workers.
Australia's mandatory retirement program will begin to require contributions from employees in mid-1997, almost three years earlier than expected.
Chile's Administratoras de Fondos de Pensiones, which handle $24 billion in privately managed pension assets, now may invest up to 37% of assets in domestic stocks, up from 30%, and as much as 9% (up from 6%) in foreign investments.
Where governments aren't passing down pension responsibilities to companies and then individuals, they are tending to lower benefits, or at least not improve them. One example is the worldwide trend by governments toward raising retirement ages.
The alternative is to find new benefit formulas that fit more current problems. And that is starting to emerge, as illustrated by the embryonic trend toward creating flexible benefit packages in which employees participate in choosing the contents of their benefit programs, noted Roger Beech, a principal in the multinational division of Sedgwick Noble Lowndes, London. Packages could include a "mix and match" among such offerings as life insurance, disability and medical insurance and pension provisions, he said.
And even as benefits are being reviewed and adjusted, plan sponsors and trade groups are pressing for improved investment returns, as in Japan and Chile. With better returns, funds might be able to lower contribution levels and better ensure pension promises are kept. But to bolster returns, constricting investment rules must be slashed; increasingly, this is happening.
In fact, as institutions expand their investment horizons, more are looking abroad - both to foreign-based managers as well as overseas investments. Increasingly, this trend is spawning yet another development: the concept of internationally preferred managers. In this case, certain managers are selected - by more institutional investors - because of their physical presence in various countries as well as their understanding of markets around the world.
Roger Irwin, head of Watson Wyatt Investment Consulting, Reigate, England, sees "a major move toward hiring brand names in the industry, big global" multi-asset, multi-product managers, such as J.P. Morgan, Capital International, Schroders and Mercury Asset Management, he said.
Among the attractions for such firms: The expectation that they would furnish top-flight investment talent - at affordable fees.
Such global trends should only gain momentum. But they will always be tempered by local interests and developments in individual countries.
Below is a summary of major retirement-related changes under way or expected soon.
United Kingdom
The U.K. Parliament is expected to enact broad pension reform, instigated by the plundering of the Maxwell company pension funds.
The legislation would create a new regulator, minimum funding standards and a compensation fund to back up underfunded pension plans that have been subject to embezzlement or fraud. It also would require a minimum level of one-third member trustees on pension boards and would give trustees a greater say in how pension funds are managed.
In addition, it would require limited indexation of pension benefits as a trade-off for ending mandatory increases in guaranteed minimum pensions and would alter gender-based pension equalization rules.
While the bill is expected to pass the critical report stage in early July - the last major point where amendments can be made - a final reading and acceptance by the House of Lords of amendments made by the House of Commons probably won't occur until autumn.
France
President Jacques Chirac campaigned in favor of pension law, leading experts to believe a bill will be enacted within a year. The issue in France is huge: French corporations hold, on average, only 27% of their retirement liabilities, and individuals realize they no longer can depend on the state's pay-as-you-go pension system.
Thus, the creation of private pension funds in France would solve a social need - even as it provides a new source of financial support for France's equity market. Some insurance experts expect the private pension market will account for between 40 billion French francs and 50 billion francs ($8 billion to $10 billion) in new pension savings each year before 2000.
But just where the Chirac government will come out on various issues affecting pensions is unknown. Observers note Mr. Chirac is more preoccupied with reducing unemployment than creating pension legislation.
Still, it appears French insurance companies have won a major victory over banks because any pension bill will require benefits to be paid out in the form of an annuity rather than a lump sum.
As things now stand, some experts believe the market might be divided into two parts: an investment part and an administrative part. Some banks - like State Street Banque - already have created their own life insurance units, while others might provide private-label management to insurance companies. But some major French insurance companies are working at beefing up their investment management capabilities.
Italy
Italy is on the verge of enacting major pension reform after years of struggling with the issue.
The existing state pension system is extremely expensive, paying workers up to 80% of their pre-retirement income and accounting for 15% of gross domestic product in 1994.
Legislation before the Parliament would reduce benefits under the beleaguered state system and create new incentives for private plans. Basically, the proposal, which was expected to be enacted by the end of this month, would complete a move toward a contribution-based system started in 1992, replacing the system based on final pay. The transition would occur over 18 years, with new entrants' benefits calculated under the new system.
Also, early retirements will be cut back, and unemployment and disability benefits will be switched to a new fund.
To encourage creation of new plans, employers and employees each would be able to make tax-deductible contributions of 2% of pay to the fund, as long as at least 2% of the severance pay plans are contributed. But contributions are capped at 2.5 million lira each ($1,525), meaning total contributions still will be very low.
Pension funds will be taxed at a fixed annual rate; benefits could be paid out as a lump sum or as an annuity.
Russia
Russia is being forced to adopt pension legislation.
With more than 1,200 so-called pension funds already in existence, government officials are aware of the need to impose standards for pension funds.
A previous bill was rejected, in part because it lacked adequate safeguards and because of oppressive investment restrictions.
A new version, which drops the investment restrictions, might be considered later this year. Even without parliamentary action, President Boris Yeltsin could sign a decree implementing the rules.
