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1
Pension Problems in Youthful Africa
Session 1: November 6, 2019
Melis U. Guven and Anita M. Schwarz
World Bank
Pensions Core Course
As anywhere else, pension schemes come in all shapes
and sizes
2
Social Pension PAYG DB FDC FF DB Hybrid DB-DC Point Systems
Most countries in Sub-Saharan Africa have
separate civil service systems
3
• 11 countries have an integrated pension system: Cape Verde, Central African Republic, Chad, Ghana, Liberia, Nigeria, Rwanda, Sao Tome e Principe, Seychelles, Sierra Leone, and Zambia.
• 34 countries have a separate pension system for public sector workers.
• In some countries public sector workers are also covered by some type of social pension in addition to their civil service pension: Botswana, Lesotho, Mauritius, Namibia, Seychelles, Swaziland.
On the surface, African pension systems look to be in
good shape
4
Africa is a young continent
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Uga
nd
a
Za
mb
ia
Ga
mbia
Bu
rkin
a F
aso
An
go
la
Cha
d
Ma
li
Ke
nya
Nig
er
Sie
rra
Leo
ne
Bu
run
di
Zim
bab
we
Ma
law
i
Sa
o T
om
e a
nd
Prin
cip
e
So
ma
lia
Nig
eri
a
To
go
Eq
ua
toria
l G
uin
ea
Rw
an
da
Unite
d R
epu
blic
of
Tan
za
nia
Ma
da
ga
sca
r
De
mo
cra
tic R
ep
ub
lic o
f th
e C
on
go
Se
ne
ga
l
Com
oro
s
Côte
d'Iv
oir
e
Sw
azila
nd
Cam
ero
on
Mo
zam
biq
ue
Lib
eria
Gu
ine
a-B
issau
Ma
uri
tan
ia
Be
nin
Gu
ine
a
Co
ngo
So
uth
Su
da
n
Eth
iop
ia
Gh
ana
Eri
tre
a
Nam
ibia
Cen
tra
l A
fric
an
Re
pu
blic
Ma
yott
e
Bo
tsw
an
a
Djib
ou
ti
Ga
bon
Cab
o V
erd
e
Leso
tho
So
uth
Afr
ica
Se
yche
lles
Réu
nio
n
Ma
uri
tiu
s
Rosy Picture
5
❑ Spending levels as a percentage of GDP are
relatively low
❑ Almost all national pension schemes are
running surpluses
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Pension Spending (% GDP)
Civil Service National Sechemes Social Pension
Reality is more complex
6
❑ For countries with separate civil servant
schemes or separate schemes for public
enterprise workers
• Demographics of these schemes are far different from
general population
• Not only are these schemes older, but life expectancy
of participants is much longer
System dependency rates are relatively higher for
civil service schemes
7
0%
5%
10%
15%
20%
25%
30%
20
16
20
18
20
20
20
22
20
24
20
26
20
28
20
30
20
32
20
34
20
36
20
38
20
40
20
42
20
44
20
46
20
48
20
50
20
52
20
54
20
56
20
58
20
60
20
62
20
64
20
66
20
68
20
70
20
72
20
74
20
76
20
78
20
80
SY
ST
EM
DE
PE
ND
EN
CY
RA
TE
Demographic structure of national and civil service pension schemes in an African country
PSPF
NSSF
Many public employees are expected to retiree
soon to further worsen system dependency rate
8
0
50
100
150
200
250
300
350
400
450
500
550
18 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 74
Fre
qu
en
cy
Age
Age Distribution of public sector employees in an African Country
❑ Age distribution of existing public employees is skewed
Even private sector systems have longer-run issues
9
❑ Systems are immature
➢ Initially systems take in contributions, but pay few
benefits because people reaching retirement do not
have enough contribution years to qualify for a
pension
➢ Maturity will take place when individuals with full
working career of contributions spend their full
retirement period with pensions
❑ Coverage is low
National Pension Schemes are immature
10
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Number of Beneficiaries per Contributor
❑ Fewer beneficiaries per contributor
Few of the elderly are receiving pensions
11
0%
10%
20%
30%
40%
50%
60%
70%
Total
12
And relatively few workers are making contributions
0%
