Pensions Core Course 2013: Civil Service Pension Schemes


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Pensions Core Course 2013: Civil Service Pension Schemes

  1. 1. Civil service pension schemesOptions for reformWorld BankCore Course on PensionsWashington, DC, April, 2013
  2. 2. Agenda Institutional arrangements for public-sector workers’pensions Demographic pressures Fiscal pressures Flexibility and portability of civil-service pensions
  3. 3. Origins Civil-service pension schemes usually set up beforenational programmes independence of civil servants make working for the public sector attractive shift the cost of remunerating civil servants into the future Separate schemes then often persisted after nationalschemes established: ‘dualism’
  4. 4. Institutional arrangementsaround the world0 25 50 75 100Eastern Europe/Central AsiaLatin America/CaribbeanOECDEast AsiaMiddle East/North AfricaAfricaSouth AsiaSeparateIntegrated732 712 152713 129 67 4
  5. 5. Institutional arrangementsFullyintegratedInstitutionallyseparate withsimilar benefitsFully integratedwith top-uparrangementsPartiallyintegrated withtop-up schemeEntirely separateinstitutions andbenefitsChileCzech RepublicEstoniaHungaryMexicoPolandSlovak RepublicDenmarkFinlandIcelandIsraelNetherlandsAustraliaCanadaIrelandItalyJapanNew ZealandNorwaySloveniaSpainSwedenSwitzerlandUnited StatesUnited Kingdom AustriaBelgiumFranceGermanyGreeceKoreaLuxembourgPortugalTurkey
  6. 6. Dualism Arguments against Integration gives civil servants direct, personal interest in theplan being well managed Economies of scale Mobility and portability Equity Transparency Long-term goal should therefore probably be integrationof civil-service and national pension plans
  7. 7. Demographic pressures:size of general government0 5 10 15 20 25 30ItalyUnited StatesSloveniaIrelandAustraliaIsraelCanadaBelgiumUnited KingdomLuxembourgEstoniaHungaryFranceFinlandSwedenDenmarkNorwayGeneral government employment, per cent of totalOECDaverage:14.7%0 5 10 15 20 25 30KoreaJapanGreeceMexicoChileGermanySwitzerlandPolandNew ZealandSlovak RepublicTurkeyAustriaNetherlandsPortugalSpainCzech RepublicGeneral government employment, per cent of totalOECDaverage:14.7%
  8. 8. Central-government employmentper cent of total populationearly 1980s early 1990sAfrica 1.8 1.1Asia 2.6 1.1Latin America 2.4 1.5All developing countries 2.2 1.2OECD 2.9 1.9
  9. 9. 10203040501995 2000 2005 2009AustraliaEstoniaKoreaIcelandUnited StatesCanadaIsraelFinlandNew ZealandAustriaPortugalUnited KingdomPercentage aged 50 and overBelgium10203040501995 2000 2005 2009ChileJapanSwitzerlandIrelandNetherlandsItalyGermanyDenmarkSwedenNorwayGreeceFrancePercentage aged 50 and overMexicoAgeing central-government workforce
  10. 10. Example: Brazil
  11. 11. Example: Egypt
  12. 12. Labour-force demographics:central government vs populationCentral government employees Total labour force0 10 20 30 40 50IrelandCanadaNetherlandsFinlandNorwayIsraelGreeceSlovak RepublicDenmarkUnited StatesGermanyBelgiumSwedenIcelandItalyPercentage aged 50 and over0 10 20 30 40 50KoreaChileJapanEstoniaAustraliaMexicoPolandSloveniaNew ZealandFranceUnited KingdomSwitzerlandPortugalHungaryAustriaPercentage aged 50 and over
  13. 13. Fiscal pressures: pension spendingCentral government/civil service Broader public sector0 1 2 3 4SpainIrelandKoreaNetherlandsDenmarkJapanAustraliaGermanyIsraelUnited KingdomUnited StatesChileFinlandPortugalAustriaFranceGreecePublic pension expenditure, per cent of GDP******0 1 2 3 4Slovak RepublicNorwayHungaryEstoniaCzech RepublicNew ZealandLuxembourgItalyIcelandTurkeySwitzerlandBelgiumSloveniaMexicoSwedenPolandCanadaPublic pension expenditure, per cent of GDP
  14. 14. Reform options 1 ‘Parametric’ reforms to defined benefit plans reduce replacement rate index pensions in payment to prices rather thancivil-service earnings introduce/increase member contributions raise pensionable age extend averaging periods for ‘final’ salary ‘Systemic’ reforms introduce new system for new civil servants with some elementof pre-funding of obligations Any reform must take account of all aspects ofcivil-service terms and conditions
  15. 15. Reform options 2 Increasing pension age: Civil service schemes are ‘closed’ systems so increasing retirement age has different effects than it does innational schemes: labour supply effect in national schemes Increase in retirement age cuts duration of benefit payments, but without downward adjustment of accrual rates to compensate,benefit values increase people might retire on higher pay if earnings continue to grow withage affects both pay and pension bills Increasing contributions: employer contributions are just re-labelling, unlike national systems employee contributions may have an effect on wages or productivity
  16. 16. Flexibility and portability Civil service schemes are inflexible: ill designed to dealwith people without full careers But flexible schemes are increasingly important ‘revolving doors’: cross-fertilisation between public and privatesectors transfer of employees due to privatisation or contracting out
  17. 17. Penalties to moving jobs Vesting periods: when individual qualifies for a pension <1 year in Finland, Netherlands, Sweden, Switzerland, UK 5 years in Belgium, Germany, Ireland, Italy 15yrs in Austria, France, Spain, Mauritius, Senegal people can leave with nothing Treatment of ‘early leavers’: what happens to the benefit betweenleaving the job and claiming the pension? full transferability (Finland, Netherlands, Sweden)moves to occupational plan with same benefits in private sector full preservation (France)accrued rights uprated in line with civil-service earnings In other countries, a pension cost to moving jobs
  18. 18. Example: Mauritiusage25 30 35 40 45 50 55 60Value of accruedpension
  19. 19. Example: Mauritiusage25 30 35 40 45 50 55 60Value of accruedpensionStaying to retirement:1/50th of final salary
  20. 20. Example: Mauritiusage25 30 35 40 45 50 55 60Value of accruedpensionLump sumDeferred pension:1/50th of current salaryStaying to retirement:1/50th of final salary
  21. 21. Example: Mauritiusage25 30 35 40 45 50 55 6002468 Cost of leaving,proportion ofearnings
  22. 22. Example: UKage25 30 35 40 45 50 55 600.511.5Cost of leaving,proportion ofearningsEarly leaver’s benefit depends onearnings uprated in line with prices:‘partial preservation’
  23. 23. Germanyage25 30 35 40 45 50 55 600246Cost of leaving,proportion ofearningsEarly leaver is retrospectively transferredto national scheme with lower benefits
  24. 24. Reforms to improve portability Shorten vesting periods Preserve pension rights of early leavers Extend averaging period for ‘final salary’ career average uprating eliminates the mobility problem also deals with problems of incentives for abuse but requires improvements in record-keeping Introduce a defined contribution scheme fully portable examples include Australia, UK, US
  25. 25. Conclusions Reform of civil-service pension schemes is important inlow- and middle-income countries often, larger expenditure than national schemes crowds out important social programmes Many options to put civil-service pension schemes on asustainable footing Structural issues as important as fiscal ones single national scheme would be more administratively efficient,equitable and increase labour-market flexibility equity and efficiency also improved by longer averaging periodsfor earnings, shorter vesting periods, preservation for earlyleavers, DC option