PENSION REFORM Federation of Saint Christopher and...

St. Kitts & Nevis Pension Reform WB Core Pension Course - Nov 09 1

PENSION REFORM

Federation ofSaint Christopher and Nevis

This Twin Island Federation is more commonly known as

St. Kitts & Nevis

World Bank – Pensions Core Course

*Group Project*

Washington, DC

November 2009


GROUP MEMBERS

1. Tanice A. Spencer (Jamaica)

2. Athifa Ali (Maldives)

3. Fareeha Shareef (Maldives)

4. Mariyam Visam (Maldives)

5. Debbie Taylor (St. Kitts & Nevis)


PENSION REFORM OVERVIEW

1. Demographics Characteristics

2. Economics Characteristics

3. Existing Pension System

4. Reform: Needs

Reform Challenges

Reform Enabling Conditions

Reform Options

Justification of Proposal

Consensus Building Strategy

Public Information Strategy

5. Summary


Demographic Characteristics (St. Kitts & Nevis)

Population 46,325 last census in 2001 (40,131 estimated July 2009, www.cia.gov)

26.3% in the age range of 0 – 14 years65.9% in the age range of 15 – 64 years7.9% 65 years and over 7.9%

Total fertility (Births/Woman) has declined by 7% within the last 9 yearsYr 2000 2.43Yr 2008 2.28Yr 2009 (estimated) 2.26

Total life expectancy at birth 73.2 years



Gross Domestic

Product (GDP)

2008 estimate 2007 estimate 2006

estimate

Purchasing Power

Parity

USD $777.7m USD $755.0m USD $733.7m

Real Growth Rate 3% 2.9% 5.3%

Per Capita USD $19,500 USD $19,100 USD $18,600



Inflation was 2% from 2000 – 2004 and increase to 3.6% in 2005. By the end of 2008 it is projected to be over 6%

Labour force 25,454 (2008)

Age Pensioners 1,858 (2008)

Dependency ratio 7.7 (2005)

Source: SKN SSB Statistics Digest 2003 - 2008


PROJECTIONSDEPENDENCY RATIO

SKN 8th Actuarial Review - Summary


CARICOM, Next 40 Years:fertility down, ageing up

YEAR 2000 2010 2020 2030 2040 2050

Total Population (‘000)

13,875 16,188 19,037 21,867 24,585 27,190

Age

0 – 19

6,860 7,420 8,202 8,789 8,966 9,086

% 49.4 45.8 43.1 40.2 36.5 33.4

Age

20 – 64

6,330 7,936 9,756 11,611 13,683 15,404

% 45.6 49 51.2 53.1 55.7 56.7

Age

65 and over

683 832 1,079 1,467 1,936 2,700

% 4.9 5.1 5.7 6.7 7.9 9.9

Source: U.S. Census Bureau, International Data Base


Economics Characteristics Industry Diversification

Main industry was Sugar production until 2005 Continued development of sectors -Agriculture, Tourism,

Financial Services, and Manufacturing SKN Debt was 185% of GDP in 2006

Banks are supervised by Central Banks (Credit Unions & Insurance Companies). Mortgage interest rates down, real estate development increasing

Capital market available locally (www.ecseonline.com) Government revenue from Taxation Social Security

Reserves in 2008 was 79% of GDP (USD $331.2M / USD $421.2M)

Total benefits expenses was 48% of contributions income and 26.7% of total income in 2008


EXISTING PENSION SYSTEM

PAYG DB system since 1978 Public & Private sectors coverage and in 1996 Self-employed coverage

Short-Term & Long-Term along with non-contributory Benefitsare met from the fundSugar Workers Pension Fund

1958

National Provident Fund1968

Social Security Fund1978


EXISTING PENSION SYSTEM Minimum Age

Pension XCD $400 per month

Non contributory assistance age pension XCD $250 per month

Not adjusted automatically –usually following actuarial advice or ad hoc adjustments

Mandatory coverage for all

Self Employed coverage low


EXISTING PENSION SYSTEM

Parameters Formal Sector Informal Sector

Contribution rate 11% 10%

Employee 5% up to a max. ceiling of XCD $6,500 of gross wages per month

Normal Pension Age (no early retirement)

62 years 62 years

Minimum Contributions required (weeks) for Age Pension

500 weeks 500 weeks

Reference wage Highest three years earnings

Maximum retirement RR 60% 60%

Pension heavily weighted to those with few contributions

3% per year for 1st 10 years

1% per year after 1st 15 years


PENSION REFORM NEEDS Benefits are not correlated to the contributions

(non-contributory age pension, invalidity assistance pension, minimum pension adjustments must be above the poverty line )

Dependency ratio – reduction (arising from increasing longevity and unemployment, reduced infant mortality)

Reduction in the operational and administrative cost of the system (review of contribution rate or retirement age, replacement rates & wage ceiling) to ensure financial sustainability Best estimate for expenditure to first exceed total

income is 2035. The system will have to rely on the reserves

Further diversification of the Investment portfolio (due to market risk etc. and inconsistent assets/liabilities mix)


