Pensions Core Course 2013: Pension Pattern and Reform Challenges from Sub-saharan Africa
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  • 1. Slide 1PENSION PATTERNS & REFORM CHALLENGES IN SUB-SAHARAN AFRICAPensions Core CourseMark DorfmanThe World BankApril 2, 2013
  • 2. Slide 2April 2, 2013Organization1. Design summary2. Challenges3. Policy options4. Design reform principles5. A process for evaluation
  • 3. Slide 3April 2, 2013…design matrixLabel &Desc.Mand.Cont.SchemesforPrivateSectorOcc.SchemesPublicSectorOccupationalPension SchemesNon-contrib-utoryPensionsCountries0/3a/3b None Yes Prominent sourceof old age incomeprotection (cov. +benefit level)CoveragenearuniversalSouth Africa, Botswana, Namibia, Lesotho, Namibia,Swaziland0/1/3a/3b - Yes, w/modesttarget RRYes Modest coveragean benefits forselect workersStrongand nearuniversalSeychelles, Mauritius, Cape Verde3a/3b - CS +limited occNone Yes Limited and weaklyregulatedNone Ethiopia (until 2011), Malawi (until 2011), and Liberia.1/3a/3b -Modest DBscheme, + CSschemeYes -partiallyfundedDBYes Yes but heter-ogeniousprevalence.None on anationalbasis.Benin, Burkina Faso, Burundi, Cameroon, CAR, Chad, CongoRepublic, Cote d’Ivoire, DRC, Ethiopia (2012+), Equatorial Guinea,Gabon, Ghana, Guinea, Guinea-Bissau, Madagascar, Mali,Mauritania, Mozambique, Niger, Rwanda, San Tome & Principe,Senegal, Sierra Leone, Sudan, Togo, Zambia, and Zimbabwe2/3a/3b -ProvidentFunds,CS +limited 3rdYes –providentfundsYes Modest coveragean benefits forselect workersNational(Swaz.)pilots(Kenya)Uganda, Swaziland, Kenya, The Gambia2/3b 2ndPillars orHybridsYes –mand. DCschemesYes –integ.w/priv.Yes but at varyinglevelsNonationalschemesNigeria, Ghana (after 2010), Malawi (2011), andTanzania (under consideration)I. Stylistic Design Typology
  • 4. Slide 4April 2, 2013II. Challenges - Earnings-related schemes have largely failed1.Small fraction of covered workers & elderly2.Aging & civil servant scheme maturation =>increasing fiscal pressure3.Reserve management yielded poor returns &incentives (augmented by administrative costs)4.Question of whether existing designs need to bereconsidered
  • 5. Slide 5April 2, 20131. Poor coverage0102030405060708090100%ofcoveredpopulationShare of population above legal retirement age in receipt of a pension (%)Active contributors to a pension scheme in the working-age population (%)Tiny % of workers covered in 50 years (median 5.1% of working age pop):• Earnings-based design ill-suited to rural/informal populations• High target replacement rates & cont. rates Sign. elderly coverage only in 8 countries w/non-contributory schemes.
  • 6. Slide 6April 2, 2013…in large part because of low incomesy = -1E-09x2 + 2E-05x + 0.0212R² = 0.26250.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%18.0%20.0%0 1000 2000 3000 4000 5000 6000 7000CoverageofWorkingAgePopulation(%)GDP per Capita (late 2000s, US$)Cape VerdeCameroonUgandaGuineaSwazilandDRCMauritaniaNigeriaGhanaRep of CongoSudanBurundiChadTogoMozambiqueBeninZambiaSource: World Bank database.Note: Data points are from late 2000s.Correlation between Working Age Coverage & Per Capita Income in Sub-Saharan Africa
  • 7. Slide 7April 2, 2013…with populations largely rural and informal Rural pop. prominent but declining. Earnings-related schemes left out rural and informal sector populations.
