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Global Transformation in Public Retirement Provisions Delivering efficiencies to the public sector
An aging population, volatile financial markets, increasing cost-consciousness and a growing awareness of risk create unprecedented challenges for governments and public sector entities seeking to make retirement provisions both for their employees and the wider population. At Citi, we recognise that new challenges require a fresh approach to tackling today’s objectives and tomorrow’s aspirations. We are pioneering the industry in delivering innovative, expert advice and solutions globally to support the robust, sustainable pension schemes and retirement plans of the future.
Priorities for Public Sector and State Retirement Plans Local and national governments, and their agencies, are tasked to make financial provision for employees on retirement, as well as providing support for the wider retired population. While there are major differences between countries’ pension arrangements, most countries are being forced to re-consider their retirement strategies in the face of significant demographic, regulatory, investment, risk management and administrative challenges.
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Changing demographics, asset and liability mismatches and a greater focus on risk management all increase pressure on public sector pension schemes.
Aging populations Changing demographics mean that many countries, particularly in Europe and North America, have a declining labour force, undermining the sustainability of pension schemes and retirement plans, and increasing the reliance on retirement products. Within the public sector, these trends are even more apparent as resources are often stretched further and the workforce is typically older than in the private sector. Conversely, in maturing markets in Asia and Latin America, there is increasing pressure to create retirement savings plans for a growing workforce, as well as supporting a burgeoning older generation (figure 1). Migration trends are resulting in the need to collaborate more extensively across schemes, and to collect contributions and make payments overseas.
Asset and liability mismatches Volatile performance in equity markets, low interest rates and changes to accounting regulations have resulted in public sector entities incurring substantial deficits in defined benefit pension schemes in countries such as UK, Netherlands, Germany, Canada, and Japan. These schemes are now adopting an asset and liability management approach to investment, with a more urgent need to increase investment returns whilst mitigating risks. Those with buffer funds, such as in Australia, Norway and China, will also need to respond to increasingly complex investment portfolio and governance requirements. With an average of 2
2% of GDP already spent on funding public sector pensions (source, OECD) and considerably more in some countries, there is significant political pressure to balance current budgetary pressures with future retirement needs. Consequently, pension funds are seeking specific investment accounting, performance reporting and monitoring capabilities to enable them to meet current and future investment challenges.
Reforms to retirement provision Governments across the world (such as Japan, Korea, China, Australia, India and a number of European countries) are focused on reforming their pension and retirement benefit provisions in the light of the growing financial burden on the working population. Increasingly, stakeholders including employers, governments, financial institutions and individuals recognise the need to share responsibility for providing financial support during retirement, and citizens and governments alike are demanding more accountability in the way that public sector pensions are invested and managed. As reforms are introduced, the scale and complexity of public pension funds is growing, so they need greater capacity and wider capabilities to meet changing operational and investment needs.
Figure 1 Population pyramids — developed countries 1950 Female
10
Male
0
Female
Male
Female
60+
60+
15–59
15–59
15–59
5
10
10
0–14 5
Percentage
0
5
10
Age
60+
0–14 5
2050
Age
Age
Male
2005
0–14
10
5
0
Percentage
5
10
Percentage
Population pyramids — less developed countries 1950 Female
0
Male
Female
60+
60+
15–59
15–59
15–59
0–14 5
Female
60+
5
10
Percentage
10
5
0
5
0–14
Age
10
Male
2050
Age
Age
Male
2005
10
10
Percentage
0–14 5
0
5
10
Percentage
Source: United Nations (2007)
Pension scheme managers need a business partner who understands the demands of different stakeholders, and can construct financially resilient solutions to meet current and future needs.
Growing focus on risk management The recent financial crisis has illustrated the importance of identifying, monitoring, and managing risk exposures within retirement plans. In the UK, for example, around 125,000 employees lost their pension benefits due to employer insolvency, creating further pressure on the state. Furthermore, market volatility, unprecedented low interest rates and economic recession have increased awareness of downside risk in the asset portfolio, and the need to manage both
market and credit risk more actively, including greater diversification. In many cases, this is taking the form of an increased proportion of overseas investment and alternative asset classes such as private equity. As a result, pension funds are seeking solutions and services to help improve governance, manage risk and develop new capabilities to manage a diversified portfolio across all asset classes and all regions.
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Trusted Solutions to Maximise Returns and Minimise Risk Inevitably, there is no single solution to the challenges faced by existing public sector pension funds and state retirement schemes. To make the most of resources and act as responsible and trustworthy guardians, they need a service provider that both understands the often conflicting demands placed upon them, and can deliver creative solutions and share best practices derived from experience working with public sector entities and pension funds globally.
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Decision-makers for both employee and state pension schemes and retirement plans need to be confident that they have access to pragmatic advice, accountable and responsible fund management, accounting, reporting and administration. These issues cannot be considered in isolation: increasing returns without a clear risk profile, reducing administration costs without enhancing efficiency and control, or modifying a scheme’s investment strategy without an efficient transition approach creates financial and reputational damage. At Citi, we adopt a holistic approach to pension fund management, taking into account all the factors that contribute to a well-managed, responsible public sector or state retirement scheme. We have the expertise to deliver innovative, high quality and transparent pension solutions, with a distinctive consultative approach and a unique breadth of capability.
