Pensions Core Course Mark Dorfman The World …. Dorfma… · Pensions Core Course Mark Dorfman The World Bank March 7, 2014 . ... Faso-CNSS Ghana-SSNIT Kenya-NSSF Tanzania- ... Niger

Slide 1

PENSION PATTERNS & REFORM CHALLENGES IN SUB-SAHARAN AFRICA

Pensions Core Course

Mark Dorfman

The World Bank

March 7, 2014

Slide 2 March 7, 2014

Organization

1. Design summary 2. Challenges 3. Design reform principles 4. A process for evaluation


I. Stylistic Design Typology

Label and Description Countries

1. Near universal non-contributory pension + Civil

Service scheme + prominent occupational

schemes (coverage + benefit level)

South Africa, Botswana, Namibia, Lesotho, Namibia,

Swaziland

2. Strong and near universal non-contributory

pension + Civil Service scheme, First pillar

w/modest target income replacement & Third

Pillars (Modest coverage and benefits for select

workers)

Seychelles, Mauritius, Cape Verde

3. Civil service + limited & weakly regulated

occupational schemes

Ethiopia (until 2011), Malawi (until 2011).

4. Modest contributory partially funded defined-

benefit scheme, civil service scheme & some

occupational schemes (heterogeneous)

Benin, Burkina Faso, Burundi, Cameroon, CAR, Chad,

Congo Republic, Cote d’Ivoire, DRC, Ethiopia (2012+),

Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Liberia,

Madagascar, Mali, Mauritania, Mozambique, Niger,

Rwanda, San Tome & Principe, Senegal, Sierra Leone,

Sudan, Togo, Zambia, and Zimbabwe 5. National non-contributory pension (Swaziland) &

pilots (Kenya). Provident Funds, civil service +

limited occupational schemes (modest coverage

and benefits for select workers)

Uganda, Swaziland, Kenya, The Gambia

6. 2nd Pillars or Hybrids & occupational schemes Nigeria, Ghana (after 2008), Malawi (2011)


I. Social Pensions

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


I. Social Pensions

Country Share 60+

Benefit % of

GDP per

capita

% of

poverty

line

Age TargetingTotal cost

(% of GDP)

Mature Schemes

Botswana 5.9% 4% 143% 65 Universal 0.33%

Swaziland 5.3% 10% 114% 60 Pensions-

tested

0.60%

Mauritius 11.6% 15% 491% 60 Universal 1.70%

Namibia 5.6% 16% 240% 60 Universal 1.36%

Seychelles 9.9% 22% 1138% 63 Universal n.a.

Cape Verde 5.4% 22% 182% 60 Means-tested 0.40%

South Africa 7.3% 25% 592% 60 Means-tested 1.14%

Lesotho 7.0% 34% 156% 70 (men); 65

(women)

Pensions-

tested

1.77%

Pilot Schemes

Zambia 4.8% 10% 37% 60 Universal no data

Kenya 4.1% 25% 94% 65 Means-tested 0.02%

Kenya 18% 67% 55 Universal no data

Uganda 3.8% 26% 72% 65 (60 in

Karamoja

Region)

Universal no data

Nigeria 4.9% 23% 135% 65 (residents

of Ekiti State

only)

Pensions-

tested

no data


II. Challenges - Earnings-related schemes have largely failed

1.Coverage. Small fraction of covered workers & elderly

2.Fiscal pressure. Civil servant scheme maturation & some aging

3.Efficiency & weak reserve management yielded poor returns & incentives (augmented by administrative costs)

4.Alignment of designs to needs


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.


1. Poor coverage

Contributory schemes tend to benefit the most well-off workers while most are left uncovered.

0

10

20

30

40

50

60

70

80

Kenya Malawi Mauritius

(%) Benefits held by 1st 20% (%) Benefits held by 2nd 20% (%) Benefits held by 3rd 20% (%) Benefits held by 4th 20% (%) Benefits held by 5th 20%

Percent of benefits of old age contributory pensions by quintile of the welfare distribution

Source: The World Bank, The Rise and the Risks of non-contributory pensions, draft mimeo, 2013.


…in part because of low & volatile non-wage 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


…with populations largely rural and informal

Rural pop. prominent but declining. Earnings-related schemes left out rural and informal sector populations.


…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


2. Compounding the inequity of support is an emerging fiscal sustainability issue, particularly in civil servant schemes

•Many pensions, especially for civil servants, starting to consume an increasing portion of government budgets, potentially crowding out other programs.

• Partly due to flawed parameters (contribution rates and benefit formulae) inconsistent w/long-run balances & partly worsening scheme demographics.

• Early stage in demographic transition, but covered workforce (esp. in civil servant schemes) older and aging more rapidly.

•Separate civil service & national schemes (except CV, Zambia, Ghana) segment labor markets


Modestly worsening demographics

Old-age dependency ratios


… and old-age dependency rates likely higher for covered populations

Senegal: Projected National and Civil Service Population Age Distributions

Senegal: Projected Dependency Ratios


…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


…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 )


…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

-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.


