Pension Reform and Complementary Pension Funds in Brazil

Pension Reform and Complementary Pension Funds in Brazil Funded Civil Service Pension Programs in Canada and the Netherlands Colin Pugh, FCIA Brasilia October 2003

Introduction Description and Analysis of Two Funded Defined Benefit Pension Plans for Civil Servants. Ontario Netherlands OMERS ABP INTRO

OMERS - Background OMERS Established in 1962. A funded, defined benefit pension plan. For employees of: } municipal governments; } school boards; } libraries; } police and fire departments; } children’s aid societies; and } other local agencies. HISTORY

Mission (governance issue no. 1 for PIAC) OMERS } To provide fully funded pension benefits at reasonable and stable contribution rates. } To invest funds prudently, for long-term growth at acceptable risk levels. } To distribute timely and accurate information to employees and employers. } To provide high quality service to all stakeholders. PIAC: Pension Investment Association of Canada MISSION

Current membership OMERS } 209, 787 active members (municipalities=48%; school boards=25%; others = 27%) } 89, 157 retired members } 906 employers Note (applicable to all slides): § all statistics at 31 December 2002 § all amounts in Canadian dollars (C$1. 00 = US$0. 72) MEMBERS

The Pension Plan OMERS } Normal retirement at age 65. } Early retirement at age 55 (with 30 years’ service) } 2% x Service x final 5 -year average earnings = 70% of final-average earnings after 35 years } Pension indexation: 100% of CPI (max. 6%pa) } Equal employee and employer contributions } 2004 contribution rate? = 8. 8% EE + 8. 8% ER THE PLAN

The Pension Fund OMERS } } Third largest in Canada. Market value of assets = $29, 952, 000 Smoothed market value = $35, 475, 000 Investment objective = inflation + 4. 25% Actuarial valuation method: Projected Unit Credit THE FUND

Progression of Fund ($ millions) OMERS ASSETS

Investment Returns (1993 -2002) OMERS RETURNS

Funded Positions (two tests) OMERS Going concern valuation Assets at smoothed market value Actuarial liabilities (plan continuance) Funded Ratio 31 December 2002 $35, 548 $33, 120 107% 31 December 2001 $35, 475 $31, 019 114% 31 December 2000 $33, 954 $28, 150 121% Plan discontinuance valuation Assets at Market value Actuarial liabilities (plan discontinuance) Funded ratio 31 December 2002 $29, 952 $36, 980 81% 31 December 2001 $33, 681 $34, 866 97% FUNDED RATIOS

Underfunding and Overfunding OMERS } Underfunding – equal increases in contribution rates (employee and employer) } Overfunding – equal decreases in contribution rates } Contribution holidays – zero contributions from both employees and employers } Surplus withdrawals – cash shared equally COST SHARING

Asset allocations: strategic & tactical OMERS Asset type Minimum Target Maximum Equities 55% 60% 65% Fixed income 20% 25% 30% Real estate 10% 12. 5% 15% Real return bonds Nil 2. 5% 5% Cash Nil Nil ASSET MIX

Current Asset Mix OMERS ASSET MIX

Management of the Fund OMERS 13 member board appointed by Ontario government } 6 employee representatives } 6 employer representatives } 1 government representative } 4 standing committees: executive, investment, pension and management } 4 sub-committees: governance, audit, appeals and compensation MGMT

Asset Management OMERS } In-house management for 95% of Canadian stock portfolio and large proportion of US investments. } More than 80 in-house investment professionals } Otherwise, external management (e. g. Europe) } Increased emphasis on “alternative assets” (e. g. infrastructure projects and private equity) } Ever-increasing use of derivatives. ASSET MGMT

Corporate Governance - Internal OMERS } } } CEO is responsible for day-to-day management. CEO cannot be a member of the Board appoints CEO, auditor, custodian, actuary. In 2002, audit and non-audit functions were separated. Mandatory orientation program for new board members and ongoing education for all board members. } Board seeks advice from outside experts. } Independent consultants evaluate Board’s performance; governance committee implements recommendations. GOV 1

Corporate Governance - Communication OMERS } Board holds 2 meetings per year with plan members. } Maintains contact with plan participants through consultation with stakeholder groups on key issues. } Other communications through annual report, website, regular newsletters, presentations and correspondence. } Members are provided with comprehensive benefit statements on a regular basis. GOV 2

Corporate Governance - Employees OMERS All employees in the investment division are subject to: } Code of Ethics; } Standards of Professional Conduct; } Conflict of Interest Policy. “Failure of an individual to maintain this Code of Ethics and Standards of Professional Conduct shall result in reprimand, up to and including dismissal. ” GOV 3

Corporate Governance - external OMERS “We vote the shares we beneficially own on behalf of plan members on the basis of their best financial interests” } Details of policy in Proxy Voting Guidelines } Social responsible investments – require transparent communication of companies’ policies/procedures } “Links” to OECD and ICGN websites. ICGN: International Corporate Governance Network SHARE VOTING

