Thursday Sep 19, 2024
Thursday Sep 19, 2024
Monday, 30 June 2014 00:00 - - {{hitsCtrl.values.hits}}
Citi is also hosting its proprietary pension forum – the first if its kind – where I will be presenting on the Australian retirement income scheme. Australia is recognised as a leader in pension reforms, in fact it is one of the early reformers, that was about 25 years ago. So there is a lot of interest on Australia in this subject, and I will be sharing that story along with some other presentations which will highlight challenges, issues, and analysis of pension system in Sri Lanka.
Q: How will you be spending your stay in the country? Any key persons you will be meeting?
A: I am here for about two days. It is a short stay and in that I will be meeting some senior people which include the Governor of the Central Bank of Sri Lanka.
Q: What was the objective of the Pension Forum hosted by Citi and what is the overall message that was delivered?
A: The central message is that pension reforms are important for a number of reasons. It is important because the demographics of the population are changing, and not just in Sri Lanka, but this is also the case in many other countries. So people are living longer and also they have fewer children.
The change in demographics does have its impact on pension systems, including the affordability of the system. If people are living longer, then you are paying pensions to people for longer and that is a central issue in every country in the world. Every county has this challenge. It certainly is great that some countries have a longer life span, but along with this comes the need to pay the retiring segment of the population.
The second central issue is that there is a lump sum payment system which is prevalent in certain countries. Australia also has this system and it is looking to change this to a gradual payment since the day of retirement.
Q: Is the gradual payment easier for governments to handle?
A: It is not easier. A pension system is all about income during retirement and not about just giving a lump sum. This is a global debate and is a big one in Australia. The debate is about what form the payment should take place, a lump sum or just a payment each year.
Q: What key factors should be taken into account when disbursing pension funds?
A: Speaking on Sri Lanka, 50% of its people receive nothing. This is because they are not in the formal workforce and this is an important social issue. It is because the economy is changing, the nature of the family structure is changing, and a safety net, which is a basic pension, is important. It is so because it will help prevent people falling into poverty when they reach retirement age.
The other thing is on where the money should be invested. Australia is relatively unusual since majority of the money is invested in equity, shares and infrastructure because that gives a better return than bonds and cash. That again I know is a debate here.
Q: What are your observations on Sri Lanka’s pension landscape?
A: I think given Sri Lanka’s level of economic and social development it is understandable what it has at the moment. However, I do think with the society changing and the economy growing stronger it needs to make some changes and there has been a number of those proposed.
Sri Lanka needs to have some sort of basic system to protect everyone in retirement. It needs to have a system where the money is invested to give a higher rate of return.
The other area is on what should happen to public sector pensions. Public servants tend to get pensions better than everyone else and the trend in many countries is to remove the special treatment for the public servants and become a part of the broader system of the population. That is the trend that is happening in Australia, and there is a big debate about that globally as well.
I think it is a challenge to maintain the special treatment for public servants.
Q: So how can this special treatment for public servants be addressed and removed since it is greatly practiced in the South Asia region?
A: Yes it is. I think what happened in most other countries is that the current persons are not told that the system will be changed tomorrow. It is new employees going forward who will be part of the general system and not part of the public service. What happens is that in this method the scheme just runs down gradually.
So if the public sector fund is shut down today, the current employees will have their current entitlement but new employees will go on to be a part of the general system that covers everyone.
In some countries where the debt is high that has not been an option, but in other countries this is the case.
Q: You mentioned that for Sri Lanka a challenge is that about 50% of the population does not receive pensions. How do you recommend those employed in the informal sector be captured in the pension system?
A: In the informal sector a significant part doesn’t work, for example women with children, they are out of the workforce for a significant period of time or may not work at all. That is why a basic safety net is needed. That has to be funded by general government revenue and that is why it should be kept at a very basic level and not be too expensive.
The pension age should also be adjusted to life expectancy. In Australia the life expectancy is now 84, it has gone up 20 years in the last 100 years. It is gradually going up in most countries so the pension age should also be increasing gradually. For this, it is good to have a modest safety net pension.
On top of that there is the national scheme and the issue there is on where the money is being invested and whether the public sector fund should continue. That is pillar two and pillar three is voluntary where if a person wants to put in extra money he can.
In Sri Lanka’s case it is building a pillar one, that is the basic safety net, pillar two where the investment is looked into, and then the option of having a pillar three.
Q: Citi is in the view that there is increasing attention from the Government on pensions. Why is it so? Is the interest in this regard higher now than before?
