March 2008 21www.the-actuary.org.ukGlobal pension assets on the risePADA consults industry on personal account chargingActuaries refuse to salute new pension standardsA new paper from the Accounting Standards Board (ASB) and the European Financial Reporting Advisory Group (EFRAG) has met with a dismayed reaction from members of the Actuarial Profession.Titled The financial reporting of pensions, the paper (available from www.frc.org.uk/asb) is intended to contribute to the eventual development of a fresh international accounting standard to replace both IAS 19 and the UK8217s own FRS 17. In contrast with the latter, which allows pension liabilities for the purpose of investor reporting to be discounted at the yield on AA-rated corporate bonds, the ASB/EFRAG thinking now is that pension liabilities should be discounted at the (government bond-based or swap-based) risk-free rate.The common theme of the vocal reaction from actuaries and others was that such a change would lead to the final demise of defined-benefit pensions in the private sector. Actuaries calculated that the total deficit to be accounted for by the largest companies would increase by the order of 163100bn. They also suggested that the probable increased deficit volatility in future would deter firms from operating defined-benefit schemes matched to a substantial degree by equities.It remains to be seen whether these concerns will lead the IASB to a different approach in dealing with one of the hottest accounting potatoes for the development of global standards.FSA highlights risks of tougher environmentIn January, the Financial Services Authority published its Financial Risk Outlook (FRO) warning firms and consumers of the risks inherent in a significantly less benign economic environment. Its central scenario identifies the following five priority risks: 1

Existing business models of some financial institutions are under strain as a result of adverse market conditions2

Increased financial pressures may lead to financial firms shifting their efforts away from focusing on conduct of business requirements and from maintaining and strengthening business-as-usual processes3

Market participants and consumers may lose confidence in financial institutions and in the authorities8217 ability to safeguard the financial system4

A significant minority of consumers could experience financial problems because of their high levels of borrowing 5

Tighter economic conditions could increase the incidence or discovery of some types of financial crime or lead to firms8217 resources being diverted away from tackling financial crime. The FRO focuses on the risks arising from the events of the second half of 2007 and the less benign economic outlook expected over the next 18 months. Global institutional pension fund assets in the 11 major markets grew by around 9% during 2007 to more than $25trn, according to Watson Wyatt8217s Global Pension Assets Study released in January, compared to an average growth rate of 12% p.a. during the past five years. Since 1997, assets of the largest 11 pension industries have increased from 64% to 82% as a proportion of the gross domestic product (GDP) and during the same period GDP grew by 57%, while global pension fund assets doubled (in US dollar terms). Hong Kong has the highest compound annual growth rate (CAGR) for a 10-year period at around 16% p.a., with Japan the lowest at around 3% p.a. Other highlights from the report include:10-year global asset datan The US, Japan, UK and Canada, respectively, were the largest pension fund markets in 1997 and this remained the case in 2007, now accounting for 87% of total assets. The smallest markets in descending order are Germany, France, Ireland and Hong Kong with the latter showing continued high growth since its pension reforms in 2000 n The US represented the largest market by some margin at the end of both 1997 and 2007, accounting for around 60% of total pension fund assets globallyn Since 1997, Hong Kong, Australia and Ireland have had the highest CAGR in local currency of around 16% p.a.,14% p.a. and 10% p.a. respectively n Japan and Canada had the lowest CAGR since 1997 of around 3% p.a. each, measured in local currenciesn In 2007, pension assets as a proportion of GDP amounted to 7% in France, the lowest, and 145% in Switzerland, the highestn Since 1997 the biggest change was in Australia (up around 59%, from 46% to 105%) and the smallest change was in France (up around 2%, from 5% to 7%).Global liability data n In 2007, global pension liabilities (discounted at government bond yields) grew a little faster than pension assets, reversing some of the gains of the years from 2003 to 2006 and leaving some defined-benefit funds in weaker solvency positions.Asset allocationn In 2007, equity allocations in the seven largest markets shrank from around 60% to 56%, but have grown from 52% in 1996. During the same period-bond allocations increased to 28% from 26% but are down from 37% in 1996n Other assets, especially real estate and, to a lesser extent, hedge funds, private equity and commodities, have grown from 12% to 16% in recent yearsn In 2007, the UK had the highest allocation to equities (64%) while Switzerland had the lowest (33%) and Japan had the highest allocation to bonds (47%) while Australia had the lowest (16%). At the same time Switzerland has the highest allocation to alternatives (29%) while Japan has the lowest (7%).Defined benefit (DB) versus defined contribution (DC)n During the 10-year period since 1997 the CAGR of DC assets in the seven largest markets was 10%, compared with around 5% for DB assets during the same periodn DC assets now comprise 44% of global pension assets, compared with 34% in 1997n Australia has the highest proportion of DC pension assets, having increased from 73% to 87% of overall assets between 1997 and 2007n The countries that show a larger proportion of DC assets than DB assets are the US, Australia and Switzerland, while Japan and the Netherlands are close to 100% DB.The Global Pension Assets Study 2008 is available at www.watsonwyatt.com/europeNewsIndustryPension assets in Switzerland highest proportion of GDP.Yazmeen Razak020+021_Actuary_Industry_0308.in21 2119/2/08 14:06:36
Page 1Page 2Page 3Page 4Page 5Page 6Page 7Page 8Page 9Page 10Page 11Page 12Page 13Page 14Page 15Page 16Page 17Page 18Page 19Page 20Page 21Page 22Page 23Page 24Page 25Page 26Page 27Page 28Page 29Page 30Page 31Page 32Page 33Page 34Page 35Page 36Page 37Page 38Page 39Page 40Page 41Page 42Page 43Page 44Page 45Page 46Page 47Page 48Page 49Page 50Page 51Page 52Page 53Page 54Page 55Page 56Page 57Page 58Page 59Page 60Page 61Page 62Page 63Page 64Page 65Page 66Page 67Page 68Page 69Page 70Page 71Page 72Page 73Page 74Page 75Page 76 Produced by PageSuite