Kein Folientitel

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5 Aniversario des Sistema Mexicano de Pensionses
- Reformas de los Sistemos Previsionales en el
Mundo German Pension Reform
Dr. Alexander Schrader Managing Director Allianz
Dresdner Pension Consult
Mexico, July 2002
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Agenda.

• The German pension market today and the need to
  reform.
• Main elements of the German pension reform.
• Changing market structures - players, products,
  distribution.
• First experience.
• Allianzs strategy to capture the pension
  opportunity.

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The German pension system.
Not able to keep the pension promise!
Retirement income
Statutory pension
Corporate pension
Private provision
Access

• all employees
• mandatory
• 85 of retirement income
• PAYG
• income related pension 67 of last net income
• mostly EEE

• 50 of employees
• voluntary
• 5 of retirement income
• partially funded (16)
• (mostly) unfunded pension reserves and insurance
  products for db plans
• TEE and EET

• everybody
• voluntary
• 10 of retirement income
• funded (37 of GDP)
• life insurance and retirement savings plans
  (AS-Fonds)
• TEE and EEE

Economic impact
Cover stock
Vehicles
Taxation
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Vehicles for corporate pensions.
Employer enters into a pension commitment tax
deductible pension provisions based on actuarial
calculations with interest rate of 6 (unfunded
liabilities according to IAS) no rules
governing investment or statutory supervision
benefits are safeguarded by the Pension Guarantee
Fund investment in external pension funds
possible.
Pension reserves
Legally autonomous pension funds can be operated
by one or more employers employees have no legal
entitlement to benefits no investment
restrictions benefits are safeguarded by the
Pension Guarantee Fund only partial asset
funding reinsurance possible.
Support funds
Company takes out an individual or group life
insurance policy in favour of its employees life
insurance companies are subject to government
insurance supervision benefit risk is assumed by
the insurance company contributions subject to
flat tax rate of 20 not all new tax incentives
can be applied.
Direct insurance
Legally autonomous pension funds can be operated
by one or more employers employees are legally
entitled to benefits subject to government
insurance supervision quantitative restrictions
on capital allocation contributions subject to
flat tax rate of 30 access to new tax
incentives.
Pensionskasse
Legally autonomous pension funds can be operated
by one or more employers employees are legally
entitled to benefits subject to government
insurance supervision benefits are safeguarded
by the Pension Guarantee Fund capital allocation
following the Prudent Person Rule access to new
tax incentives.
Pension funds
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The German market for corporate pensions
Momentum needed.

• Shadowy existence of corporate pensions in
  Germany Stagnating market and low penetration.
• Occupational pensions as employer-financed
  instrument mainly aimed at encouraging loyality
  of highly qualified employees.
• Unfunded pension reserves are still the
  dominating vehicle, followed by insurance
  products.

direct
insurance
13
pension
reserves
Pensions-kasse 21
59
? thereof funded 27
support
funds 7
Cover funds 2000 EUR 331 bn.
Source aba Estimate
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Pressure to reform pension systems.
Elderly dependency ratios ) in percent

• The population in all industrialized countries is
  ageing, bringing the Pay-As-You-Go (PAYG) state
  pension systems and consequently state budgets
  under severe pressure.
• To ensure sustainable pensions, the PAYG systems
  need to be complemented by funded pension plans,
  either corporate or private pension provision
  schemes.
• Germany as a country that has been heavily
  relying on statutory PAYG pension faces one of
  the biggest challenges.
• With the pension reform Germany has taken a
  decisive step towards funded pensions strongly
  promoting corporate pensions.

2000
2050
) 65 in population as a percentage of working
age population Source Eurostat, UN
7
High Reliance in Europe on Government PAYG
Systems.
Retirement income by sources
Source DIA
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Accelerating reform pace in Europe.
Reforms on behalf of EU memberstates
France

• Consolidation of statutory PAYG systems
• reductions in benefits
• increase in pension age
• Enhancement of funded private pension systems
• modern pension funds
• tax incentives

Germany, Italy, Spain
Netherlands, Switzerland Austria, Sweden
reforms leading
steps been taken
reforms lagging
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Agenda.

• The German pension market today and the need to
  reform.
• Main elements of the German pension reform.
• Changing market structures - players, products,
  distribution.
• First experience.
• Allianzs strategy to capture the pension
  opportunity.

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The German pension reform Objectives.

• Income
• replacement
• level approx.

• Stabilize the PAYG statutory system
• Limit contributions at a long-term level of 22
  (2002 19,1).
• Retirement pensions of the model retiree were
  reduced from 70 to 67 of last net income.
• Encourage personal retirement savings for
  retirement by introducing tax incentivized and
  officially certified personal retirement plans
  (so called Riester pension).
• Revitalize corporate pension schemes as strong
  pillar of old age income.

