Mecanismos de Fomento para a Previdncia Complementar

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Mecanismos de Fomento para a Previdência
Complementar

• Alex Landsman
• William M. Mercer
• November 21, 2000

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Major Issues

• Tax and Legal Issues
• Social, Economic and Cultural Challenges
• Market Barriers
• Logistical Problems

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Tax and Legal Issues

• Ideal Tax Treatment
• Employer Contribution - Within Limits
• Tax deductible to Employer
• Not Taxable to Employee
• Not Subject to Social Charges
• Employee Contribution - Within Limits
• Not Taxable to Employee
• Not Subject to Social Charges

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Tax and Legal Issues (cont.)

• Ideal Tax Treatment (cont.)
• Asset During Accumulation
• Not Taxable to Employer
• Not Taxable to Employee
• Benefit Paid
• Non Taxable to Employee

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Tax and Legal Issues (cont.)

• Ideal Tax Treatment is Not Common
• Generally There Is One Point of Taxation
• In the US usually when Benefit Paid
• Some Exceptions
• Employee Contribution to Defined Benefit (DB) and
  After - Tax Contribution to Defined Contribution
  (DC) Plans
• Roth IRA

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Tax and Legal Issues (cont.)

• Tax Rate
• Ordinary Income
• Capital Gain
• Dividend
• Limits
• Employer 20 of Compensation
• Employee 12 of Compensation

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Tax and Legal Issues (cont.)

• Treatment of Superávit
• Mandated Benefit Increases
• Low Flexibility for Alternative Use
• Post-Retirement Medical
• Window Benefits

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Social, Economic and Cultural Challenges

• Low Coverage
• US - 61.5 million
• UK ? 17 million
• Brazil ? 1.6 millions
• High Social Charges
• High Benefits from INSS
• High Cost - Mandated Adjustment for Inflation
• No or Low Union Pressure
• Significant Informal Economy

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Workers in the Formal Economy as of the Total
Workforce ( Annual Average )
Average Jan - Apr 1999
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Target EU Wide Pension Pay-Out in 2020
2020 Target
Source Pragma Consulting
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Social, Economic and Cultural Challenges (cont.)

• Low Value Assign to Pension Plan
• Significant Number of Employees Prefer Cash
• Situation Is Gradually Improving
• Bad past experience with montepios
• High Earners (Executives, Investment Bankers,
  etc.) Do Not Value Tax Deduction
• Low Highest Individual Tax Rate - 27.5

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Social, Economic and Cultural Challenges (cont.)

• We Need Efforts in Education and Communication to
  Change Culture
• Significantly Underfunded Public Plans

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Market Barriers

• Limited Investment Options
• Fixed Income - Short -Term Only
• Equities - Highly Volatile
• Real Estate
• Foreign Investment not Permitted
• In the US in addition
• International Equities and FI, Venture Capital,
  Hedge Funds, Long-Term FI, etc.

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Market Barriers (cont.)

• High Cost of Investment Management
• Resolution 2720 - Costly Reporting and Disclosure
  Requirements
• Few Products Available
• Insurance Market Is not Developed
• Corporate Governance

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Logistical Problems

• Not Enough Pension Professionals
• Development of Actuaries
• Education of Current and Potential Plan Sponsors
• Products
• Financial Markets
• Risk/Rewards
• We Need More Cooperation Between Business and
  Academics

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Logistical Problems (cont.)

• Relatively Simple Plan Design
• Generally DB or DC
• Few Hybrid Plans
• Few DC Plans with Investment Choices
• Study Regarding Retirement Needs Should be
  Performed.
• In the US Replacement Ratio Generally Considered
  to be 60 - 80 Depending on Income.

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Public pension plan maximum replacement rates
and Pension Assets as a of GDP in 1996