Micro pensions offer a simple and effective means to alleviate the problem of persistent old-age poverty in emerging economies facing rapid population aging. They enable voluntary savings for old age among lower income individuals. There is significant potential demand and willingness among the working poor to participate in micro pension programs. However, providing pensions to large numbers of informal workers in developing countries poses socioeconomic challenges given low coverage of existing social security systems and a lack of resources to support aging populations. Microfinance institutions are increasingly diversifying their products to include pensions and other savings instruments in response to market saturation of microcredit.

1. MICRO PENSIONS: HELPING THE POOR TO SAVE FOR THE FUTURE
Boudewijn Sterk, Programme Manager, Pension & Development Network
The world’s population is growing older rapidly. By 2050, older people
will outnumber the younger for the first time in the world’s history. For
emerging economies in the 21st century, global ageing will be one of
the most demanding problems they face.1 Without advanced planning
and the necessary money to cope with the social and economic
challenges of population ageing, emerging economies face a daunting
outlook of persistent old-age poverty. Micro pensions offer a simple
and effective means to alleviate this problem.
What are micro pensions?
Many people may be more familiar with other forms of micro finance – micro credit, micro savings
and micro insurance – as micro pensions are a relatively new development. They are a form of third
pillar old age income security, enabling voluntary savings for old age and aimed at lower income
people. By introducing (simple) pension provisions, aimed at providing old-age income for the
working poor, the poor are offered the opportunity to provide for their own old-age welfare. This
increases their ability to fend for themselves and decreases the dependency of older people on the
state, their offspring and/or families.
Micro pensions are intended to generate capital growth by enabling the working poor to invest in
diverse assets. A micro pension scheme can be described as a fixed system of contributions where
participants can save voluntarily over a long period. The built up savings are invested by a
professional asset manager, and, at a pre determined age, often around 58 – 60 years, the built-up
assets can be collected as a lump sum, in phases or on a monthly basis as an annuity. Often, a
combination of these methods is used.
An ageing world
Global ageing is the result of a decrease in both mortality and fertility: as hygiene, healthcare and
standards of living improve, fewer children are born and more people reach old age, leading to a
global increase in life expectancy. According to the UN Population Division, by 2050 the number of
people aged 65 and over as a proportion of the global population will have doubled from 7% in 2000
to 16%.2
1
United Nations, ‘World Population Ageing 2009’, Department of Economic and Social Affairs, Population Division, 2010.
2
United Nations, ‘World Population Ageing 2009’, Department of Economic and Social Affairs, Population Division, 2010.
1 May 2011

2. Figure 1: Population by age group, 1950, 2000 and 2050 (source: United Nations)
Although population ageing evolved gradually in Western countries, as a result of an earlier decline
in fertility and improving living standards for the majority of the population following the industrial
revolution, this same process will occur much faster in emerging economies. The recent and
continuing fertility decline in many emerging economies today is more rapid than the gradual decline
experienced by the developed economies. Today 64% of the global older population lives in
emerging economies; by 2050 this percentage will have increased to 80%.3
According to Daniel Cotlear, lead economist in the World Bank’s Human Development Network, ‘We
should all be worried that rapid ageing is no longer a rich country phenomenon and that many poorer
countries are now catching up, but largely without the money and advance planning to cope with the
social and economic challenges of this profound social change.’4
Socio-economic challenges of global ageing
The main consequence of global ageing, a dramatic increase in government expenditures for
healthcare and old-age income provisions, will impact both emerging and developed economies
alike. However, as the old-age dependency ratio – the ratio of the population aged 65 years or over
to the population aged 15-64 – continues to widen worldwide, poorer countries will have even fewer
resources to pay for increases in expenditure. In addition, the rapid demographic change in
developing regions means they will have less time to adapt as the supply of labour decreases,
having a knock-on effect on both economic growth and social security.
3
United Nations, ‘World Population Ageing 2009’, Department of Economic and Social Affairs, Population Division, 2010.
4
The World Bank Group, ‘Is Latin America: Ready for an Aging Revolution?’.
2 May 2011