At its heart, the legislation would create a pension regulator, the inspector of non-state pension funds. It would steer participants toward personal pensions that could be set up by individuals or employers. Capital accounts would have to be converted to annuities at retirement.
There are no tax rules in the bill, because Russian constitutional law confines tax changes to separate legislation. But tax deductibility for pension contributions is expected.
Meanwhile, four local governments have permitted some tax-favored treatment in their areas, helping pensions advance there.
Japan
In the world's second largest pension market, liberalization is decidedly under way.
In January, the United States and Japan reached accords on trade in financial services that included further opening of Japan's pension market, especially public pension funds, to international managers. Effectively, the pact should expand investment freedom as well as investment accountability.
Some of the key elements of the January accords:
Technically, the estimated $200 billion Pension Welfare Service Public Corp., or Nenpuku, became accessible to investment advisory firms; previously, only trust banks and life insurers in Japan could manage this money.
The age of corporate Employee Pension Funds that can use investment advisers was trimmed to three years from eight years.
Money managers gained access to the mutual aid associations (funds of public employees) of the Federation of National Public Services and Affiliated Personnel and Nippon Telegraph.
By 1997, pension funds should be using market values instead of book values for actuarial calculations.
Disclosure of fund manager performance on a market-value basis will be encouraged.
And more deregulation is in the works. Right now, investment advisers can only manage one-third of the assets of corporate Employee Pension Funds; the remaining two-thirds must be managed by Japanese trust banks and insurance companies. But in the fall of 1996 up to half of an Employee Pension Fund's assets would be available to investment advisers.
But the Tokyo-based Pension Fund Association doesn't want liberalization to stop there. It hopes that after Japan's next review of pension rules in 1999, all pension investing regulations will be replaced by a prudent investor rule. In the meantime, the association wants the government to abolish investment curbs that apply to individual managers.
(Currently, each account in the two-thirds of pension assets that must be handled by trust banks and insurers must abide by the 5-3-3-2 rule. That means no less than 50% of an account can be invested in safe assets. And funds can invest only up to 30% in equities, 30% in foreign securities and 20% in property. Although starting in late 1996 the 5-3-3-2 rule will only apply to each account in one-half of a pension fund's assets - instead of the current two-thirds - the PFA wants all restrictions on individual managers scrapped. In that case, pension sponsors would have to ensure their entire fund meets the 5-3-3-2 rule.)
Hong Kong
Legislation is expected imminently that would create a mandatory provident fund - Hong Kong's first retirement program for all workers.
If approved by the territory's Legislative Council, the MPF might be launched in early 1997.
MPF legislation is likely to include the main features of a report by GML Consulting Ltd. and its parent, Hewitt Associates L.L.C. The report suggests a defined contribution plan that would be fully vested and portable. Employers and employees each would contribute 5% of an employee's monthly salary up to a maximum of HK$20,000 (U.S.$2,600). Employees could receive benefits any time after reaching age 60. The tax-free benefits will be disbursed as a lump sum.
The mandatory retirement program is controversial, and it remains unclear what the Legislative Council actually will pass. Among the unanswered questions about the MPF plan are how it would fit with Hong Kong's existing 20,000-odd existing plans and whether MPF funds would have to be domiciled in Hong Kong.
Australia
Australia's mandatory retirement program will begin to require contributions from employees in mid-1997. That plan was unveiled as part of the government's annual budget. According to the new plan, in addition to required contributions from employers, employees will have to save as much as 3% of their earnings. On top of that, the government announced it would make a contribution of as much as 3% of pay for lower-paid employees. Together, the moves boost annual contributions into the national superannuation system to as much as 15% of salaries by 2002 from a previously planned 12% (including 9% from employers). The government hopes the contributions will raise the level of national savings in Australia.
Chile
Investment liberalization has been continuing.
In May, Chile's Administratoras de Fondos de Pensiones obtained approval to invest up to 37% of assets in domestic stocks, up from 30%. At the same time, Chile's Superintendency of Pension Fund Administrators raised to 9% from 6% the AFPs' allowable foreign investments. And for the first time, half of the AFPs' allowable foreign allocation can be invested in equities.
The AFPs received permission to use derivatives - for hedging purposes only. Also, some restrictions were eased that apply to investments in project financing and venture capital.
The formula for calculating how much AFPs can invest in each company also changed. Previously, it favored investments in liquid, bigger-capitalized stocks. But a change in the variables being computed now give a higher limit to most smaller-cap stocks.
Brazil
In June, the Brazilian government said it would push back social security reform to 1996 in order to address more pressing tributary and administrative reforms during the second half of 1995.
Social security reform - which had been high on the agenda of President Fernando Henrique Cardoso - is needed to improve the fairness of the system and make it less costly to government. But politics has bogged down the complicated reform plan.
Key issues being discussed in social security reform include creating a benefits formula that links social security payments to age and length of contributions; increasing the years of contributions necessary to collect the benefit; and establishing a benefits ceiling. In the latter case, the ceiling could be as low as five times the minimum wage; supplementary benefits would come from private sector pension funds.
Francine Brevetti in Hong Kong, Barrie Dunstan in Australia and Michael Kepp in Brazil contributed to this story.
