Pensions Core Course 2013: Pension Pattern and Reform Challenges from Sub-saharan Africa

Slide 1

PENSION PATTERNS & REFORM CHALLENGES IN SUB-SAHARAN AFRICA

Pensions Core Course

Mark Dorfman

The World Bank

April 2, 2013

Slide 2 April 2, 2013

Organization

1. Design summary 2. Challenges 3. Policy options 4. Design reform principles 5. A process for evaluation


…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


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


1. Poor coverage

0

10

20

30

40

50

60

70

80

90

100

% o

f cov

ered

pop

ulat

ion

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.


…in large part because of low incomes

y = -1E-09x2 + 2E-05x + 0.0212R² = 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

Cover

age of

Work

ing Ag

e Pop

ulatio

n (%)

GDP per Capita (late 2000s, US$)

Cape Verde

Cameroon

Uganda

GuineaSwazilandDRC

Mauritania

Nigeria

Ghana

Rep of Congo

SudanBurundi

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


…with populations largely rural and informal

Rural pop. prominent but declining. Earnings-related schemes left out rural and informal sector populations.


…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

Sout

h Af

rica

Mau

ritan

ia

Zimba

bwe

Liber

ia

Rwan

da

Cong

o, D

em. R

ep.

Cam

eroo

n

Cent

ral A

frica

n Re

publ

ic

Gabo

n

Cote

d'Iv

oire

Chad

Mau

ritiu

s

Mal

i

Keny

a

Sao

Tom

e an

d Pr

incip

e

Swaz

iland

Zam

bia

Buru

ndi

Beni

n

Cape

Verd

e

Mad

agas

car

Nige

r

Burk

ina F

aso

Eritr

ea

Togo

Cong

o, R

ep.

Guin

ea

Sene

gal

Nige

ria

Sierr

a Leo

ne

Ugan

da

Gam

bia,

The

Ethi

opia

Ghan

a

Tanz

ania

Seyc

helle

s

Suda

n

Equa

toria

l Gui

nea

Cont

ribut

ion

Rate

(% o

f Cov

ered

Wag

e)

Additional Contribution Rate for Non-Old Age Social Security Employer Old Age/Disability/Survivorship

Employee Old Age/Disability/Survivorship

Contribution Rates


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


… and old-age dependency rates likely higher for covered populations

Senegal: Projected National and Civil Service Population Age Distributions

Senegal: Projected Dependency Ratios


…with target replacement rates too high to be sustained or affordable

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%Gh

ana

Togo

Zim

babw

e

Cent

ral A

fric

an R

epub

lic

Cam

eroo

n

Libe

ria

Gabo

n

Mau

ritan

ia

Cong

o, R

ep.

Cote

d'Iv

oire

Chad

Sao

Tom

e an

d Pr

inci

pe

Ethi

opia

Nige

r

Beni

n

Burk

ina F

aso

Buru

ndi

Cape

Ver

de

Cong

o, D

em. R

ep.

Guin

ea

Mad

agas

car

Rwan

da

Sier

ra Le

one

Tanz

ania

Mal

i

Equa

toria

l Gui

nea

Sim

ulat

ed R

epla

cem

ent

Rate

Simulated Replacement Rates


…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%

Net p

ensio

n exp

endit

ures

as %

of G

DP

Scenario 1 (pensions indexed to inflation)

Scenario 2 (pensions are Not Indexed )


…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.


…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

Eritr

ea

Ethi

opia

Cam

eroo

n

Cong

o, D

em. R

ep.

Gam

bia,

The

Ugan

da

Sier

ra Le

one

Mau

ritan

ia

Buru

ndi

Burk

ina F

aso

Cote

d'Iv

oire

Nige

r

Rwan

da

Cent

ral A

fric

an R

epub

lic

Togo

Tanz

ania

Nige

ria

Cape

Ver

de

Ghan

a

Nam

ibia

Bots

wan

a

Keny

a

Zam

bia

Beni

n

Mal

i

Sene

gal

Moz

ambi

que

Guin

ea-B

issau

Sout

h Af

rica

Zim

babw

e

Mau

ritiu

s

Seyc

helle

s

Expe

nditu

re as

a %

of G

DP

Total Spending Civil Service Expenditures

Source: World Bank database.


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?


…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

SouthAfrica-GEPF

Uganda-NSSF

Tanzania-PPF

BurkinaFaso-CNSS

Ghana-SSNIT

Kenya-NSSF

Tanzania-GEPF

SierraLeone-NASSIT

Rwanda-RSSB

Kenya-CSPS

Mauritius-MNPS

perc

ent

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.


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?


III. Policy Options: Parametric Reforms

• Ret. age • Accrual & contribution rate • Commutation factor • Wage base extension & valorization

16.919.4 19.5 20.0 20.0 20.2

22.0

15.010.3

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 12.214.0

0

10

20

30

40

50

60

70

80

90

Age

Life Expectancy at ret. age Retirement Age - Men

Source: World Bank Database & ILO.


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

HouseholdsOverallElderly OnlyHouseholdsSome Elderly

Poverty Prevalence

Source: Bank estimates, 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


… 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

(% o

f GDP

)

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.


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.


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.


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

Pensions Core Course 2013: Pension Pattern and Reform Challenges from Sub-saharan Africa

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