3. Figure 2: Old-age dependency ratio (%) in major areas, 2007 and 2050
Economic growth will be harder to achieve in countries with large numbers of elderly people, and
meeting healthcare, pension, and other needs will be especially difficult for low and middle income
countries. Global ageing may have an enormous impact on economic performance, social relations
and political stability, especially within emerging economies where large parts of the workforce are
currently not covered by social policies. Here, global ageing may come to be accompanied by
persistent poverty.
Youth bulge in Africa
Although life expectancy is increasing in all regions of the world, birth rates are not declining equally
everywhere. Indeed, in some emerging economies fertility rates are still high. In countries where life
expectancy has been lower and where fertility remains high, the average age of the population drops
and a ‘youth bulge’ is formed.
Africa currently provides a good example of a continent experiencing a youth bulge: more than 60
percent of Africa’s population is under the age of 25, and this is expected to increase to 75 percent
by 2015.5 By 2040, Africa is expected to have the world’s largest working-age population: a labour
force of 1.1 billion, exceeding India and China.6 Although life expectancy in Asia/Pacific and Latin
America/Caribbean has increased just as in Africa, fertility rates have not.7 Africa is therefore in the
unique position of being able to speed up economic development through its youth bulge, producing
a so-called ‘growth dividend’.
Unfortunately, however, there is nothing inevitable about a youth bulge producing a growth dividend.
The right socio-economic conditions need to be established, including education, job opportunities
and the distribution of wealth. Without these elements, a youth bulge can lead to social unrest, as
5
OECD, ‘The African Economic Outlook 2010’, 2010.
6
McKinsey&Company, ‘McKinsey on Africa – A Continent on the move’, June 2010.
7
It should be noted that there is continued academic debate about whether fertility rates in Africa will drop in the
future.
3 May 2011

4. presently seen in Northern Africa, where masses of unemployed youth took to the streets to call for
political change.8
Regardless of the youth bulge, the growth rate of the older population in Africa will bring economic
and social challenges.9 Currently, close to 90% of those living in Sub-Saharan Africa are without any
form of social security, while many who are covered receive benefits that fall short of their basic
needs.10 Currently, 90% of those in Sub-Saharan Africa living on less than a dollar per day are
without any form of social security.11 With the additional crises that Africa will have to face on two
fronts, disintegrating social safety nets (due to urban migration) and the effects of HIV/Aids12 (Sub-
Saharan Africa is the most heavily AIDS affected region in the world, accounting for 67% of the
global population living with HIV and 72% of AIDS deaths in 2007)13,there is a clear need to improve
the position of both current and future older people, as well as the people working in the secondary
economy (unorganized sector), through social security schemes provided by local governments.14
Global ageing, social security and the role of micro pensions
It is important to recognize that the ageing of population is inevitable. However, a recent survey of
old age security provision in most middle and lower income countries shows that less than 25% of
the older population will receive social security support.15 With no old-age income support, the
working poor (those working in the informal sector, earning less than US $2 a day) are extremely
vulnerable to falling into the old-age poverty trap. Social protection can be used as a tool both for the
reduction of old-age related poverty and for national development. Social policies not only
strengthen social cohesion but they also promote productivity, protect individuals from social risks
and serve as a vital instrument for poverty reduction.
Global ageing will prove to be a tremendous burden on the economic development of the working
poor. On a global scale, the group of people aged over 80 is growing at the fastest rate. The greater
part of this growth takes place in low-income countries; countries that typically do not offer old-age
provisions for their elderly. Most extreme poverty is found amongst the young and the elderly. While
the young still posses labour power, the elderly do not. Since the ageing workforce in emerging
economies for the most part consists of self-employed and labourers in the informal sector, to whom
pensions and other old age security provisions are unavailable, a regular income for the elderly is an
almost unheard of luxury.
Given the expected exponential increase in the elderly population and the working poor’s willingness
and ability to save for old age, it becomes clear that there is a strong need to provide lifelong
financial security for the self-employed poor individuals living in low-income countries. It is time for
8
Kenny, Charles, ‘Sweet Bird of Youth! The Case for Optimism’, Time Magazine, March 17, 2011.
9
Wright, Graham et al., ‘Cash, Children or Kind? Developing Old Age Security for Low-Income People in Africa’,
MicroSave, 2005.
10
Devereux, S., and Cipryk, R., ‘Social protection in Sub-Saharan Africa: A Regional Review’, Centre for Social Protection,
July 2009.
11
Help Age International, Aging in Africa, Issue 25, 2005b.
12
Wright, Graham et al., ‘Cash, Children or Kind? Developing Old Age Security for Low-Income People in Africa’,
MicroSave, 2005.
13
Devereux, S., and Cipryk, R., ‘Social protection in Sub-Saharan Africa: A Regional Review’, Centre for Social Protection,
July 2009.
14
Kasala, Benou, ‘Population and Ageing in Africa: a Policy Dilemma?’, United Nations Population Fund / Country
Support Team Addis Ababa, Ethiopia, 2011.
15
Holzmann, R., et al., Closing the Coverage Gap – Role of Social pensions and Other Retirement Income Transfers, World
Bank Publications, 2009, ISBN: 0821379712.
4 May 2011