Benefit loss to be compensated by additional
retirement income
70
Mixing of 2nd and 3rd pillar
67
Contribution level 22
Occupational Pension Plans
Personal Funded Pensions
Social Security
1st pillar
2nd pillar
3rd pillar
to play a more dominant role T O T A L R E T
I R E M E N T I N C O M E
45 years of creditable work
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Reforming corporate pensions Main elements.

• Legal entitlement to deferred compensation
• As of 2002, any employee can legally demand that
  up to 4 of his gross income (up to the social
  security ceiling) will be converted into pension
  entitlements (2002 max. EUR 2,160).
• Establishment of deferred compensation schemes
  mostly subject to collective bargaining
  agreements.
• Introduction of a defined contribution (dc)
  plans, albeit with some defined benefit (db)
  elements
• dc plan with a minimum guarantee Employer has to
  guarantee the sum of the paid in contributions,
  less the disbursements for the coverage of
  biometric risks.
• Shortening of vesting period for
  employer-financed benefits (max. 5 years) and
  improvement of the portability of company pension
  claims.
• Introduction of a German-style pension fund as a
  5th funding vehicle.
• New tax incentives.

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Pension reform changes corporate pensions...
Classical pension plan
New pension plans
Employer
Employer
Employee

contribution
contribution and/or deferred compensation
Tax incentives
Asset Management product
Insurance product
Unfunded reserves/ Insurance product
New German pension fund
Defined benefit
Defined benefit or defined contribution with
minimum guarantee
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... but has not made it easier.
Personal Pensions
Company Sponsored Plans
Deferred Compensation Plans
Tax Free
Riester-Subsidy
Riester-Subsidy
4( 3 No. 63 EStG)
4 ( 3 No. 63 EStG)
1 - 4 ( 10 a EStG)
1 - 4 ( 10 a EStG)
1
2
PC
DI
PK
PK
PF
PK
PF
DI
PK
PF
Personal Contracts Annuity
Insurance Combination of Mutual Funds and
Annuity Insurance
1.752 p.a.
4 of Social Security Ceiling
PR
DI
PK
PR
SF
SF
Contributory DB Plan Cash Balance
Plan Deferred Comp.
40b EStG (Flat Tax Rate 1.752)
Defined Benefit Plan
Defined Contribution Plan
DI direct insurance (Direktversicherung) PK
Pensionskasse PF pension funds
(Pensionsfonds) PR pension reserves
(Direktzusage) SF support funds
(Unterstützungskasse)
Bargaining agreements between Management and
Unions
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Tax incentives favour corporate pensions.
In EURO per employee per year.
2002
2008
Riester pension (10a EStG)
2.480 (4 SSC)
525 (1 SSC)
Deferred taxation ( 3 No. 63 EStG)
(4 SSC)
(4 SSC)
2,160
2,480
1,752 - 2,148
Flat rate tax ( 40b EStG)
1,752 - 2,148
6.712 - 7.108
4.437 - 4.833
Total
88 - 89
63 - 65
Utilization via corporate pensions
The social security ceiling is calculated at
62,000 EURO in 2008 In case of group
contracts, it is possible to invest up to 2.148
EUR as long as the average contribution rate does
not exceed 1.752 EUR. Source McKinsey
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Cost effectiveness favours corporate pensions.

• Corporate pensions
• easy access to working population through HR
  departments of companies
• lower distribution and administration costs
  (economies of scale)
• taylor-made solutions for larger companies
  possible
• layer of security thru employers commitment
• collective investment decision possible

• Private provisions
• product choice according to individual investment
  preferences (life-cycle investment, annuity vs.
  high-yielding products)
• highly standardized products common practice
• broad distribution network (agents, banks)
• clear link to individual savings decisions

We expect corporate pensions to attract more than
50 of the tax incentivised new inflow of pension
assets.
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German pension funds Example for the new hybrid
products of asset management and insurance
components.

• Separate legal entity regulated by German Federal
  Financial Supervisory Agency.
• Legal entitlement of employee to benefits.
• Benefits as annuity or payment plan, up to 20 of
  the capital as lump sum payments, additional
  biometrical risk cover possible.
• Minimum capital guarantee.
• Db or dc with minimum guarantee.
• Capital adequacy requirement min. 3 m.

• Liability to contribute to the Pensions Guarantee
  Fund as additional safeguard against insolvency
  risk.
• Tax incentivised vehicle for new deferred
  compensation plans (10 a plus 3 No. 63 EStG)
  as well as the transfer of cover stock of
  existing plans from pension reserves and/or
  support funds.
• Company, third party or industry-wide pension
  funds possible (schemes established in the metal
  engineering and chemical industry ).
• Investment process following the Prudent Person
  Principle.