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Consultative Approach We have developed substantial expertise and insights into the world’s leading pension funds over many years. Increasingly, public sector pension funds are keen to leverage our experience in order to understand and implement industry best practices, share knowledge across borders and develop greater efficiency in their investment, custody and transaction processes. We focus on delivering pragmatic advice that can be put in practice with minimal impact to stakeholders and with the highest degree of project discipline.
Leading Investment Solutions Citi’s global footprint and worldwide market presence give our pension clients excellent access to liquidity and trade execution across products and geographies. Citi’s pension solution network helps clients review, evaluate and implement a wide variety of investment strategies across all asset classes, from liability driven investment to tail risk management, from commodity trading to FX hedging, from market trading to portfolio structuring. Citi’s global investment solution and asset servicing capability provide a holistic approach in managing pension assets.
Best-in-Class Custody and Fund Services Linked to the increasing complexity of asset classes is the importance of best-in-class custody services, to ensure the security of assets, 6
the efficiency of processing, the ability to measure fund manager performance and increase returns through securities lending. Citi is an established and market leading global custodian holding over $12 trillion assets under custody across 93 markets worldwide for our clients. Within this global structure, Citi has an unparalleled proprietary network of 57 sub-custodians providing public sector pension funds with the highest quality of service across all geographies whilst minimising third party insolvency risk. A vital element of our service is to establish transparent, objective performance measurements for fund managers, and monitoring these on a routine basis, so that investment executives can be confident that they are working with the right managers for their scheme. This is supported by robust fund administration, accounting and compliance reporting solutions for all asset classes.
Comprehensive Tax Reporting Accurate, timely and compliant tax reporting is critical to a transparent, accountable public sector pension fund, but frequently requires considerable resources. To address this, we provide comprehensive tax services to our clients that are tailored to the reporting requirements in each country and leverage the tax advantages that are available. These tax services include: withholding tax reclamation; submission of relief
at source; tax documentation to the local market sub-custodian; end-to-end tax documentation re-solicitation; withholding tax reporting; tax profiles and provision of comprehensive tax information in each market in which the fund is invested.
Real-time Bond Portfolio Analysis Fundamental to our ethos is to help governments and public sector entities to reduce risk, minimise volatility and maximise returns whilst maintaining a high degree of visibility over decision making. Leveraging our industry-leading tool, Yield Book®, we work with our public sector pension funds to put in place quantitative fixed income portfolio strategies and analysis, including overlay strategies for asset and liability management hedging and portfolio optimisation. Yield Book provides online access to market-tested financial models, a comprehensive research library, extensive databases and analytics, and flexible portfolio analysis tools. Furthermore, our unique access to the Citigroup Pension Liability Index (CPLI) we have superior abilities to help assess credit risk and design solutions accordingly.
To fulfil their responsibilities to elected representatives, taxpayers, and current and future beneficiaries, public sector pension schemes must demonstrate best-in-class financial practices at every stage of the investment process.
Alternative Investment Services Citi has been a leading global provider within the alternative investment space for both funds and investors for over 15 years, and we participate directly in all major cash,
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We take a consultative approach to prioritising pension scheme objectives and leveraging the right solutions to increase efficiency, reduce costs and mitigate risk.
securities, FX and derivative clearing systems globally. By partnering with Citi, public sector pension funds can draw on the complete range of front to back-office alternative investment solutions, which are integrated across the entire investment value chain. For every strategy, across all major private equity, real estate and hedge fund asset classes, we leverage our local and global strength in execution, custody, fund administration and tax services to enable public pension funds to deliver on investment and operational efficiency objectives.
Trade Execution Solutions We recognise that every gap in the transaction process presents a risk of error or delay. To mitigate this, our innovative Execution to Custody (E2C) service delivers end-to-end processing of transactions across all asset classes from execution to custody. Working with a single trusted partner such as Citi, leveraging an integrated platform across trading, clearing and settlement, ensures access to bestin-class services across every step of the transaction cycle and removes additional costs and risks resulting from disconnected processes.
Securities Lending Every public sector pension fund has unique requirements and priorities when establishing a securities lending programme. We help to design individual solutions that achieve the right risk-reward balance for each scheme, recognising that incremental yield for securities lending must be earned in a prudent and controlled manner. Within this context, we 8
provide well-managed programmes that help to enhance portfolio performance, offset operational expenses, generate liquidity and capture additional revenues associated with the inherent value of the holdings of the pension fund. We support securities lending from 6 financial centres across nearly 40 markets, leveraging our local market presence to help our public sector clients when lending in new markets as well as providing ongoing support.
