Pensions Core Course 2013: Pension Pattern and Reform Challenges from Sub-saharan Africa
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This document summarizes challenges facing pension systems in Sub-Saharan Africa and options for reforming them. It discusses how existing earnings-based schemes have very low coverage rates due to factors like rural/informal employment and high contribution rates. It also notes aging populations and civil servant schemes are increasing fiscal pressures. Policy options presented include parametric reforms like changing retirement ages and social pensions to reduce elderly poverty, with principles of targeting modest replacement rates and gradual reforms. A process of actuarial modeling and evaluating full social protection measures is suggested for reform consideration.
Pensions Core Course 2013: Pension Pattern and Reform Challenges from Sub-saharan Africa
- 1. Slide 1 PENSION PATTERNS & REFORM CHALLENGES IN SUB-SAHARAN AFRICA Pensions Core Course Mark Dorfman The World Bank April 2, 2013
- 2. Slide 2 April 2, 2013 Organization 1. Design summary 2. Challenges 3. Policy options 4. Design reform principles 5. A process for evaluation
- 3. Slide 3 April 2, 2013 …design matrix Label & Desc. Mand. Cont. Schemes for Private Sector Occ. Schemes Public Sector Occupational Pension Schemes Non- contrib- utory Pensions Countries 0/3a/3b None Yes Prominent source of old age income protection (cov. + benefit level) Coverage near universal South Africa, Botswana, Namibia, Lesotho, Namibia, Swaziland 0/1/3a/3b - Yes, w/ modest target RR Yes Modest coverage an benefits for select workers Strong and near universal Seychelles, Mauritius, Cape Verde 3a/3b - CS + limited occ None Yes Limited and weakly regulated None Ethiopia (until 2011), Malawi (until 2011), and Liberia. 1/3a/3b - Modest DB scheme, + CS scheme Yes - partially funded DB Yes Yes but heter- ogenious prevalence. None on a national basis. Benin, Burkina Faso, Burundi, Cameroon, CAR, Chad, Congo Republic, 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 Zimbabwe 2/3a/3b - Provident Funds,CS + limited 3rd Yes – provident funds Yes Modest coverage an benefits for select workers National (Swaz.) pilots (Kenya) Uganda, Swaziland, Kenya, The Gambia 2/3b 2nd Pillars or Hybrids Yes – mand. DC schemes Yes – integ. w/priv. Yes but at varying levels No national schemes Nigeria, Ghana (after 2010), Malawi (2011), and Tanzania (under consideration) I. Stylistic Design Typology
- 4. Slide 4 April 2, 2013 II. Challenges - Earnings-related schemes have largely failed 1.Small fraction of covered workers & elderly 2.Aging & civil servant scheme maturation => increasing fiscal pressure 3.Reserve management yielded poor returns & incentives (augmented by administrative costs) 4.Question of whether existing designs need to be reconsidered
- 5. Slide 5 April 2, 2013 1. Poor coverage 0 10 20 30 40 50 60 70 80 90 100 %ofcoveredpopulation Share 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 6 April 2, 2013 …in large part because of low incomes y = -1E-09x2 + 2E-05x + 0.0212 R² = 0.2625 0.0% 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 7000 CoverageofWorkingAgePopulation(%) GDP per Capita (late 2000s, US$) Cape Verde Cameroon Uganda Guinea SwazilandDRC Mauritania Nigeria Ghana Rep of Congo Sudan Burundi Chad Togo Mozambique Benin Zambia Source: World Bank database. Note: Data points are from late 2000s. Correlation between Working Age Coverage & Per Capita Income in Sub- Saharan Africa
- 7. Slide 7 April 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 8 April 2, 2013 …and contribution rates relatively high for low income workers A 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 SouthAfrica Mauritania Zimbabwe Liberia Rwanda Congo,Dem.Rep. Cameroon CentralAfricanRepublic Gabon Coted'Ivoire Chad Mauritius Mali Kenya SaoTomeandPrincipe Swaziland Zambia Burundi Benin CapeVerde Madagascar Niger BurkinaFaso Eritrea Togo Congo,Rep. Guinea Senegal Nigeria SierraLeone Uganda Gambia,The Ethiopia Ghana Tanzania Seychelles Sudan EquatorialGuinea ContributionRate(%ofCoveredWage) Additional Contribution Rate for Non-Old Age Social Security Employer Old Age/Disability/Survivorship Employee Old Age/Disability/Survivorship Contribution Rates
- 9. Slide 9 April 2, 2013 2. Aging in national & civil servant scheme maturation 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 civil servant schemes) older and aging more rapidly. Old-age dependency ratios
- 10. Slide 10 April 2, 2013 … and old-age dependency rates likely higher for covered populations Senegal: Projected National and Civil Service Population Age Distributions Senegal: Projected Dependency Ratios
- 11. Slide 11 April 2, 2013 …with target replacement rates too high to be sustained or affordable 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Ghana Togo Zimbabwe CentralAfricanRepublic Cameroon Liberia Gabon Mauritania Congo,Rep. Coted'Ivoire Chad SaoTomeandPrincipe Ethiopia Niger Benin BurkinaFaso Burundi CapeVerde Congo,Dem.Rep. Guinea Madagascar Rwanda SierraLeone Tanzania Mali EquatorialGuinea SimulatedReplacementRate Simulated Replacement Rates
- 12. Slide 12 April 2, 2013 …and unsustainable fiscal burdens over the medium-term Tanzania: Pension Financing Gaps Projected Cash- Balance in the Mandatory National Social Security Scheme in Niger -0.35% -0.30% -0.25% -0.20% -0.15% -0.10% -0.05% 0.00% Netpensionexpendituresas%ofGDP Scenario 1 (pensions indexed to inflation) Scenario 2 (pensions are Not Indexed )
- 13. Slide 13 April 2, 2013 …as well as growing costs of civil service schemes as covered populations age 0.0% 0.1% 0.2% 0.3% 0.4% 0.5% 0.6% 0.7% 0.8% 2006 2011 2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066 2071 price indexation no indexation The Gambia: Projected Expenditures for the Public Service Pension Fund Uganda: Public Service Pension Fund Projected Baseline Pension Expenditure Figure 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 in Uganda, December 2010.
