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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
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
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
Slide 5 April 2, 2013
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.
Slide 6 April 2, 2013
…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
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.
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
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
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
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
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%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
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%
Net p
ensio
n exp
endit
ures
as %
of G
DP
Scenario 1 (pensions indexed to inflation)
Scenario 2 (pensions are Not Indexed )
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.
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
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.
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?
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
$400.0
x x x x x x x
Botswana-POPE
Namibia-GIPF
Swaziland-PSPF
SouthAfrica-GEPF
Uganda-NSSF
Tanzania-PPF
BurkinaFaso-CNSS
Ghana-SSNIT
Kenya-NSSF
Tanzania-GEPF
SierraLeone-NASSIT
Rwanda-RSSB
Kenya-CSPS
Mauritius-MNPS
perc
ent
US$
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.
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?
Slide 18 April 2, 2013
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.
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
HouseholdsOverallElderly OnlyHouseholdsSome Elderly
Poverty Prevalence
Source: Bank estimates, 2013.
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
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
(% 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.
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.
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.
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