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Melbourne APEC Finance Quarterly Issue 3, May 2008 |
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Welcome to the newsletter of the Melbourne APEC Finance Centre. In this edition, consulting, outsourcing and investment services corporation Mercer, proposes raising the pension eligibility age; global growth consulting specialist Frost and Sullivan, reviews the world of outsourcing and offshoring, while energy and sustainable solutions firm Energetics demystifies carbon trading, plus more from our MAFC Director on the outcomes of a recent business roundtable hosted in China.
THE PENSION AGE - TO BE 65 OR NOT OT BE?David Knox is Worldwide Partner at Mercer
Is the pension age history? In Australia, as in many countries globally, citizens can receive government provided or subsidized pensions at a certain age. In Australia, that age is 65 years – is this still appropriate? Figure 1 shows the increasing life expectancy in Australia based on the published Australian Life Tables (Australian Government Actuary, 2004). With the exception of a minor blip in the 1960s, the graph shows a steady increase in life expectancy at birth from 48 to 78 for males and from 51 to 83 for females. Figure 1: Life expectancies for Australians at birth from 1885-2001
However, with even greater relevance for the age pension, Figure 2 shows the changes in life expectancy for Australians aged 65. Figure 2: Life expectancies for Australians at age 65 from 1885-2001
Figure 2 suggests there was not a major increase in the life expectancies for older Australians during the first six or seven decades of the 20th century. However since that time, it is clear that life expectancies have improved for this age group and are expected to continue to do so. Such a finding has clear implications for the pension eligibility age. Retirement and pension ages – it’s now appropriate to review The definition of retirement and pension ages can cause confusion. For the purposes of this paper, pension age is the earliest age at which individuals can receive their full Social Security or age pension entitlement having achieved the relevant age and satisfied any other conditions (e.g. residence, means tests, minimum time in the workforce). Within the Australian employment context, a defined retirement age generally does not exist due to age discrimination laws. Nevertheless many employers have traditionally operated with a “normal” retirement age as part of their normal workplace practices. The eligibility age for the (old) age pension in Australia has remained at 65 for males since its introduction in 1909. The pension age for females was decreased to 60 in 1910 but is now being increased gradually to 65. In view of the relatively stable life expectancy for older Australians in the first six or seven decades of the 20th century, an unchanged pension age seems reasonable. However, in the context of an ageing population and increasing life expectancies for 65 year olds, it is now appropriate to review the pension age. Trends in pension ages around the world Declining mortality rates and the related increase in life expectancy is a common pattern around the world. As a result, many governments have considered or undertaken significant pension reforms during recent years. The majority of OECD countries have a standard pension age of 65 for men (OECD, 2007). Traditionally most OECD countries have permitted women to receive Social Security benefits at younger ages than men although many are now increasing them to the same age as males. Indeed, European countries are required to do so by a 2004 European Union Directive. However increases in the pension age are now going beyond the equalisation issue. Some current changes that have already been announced include:
Although more than two dozen countries have raised their pension age in recent years, over the years 1949-1993, 14 of the 23 OECD countries actually lowered the pensionable age for at least one gender (Turner, 2005). Clearly the pressures during these decades, such as youth unemployment, were quite different from those of an ageing population and increasing longevity. Pension Age in Australia The male pension age of 65 has remained unchanged for almost a century whilst the female pension age of 60 remained unchanged from 1910 until a proposal for change was announced in the 1993-94 Commonwealth budget. The change was an increase in the female pension age of six months every two years commencing on 1 July 1995 when it was increased to 60.5. These changes mean that by 1 January 2014 both the male and female pension age will be 65. It is therefore recommended that the Government announce its intention to gradually raise the pension age from 65 to 67 commencing in 2015 with an approach similar to that used to raise the female pension age. Table 1 shows the pension age and date of pension eligibility for different dates of birth. Table 1: Recommended changes to the Australian pension age
It is also recommended that the pension age should be regularly reviewed in line with increases in life expectancy from the pension age. In conclusion The pension eligibility age and age of retirement are becoming critical issues for many counties as life expectancy continues to increase and the baby boomer generation approaches retirement. Whilst the projected costs for the Australian age pension are moderate when compared to many developed countries, they still represent a considerable fiscal cost at a time when the Commonwealth budget will be under pressure from other age related costs. The recommendation in this paper to increase the pension age is not primarily prompted by the desire to reduce Government expenditure. Rather, there is a need to change our community’s understanding and focus on this single age. After all, the male pension age will not have changed in more than a century whilst the life expectancy of a 65 year old has increased by more than 45 percent in the last four decades. The pension age should not be fixed for the next century! Instead, it should have an in-built mechanism of change that reflects changes in life expectancy as well as broader community expectations. References: Australian Government Actuary, 2004, Australian Life Tables 2000-02, Canberra OECD, 2007, Pensions at a Glance, Public Policies across OECD Countries, Paris