…expenditures on national and civil service schemes are modest though increasing

Pension Spending and Civil Service Pension Spending (% of GDP – late 2000s)

Source: World Bank database.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Exp

end

itu

re a

s a

% o

f G

DP

Total Spending Civil Service Expenditures Social Pensions


…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.


4. Need for Parametric Modernization … including the retirement age

16.9

19.4 19.5 20.0 20.0 20.222.0

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

Retirement Age and Life Expectancy


More modest accrual rates from mandatory schemes…

Simulated Replacement Rates

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Gha

na

Togo

Zim

babw

e

Cent

ral A

fric

an R

epub

lic

Cam

eroo

n

Libe

ria

Gab

on

Mau

rita

nia

Cong

o, R

ep.

Cote

d'Iv

oire

Chad

Sao

Tom

e an

d Pr

inci

pe

Ethi

opia

Nig

er

Beni

n

Burk

ina

Faso

Buru

ndi

Cape

Ver

de

Cong

o, D

em. R

ep.

Gui

nea

Mad

agas

car

Rwan

da

Sier

ra L

eone

Tanz

ania

Mal

i

Equa

tori

al G

uine

a

Sim

ulat

ed R

epla

cem

ent

Rate

Simulated replacement rates for full term workers


Explicit indexation, reduced vesting periods (& minimums), lengthening of wage bases + valorization …

Indexation

Central African Republic No explicit indexation

Cameroon No explicit indexation

Ethiopia No explicit indexation

Niger No explicit indexation

Guinea No explicit indexation

Equatorial Guinea No explicit indexation

Zimbabwe No explicit indexation

Gabon Disretionary

Chad Disretionary

Benin Disretionary

Cape Verde Disretionary

Congo, Dem. Rep. Disretionary

Madagascar Disretionary

Tanzania Disretionary

Togo Price indexation

Mauritania Price indexation

Congo, Rep. Price indexation

Cote d'Ivoire Price indexation

Burkina Faso Price indexation

Burundi Price indexation

Rwanda Price indexation

Mali Price indexation

Ghana Wage indexation

Sao Tome and Principe Wage indexation

Sierra Leone Wage indexation

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Lib

eria

Eq

ua

to

ria

l G

uin

ea

Ga

mb

ia,

Th

e

To

go

Sa

o T

om

e a

nd

P

rin

cip

e

Se

yc

he

lle

s

Co

ng

o,

De

m.

Re

p.

Ma

li

Co

te

d'I

vo

ire

Gu

ine

a

Rw

an

da

Za

mb

ia

Be

nin

Bu

ru

nd

i

Ce

ntra

l A

fric

an

Re

pu

bli

c

Ch

ad

Sie

rra

Le

on

e

Ta

nza

nia

Ma

da

ga

sc

ar

Ca

pe

Ve

rd

e

Ga

bo

n

Ca

me

ro

on

Gh

an

a

Nig

er

Su

da

n

Ma

urit

an

ia

Co

ng

o,

Re

p.

Ye

ars R

eq

uir

ed

fo

r V

estin

g

Vesting periods


5. Need for Reconsideration of Social Pensions vs. Social Assistance

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.


5. 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?


IV. Design Reform Principles (1)

Modest benefit targets - Target a modest replacement rate – cont. schemes (affordable & sustainable contribution rate)

Designs for rural & informal populations. Design experimentation & sequencing (health insurance expansion, enhanced savings instruments, matching contributions, default options, consumer education; UID, data & payments infrastructure; SP systems).

Modernize DB parameters - parametric reforms (retirement age, linear & sustainable accrual rate, cont. rate, wage base & valorization, indexation) w/transitions (take advantage of immature schemes & young populations to minimize impact on older cohorts)

Harmonize & merge civil service & national schemes (w/occupational top-up as necessary - 28 sep., 7 integ, 2 only cs schemes)

Build enabling conditions. Funded DC schemes require sufficient enabling conditions (fiscal, macro, supervision, financial market depth & breadth, legal & administrative infrastructure). Strengthen occupational & individual schemes as stepping stone to FDC.


IV. Design Reform Principles (2)

Social pensions

Social pensions vs. social assistance.

Link benefits & targeting to contributory benefits

Establishment of infrastructure for public transfers - identification, targeting, record-keeping, disbursement.

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Cost

(% of

GDP)

Women Men

Cost of social pensions to eliminate poverty gap amongst the elderly

Source: Kakwani and Subbarao, Aging and Poverty in Africa and the Role of Social Pensions. 2005.


V. A Process to Consider Reform

• 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 + consider systemic approach

• Project baselines of existing schemes & parametric reforms with actuarial modeling (PROST)

Documents

Pensions Core Course Mark Dorfman The World …. Dorfma… · Pensions Core Course Mark Dorfman The World Bank March 7, 2014 . ... Faso-CNSS Ghana-SSNIT Kenya-NSSF Tanzania- ... Niger