1 Options for Increasing Coverage Mukul G. Asher Professor, LKY School of Public Policy National University of Singapore Email: [email protected]@nus.edu.sg

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Options for Increasing Options for Increasing CoverageCoverage

Mukul G. AsherMukul G. AsherProfessor, LKY School of Public Policy

National University of SingaporeEmail: [email protected]

Presented at the Expert group Meeting on Setting the Agenda Of the High-level Meeting on the Regional Review of the Implementation of the Shanghai Implementation Strategy for the Macao and Madrid Plans of Action on Ageing, 30 June-1 July 2006, Shanghai, China.

mailto:[email protected]

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Introduction/1Introduction/1

□Three aspects of coverage of social protection systems:

□Proportion of the labor force (or population cohort) covered

□The number of risks covered (for example during retirement, longevity and retirement risks)

□The extent of the benefits (this is closely linked to the overall adequacy)

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□ Main characteristics of developing ESCAP countries:

□ Dualism with respect to philosophy all three aspects of the coverage between civil servants (public sector) on the one hand, and private sector workers on the other.

□ Limited development of multi-tier systems (for example, the five-tier system suggested by the World Bank) (Table 1).

□ Relative lack of innovation and limited professionalism in this sector.

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Table 1: Multi-Pillar Pension Taxonomy of the World Bank

Pillar Target Groups Main Criteria

Lifetime poor

Informal sector

Formal sector

Characteristics Participation Groups

0 X x x “Basic or “Social pension,” at least social assistance, universal or means-tested

Universal or Residual

Budget/general revenues

1 X Public pension plan, publicly managed, defined-benefit or notional defined-contribution

Mandated Contributions, perhaps with financial reserves

2 X Occupational or personal pension plans, funded defined-benefit or funded, defined-contribution

Mandated Financial assets

3 x x, X X Occupational or personal pension plans, funded defined-benefit or funded, defined contribution

Voluntary Financial assets

4 x X X Personal savings, homeownership, and other individual financial and non-financial assets

Voluntary Financial assets

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Table 1: Multi-Pillar Pension Taxonomy of the World Bank

□ Note: The size of x or X characterizes the importance of each pillar for each target group.

□ Source: Holzmann R. et al. “Old age income support in the 21st century: the World Bank’s perspective on pension systems and reform”, Washington DC: The World Bank, May 2004 Draft (Processed).

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□ This presentation focuses on the first aspect of the coverage, i.e. how to increase the proportion of the labor force (population cohort) which is covered under social safety nets.

□ This issue is complicated by the fact that social security schemes tend to be earnings-related and assume some type of employer-employee association.

□ The labor force in most ESCAP countries has a large so-called unorganized or informal sector where formal labor laws and social security schemes do not or cannot apply due to administrative and other constraints.

Table 2: Population Aging in Selected Countries

Population(In Millions)

% of Population Over 65

Population over 65 (Numbers in million)

2000 2030 2000 2030 2000 2030

China 1262 1483 7.0 16.0 88 237

India 1014 1437 4.6 9.0 47 129

USA 276 351 12.6 20.0 35 70

Vietnama 76 N.A. 5.8 N.A. 4.4b N.A.

Indonesia 225 313 4.5 10.9 10 34

Brazil 173 203 5.3 13.2 9 27

Russia 146 133 12.6 20.5 18 27

Japan 127 117 17.0 28.3 22 33

France 59 62 16.0 24.0 9 15

UK 60 61 15.7 23.5 9 14

S.Korea 47 54 7.0 19.5 3 11

Malaysia 22 35 4.1 9.4 1 3

Australia 19 23 12.4 21.1 2 5

Singapore 4 9 6.8 14.8 0 1

Demographic and Labor Force ChallengeDemographic and Labor Force Challenge

Source: Ahya, C., A. Xie et al. (2006), “India and China: New Tigers of Asia

Part II”, JM Morgan Stanley, Exhibit 8, p.15.

Demographic and Labor Force ChallengeDemographic and Labor Force Challenge

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Coverage in ESCAP/1Coverage in ESCAP/1

□The coverage in ESCAP countries relatively low.

□The demographic and labor force challenges will simply increase the complexity of providing social security coverage.

□Table 3 provides the coverage in selected Southeast Asian countries.

Table 3: Key Provident and Pension Fund Organizations and Indicators in Southeast Asia

Country Organizations Contributors as Percent of Labor Forcea

Contribution Rate

(2004)

Wage Ceiling (2004)

Member Balances

(USD Billion), Percent of

GDP

Malaysia

Employees Provident Fund (EPF)

Government Pension Fund, Malaysia (GPF)

50.6 (March 2006)b

NA

23.0

NA

No

No

72.2, 52.8 (March 2006)

NA

Philippines

Social Security System (SSS)

Government Service Insurance System (GSIS)

20-25c (2003)

4.5 (2003)

8.4 ( 5.07/3.33)

21.0(12/9)

P 15,000 per month

No wage ceiling

3.3, 3.8(June 2005)

3.7, 4.3(early 2005)

Singapore

Central Provident Fund (CPF)

Government Pension Fund, Singapore (GPF)

58.3d

(December 2005)

NA

30.0f

NA

$4,500 per month from

January 2006

74.8, 61.6(December

2005)

NA

ThailandSocial Security Organization (SSO)

Government Pension Fund, Thailand (GPF)

21.2e (2003)

3.5(2003)

6.0

6.0

B15,000 month

Yes

20.0, 11(early 2005)

7.8, 4.6(2005)

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Table 3: Key Provident and Pension Fund Organizations and Indicators in Southeast Asia

□ a Figures in brackets refer to year to which data refers.

