Simplifyingthe Ultimate 3P Partnership Model

Pension Reform in Africa

How did it all get so complicated?

If we’re going to effectively tackle the problem

We need to vastly simplify the discussion

We need to make the discussion relevant to emerging economies

We need to make the discussion relevant to Africa

Most importantly:We need to understand the objectives/agendas/conflicts of the different players

The Ultimate PPP Partnership Model

PublicSector Private Sector

PeoplePersonnelPersonal

Inherited systems,Reform needs,

Enabling environment

The ChallengeHow to cope with:

Competing objectives Competing agendas Competing “hot points”

The bottom line:

Getting it right isn’t about compromising to address immediate political/economic demands of each party

Getting is right is about not-compromising the futures of multiple generations of a nation.

The Ultimate PPP Partnership Model

What’s everyone’s requirement – their objectives?

Public Sector• Govt needs to provide basic social protections:•Old age, child and unemployment income

• Health/Education/ Housing

• Infrastructure

Private Sector•Employer/employee compact

•Employee wellness = greater productivity

People•Security:

•Income :•Loss of job•Disability/Death •Post-retirement

•Health• General Well-being• Family

What’s everyone’s requirement – their agendas?

Public Sector•Political legitimacy•Redistribution or wealth

•Develop capital markets

•Greater global legitimacy

•Target investing to “national” interests

Private Sector•Whatever is provided must make economic sense

•Minimise financial burden on company

People•As a citizen/ employee, this is my right•The financial dependency of a family/extended family/ village/etc.

What’s everyone’s requirement – their constraints?

Public Sector•Fiscal demands•Limited skills in:

• Administration• Good governance• Finance

•Limited regulatory framework

• Limited capital markets

Private Sector•Weak or non-existent human capital development skills

•Not core business•Financial constraints

People•Choice is a bad option

•Financial literacy –even literacy

• Immediate needs take precedence over the end game or even the financial journey

TRUST?

How well the system can maintain: Adequacy Affordability Sustainability Equity Predictability Robustness

Secondary objectives: Minimize labor distortions Contribute to savings mobility Contribute to financial market development

Source: Robert Holzmann PENSION SYSTEMS AND REFORM CONCEPTUAL FRAMEWORK 2008

A Pension System’s Success is Predicated on:

How to start – the decisions to be madePublic Sector Social protection or

financial wellness? Private Sector

Non-contributory Is this a basic right? Safety net vs. ladder

Contributory

Publicly managed Who do you trust? What’s cheapest?

Privately managed

Compulsory Social protection vs. savings vehicle

Voluntary

Means tested Redistribution vs. social solidarity

Universal

Unfunded / PAYG Multigenerational vsindividual risk/benefit

Funded

Pension Annuitize savings vstake lump sum

Provident

Defined Benefit State/employer risk vs. employee risk

Defined Contribution

Single Pillar Single vs multiple stakeholder agendas

Multi-pillar

Group Scheme Paternalism vsindividual choice

Personal Pension Plan

Can multigenerational systems work in emerging economies where political and economic stability is fragile?

Does a tighter “contribution-to-benefit” link limit capability to redistribute income?

Should pensions and related insurance programs be integrated?

Are pensions appropriate to assist the poor because social structures are crumbling? Or do welfare grants/pensions accelerate social breakdown?

Does a solid pension program encourage more entrepreneurial risk taking? Or is there potential for moral hazard?

How much should be mandated and is tax the right incentive?

Should public servants continue to have a separate scheme?

These are pension investments, not venture capital opportunities.

Other important debates

Since the early 1990’s a marked change in direction of reform for emerging economies Central and Eastern Europe shift to market

economies Latin America and the Chilean success story

Introduction of the multi-pillar system

How the World Bank/OECD et alia steered the debate

Multi-pillar system provides risk diversification: Unfunded pillars allocating savings to pay-as-you-go

asset Funded pillars allocating to financial assets

Different pillars have varying degrees of importance to key target groups: Formal sector Informal sector Lifetime poor

Multi-pillar provides an important starting point

The Five Pillar ConceptZero Pillar Pillar 1 Pillar 2 Pillar 3 Pillar 4

Poverty reduction and redistribution

Mandated Poverty protection and first level consumption smoothing

Mandatedoccupational or personal pension plans

consumption smoothing

VoluntaryIndividual or company levelProvides choice

Voluntary Informal (family),market-based, public support (e.g. health care) to elderlyHomeownership, reverse mortgages etc.

