Conceptually we can split the obligations of a Defined Benefit pension scheme into two components: pension obligations to current and former staff that have already been accumulated; and new obligations arising from the additional pension rights earned by the current staff in the current year through additional service and any increase in pay. The first component will dominate in the case of anything other than a very new scheme, so let me concentrate on that for now. In turn, I will consider the impact on: a fund that is balanced and hedged; one that is initially in balance but exposed to market risk; and one that is initially in deficit, as well as being exposed to market risk. Now the existing pension obligations will typically be for a fixed flow of real income, that is the pension entitlement will be adjusted for inflation. In principle, an employer could therefore exactly match his pension obligations by holding a portfolio comprising indexed government debt of appropriate durations.5 In this case, a change in the yields on government bonds as a result of QE, or indeed on any other assets, would not alter the position of the fund one iota – its obligations would still be completely covered. In this case, the change in the valuation of the liabilities is exactly matched by a change in the valuation of the assets. Of course, most pension funds do not seek to match their assets exactly to their obligations in this way.
Financial inclusion is supported through a number of strategies amongst which includes increased access to financial services, access to financial information and advisory services and consumer education. Currently, 98% of the adult population in Malaysia have a savings account. Given this greater financial inclusion, banks need to recognise their role and their special relationship with their customers. Customers expect banks to provide relevant financial information to them to ensure that they will be able make informed judgments. Avenues for the public to seek redress is also an important part of the financial safety net. The Financial Mediation Bureau provides an alternative redress mechanism between the service providers and consumers on financial disputes. In addition, with the objective of promoting prudent financial management, the Credit Counselling and Debt Management Agency offers free advisory services. This is to ensure the sustainability and resilience of the household sector. In addition, there is also the BNMLINK and BNMTELELINK at the Central Bank to provide a further interface with the public. The objectives of financial inclusion can also be met with the support of banking institutions as the benefits would justify the effort. Banks and other financial institutions that approach their business strategies responsibly and with the consumer interest in mind will stand to reap long-term gains from enhanced franchise value, a strong reputation and positive association with socially responsible values that will engender public trust and confidence. Public confidence is an important pre-condition for financial stability.