PROJECTIONSSt. Kitts & Nevis SSB RESEVES

-1

0

1

2

3

4

5

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Bil

lion

s of

$'s

8th Actuarial ReviewBest Estimates 2035 Income = Expenditure

High Dependency (pessimistic)

Low Dependency (optimistic)


KEY PROJECTIONS RESULTS

Projected of Contributions Required to Fund Benefits

0%

5%

10%

15%

20%

25%

30%

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065

Contribution Rate

General Average Premium


REFORM CHALLENGES

Endorsement of the reform options by Parliament

Amendment of the Laws & Regulations

Creating awareness and maintaining confidence in the new system

Improvement in ICT – costly

Lack of adequate instruments/financial markets

Asset Management Liability feasibility study would be required – risks such as

operational, liquidity, liability, economic, investment, catastrophe, political


ENABLING CONDITIONS Economic stability and conducive

environment for investments

Existing pension administration structure enables reform since it does not require major changes (institutional framework is in place)

Public consultations on pension reform has been completed (Next >>> Feedback from other stakeholders)

Preparation of annual strategic (action) plan by the SKN Social Security Office


PENSION REFORM OPTIONS Strengthen the supervisory framework (assign an

independent authority to oversee the operations of the Fund)

Periodic increase in retirement age in line with life expectancy rate OR Adjust rate for contribution (e.g. 11% to 13.7%)

Adjust the replacement rate

Increase coverage - creating awareness, effective voluntary and self employed coverage

Calculation of the age benefit using life time salary versus three (3) best years of salary

Diversification of the investment portfolio (instruments and geographical location)


PENSION REFORMPROPOSAL AND JUSTIFICATION

The independent oversight to ensure efficient administration of the fund and improve transparency.

Retirement age periodic changes will improve Fiscal Sustainability

RR will decline below the base RR, improves equity

Additional coverage to ensure increase compliance and addition contributions.

Improve incentives and equity (determination of liability gap for future expenses, reduction of the dependency ratio)

Diversification of the portfolio to maximize the real returns and mitigate various risks to the portfolio (economic, market, liquidity)


PENSION REFORMConsensus Building Strategy

Consensus of the reform options must be

endorsed by the following parties to ensure

transparency and agreement to make the

changes required for the Fund’s sustainability

1. Minister of Social Security (already on board)

2. Parliament

3. Minister of Finance

4. Chamber of Industry & Commerce

5. Labour Unions

6. Other organizations

7. The population in general (feedback received during public meetings)


PENSION REFORMCommunication Strategy

Communication/public information strategy

A variety of communication methods will be

used (not limited to):

1. Media

2. Internet/text messaging

3. Infomercial

4. Continued focus groups and stakeholders discussions

5. Workshops/Training (Financial Literacy, Internal & External Training)

6. Education program in all schools


PENSION REFORMSummary

The parametric reform options are required for the

fund to have:

Financial sustainability

Affordable (contribution levels)

Adequate benefits

Robust

The reform process must be ongoing with periodic

reviews and assessments due to economic

and demographics changes


PENSION REFORM ST. KITTS & NEVIS SOCIAL SECURITY

THANK YOU

World Bank – Pensions Core Course

*Group Project*

Washington, DC

November 2009


PENSION REFORMSt. Kitts & Nevis Social Security

Reference Materials:

1. St. Christopher & Nevis Social Security About Social Security (TYSKB5/07) prepared by Social Security Office

2. SKN Social Security Board Statistical Digest 2005 -2008 by Social Security Board 2009

3. (https://www.cia.gov/library/publications/the-world-factbook/geos/sc.html)

4. Social Security in the CARICOM Single Market & Economy by Mr. Derek Osborne, June 2004

5. 8th Actuarial Review (SKN Social Security Board) by Mr. Derek Osborne (2003 – 2005) May 2007

6. World Bank Pensions Core Course materials, Washington DC November 2009

https://www.cia.gov/library/publications/the-world-factbook/geos/sc.html






Appendix – Slide #11SSB – Things you should know booklet APPENDIX 2 The table below shows the percentage of average annual wages which will be paid for Age Pension according to the contributions wholly paid or a combination of paid and credited. An additional 1% of average earnings in respect of each unit of 50 contributions in excess of 800 contributions will be added up to a maximum pension of 60% of the insured person’s average annual wages. Total Contributions Paid and Credited Age Pension 150 - 199 16% of wages 200 - 249 18% of wages 250 - 299 20% of wages 300 - 349 22% of wages 350 - 399 24% of wages 400 - 449 26% of wages 450 - 499 28% of wages 500 - 549 30% of wages 550 - 599 32% of wages 600 - 649 34% of wages 650 - 699 36% of wages 700 - 749 38% of wages 750 - 799 40% of wages 800 - 849 41% of wages

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