□ b Includes 4017 foreign workers.

□ c Membership in the SSS is 23 million but the active contributors are 6-8 million.

□ d Foreign workers are around 25% of the labor force and are excluded.

□ e The SSO coverage is overstated as the figure refers to members rather than active contributors. If the provident funds of SOE’s are included, the coverage rate may be as high as 25%.

□ f This rate applies to those below 55 years of age. Lower rates apply to those above 55 years.

Sources: Information obtained for official sources in each country.

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□ In other ESCAP countries such as India and Indonesia, the coverage ranges from between 10 and 20 percent of the labor force.

□ This however does not imply that all those that are covered will satisfy the second and third aspects of coverage mentioned earlier.

□ Given this huge challenge, what are the options?

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□OPTION 1OPTION 1:□ Element 1:

Increase the capacity of formal provident and pension fund organizations to cover larger proportion of those in the formal sector. For example, in India, the provident fund organization can improve its capacity to effectively cover firms with less than 20 employees.

This element can provide non-trivial increase in coverage though would still leave out large proportion of those in the informal sector.

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□Element 2:

Provide decentralized voluntary schemes with effective regulation for all individuals to participate.

The role of group-schemes, including by Self-Help Groups (SHGs) becomes critical.

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□Element 3:

Undertake fiscal reforms to increase the coverage of social assistance programmes, financed directly through the budget (Zero pillar of Table 1).

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□OPTION 2OPTION 2

□Centralized mandatory social insurance-based schemes to cover health, pension, and other aspects.

This is the approach taken by Indonesia in its recently passed legislation. Similar legislation is pending in Vietnam. In India, some groups have also recommended such a scheme covering more than 300 million people.

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Limitations of Social Insurance:

Social insurance is a complex concept. In many countries, the critical constraints are administrative, particularly related to record-keeping, paying the benefits in a correct way with low transactions costs, sound actuarial analysis, and managing political risk.

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□ Recently UTI Mutual Fund has started an initiative which can be credited as India’s first Micro-Pension Scheme for the unorganized sector.

□ UTI Mutual Fund has entered into a customized arrangement with Shree Mahila Sewa Sahakari Bank Ltd. for providing its members an investment opportunity through a micro-pension initiative under its UTI-Retirement Benefit Pension Fund.

□ This initiative will enable the workers in the unorganized sectors with very small income to share the benefits of the capital market.

An SHG-based Micro Pension Initiative/1

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□Shree Mahila Sewa Sahakari Bank Ltd. (SEWA Bank) is a unique institution which is primarily owned, led and established by self employed women in low-income groups.

□These self employed women are primarily engaged as vendors or laborers or small service providers or home-based workers. The average monthly income of a member of SEWA Bank is Rs.800.


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□SEWA was established in 1972, and is the largest trade union in the country.

□It has membership of over 7 Lakh Women.

□SEWA objective is to make the poor self employed women, economically strong, safe, sound and self reliant.

□SEWA also endeavors to provide financial literacy.


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□ The UTI MF Micro Pension Scheme is a customized version of an existing Government/ SEBI / CBDT approved scheme for low income workers.

□ UTI MF will provide members of SEWA Bank with Pension fund option through UTI Retirement Benefit Pension Fund.

□ The scheme focuses on self-provision through its micro-pension scheme.

□ The scheme targets low-income earners across all States


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□Minimum Investment per applicant is Rs. 50 per month.

□Members will contribute up to 55 years so as to receive periodic pension after they reach 58 years.

□Estimates suggest that initially 50,000 members will join the scheme, with the number likely to increase to 0.35 million over the next few years.

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□The savings will be pooled and transferred to UTI for funds management.

□Each worker will receive a unique account number and will receive a passbook which will record contributions history and savings values.

□The scheme will ensure periodic cash flow through its Systematic Withdrawal Plan.

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□UTI is actively working with SEWA, SA-DHAN, FWWB and Grameen Koota for building institutional and human capacity for lower transactions costs

□This will help to scale the scheme to a national level

□Representatives of over 1 million workers have already sought participation for their members in this scheme


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Opportunities□Ease of replication □Capable of internalizing Employer / Govt.

Contribution □Low Transaction cost through technology

Challenges□Awareness □Institutional capability in workers / MFIs


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Scheme Objective

□ To provide Pension to Investors on retirement after

they attain the Age of 58

□ Ideal for Self employed people

□ Periodic Cash flow through Systematic Withdrawal

Plan


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□ An Open ended Balanced fund with a maximum equity allocation of 40% and a minimum allocation of 60% in Fixed income instruments.

Fund Performance as on 31st March 2006Scheme Performance as on March 31, 2006 (NAV- 19.7141)

Performance Comparison with Benchmark Index

Compounded Annualised Returns

NAV Crisil MIP Blended Index

Over last one year 30.06% 11.23%

Over last three years 24.25% 10.51%

Over last five years 15.65% Not Available

Since Inception 12.64% Not Available

Assuming reinvestment of past dividends and bonus at immediate ex-dividend NAV Past Performance may or may not be sustained in the future


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□The critical challenge will be in the payout phase.

□Currently, a lumpsum payment is planned. So, longevity, inflation risk, survivors benefits, and long-term health care issues are not addressed.

□Such schemes require national level base of strong regulation and large scale and scope economies to be viable on their own.

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□The replicability and scalability of this initiative within India and elsewhere needs to be examined.

□This would be an interesting area of further work.

Documents

1 Options for Increasing Coverage Mukul G. Asher Professor, LKY School of Public Policy National University of Singapore Email: [email protected]@nus.edu.sg