10%
20%
30%
40%
50%
60%
70%Percentage of working age making contributions
Share of elderly population will double on average
between 2015 and 2050
13
0%
5%
10%
15%
20%
25%
30%
35%
Uga
nd
a
Za
mb
ia
Ga
mbia
Bu
rkin
a F
aso
An
go
la
Cha
d
Ma
li
Ke
nya
Nig
er
Sie
rra
Leo
ne
Bu
run
di
Zim
bab
we
Ma
law
i
Sa
o T
om
e a
nd
Prin
cip
e
So
ma
lia
Nig
eri
a
To
go
Eq
ua
toria
l G
uin
ea
Rw
an
da
Unite
d R
epu
blic
of
Tan
za
nia
Ma
da
ga
sca
r
Dem
ocra
tic R
ep
ub
lic o
f th
e C
on
go
Se
ne
ga
l
Com
oro
s
Côte
d'Iv
oir
e
Sw
azila
nd
Cam
ero
on
Mo
zam
biq
ue
Lib
eria
Gu
ine
a-B
issau
Ma
uri
tan
ia
Be
nin
Gu
ine
a
Con
go
So
uth
Su
da
n
Eth
iop
ia
Gh
ana
Eri
tre
a
Nam
ibia
Cen
tra
l A
fric
an
Re
pu
blic
Ma
yott
e
Bo
tsw
an
a
Djib
ou
ti
Ga
bon
Cab
o V
erd
e
Leso
tho
So
uth
Afr
ica
Se
yche
lles
Réu
nio
n
Ma
uri
tiu
s
Elder share 2015 Elder share 2050
Very high contribution rates
14
❑ Desire for actuarial balance has led to higher contribution
rates than desirable given young demography
0%
5%
10%
15%
20%
25%
30%
35%
40%
Contribution Rates as % of Wage
National Civil Service
In European countries contribution rates grew as
population aged
15
0
5
10
15
20
25
30
35
40
45
1940 1949 1961 1977 1983 1989 1993 1997 2002 2010 2012
High Income Moderate Spenders
Netherlands
Finland
Norway
Iceland
Ireland
UK
Germany
Austria
Portugal
Sweden
High contribution rates are problematic
16
❑ Disadvantages of high contribution rates
➢ Limit growth of formal sector
➢ Discourage labor-intensive growth
➢ Lower global competitiveness
Combination of high contribution rates and youthful
population leads to large surpluses or reserves
17
❑ Pension fund becomes the largest financier in the country – politically powerful
❑ Symbiotic relationship with government• Governments use pension fund to advance projects
for which they otherwise do not have financing
• Governments frequently do not pay their required contributions to the pension fund
• Governments of course rely on pension funds to buy their securities
• Government loses ability to enforce governance and accountability
Many earn negative real rates of return on their
investments
18
❑ Lack of marketable securities leads to
investments in real estate and non-liquid
investments
❑ Reluctance to invest abroad
❑ Pressure to invest in “socially targeted” projects
Pension funds spend an enormous amount on
administrative costs
19
❑ Typical developed country system spends no
more than 1-2% of contribution revenue on
administrative costs or 1% of wage
❑ Recognize that there are far fewer economies
of scale and potentially higher costs
• Could justify administrative costs 3 or 4 times higher
than in developed countries
❑ In reality, range from between 14% of
contribution revenue to as high as 70%
❑ Lack of accountability
Benefits are also more generous than is sustainable
20
❑ Hard to resist demands for higher benefits when the pension fund is flush with reserves
❑ Often long duration of benefits due to early retirement➢ People should expect to spend no longer than 15 years in
retirement
➢ Civil servants actually do not want to retire
❑ Higher accrual rates than will be affordable in the long run
❑ Benefits not related to lifetime earnings, but focused on earnings of last few years – incentive to underreport earnings in early years and over-report in last years
Life expectancy at age 60 on basis of national statistics
21
0
5.00
10.00
15.00
20.00
25.00
Sie
rra L
eone
Nig
eria
Côte
d'Ivoire
Guin
ea-B
issau
Guin
ea
To
go
Gam
bia
Ma
li
Bu
rkin
a F
aso
Lib
eria
Lesoth
o
Centr
al A
fric
an R
epublic
Ghana
Chad
Sw
azila
nd
Nig
er
Eritr
ea
So
malia
Com
oro
s
So
uth
Afr
ica
So
uth
Suda
n
Bu