A: Yes, the interest is increasing. This is because firstly in many countries governments are making those payments. Greece went broke and eventually collapsed by making these payments. The Government could not afford to pay the pensioners. So that is one of the reasons why governments are looking at this.
However, I think the more interesting issue is the investment. And the third is that people do expect at least a modest pension when they are too old to work.
As a country modernises, the social family structure changes and the old cannot be reliant on their children and grandchildren to look after them since the economic changes are affecting the way families live. These are mostly the reasons as to why governments are interested in pensions now than before.
Q: What are the global and regional reforms in this regard? In that, what can Sri Lanka embrace?
A: The broad reform is that in advanced economies they are looking at reducing pensions to a lower basic level to ensure that the system is sustainable.
Sri Lanka has the opportunity to set up a pillar one so it should have a modest safety net. In some countries, such as Japan, it is just too generous.
So a modest safety net in pillar one is important and the level of occupational pensions in pillar two should be mandatory.
Q: When looking at the regulatory policies on pensions, what are the current trends across the region? And where does Sri Lanka stand in this regard?
A: If something is invested on behalf of an individual or a group of retired persons, it is important to be rigorous on the regulation. If this is the money that is to be invested, every individual would want it to be well regulated to ensure that it will be there. The general trend is to increase supervision of pension fund investments.
A couple of other factors are that more and more pension monies are being invested offshore and for that it is necessary to have good regulation.
Also there is increased supervision on pensions as a consequence of the financial crisis.
There is a very strong ‘duty of care’. If you have money that is to be invested in 30 or 40 years in someone’s retirement, there is a requirement for stronger oversight of regulation and supervision since the last thing you would want is for the money to be poorly invested.
Q: In what ways do you recommend that the private sector can participate in the growth of pension funds?
A: I think it is important to have the private sector in the investment. Diversified investment in pension funds is important. So private sector investment and much greater investment in equity and infrastructure both domestic and overseas are necessary.
FT PROFILE
"In 1986 Nick Sherry established two superannuation funds – HOST PLUS and Club Plus (Tas). He was a founding trustee/director and company secretary and trustee/director of each respectively. He merged Club Plus with HOSTPLUS in 1990.
He was elected as a Senator for Tasmania in 1990 and Chaired the Senate Committee on Superannuation. In that role he over-sighted the legislation for the 9 p.c. Superannuation Guarantee and Superannuation Industry Supervision Acts – the foundations of the modern Australian system.
In 2007 Sherry was appointed as Australia’s first Minister for Superannuation and Corporate Law. He initiated the Cooper Review and Future of Financial Advice amongst many other initiatives. He was responsible for the Australian Prudential Regulatory Authority and Australian Tax Office, Superannuation Sections.
Sherry also introduced single national regulation of all financial providers, products and advisers in Australia. As Corporate Law Minister he had responsibility for the Australian Securities and Investments Commission (ASIC) and developed policy for stock market competition and introduced oversight of short selling and credit rating agencies.
He was a member of the Cabinet sub-committee over-sighting the Global Financial Crisis response.
In 2009 Nick was appointed Assistant Treasurer where he introduced new national accounting and tax advice oversight, foreign investment approvals and administration, major reforms to key tax measures including Sovereign Wealth Funds, Managed Investment Trusts and Ancillary Investment Funds and developed new policy on Charities law, Gambling and Oversight of the Tax Office.
In 2010 Sherry was appointed Small Business Minister and Minister Assisting on Deregulation and Public Sector Superannuation and Tourism. He over-sighted the implementation of the Seamless National Economy and merger of Government super funds.
He was Minister responsible for the Asian Development Bank serving as the alternative Governor.
He has vast experience in parliament particularly the Senate, committees, government, and responsibility for regulators in key financial, tax and regulatory areas.
Regarded as a policy reformer, having studied and written on superannuation and pension’s policy over 25 years, he is an Australian leader on pension/superannuation matters. A passionate public advocate combined with successfully delivering complex, diverse policy projects is Sherry’s hallmark. He retired as a Minister on December 10, 2011 and from the Senate on 1 July 2012.
In 2012 Sherry was involved in over 50 projects, including policy, systems analysis, speeches and presentations in Australia, US, Ireland, Korea, UK, Thailand, Singapore, Taiwan, Malaysia and Hong Kong (including interaction with policy makers, ministers and regulators) and working with a range of operational providers such as life companies, pension and superannuation funds, banks and investment managers."