OUTSOURCING AND OFFSHORING – WHO IS IN THE GAME?Simon Hayes is Senior Industry Analyst at Frost and Sullivan
A number of APEC economies are expected to benefit from offshoring The APEC economies have been significant beneficiaries of the growing trend towards global sourcing. Businesses in mature nations like the US, Australia and Canada are leveraging lower-cost labour to further reduce their costs of operation, while developing economies like Malaysia, China and Indonesia have grown strong services export markets. While India has snared the headlines in the offshoring debate, Frost & Sullivan believes a number of developing APEC economies are well-placed to benefit from niche offshoring opportunities, as organisations in developed markets look to secure the next level of cost savings and efficiency gains. Frost & Sullivan’s Global Shared Services & Outsourcing study surveyed 338 senior outsourcing decision-makers, and identified several APEC economies as strong offshore services locations. These locations were China, Singapore, Malaysia, Mexico, the Philippines and Canada (see figure 1). These economies have the potential to carve out niches in industries ranging from financial services to healthcare. Figure 1: Top shared services and offshoring locations
Paralleling this study, Frost & Sullivan’s research in the Australian outsourcing market has found strong demand for offshore services, but also significant untapped potential presently restrained by concerns over bad publicity, cultural and communication issues, privacy and security concerns. Global sourcing destinations have to work had to address these restraints and release this potential investment. The cost/risk paradox Decision-makers in mature outsourcing markets are driven by two conflicting imperatives: pressure from shareholders and boards to keep cost-to-income ratios low, balanced with a desire to reduce technology risk by keeping as much control over a project as possible, and to reduce political and brand risk by being seen to be creating jobs in their local economies. Taking work offshore is a risk, and that is enough to scare off some risk-averse institutions, particularly organisations with high public profiles. In an Australian context, companies as diverse as Qantas, National Australia Bank and Hutchison Telecommunications have been hit by negative publicity over offshoring, as have UK companies like BT and HSBC. Both Australia’s Finance Sector Union and the UK’s Communication Workers’ Union have produced ‘hit-lists’ of companies they accuse of using offshore labor. On the other hand, constrained global financial markets and increased competition continue to pressure all large corporations to reduce their costs. While salaries are rising in traditional low-cost locations like India and the Philippines, and emerging geographies like Eastern Europe and Latin America, the arbitrage between wages there and in high-cost locations like Western Europe, Australia and the US remains significant. Access to skills is also a serious concern for both client organisations and outsourcers with domestic operations in high-cost markets. With Australia’s unemployment rate currently at 4.1 percent, and the unemployment rate in the Information and Communications Technology (ICT) industry at 3.84 percent, many large companies are finding it increasingly difficult to source the skills they need. Outsourcing such operations on a low-cost, offshore basis is, on the face of it at least, a sensible course of action. Offshoring, right shoring, best shoring or near shoring? Most outsourcing services providers have adopted a blended model of offshoring – where a significant proportion of the work, particularly that which is seen as business-critical, is performed on-shore. That attempts to side-step the problems inherent in cross-cultural communication, and restore some control to the client. Whether it is marketed as ‘best shore’, ‘right shore’ or ‘near shore’, it means taking advantage of the best elements of offshoring, while keeping control of elements that would cause serious problems if they went wrong. The ‘near shore’ element is aimed at creating a politically palatable form of offshoring by, for instance, relocating software development work for an Australian organisation to New Zealand, a country with the same language, similar culture and lower wages than Australia. Similarly, some outsourcing service providers are offering US clients Canada as an offshore option, while Western European countries are taking advantage of lower costs in Eastern European countries like Hungary and the Czech Republic. The downside of this tactic is the cost differential is not as great as between, say, Australia and India, and the pool of skills is significantly smaller. Free trade and economic liberalisation are essential elements in promoting offshore locations, forcing economies to address issues such as government procurement policies and intellectual property protection. If India had not undertaken the deregulation and liberalisation it did ten years ago, it would not be in as competitive a position as it is today. Similarly, APEC economies must address a broad spectrum of reforms – including trade and investment liberalisation, human and capital infrastructure investment and corruption control – if they are to realise their potential.