rundi
Ma
urita
nia
DR
Con
go
Se
negal
Cam
ero
on
Eq
uato
rial G
uin
ea
Mozam
biq
ue
Ma
dagascar
Nam
ibia
An
gola
Be
nin
Uganda
Bo
tsw
ana
Djib
outi
Za
mbia
Zim
babw
e
Eth
iopia
Congo
Ma
law
i
Ta
nzania
Rw
and
a
Sa
o T
om
e a
nd P
rincip
e
Gabon
Ke
nya
Cabo V
erd
e
Se
ychelle
s
Ma
uritiu
s
Ma
yotte
Réunio
n
Current accrual rates will not be affordable in the
long run
22
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Accrual rates
Wage patterns when only last few years covered
23
0%
200%
400%
600%
800%
1000%
1200%
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
% o
f m
inim
um
wage
Age
Other issues with benefits
24
❑ Lack of legislated indexation leaves retiree with uncertainty
❑ Often include step accrual rates, with higher benefits given for first 15 years than for subsequent years➢ Or high minimum pensions
❑ Commutations result in low benefits over retirement life
❑ Civil service benefits sometimes based on base salary, rather than salary plus allowances, resulting in very low pensions compared to working age income
❑ Benefits for survivors not always designed to protect surviving family members
❑ Use of gratuities fairly common in addition to pension
Reform challenges for African countries (generic)
25
❑ Universal pension schemes• Identifying eligible beneficiaries and removing them upon death
• Maintaining sustainable benefits
❑ Defined contribution schemes• Improving governance
• Increasing investment instruments for funds to invest in
• Enhancing supervisory capacity to ensure that funds are safe
❑ Defined benefit schemes• Maintain contribution rates at levels needed to pay current benefits until there are
investment instruments which can reliably earn positive rates of return
• Keep benefit design simple
• Provide benefits of 1-1.5% of average lifetime salary per year of contribution
• Inflation index benefits after retirement
• Adjust retirement ages targeting life expectancy of 15 years after retirement for covered group
❑ Consider integration of multiple schemes for better labor market mobility
Increasing number of countries are looking at ways
to extend pension coverage to informal sector
26
❑ Coverage of contributory pension systems remain limited to
the formal sector
❑ Several high-middle income countries extended coverage
through social pensions but at a high cost
❑ Informal sector is large in Africa
❑ Informal jobs comprise more than 90% of total
employment in some countries
❑ Most countries in Africa are likely to have large informal
sectors for many years to come
Areas that need particular attention (1)
27
❑ Important to look at existing financial inclusion landscape
(microfinance sector, mobile money, etc)
❑ Voluntary, DC scheme- individual accounts
❑ Identify main target groups
❑ Household survey data analysis to get an indication of target groups
Additional surveys, focus group analysis
❑ Use technology to reach geographically dispersed informal
sector
❑ Mobile money could be considered
❑ Link long term old age savings with short term products;
flexible product design
❑ Health, microfinance
❑ Short term savings account along with long- term savings for old-age
Areas that need particular attention (2)
28
❑ Professional management of savings
❑ Maximize returns
❑ Minimize asset management costs
❑ Regulation
❑ Appropriate administration platform
❑ Link with ID
❑ Budget for start up costs, staffing
❑ Design the pay-out phase from the start
❑ Effective communications strategy and an implementation
plan
❑ Work with existing partners to build trust
❑ Be clear on what benefit is being promised at eligibility age
❑ Important to pilot test various approaches