Proxy Voting – Basic Principles OMERS } Stock options must be expensed } Strict standards on management stock options } “Majority” of board directors from outside } All directors must own shares of the company } Outside directors must chair all key committees } Audit committee responsible for audit function and for retaining audit firms } Separation of Board Chair from CEO PROXY VOTING

Votes against Management OMERS North America (2001 -02) Motions Rejected Inside directors on committees 360 100% Audit-related issues 17 71% Option programs, including repricing 647 71% Takeover protection clauses 62 92% Social, ethical and environmental 163 47% Other issues 1456 22% PROXIES

In Summary OMERS A well organized and effectively run pension plan and pension fund providing generous benefits on a cost-effective basis. www. omers. com SUMMARY

Ontario Netherlands OMERS ABP PART 2

ABP - Background ABP Established in 1922. A funded, defined benefit pension plan. For employees of: } central government; } provincial and municipal governments; } police and judiciary; } defense; } water boards and other utilities; } school boards and culture and science agencies } ABP and its subsidiaries. HISTORY

Current membership ABP } 1, 065, 677 active participants (including 7, 677 employees of ABP and associated companies) } 692, 000 former participants } 42, 000 early retirement pensions/salary continuation } 330, 000 in receipt of retirement pensions } 331, 000 in receipt of survivor, disability and flexible early retirement pensions. Note (applicable to all slides): § all statistics at 31 December 2002 § all amounts are in euro (€ 1. 00 = $1. 10 -$1. 14) MEMBERS

The Pension Plan ABP } Normal retirement at age 65. } Early retirement at age 55. } 1. 75% x Service x (almost) final salary = 70% of final salary after 40 years Ø Pension indexation: under review. } Employee pay 25% of the overall cost. } 2003 contribution rates = 3. 8% EE + 11. 4% ER } Social security integration: salary below the franchise is ignored for benefits and contributions. THE PLAN

The Pension Fund ABP } } Largest or second largest fund in the World. Market value of assets = € 135, 564, 000 Smoothed market value: not used. Investment objective = long bond yields + 2%pa. Actuarial valuation methods: } Current unit credit (discount rate of 4%pa) } Current unit credit (current real interest rate) No explicit allowance for salary increases, but… No allowance for employee turnover, etc… THE FUND

Progression of Fund (€ millions) ABP ASSETS

Investment returns (1998 -2002) ABP RETURNS

Funded Positions (two tests) ABP Statutory valuation Assets at market value Actuarial liabilities (4% discount rate) Funded Ratio 31 December 2002 € 135, 564 € 131, 680 103% 31 December 2001 € 147, 334 € 121, 039 122% 31 December 2000 € 150, 302 € 112, 347 134% Real interest rate valuation Assets at market value Fully-indexed liabilities Funded ratio 31 December 2002 € 135, 564 € 157, 621 86% 31 December 2001 € 147, 334 € 131, 083 112% 31 December 2000 € 150, 302 € 121, 702 124% Funding objective = 140% of fully-indexed liabilities FUNDED RATIOS

Asset allocations: strategic & actual ABP Asset type Target Actual end-2002 Actual end-2001 Equities 40% 36% Bonds 40% 54% 51% Real estate and alternative inv’ts 20% 16% 13% ASSET MIX

Current Asset Mix ABP ASSET MIX

Management of the Fund ABP } Board of Governors (chair + 5 employer representatives + 5 employee representatives). } Board of Directors: day-to-day responsibilities (3 members). } Investment committee advising board of directors. } Advisory Committee (36 employer representatives and 36 employee representatives): now to be split into participants’ council and employers’ council? } 3, 000 employees (including 365 employees at ABP Investments – Netherlands and New York). } In-house international staff of specialist managers (at ABP Investments) manages 85% of fund assets. MGMT

ABP subsidiaries and affiliates ABP } Loyalis: sells income-replacement products, provides financial advice and services related to disability prevention and re-integration. } Obvion (joint venture): residential mortgages. } ABP Investments: in-house asset management. } NIB Capital: asset management. } State Street Global Alliance (joint venture): asset management, focusing on creating high added value and pursuing innovative investment strategies. www. abp. nl OTHER

Governance ABP } As a shareholder: “ABP will base its corporate governance policy on the principles established by ICGN and OECD. ” } Setting Strategic Investment Plan: heavy emphasis on Asset Liability Modeling (ALM) studies. } Other internal considerations: clear delineation of roles; checks and balances; reasoned behavior; prudent investment process; compliance monitoring; use of experts and third parties → “Code of Conduct”. } Basic objective: “first quartile customer service (as measured by CEM) on a cost-effective basis”. CEM: Cost Effective Measurement (Toronto-based research bureau) GOV

Conclusions and Questions } Two well-structured pension funds, with many common features and some distinct features. } OMERS – useful lessons on “governance”. } ABP – emphasis on ALM and “prudent expert”. } Pension regulation – heavy in both countries, but slightly different emphasis (e. g. funding rules). Questions? colin. pugh@wanadoo. fr SUMMARY