Publicly managed

Publicly managed

Privatelymanaged

Privately managed –more flexibility than 2nd pillar

Universal for elderly/ means tested young

Guarantee of minimum pensions

Mandatory – tax incentive

Voluntary – tax incentive

Budget/General revenues

Contributions/financial reserves

Earnings related funding – financial assets

Earnings related funding – financial assets

Financial and non-financial assets

DB/NDC DB / DC DB/ DC

Life-time poorDependent on

budget/reserves

Formal sectorPublic pension

plan DB/NDC

Formal sectorEmployer or

individual DB/DC

Formal/ informal

More flexible

New generation

thinkingNon-financial

Perhaps the most controversial recommendation:

Shift from publicly managed unfunded defined benefit schemes to privately managed, fully funded defined contribution schemes (World Bank 1994)

Why this made sense for emerging economies

How the World Bank/OECD et alia steered the debate

What was on offer: Investment banking and capital market development Custodial skills Administrative, distribution and communication skills Asset Management skills Insurance and employee benefit products Financial Planning Skills Credit and Debt management skills

Bonus points: An imported regulatory context with international players

The Financial Service Company as the new intermediary

Can a financial service company serve two masters?

The tightrope walk between fiduciary and profit centre

Building trust / Depending on regulations?

The Challenge

The Lessons from Benefits Barometer* (South Africa)

It was important to change the conversation:Think of employee benefits as a critical social protection that government has “outsourced” to the private sector

It was important to understand that in the DB to DC shift, the real risk that was transferred was financial planning risk Individuals are simply not equipped

With employers stepping away – financial service companies filled the gap – do they understand their role here?

The cultural context is key

*http://benefitsbarometer.co.za

Are government mandated defaults the answer?

Our most significant conclusions

Not engaging with members means we will miss out on the most significant opportunity to turn the tides of financial literacy in this generation.

But, the extreme diversity of the African demographics means that if engagements are going to be far-reaching, “vanilla” solutions are not going to address the issues that most Africans face.

And most importantly….

The whole journey matters

How to derail a pension reform process

Lessons learned from the South African context

The debate cannot remain fragmented

Robert Holzmann – World Bank

What’s been learned about pension reform in emerging economies

Readjustment of objectives: Refocus on basic protection Need to address aging and deferred retirement Capacity of funded schemes to manage risks in question:

i.e.GFC Need for broader coverage

The ILO returns to the debate with the “social floor” concept

Push for complementary reform approaches

Reforming the pension reform process

African interpretations of multi-pillar

Source: African Alliance Securities 2013

Pillar zero Pillar threeOld age grants/social grants

The Missing Link? occupational schemes pension and provident funds

Poverty reduction/ restribution

Minimum pension safety net?

Formal sector

Means tested / qualify

Potential financial sector conflicts:• Costs• Control

Voluntary – no govtmandated participation or annuitization

Budget/generalrevenues

More inclusive coverage of informal?

Funded / earnings linked / tax incentive

Publicly managed Separate structures Privately managed Civil workers vs Private workers

DB /DC

The South African interpretation of multi-pillar

Source: Ben Yen, Pension Reform in a small African country 2009

How the full five pillar model can work

The Challenge:•Political discretion• Labor market

concerns• Long term

solvency

•NDC schemes• Promised

solvency• Addresses

social changes

The Challenge:• Requires

meaningful investment options (lifecycle)

• Measures to reduce costs and fees

• Relaxation of investment constraints

• Focus on payout phase

The Challenge:• Often precedes

mandated 2nd

pillar• Coverage to

informal sector• Better

incentives: matching contributions

• Cost and communication and appropriate solutions

But it definitely demands tweaking for Africa!

Multi-pillar includes everyone – but also recognizes the weaknesses in each of the players

Mind the gaps – and close them before they create an impossible chasm

For emerging economies: Social protections need to be protected from politics Separation of public servant funds may be problematic The private sector (financial service companies) must play a

pivotal role because of lack of funding and skills– but their mandate on compulsory investments needs to be clear

The design of the plan has big influence on member behaviour Appropriate defaults/mandations Appropriate investment options Understand the investment culture

The employer needs to play their role in the greater scheme The regulatory/fiduciary environment will be the deciding

factor

Takeaway thoughts

Getting it right isn’t about compromising to address immediate political/economic demands of each party

Getting is right is about not-compromising the futures of multiple generations of a nation.

Most importantly:

Benefits Barometer, Alexander Forbes, 2013, 2014

Pension Privatization in Africa, Michael Kpessa 2013

Pensions in Africa, Fiona Stewart and Juan Yermo 2009

Pension Trends in Emerging Markets – The Rise of DC Plans and Its Consequences, Allianz Global Investors

Pension Reform in Sub-Saharan Africa, Randolph Oosthuizen –African Alliance Securities- 2013

Pension Systems and Reform Conceptual Framework; Hlozmann, Hinz, Dorfman

Global Pension Systems and Their Reform – Robert Holzmann

Pension reform – lessons from a small African coun

Reforming pensions: Myths, truths, and policy choices – Nicholas Barr

Analytical Review of the Pension System in Kenya, Sundeep Raichura

Nonfinancial Defined Contribution Pension Schemes in a Changing Pension World: Holzmann, Palmer,Robalino

Sources: