Point of View - Global Investment Solutions from Northern Trust

Voices

A review of current activity in global financial markets, with an emphasis on U.S. markets.

Today, and over the foreseeable future, a series of events – call them global megatrends – will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.

The Aging of the Work Force in Industrialized Nations

Around the globe, aging populations in industrialized countries are impacting growth, living standards, public policy, public finances, financial markets and international capital flows. Declining ratios of workers to retirees have led to an underfunding of pensions across a range of developed countries. This underfunding has, in turn, led to increased legislation and regulatory changes. For plan sponsors faced with funding issues amid the development of a new paradigm, however, a wide range of potential solutions can be found.

Aging Populations in G-10 Countries
By 2050, Japan and Italy will face economic pressures as
seven out of 10 people are forecast to be 65 years or older.

Note: Chart indicates ratio of population aged 65 years or older to the population aged 15 to 64, by percentage. Source: United Nations

"Coming to grips with these global megatrends is crucial to the success of any investment plan going forward. The aging work force puts pressure on employers to devise liability-matching programs and other solutions to deal with the issue."

—Terry Toth, President, Northern Trust Global Investments

Legislative and Regulatory Changes

Around the globe governments are taking action to ensure adequate funding of retirement obligations.

Canada: The Department of Finance released consultation papers
seeking input on a number of pension-related reforms for defined benefits plans. The input period will end on Sept. 15. The government will then release its conclusions for the future.

France: More than 12,000 companies have taken advantage of employee savings plans called Perco. The 2003 Fillon Law allows employees to invest up to 25% of annual salaries in a company-sponsored Perco plan. Assets in Perco plans rose from 73 million euro at the end of 2004 to 220 million euro by the third quarter of 2005.

Germany: So-called working-time accounts (Zeitwertkonten) offer opportunities to fund managers. Workers can monetize their overtime into savings credits to be applied to sabbaticals or early retirement.

Italy: Beginning in January 2007, the government will transfer the Tfr, employees' severance pay, into pension funds. The value of the new premiums will be about 10 billion euro annually.

The Netherlands: New accounting standards were implemented in 2005. FTK regulation forces both assets and liabilities to be valued on a mark-to-market basis. Three tests are mandated to measure funds' abilities to meet their obligations.

Nordic countries: Several Nordic countries are examining pension
reform proposals focused on funding and accounting requirements. United Kingdom: Pension reform in 2005 mandated documented accounting treatment for retirement plans and requires full recognition of defined benefit plan surplus or deficit on the balance sheet. On A-Day, April 6, 2006, a major simplification of tax laws took effect for pensions, reducing eight regimes to one.

United States: Pension reform proposals — Pension Protection
Act of 2005, H.R. 2830; Pension Security and Transparency Act of 2005, S. 1783; Financial Accounting Standards Board, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R) — are in review, including a push for Projected Benefit Accounting standards in determining pension funding status.

Sources: Association Française de la Gestion Financière (AFG), Benefits Canada, European Pensions & Investment News, National Association of Pension Funds, Northern Trust

Average Funded Status of Private Pensions Even after recovering from the bear market of 2000, the funding status of pension plans remains low in some countries.	Country	Average Funded Status
		2004	2005
	Belgium	94%	123%
	Canada	91%	90%
	France	57%	54%
	Germany	55%	39%
	Italy	N/A	N/A
	Japan	62%	74%
	Netherlands	102%	104%
	Sweden	N/A	N/A
	Switzerland	108%	91%
	United Kingdom	90%	90%
	United States	88%	91%
Source: Watson Wyatt, Greenwich Associates

Strategies for Matching Pension Liabilities
Pension plan sponsors facing the prospects of more retirees living longer in retirement are considering various new investment solutions:
• Hedge funds	• Long/short strategies
• Liability-driven investments	• Commodities
• Absolute return strategies	• Portable alpha
• Private equity
Source: Northern Trust

Related Links

Financial Market Update
Transcript of the quarterly Financial Market Update conference call.

Global Investments Strategy
Monthly review of market conditions and investment implications.

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