  • 8. Slide 8April 2, 2013…and contribution rates relatively high for low income workersA0.05.010.015.020.025.030.035.0SouthAfricaMauritaniaZimbabweLiberiaRwandaCongo,Dem.Rep.CameroonCentralAfricanRepublicGabonCotedIvoireChadMauritiusMaliKenyaSaoTomeandPrincipeSwazilandZambiaBurundiBeninCapeVerdeMadagascarNigerBurkinaFasoEritreaTogoCongo,Rep.GuineaSenegalNigeriaSierraLeoneUgandaGambia,TheEthiopiaGhanaTanzaniaSeychellesSudanEquatorialGuineaContributionRate(%ofCoveredWage)Additional Contribution Rate for Non-Old Age Social Security Employer Old Age/Disability/SurvivorshipEmployee Old Age/Disability/SurvivorshipContribution Rates
  • 9. Slide 9April 2, 20132. Aging in national & civil servant schemematuration drive increases in fiscal pressure• Fiscal costs of many formal sector schemes (esp. for civil servants)consume increasing portions of government budgets.• Contribution rates & benefit formulas not consistent with long-run balance• Early stage in demographic transition, but covered workforce (esp. in civilservant schemes) older and aging more rapidly.Old-age dependency ratios
  • 10. Slide 10April 2, 2013… and old-age dependency rates likely higher for covered populationsSenegal: Projected National and Civil Service Population Age DistributionsSenegal: Projected Dependency Ratios
  • 11. Slide 11April 2, 2013…with target replacement rates too high to be sustained oraffordable0%10%20%30%40%50%60%70%80%90%GhanaTogoZimbabweCentralAfricanRepublicCameroonLiberiaGabonMauritaniaCongo,Rep.CotedIvoireChadSaoTomeandPrincipeEthiopiaNigerBeninBurkinaFasoBurundiCapeVerdeCongo,Dem.Rep.GuineaMadagascarRwandaSierraLeoneTanzaniaMaliEquatorialGuineaSimulatedReplacementRateSimulated Replacement Rates
  • 12. Slide 12April 2, 2013…and unsustainable fiscal burdens over the medium-termTanzania: Pension Financing GapsProjected Cash-Balance in theMandatory NationalSocial SecurityScheme in Niger-0.35%-0.30%-0.25%-0.20%-0.15%-0.10%-0.05%0.00%Netpensionexpendituresas%ofGDPScenario 1 (pensions indexed toinflation)Scenario 2 (pensions are NotIndexed )
  • 13. Slide 13April 2, 2013…as well as growing costs of civil service schemes as coveredpopulations age0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%20062011201620212026203120362041204620512056206120662071price indexation no indexationThe Gambia: Projected Expenditures forthe Public Service Pension FundUganda: Public Service Pension Fund Projected BaselinePension ExpenditureFigure 26: Uganda: Public Service Pension Fund Projected Baseline Pension Expenditure(% of GDP)-1.2%-1.0%-0.8%-0.6%-0.4%-0.2%0.0%Source: World Bank, Options for the Reform of the Public Service Pension Fund inUganda, December 2010.
  • 14. Slide 14April 2, 2013…expenditures on national and civil service schemes aremodest though increasingPension Spending and Civil Service Pension Spending(% of GDP – late 2000s)0.000.501.001.502.002.503.003.50EritreaEthiopiaCameroonCongo,Dem.Rep.Gambia,TheUgandaSierraLeoneMauritaniaBurundiBurkinaFasoCotedIvoireNigerRwandaCentralAfricanRepublicTogoTanzaniaNigeriaCapeVerdeGhanaNamibiaBotswanaKenyaZambiaBeninMaliSenegalMozambiqueGuinea-BissauSouthAfricaZimbabweMauritiusSeychellesExpenditureasa%ofGDPTotal Spending Civil Service ExpendituresSource: World Bank database.
  • 15. Slide 15April 2, 20133. Reserve management yielded poor returns & incentives1.Reserve management has yielded returns < per capitaincome or wage growth due to multiple factors incl.limited investment options2.Public pension funds often heavily impact pricedetermination in important market segments (treasurybonds, real estate, listed equities) + impact fiscalspending incentives3.Should public pension funds actively invest in small andoften weak financial markets?
  • 16. Slide 16April 2, 2013…and administrative costs further aggravating the fiscal threatAdministrative Expense Indicators(US$ or % of Benefits/Expenditures)0.0%20.0%40.0%60.0%80.0%100.0%120.0%140.0%160.0%180.0%200.0%$0.0$50.0$100.0$150.0$200.0$250.0$300.0$350.0$400.0x x x x x x xBotswana-POPENamibia-GIPFSwaziland-PSPFSouthAfrica-GEPFUganda-NSSFTanzania-PPFBurkinaFaso-CNSSGhana-SSNITKenya-NSSFTanzania-GEPFSierraLeone-NASSITRwanda-RSSBKenya-CSPSMauritius-MNPSpercentUS$Administrative Expense per Insurance Benefit- US$ - left axisAdministrative Expense as % of Benefits percent right axisAdministrative Expense as % of Revenues percent right axisSource: Oleksiy Sluchynsky, Defining, Measuring and Benchmarking Administrative Expenditures of Public Pension Programs. Draft,mimeo, 2012. Note: An “x” above the scheme indicates that the actual costs of operation are more than 5 times the predicted levelsbased on the averages observed for 100 pension and social security programs throughout the world.
  • 17. Slide 17April 2, 20134. Question of whether existing designs need to be reconsidered1.Do mandatory wage-based schemes make sense forpopulations with much of the population withoutpredictable wage incomes?2.How does contributing for old-age fit with other SPpriorities (eg. loss of income, health or other shocks)?3.What are sensible principles for social assistance &social insurance design appropriate to needs,objectives & conditions in SSA?
  • 18. Slide 18April 2, 2013III. Policy Options: Parametric Reforms• Ret. age• Accrual & contribution rate• Commutation factor• Wage base extension & valorization16.919.4 19.5 20.0 20.0 20.222.015.010.313.1 13.9 14.2 14.9 15.3 15.5 15.5 15.6 15.7 15.8 16.1 16.2 16.6 16.7 16.7 17.2 17.2 17.9 18.1 18.8 18.9 16.4 12.214.00102030405060708090AgeLife Expectancy at ret. age Retirement Age - MenSource: World Bank Database & ILO.
  • 19. Slide 19April 2, 2013III. Policy Options: Social Pensions0.000***0.050***0.100***0.150***0.200***0.250***Ghana Malawi Nigeria RwandaInd OverallInd ElderlyInd Working AgeInd Youth0.000***0.050***0.100***0.150***0.200***0.250***Ghana Malawi Nigeria RwandaHouseholdsOverallElderly OnlyHouseholdsSome ElderlyPoverty PrevalenceSource: Bank estimates, 2013.
  • 20. Slide 20April 2, 2013III. Social Pensions: Old & New0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%1.60%1.80%2.00%0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%Botswana Swaziland Mauritius Namibia Seychelles Cape Verde South Africa LesothoShare 60+Benefit % of GDP per capitaTotal Cost (% of GDP) - (RIGHT AXIS)8 countries with national schemes, 4 pilot programs.7 universal, 3 pensions tested & 3 means-testedBenefit levels between 10% and 35% of per capita GDP, (Botswana lower).Annual costs for mature schemes 0.3% - 1.8% of GDP
  • 21. Slide 21April 2, 2013… closing the elderly poverty gap is costly for many countries-0.20.40.60.81.01.21.41.6Cost(%ofGDP)Women MenBudget as a % of GDP to Eliminate Poverty Gap for the ElderlySource: Kakwani and Subbarao, Aging and Poverty in Africa and the Role of Social Pensions. 2005.
  • 22. Slide 22April 2, 2013IV. Design Reform Principles Target a modest replacement rate – cont. schemes (affordable &sustainable contribution rate) Gradually effect parametric reforms w/transitions (take advantageof immature schemes & young populations to minimize impact onolder cohorts) Contributor coverage expansion requires experimentation &sequencing (health insurance expansion options, enhanced savingsinstruments, matching contributions, default options, consumereducation) Harmonize & merge civil service & national schemes(w/occupational top-up as necessary - 28 sep., 7 integ, 2 only csschemes) Funded schemes require sufficient enabling conditions. Strengthen occupational & individual scheme regulation &supervision.
  • 23. Slide 23April 2, 2013IV. Design Reform Principles (2)Social pensions Link benefits & targeting to old-age income protection Link benefits to social assistance objectives &instruments Weigh elderly assistance against other developmentpriorities Utilize unified infrastructure for safety nets -identification, targeting, record-keeping, disbursement.
  • 24. Slide 24April 2, 2013V. A Process to Consider Reform• Project baselines of existing schemes & parametricreforms with Actuarial Modeling (PROST)• Evaluate full scope & sequencing of social protectionmeasures for coverage expansion (health insurance,old-age, survivorship, CCTs)• Map programs to satisfy institutional requirements &enabling conditions