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German pension funds Liberal investment
regulations.

• Finally, investment directive essentially follows
  Prudent Person Principle.
• Diversification of assets in accordance with the
  upcoming EU pension fund directive.
• max. 5 investments in sponsoring company, in
  case of more than 2 sponsoring companies up
  to 15.
• max. 10 share capital of one company
• max. 5 one borrowing name, exception
• max. 30 public borrowers and financial
  institutions
• max. 10 sole property
• Currency exposure is restricted to 30 of assets.
• Defined range of investment vehicles essentially
  following regulations for insurance companies.
• Qualified management of capital investment,
  especially risk management
• stress testing / value-at-risk-modelling /
  scenario analyses

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Pension fund design Allianz Dresdner Pension
Fund (ADPF) - conceptual.
Other biometric Risks
Contribution
Asset-Liability Management
Free assets (in segregated fund)
SafeAssets
Strategic Asset Allocation
Bonds EuropeBenchmark JPM Europe
Equities EuropeBenchmark MSCI Europe
Multi-Advise (Selection and Controlling of Asset
Managers)
Subfund 1(MSCI Europe)
Subfund 2 (MSCI Europe)
Subfund 3(JPM Europe)
Insurance product
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Allianz Dresdner Pension Fund.Investment
Strategies - conceptual.
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Agenda.

• The German pension market today and the need to
  reform.
• Main elements of the German pension reform.
• Changing market structures - players, products,
  distribution.
• First experience.
• Allianzs strategy to capture the pension
  opportunity.

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Change drivers.

• Legal entitlement provides a strong stimulus for
  corporate pensions
• Delevopment of the so-called instividual market
• market pension schemes to employers firsts (e.g.
  group insurance, group or individual pension
  fund)
• market scheme or scheme products (e.g.
  unit-linked pension plans) to employees.

• Hybrid product structures to tap the return
  potential of global capital markets while
  maintaining a high degree of security.
• Combination of asset management and insurance
  know how.
• German-style pension fund, funding of pension
  reserves
• Competitive edge for integrated financial
  services providers

• Employers associations and the trade unions
  establish collective, industry-wide pension
  schemes, e.g. MetallRente
• .Employees profit from economies of scale.
• Reduced distribution margins

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MetallRente as a benchmark for collective
schemes

• Market potential
• MetallRente directly geared at over 4 mio.
  employees in the metal and electrical industries
  and other associated sectors (textiles and
  clothing, wood and plastics, iron and steel)

• Retirement schemes set new benchmarks for the
  management and administration of company pension
  schemes
• three pension vehicles to take advantage of all
  tax incentives introduced by the pension reform
• product spectrum covering 12 different insurance,
  unit-linked products and pension fund products
• a common, cost-effective administration platform
• high level of service, full portability among
  member firms, no switching costs for employees
• MetallRente direct insurance industry benchmark
  with regards to costs and performance

• Distribution
• Special sales force with currently 60 consultants
  focussing exclusively on marketing MetallRente
  products to employers and employees using a broad
  spectrum of marketing tools
• Other distribution channels of the members of the
  consortium are allowed to sell MetallRente as
  well, albeit at reduced fees

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IG Metall
Gesamtmetall

• MetallRente Organisation (GbR) by Civil Law

Operator MetallRente consortium under Allianz
leadership
Administration Platform
MetallRente Sales and Consultancy Unit Allianz
Dresdner Pension Consult
MetallRente Direct InsuranceAllianz
withVictoria, BHW
MetallRente Pensionskasse Allianz withVictoria,
BHW
MetallRente Pension Fund Allianz withVictoria,
West LB, BHW
Investment Multiadvise Approach for Public and
Segregated Funds
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Implications.

• Well established players get under pressure
  Predominantly life insurers with fee driven tied
  agents network, pension brokers and specialized
  pension consultants focussing on actuarial
  business and complex restructuring are facing ...
• ...new players large scale market entry of asset
  managers and banks combining product know-how and
  sales power, and consultancy firms tied to
  production factories.
• New product management capabilities required
• Increasing product complexity at shrinking
  margins.
• Product packaging of standardized asset
  management and insurance components
• Different distribution strategy critical in
  capturing the pension opportunity
• A more complex product demands specialized,
  highly skilled sales networks focussing more on
  consultancy
• Banks distribution networks will gain in
  importance
• Well-crafted direct marketing and workplace
  marketing strategies necessary to cope with lower
  distribution margins

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The market for pension products in Germany.
Germany with large growth opportunity
Corporate pensions shift towards funding
Pension assets ( bn)
100
100
Funded schemes
New German Pension funds
Pensionskasse direct insurance
7,3
Funded pension reserves
890
Non funded schemes
Corporate pensions
8,5
Support funds
Private provisions
Pension reserves
Source EFRP, ADPC, Allianz Group Center Economic
Research
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Agenda.