5. the microfinance sector to build efficient and effective vehicles to help the informal sector save for
old age. Micro pensions are not a luxury!
Case study: providing micro pensions in Guatemala
In Central America, REDCAMIF, the regional network of Micro Finance Institutions, is working to
develop micro pension provisions for low-income workers and their families in Guatemala,
Honduras and Nicaragua. Together with AEGON, the Pension & Development Network has
been working to help REDCAMIF with the design and roll-out of micro pensions in the region.
In Central America, 60% of the working age population is employed in the informal economy.
Broadly speaking, more than 90% of the population of Central America does not receive pension
or social welfare benefits of any kind. A market study determined that the potential demand of
the Central American region for micro pensions covers more than 8.5 million people.
AEGON employee, Edo de Wit (an
actuarial consultant at AEGON, The
Netherlands), together with Robert
Timmer (a management consultant at
Mastermind Consultancy), were sent on
a technical mission by the P&D Network
to provide assistance in developing
REDCAMIF’s micro pension product.
Between 5 and 11 March 2011, the team
of P&D Network consultants assessed
and examined the current micro pension
project set-up, focusing on product
Edo de Wit (middle left) and Robert Timmer (middle right) design and IT & administrative
infrastructure architecture.
REDCAMIF’s micro pension offering will help to reduce poverty among the beneficiaries (15,500
micro-entrepreneurs, small-business owners, non-salaried and low-income workers and their
families in Guatemala, Honduras and Nicaragua).
A detailed report of the P&D Network mission to REDCAMIF Guatemala can be found on the
P&D Network micro pension Community .
The market for micro pensions
Research has shown that not only can the poor can save money but that they are also very much
willing to do so.16 Although the poor are able to frequently put aside small sums of money, they have
lacked the capability to convert these savings into funds large enough to support them during old
age. For example, Moneer Alam, economist at the Institute of Economic Growth in Delhi, has shown
in India that there is a clear understanding amongst the working poor that their increasing life
expectancy combined with their volatile position requires a guaranteed old-age income.17 The
16
Banerjee, A.V. & Dufloo, E., ‘The Economic Lives of the Poor’, The Journal of Economic Perspectives, Volume 21,
Number 1, Winter 2007, pp. 141 – 168.
17
Alam, M., ‘Ageing, Old Age Income Security and Reforms – An Exploration of the Indian Situation’, Economic and
Political Weekly, August 14, 2004, pp. 3731 – 3740.
5 May 2011

6. research of Rutherford and others shows that in order to give themselves security, the poor may
even borrow in order to have something to save.18
The motivation and willingness of the working poor to participate in micro pensions can be illustrated
by the outcome of a feasibility study amongst members of the DHAN Foundation in India.19 Together
with the DHAN Foundation, the Pension & Development Network launched its first micro pension
pilot project in Madurai, India. As can be seen from the figures below, the need for micro pension
provisions is present for all ages, as is the willingness to participate.
Figure 3: Motivation to participate in a micro pension Figure 4: Willingness to participate in a pension
Source: feasibility study amongst members of the DHAN Foundation in Madurai, India.
The potential market for micro pension provisions is huge. For example, informal employment makes
up 48% of non-agricultural employment in North Africa, 51% in Latin America, 65% in Asia, and
72% in sub-Saharan Africa. If agricultural employment is included, the percentages rises in some
countries like India and many sub-Saharan African countries beyond 90%.20 Since these workers
have no access to government contributory pension provision, the scope of markets in which micro
pension provisions can be introduced is almost global. However, the most important pre-condition is
that the financial infrastructure of a specific country is developed enough in order to facilitate the
implementation and execution of a micro pension provision.
Trends and challenges in providing pensions for the poor
Globally, the concept of offering micro pensions to the working poor is rather new, but since it can be
seen as a combination between long-term savings and (old-age income) insurance, the product
perfectly matches the evolving demand of the clients of the micro finance industry and further trends
in today’s micro finance industry.
Trends in the micro finance industry
Having experienced some major scandals (the most noteworthy taking place in Mexico and India,
involving extraordinarily high interest rates on micro credit), which in many ways resemble the global
financial crisis of 2008, the micro finance industry is currently re-inventing itself. To put it crudely, the
claim that providing the poor with credit would enable them to work their way out of poverty (based
on the neoliberal concept of offering market regulated development aid) has been debunked. 21
18
Rutherford, Stuart, et al., Portfolios of the Poor – How the World’s Poor Live on $2 a Day, Princeton University Press,
2009.
19
The feasibility study has been undertaken by Tata DHAN Academy of the DHAN Foundation during 2009 and early
2010. 44.000 members of the DHAN Foundation participated in the research.
20
International Labour Organisation. ‘Men and Women in the Informal Economy‘, 2002, ISBN 92-2-113103-3.
21
For a detailed analysis of the developments in the microfinance industry, I recommend Milford Bateman’s book ‘Why
Doesn’t Microfinance Work? – The Destructive Rise of Local Neoliberalism’, published by Zed Books, 2010.
6 May 2011