- 14. Slide 14 April 2, 2013 …expenditures on national and civil service schemes are modest though increasing Pension Spending and Civil Service Pension Spending (% of GDP – late 2000s) 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Eritrea Ethiopia Cameroon Congo,Dem.Rep. Gambia,The Uganda SierraLeone Mauritania Burundi BurkinaFaso Coted'Ivoire Niger Rwanda CentralAfricanRepublic Togo Tanzania Nigeria CapeVerde Ghana Namibia Botswana Kenya Zambia Benin Mali Senegal Mozambique Guinea-Bissau SouthAfrica Zimbabwe Mauritius Seychelles Expenditureasa%ofGDP Total Spending Civil Service Expenditures Source: World Bank database.
- 15. Slide 15 April 2, 2013 3. Reserve management yielded poor returns & incentives 1.Reserve management has yielded returns < per capita income or wage growth due to multiple factors incl. limited investment options 2.Public pension funds often heavily impact price determination in important market segments (treasury bonds, real estate, listed equities) + impact fiscal spending incentives 3.Should public pension funds actively invest in small and often weak financial markets?
- 16. Slide 16 April 2, 2013 …and administrative costs further aggravating the fiscal threat Administrative 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 $400.0 x x x x x x x Botswana- POPE Namibia- GIPF Swaziland- PSPF South Africa- GEPF Uganda- NSSF Tanzania- PPF Burkina Faso-CNSS Ghana- SSNIT Kenya- NSSF Tanzania- GEPF Sierra Leone- NASSIT Rwanda- RSSB Kenya- CSPS Mauritius- MNPS percent US$ Administrative Expense per Insurance Benefit- US$ - left axis Administrative Expense as % of Benefits percent right axis Administrative Expense as % of Revenues percent right axis Source: 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 levels based on the averages observed for 100 pension and social security programs throughout the world.
- 17. Slide 17 April 2, 2013 4. Question of whether existing designs need to be reconsidered 1.Do mandatory wage-based schemes make sense for populations with much of the population without predictable wage incomes? 2.How does contributing for old-age fit with other SP priorities (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 18 April 2, 2013 III. Policy Options: Parametric Reforms • Ret. age • Accrual & contribution rate • Commutation factor • Wage base extension & valorization 16.9 19.4 19.5 20.0 20.0 20.2 22.0 15.0 10.3 13.1 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 12.2 14.0 0 10 20 30 40 50 60 70 80 90 Age Life Expectancy at ret. age Retirement Age - Men Source: World Bank Database & ILO.
- 19. Slide 19 April 2, 2013 III. Policy Options: Social Pensions 0.000*** 0.050*** 0.100*** 0.150*** 0.200*** 0.250*** Ghana Malawi Nigeria Rwanda Ind Overall Ind Elderly Ind Working Age Ind Youth 0.000*** 0.050*** 0.100*** 0.150*** 0.200*** 0.250*** Ghana Malawi Nigeria Rwanda Households Overall Elderly Only Households Some Elderly Poverty Prevalence Source: Bank estimates, 2013.
- 20. Slide 20 April 2, 2013 III. Social Pensions: Old & New 0.00% 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 Lesotho Share 60+ Benefit % of GDP per capita Total 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 21 April 2, 2013 … closing the elderly poverty gap is costly for many countries - 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 Cost(%ofGDP) Women Men Budget as a % of GDP to Eliminate Poverty Gap for the Elderly Source: Kakwani and Subbarao, Aging and Poverty in Africa and the Role of Social Pensions. 2005.
- 22. Slide 22 April 2, 2013 IV. Design Reform Principles Target a modest replacement rate – cont. schemes (affordable & sustainable contribution rate) Gradually effect parametric reforms w/transitions (take advantage of immature schemes & young populations to minimize impact on older cohorts) Contributor coverage expansion requires experimentation & sequencing (health insurance expansion options, enhanced savings instruments, matching contributions, default options, consumer education) Harmonize & merge civil service & national schemes (w/occupational top-up as necessary - 28 sep., 7 integ, 2 only cs schemes) Funded schemes require sufficient enabling conditions. Strengthen occupational & individual scheme regulation & supervision.
- 23. Slide 23 April 2, 2013 IV. 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 development priorities Utilize unified infrastructure for safety nets - identification, targeting, record-keeping, disbursement.
- 24. Slide 24 April 2, 2013 V. A Process to Consider Reform • Project baselines of existing schemes & parametric reforms with Actuarial Modeling (PROST) • Evaluate full scope & sequencing of social protection measures for coverage expansion (health insurance, old-age, survivorship, CCTs) • Map programs to satisfy institutional requirements & enabling conditions