Transition Management As financial executives for governments or public sector employees decide to modify the fund’s asset mix, it is imperative that the transition from current portfolios and asset allocation is conducted smoothly and without interruption to the functioning of the scheme or that greater returns are neutralised by a high implementation cost for restructuring the portfolio. Our Transition Management team has executed over 1,000 multi-asset transitions comprising more than USD500 billion of assets, including many complex, high profile government and public sector schemes. We deploy an impartial operating model, ensuring transparency of processes and avoiding potential conflicts of interest. Our dedicated team is augmented by our comprehensive, robust multi-asset global platform, incorporating: superior access to liquidity and sophisticated, useable analytics across all asset classes; an extensive real-time system infrastructure to ensure full operational control, and extensive project management experience and track record established over many years.
Collateral Management The environment for all users of OTC (over the counter) derivatives, including pension funds, is changing fast. From connectivity to major clearing venues, to independent daily valuations and proactive collateral management, Citi Derivative Services offer comprehensive, end-to-end servicing for both cleared and noncleared OTC’s, maximising efficiency and automation. We provide public sector funds with a range of services including: access to all live clearing venues; daily independent valuations; calculation and settlement of daily collateral movements for non-cleared OTC’s, including dispute resolution with counterparties; pre-funding for intraday margin calls; daily positional and valuation reconciliations, and management of all lifecycle events.
public sector pension funds are also focused on enabling cross-border payments and collections to support employees and citizens overseas who are eligible for benefits or wish to continue paying into a state scheme. These clients benefit considerably from our robust, flexible platform WorldLink that allows pension funds to make secure, efficient cross-border and crosscurrency payments in 135 currencies without having to maintain multiple currency accounts. We also provide multi-currency cash management services globally to support foreign currency investments, collections and disbursements payments to citizens.
Cash Management Services Efficient, convenient and secure payments and collections are essential for every public sector pension scheme globally. Citi’s excels in providing cash management, payments and collections across 190 countries, helping public sector entities and pension funds to reduce costs, automate processes such as reconciliation, and gain greater control over cash flow. In maturing markets particularly, the rapid expansion of pension scheme coverage and membership means that pension funds need solutions that are accessible to both an urban and rural population, including a variety of electronic and manual payment methods. In other instances, 9
A Trusted Partner for Today’s and Tomorrow’s Challenges Providing support during retirement for employees and the wider population is amongst the most significant challenges facing local and national governments, and their agencies. Executives responsible for public sector and state retirement provisions need to take a broad and holistic approach to balancing risk and return, embracing innovative techniques and increasing transparency to address this issue successfully. State and public sector pensions and retirement plans globally select Citi as their preferred partner for a variety of reasons.
» Unique Consultative Approach At Citi, our depth of experience throughout the investment cycle enable us to create pragmatic solutions that incorporate the wide variety of factors that affect risk, return, cost and public perception. We work closely with government and public sector clients to understand and achieve their retirement plan objectives, augmented by disciplined project management and a highly specialised team. » Breadth of Solutions A comprehensive advisory service needs to be supported with the right solutions to achieve the pension or retirement scheme objectives. Citi has invested in the skills, solutions and technology in the locations where our clients require our services to meet these needs. » Risk Mitigation Our sub-custody and fund services network extends over 57 countries, greatly reducing counterparty insolvency risk. Furthermore, we take a low risk approach to securities lending to protect our clients’ assets during periods of financial turbulence whilst delivering attractive incremental returns. » Capacity and Scalability Citi delivers best-in-class processing and capacity based on our unique access to global markets, consistent processing platform and global operating model. In Custody, for example, we operate across 92 countries, with $12 trillion in assets in custody, processing 65 million transactions each year.
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Citi’s Global Transaction Services has access to clearing systems in 96 countries globally and processes transactions with a daily average of $3 trillion, enabling us to support the volumes required by the largest state and public sector pension schemes. » Investment in Skills and Innovation Our robust processing and operating model enables us to achieve considerable cost efficiencies and therefore invest in the skills and innovation that will help our government and public sector clients to address today’s challenges and create future value. » Geographic Coverage Our global footprint and depth of presence in each market, combined with our global operational model enable us to provide the local insights that our government and public sector clients require, whilst giving access to the wealth of solutions and expertise across our global business.
Key Points » Rules on pension funding have or will soon tighten in virtually every jurisdiction globally. » The current and future pensions burden at local and national government level is now a high profile issue with significant financial and political implications. » Private sector and public sector schemes alike are now compelled by regulators and voters to manage the risk in their pension schemes and address under-funding. » Citi has the expertise to deliver cutting-edge pension solutions, a distinctive, holistic advisory approach and a unique breadth of product capability globally.
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Global Transaction Services www.transactionservices.citi.com © 2011 Citibank, N.A. All rights reserved. CITI and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates, used and registered throughout the world. The information contained in these pages is not intended as legal or tax advice and we advise our readers to contact their own advisers. Not all products and services are available in all geographic areas. Any unauthorised use, duplication or disclosure is prohibited by law and may result in prosecution. Citibank, N.A. is incorporated with limited liability under the National Bank Act of the U.S.A. and has its head office at 399 Park Avenue, New York, NY 10043, U.S.A. Citibank, N.A. London branch is registered in the UK at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, under No. BR001018, and is authorised and regulated by the Financial Services Authority, VAT No. GB 429 6256 29. Ultimately owned by Citi Inc., New York, U.S.A. GRA21884 05/11