7. Furthermore, the industry is experiencing a rising level of competition for clients and a growing
problem that the market for providing micro credit is rapidly becoming saturated.22
In the wake of these events, two trends can clearly be distinguished. Firstly, the microfinance
industry is reinventing itself by focusing on product diversification. Besides providing credit, micro
finance institutions (MFIs) are expanding their client base through offering insurance and savings
products, backed up by the support of influential institutions such as the WorldBank and the
International Labour Organization. Also, the microfinance industry is showing a growing interest in
the importance of remittances as a funding source for the products it offers. Secondly, larger
investment funds are gradually shifting their strategy from direct investments in MFIs (in order to
provide micro credit to their clients) towards large investments in insurance companies in emerging
markets.
In order for the micro finance industry to be able to offer micro pensions successfully to its clients,
the following five challenges will have to be overcome.
1. Financial literacy: As most micro savings products that are currently offered are short
term, focusing on 3 to 5 years, offering micro pension provision requires a whole new way of thinking
and financial planning for the working poor. For most of the time, they are not used to planning for
20 to 30 years ahead. This also applies to the institutions that offer micro pensions.
Among the poor and lower skilled, financial literacy is often lower. Therefore, it is essential that
clients should be able to understand micro pensions: the pension product itself should not be
complex. Micro pensions also require careful selling: both to attract customers and to ensure that
customers are aware of what they are buying. For example, a lump-sum payout upon completion of
the contractual pension savings agreement will not ensure a secure old age if it is subsequently
invested inappropriately. In this case, it can rapidly disappear when the pensioner needs it most.23
2. Product design & trust: Micro pension provisions are individually developed according to
the socio-economic situation of the client group in each country. As reliable mortality tables are often
absent, micro pension systems are necessarily based on simple individual-based Defined
Contribution (DC) systems.
A DC micro pension system puts the investment risk with the client. When operating in emerging
economies, volatile financial markets could cause turmoil that can generate investment losses
which are unaffordable for the poor (though, however, recently established economies have
shown the same financial instability & vulnerability). This makes trust one of the most basic aspects
in designing and executing a micro pension product:
Client trust in the financial institution that will handle their precious life savings;
Trust in the financial system itself (requiring excellent governance from within and outside the
financial sector, in order to guarantee clients an old-age income after 20 to 30 years of saving).
3. Inflation: The micro pension offered should be sustainable under volatile economic
conditions, providing a reasonable interest and be able to protect against (often high) inflation rates
and it should be attractive in order to encourage clients to put away their savings for 20 to 30 years.
22
Bateman, M., ‘Why Doesn’t Microfinance Work? – The Destructive Rise of local Neoliberalism’, Zed Books, 2010.
23
Wright, Graham et al., ‘Cash, Children or Kind? Developing Old Age Security for Low-Income People in Africa’,
MicroSave, 2005.
7 May 2011