• The German pension market today and the need to
  reform.
• Main elements of the German pension reform.
• Changing market structures - players, products,
  distribution.
• First experience.
• Allianzs strategy to capture the pension
  opportunity.

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First experience with the Riester reform.

• Subdued start In the first five months, only 2 m
  contracts offering a Riester pension were signed.
  That is roughly 6 of the total market.
• Employersassociations and trade unions stepped
  up their activities in implementing the necessary
  preconditions for establishing deferred
  compensation schemes.
• 180 collective bargaining agreements have been
  closed, ...
• ... covering 16 m employees, about 60 of the
  market potential.
• Regulatory bottle-neck up to now, the German
  Federal Financial Supervisory Agency has approved
  only seven new pension funds with a further 23
  requests waiting for approval. Three new
  Pensionskassen are authorized, 18 further
  requests are pending.

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German Pension Reform (2001/2002) pros and cons

• Cons / Risks (-)
• Pension reform too complex, e.g. by mixing of 2nd
  and 3rd pillar of retirement income (personal
  pensions and/or group pensions or a mix of both),
  also with regard to taxation
• Personal pensions appear to be overregulated and
  lacking transparency.
• New Riester plans might be used as a benchmark
  regarding costs and thus exerting pressure on the
  margins of existing traditional life products

• Pros
• Important step towards a funded and private
  Pension System.
• Strengthening of dc type schemes.
• Reform policy as catalyst for a renaissance of
  occupational pension schemes.
• Numerous deferred compensation models on a pre-
  and after-tax basis and with or without limit.
• Tendency to move from on-balance sheet pension
  schemes to off-balance sheet pension schemes.
• Attractive tax incentives for corporate plans

Overall positive assessment
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Winners and losers from pension reform?

• The larger part of fresh pension money is going
  to flow into corporate (and collective?) schemes,
  due to
• higher tax incentives
• lower (distribution and administration) costs
• Hard facts are not available yet, but the
  establishment of collective, industry-wide
  schemes are a strong indicator
• Conventional wisdom speaks for insurance
  companies
• active, fee-driven sales force
• insurance-type products prevailing in the market
  
• but trend towards asset management-style pension
  products (unit-linked, pension funds)
• Banks could gain pension market share because of
  the higher quality of advise for asset
  management-style pension products.

Distribution channels
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Agenda.

• The German pension market today and the need to
  reform.
• Main elements of the German pension reform.
• Changing market structures - players, products,
  distribution.
• First experience.
• Allianzs strategy to capture the pension
  opportunity.

31
Allianzs strategic position in the market for
corporate pensions.

• Well positioned in the corporate business 50 of
  all companies are customers of Allianz Group.
• Unique selling proposition as allround provider
  of pensions products
• Complete product range of asset management and
  insurance products.
• Development of tailor-made product bundles for
  corporate pensions.
• Pensions administration as integrated part of
  value chain.
• Allianz Dresdner Pension Consult GmbH
  specialised consultancy offering product neutral
  advise to multinational companies and complex
  pension schemes as well as managing the sales
  force MetallRente.
• Winning the MetallRente consortium leadership
  was a major success.

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Integrated process for distributing pension
products.
Process
Producer
Allianz Groups institutional distribution
channels

• Relationship management by client manager
• specialised consulting

• Administration of standard products
• Interactive administration of individual and
  collective retirement claims

Different divisions of Allianz Group
Product range of Allianz Group (Asset management
and insurance products)

• Supply of standard products
• interdisciplinary expert team develops innovative
  and individual products

• Systematic analysis of clients need
• development and implementation of individual
  solutions
• initiative for development of new products

Allianz Groups consulting divisions
Allianz Groups institutional distribution
channels

• Distribution of highly standardized pension
  products
• Analysis of clients need for complex products
• Involvement of specialists

Distribution
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Pension solutions offered by Allianz Group.
Instividual market Employee incentive saving
schemes

• Corporate pension products
• Asset funding of/reinsurance for pension
  commitments
• Asset funding of/reinsurance for working-time
  accounts
• Reinsured support fund
• Direct insurance
• Pensionskasse
• Pension consulting
• Pension administration

• Private provisions
• Allianz Dresdner Fondspolice
• dit FondsVorsorge
• dit-Vorsorgeplan mit AS-Fonds
• Future annuity/capital benefit
• Immediate annuity
• Unit linked annuity
• DIT-private pension
• DREVEST PLUS

Hybrid solutions Pension fund
classical annuity or unit linked annuity
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The End.