BUILDING BRIDGES TO SHANGHAIKen Waller is Director of MAFC at Monash University
MAFC recently organised a Business Roundtable in China on behalf of the Victorian Government to deepen relations between Melbourne and Shanghai in the provision of financial services. The Hon Theo Theophanous, Minister for Industry and Trade met with Mr Sha Hai Lin, Deputy Secretary General of the Shanghai Municipal People’s Government and Mr Ma Hong, Vice Chairman of the Shanghai Financial Services office, to discuss pensions, infrastructure needs and financial services capacity building. Superannuation China’s ageing workforce is placing a heavy demand on its government to support superannuation systems. As state pension funds accumulate, Allianz Global Investors AG estimates assets are likely to increase significantly over the next two decades from USD 18.7 bn in 2006 to USD 65.9 bn. Mr Ma identified opportunities for the Shanghai municipal government’s fund to consider longer term mechanisms for cooperation with the Victorian Funds Management Corporation. Infrastructure Infrastructure financing was also discussed as demand in China for new roads, expressways, bridges, tunnels and rail links escalates. Investments in Shanghai alone are estimated at USD 14 bn annually and Victoria is seeking to finance partnerships through an investment banking or consortium approach, as well as to provide expertise in Private Public Partnership (PPP) models for infrastructure development projects. The Chinese metropolis will host the World Expo in 2010 and is currently building eleven new metro lines. Organisers anticipate 70 million visitors to the fair which is located on a 5.3 square kilometer site – the biggest ever in the history of the event – on the banks of the Huangpu River. Capacity building Other cooperation includes the MAFC in conjunction with the Asia-Pacific Finance and Development Centre in Shanghai training regional financial system regulators. Mr Sha and the Minister confirmed a joint program by the Centres to deliver capacity building training on risk management in China later in 2008. Following the meeting, a delegation of Australia’s leading bankers and regulators convened a roundtable with Chinese counterparts to discuss global financial and economic pressures facing their respective economies and ways in which these pressures can be managed.
CARBON MARKETS - ITS A CALCULATING BUSINESSAnna Reynolds is the Principal Consultant for Carbon Markets and Government Policy at Energetics
Market mechanics Carbon Trading is a tool used by Governments to meet targets to reduce emissions. When a company is part of a Government regulated emissions trading scheme they are required to maintain or reduce their emissions to the level set by the regulated target (or cap). Each year, firms will need to surrender a number of permits equal to their carbon dioxide emissions. Companies that can easily reduce emissions can free up and sell permits to those companies who have limited opportunities to reduce their emissions. Companies are also allowed to purchase ‘offsets’ instead of permits. To buy an offset means they invest in a project undertaken by someone else that is positive for climate change as a way of compensating for their carbon dioxide emitting activity. Regulated trading schemes are being established around the world, but there has also been an emergence of carbon trading outside these Government-initiated schemes. The voluntary carbon market operates without a regulated cap on emissions. This market is being driven by companies wanting to show they are taking action to their consumers and by individuals concerned about climate change. Counting emissions A plethora of carbon calculators have emerged online around the world that allow companies and individuals to understand the amount of carbon dioxide emissions created by an activity. The calculators then also assert how much positive activity is required to make up for the impact of the emissions - how many carbon offsets that are needed to be purchased to compensate. Offsets projects include the planting of trees, investment in new renewable energy projects and the capture and destruction of methane. Generally speaking tree planting activities are the lowest cost carbon offsets, largely due to uncertainty about how secure they are as permanent offsets. The voluntary carbon market is growing around the world - approximately 65 million tonnes of carbon credits were transacted in 2007, a 165 percent increase over 2006. The average price paid to offset one tonne of carbon dioxide was USD 6.10 in 2007, up 49 percent from the 2006 price. The voluntary market in carbon offsets is expected to grow over the coming years even as regulated emissions trading schemes are introduced. Ultimately companies will aim to reduce their own emissions rather than having to continually buy offsets for their emitting activities. Starting line In Australia most of the carbon trading activity has been via the NSW Greenhouse Gas Abatement Scheme market - a government program targeting the power sector. Offset projects in that scheme can generate certificates and in 2007, 25 million certificates were traded at a value of USD 225 million. In September 2007 the price of these certificates slumped substantially. This market has been troubled by ongoing uncertainty about how it will be transitioned into the national emissions trading scheme being designed by the Federal Government. There is a small voluntary carbon offset market with a range of providers offering to offset the impact of flights and electricity use undertaken by individuals and businesses. Concern about the rigour of carbon offsetting claims by these providers led to in Inquiry by the Australian Competition and Consumer Comission which reported in early 2008. The next big development will be the Australian Emissions Trading Scheme - a Green Paper on the design of this scheme is due to be released by the Federal Government in July. Draft legislation for the scheme is expected in December.
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