8. 4. Profitability & costs: There is no single standard design for a micro pension. The typical
minimal amount of pension premium that participants in the micro pension provision pay on a
monthly basis therefore also differs. For example, clients participating in the DHAN Foundation micro
pension scheme in India have a minimum pension premium of 100 Rupees a month (US $2.2),
whilst the premium for a Mongolian micro pension scheme, targeting a somewhat wealthier client
group (herders), was designed to be US $ 16.6 a month (US $200 a year).
Since micro pension premiums are typically very small, the transaction and administrative costs are
relatively high. In order to minimise these costs, the number of clients should be as large as
possible. Typically, a micro pension pilot project starts out with around 10,000 clients, but in order to
be sustainable needs at least 100,000 or more. In addition, the use of mobile banking systems or
specially designed administrative software can decrease administrative costs exponentially.
5. Entry date: Small micro pension premiums leave little space for solidarity between the
younger and the older pension participants. How then can participation of those aged 50 years or
older, who are subject to arrears in the time they have available to build up their pension savings, be
financed? Leaving to one side the question of the responsibility of the state, the Pension &
Development Network believes that this problem can be solved with the participation of the pension
and insurance sector in developed economies. For example, an annual contribution of US $1 a year
won’t make much difference to the pension pay-out of a retiree in the Netherlands, but a
considerable difference for a micro pension participant in India.
Micro pensions in action
In India, micro pensions are already becoming an established concept. Here, the most commonly
used scheme for providing micro pensions is the ‘partner-agent model’. An insurance company
manages the micro pension savings by pooling them in a fund (the role of partner), while a (micro)
finance institution offers the micro pension product to its clients (the role of agent). The Indian
insurance company UTI Mutual Fund has entered into arrangements with five different organisations,
providing their members access to a micro pension scheme through the UTI-Retirement Benefit
Pension Fund.24 The pension premiums collected differ from monthly cash premiums for
unorganized workers to bartering portions of milk for dairy farmers and to the revenue of advertising
deals for rickshaw drivers.25
Besides India, micro pensions are offered in Bangladesh by the Grameen Bank. The Pension &
Development Network is involved in the development of micro pensions in Central America (in
Guatemala, Honduras and Nicaragua, executed by a collaboration between REDCAMIF and the
Inter American Development Bank), in the Philippines (executed by RIMANSI) and in Kenya.
A different form of pensions have been developed in South America, where coffee bean farmers in
Peru, with the assistance of the local NGO ‘CEPICAFE’, invest in their pensions by growing species
of tropical hardwood trees. When the farmers are old, and the trees have grown, they sell the trees
to be harvested as lumber in order to provide an income for themselves and their families.
24
UTI Mutual Fund, http://www.utimf.com/misc/misc1/csr.aspx.
25
Goyal, M., ‘Pension Plans for the Unorganized Sector’, Forbes India, April 7, 2010.
8 May 2011

9. Conclusion
In a rapidly ageing society, where rising life expectancy is associated with lower economic
productivity, the working poor in particular are at risk. If designed and executed properly, micro
pensions can help provide the means to lift the working poor and their families out of the poverty trap
as they grow older.
With financial and technical investments in the development of the pension sector in developing
economies, micro pensions prove an opportunity to save today’s working poor from a future of old-
age poverty.
The Pension & Development Network is able to operate through the financial and professional
support it receives from participating organisations and individuals. To find out more on how you or
your organisation can contribute, or on investing in micro pensions, please contact Boudewijn Sterk
at info@pensiondevelopment.com.
Micro pension specialists - the Pension & Development Network
The Pension & Development Network is a not-for-profit organization, specialized in the development
of micro pension provisions. The aim of the P&D Network is to build bridges between pension
experts in the Netherlands and Micro Finance Institutions (MFI) in emerging economies. To this
extent, the P&D Network was set-up as a collaborative enterprise together with various Dutch
financial companies and institutions that are willing and able to apply their expertise in the field of
pensions to the growing need for institutionalized old age provisions in emerging economies.
The P&D Network is a division of the Netherlands-based NGO WorldGranny, and operates from the
WorldGranny office. Cooperation with the P&D Network always takes place on a local level, where
the P&D Network partners with local agencies. In this way, the P&D Network is able to provide
organizations like NGOs, MFIs and banks with valuable support in developing and implementing
pension systems.
Through its extended network, the P&D Network offers consultancy, advice and hands-on support in
designing, developing and implementing savings and micro pension schemes. Combined, its
members possess knowledge and expertise in all areas of pension systems, including direct
investments, risk management, asset management, governance, project management, project
finance, IT solutions, logistics, marketing, supervision, and regulation.
More information on the P&D Network can be found on www.pensiondevelopment.org and
www.pensiondevelopmentcommunity.org.
The author of this article, Boudewijn Sterk, works as a Programme Manager for the Pension &
Development Network, and can be contacted via info@pensiondevelopment.org.
9 May 2011