World Bank

Core Course on Pensions

Washington, May 2015

Civil-Service

Agenda

Institutional arrangements for public-sector workers’ pensions

Demographic pressures on finances

Flexibility and portability of civil-service pensions

Origins

Civil-service pension schemes usually set up before national programmes

independence of civil servants

make working for the public sector attractive

shift the cost of remunerating civil servants into the future

Separate schemes then often persisted after national schemes established: ‘dualism’

Institutional arrangements

around the world

0 25 50 75 100

Eastern Europe/

Central Asia

Latin America/

Caribbean

OECD

East Asia

Middle East/

North Africa

Africa

South Asia

Separate

Integrated

7

32 7

12 15

27

13 12

9 6

7 4

Institutional arrangements

Fully integrated

Institutionally separate with similar benefits

Fully integrated with top-up arrangements

Partially integrated with top-up scheme

Entirely separate institutions and benefits

Chile Czech Republic Estonia Hungary Mexico Poland

Slovak Republic

Denmark Finland Iceland Israel Netherlands

Australia Canada Ireland Italy Japan New Zealand Norway Slovenia Spain Sweden Switzerland United States

United Kingdom Austria Belgium France Germany Greece Korea Luxembourg Portugal Turkey

Institutional arrangements

Separate

Angola

Benin

Burundi

Cameroon

Congo, DR

Congo, R

Cote d’Ivoire

Gambia

Guinea

Guinea-Bissau

Kenya

Madagascar

Malawi

Mali

Mauritania

Mozambique

Niger

Senegal

Sudan

Tanzania

Togo

Uganda

Zimbabwe

Partially integrated 1

Botswana

Lesotho

Mauritius

Namibia

South Africa

Swaziland

Integrated

Cape Verde

Central African Republic

Chad

Ethiopia

Ghana

Nigeria

Rwanda

Sao Tome e Principe

Seychelles

Sierra Leone

Zambia

Partially integrated 2

Liberia

No private-sector

scheme

Eritrea

South Sudan

Dualism

Arguments against

Integration gives civil servants direct, personal interest in the plan being well managed

Economies of scale

Mobility and portability

Equity

Transparency

Long-term goal should therefore probably be integration of civil-service and national pension plans

Economies of scale

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

Relative cost per beneficiary

Number of beneficiaries

Central-government employment

per cent of total population

early 1980s early 1990s

Africa 1.8 1.1Asia 2.6 1.1Latin America 2.4 1.5All developing countries 2.2 1.2

OECD 2.9 1.9

10

20

30

40

50

1995 2000 2005 2009

Australia

Estonia

Korea

Iceland

United States

Canada

Israel

FinlandNew Zealand

Austria

Portugal

United Kingdom

Percentage aged 50 and over

Belgium

10

20

30

40

50

1995 2000 2005 2009

Chile

Japan

Switzerland

Ireland

Netherlands

Italy

Germany

Denmark

Sweden

Norway

Greece

France

Percentage aged 50 and over

Mexico

Ageing central-government workforce

Example: Egypt

Example: Morocco

0

1

2

3

4

5

20 25 30 35 40 45 50 55 60

CMR

CNSS

RCAR

Labour-force demographics:

central government vs population

Central government employees Total labour force

0 10 20 30 40 50

Ireland

Canada

Netherlands

Finland

Norway

Israel

Greece

Slovak Republic

Denmark

United States

Germany

Belgium

Sweden

Iceland

Italy

Percentage aged 50 and over0 10 20 30 40 50

Korea

Chile

Japan

Estonia

Australia

Mexico

Poland

Slovenia

New Zealand

France

United Kingdom

Switzerland

Portugal

Hungary

Austria

Percentage aged 50 and over

Reform options 1

‘Parametric’ reforms to defined benefit plans reduce replacement rate

index pensions in payment to prices rather thancivil-service earnings

introduce/increase member contributions

raise pensionable age

extend averaging periods for ‘final’ salary

‘Systemic’ reforms introduce new system for new civil servants with some element

of pre-funding of obligations

Any reform must take account of all aspects of civil-service terms and conditions

Reform options 2

Increasing contributions: employer contributions are just re-labelling, unlike national systems

employee contributions may have an effect on wages or productivity

Increasing pension age: Civil service schemes are ‘closed’ systems

so increasing retirement age has different effects than it does in national schemes: labour supply effect in national schemes

Increase in retirement age cuts duration of benefit payments, but

without downward adjustment of accrual rates to compensate, benefit values increase

people might retire on higher pay if earnings continue to grow with age

affects both pay and pension bills

Lump-of-labour fallacy

across countries

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.80

0.1

0.2

0.3

0.4

0.5

0.6

AUT

BEL

CZE

DEU

DNK

ESP

FIN

FRA

GBR

GRC

HUN

IRL

ITA

LUX

NLD

POL

PRT

SVK

SWE

Employment rate, 20-24 year olds

Employment rate, 60-64 year olds

Lump-of-labour fallacy

over time

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.80

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

New Zealand

1992

1995

2000

2001

2004

2010-12

France

19831985

1990

1995 2000

2005

2012

Employment rate, 20-24 year olds

Employment rate, 60-64 year olds

Individual-level model: Morocco

Baseline

Contribution rate 20%Contribution years 33Lifetime contributions (x annual salary)

6.6

Accrual rate 2.5%Gross replacement rate 82.5%Net replacement rate(average earner)

106.7%

Pension age 60Indexation half pricesLifetime benefits(x annual salary)

13.2

Individual-level model

Baseline

Contribution rate 20%Contribution years 33Lifetime contributions (x annual salary)

6.6

Accrual rate 2.5%Gross replacement rate 82.5%Net replacement rate(average earner)

106.7%

Pension age 60Indexation half pricesLifetime benefits(x annual salary)

13.2

Benefit/cost ratio 2.0Equilibrium contribution rate 40%Sustainable replacement rate 41%

Individual-level model

Baseline Age 65: same accrual

Contribution rate 20% 20%Contribution years 33 38Lifetime contributions (x annual salary)

6.6 7.6

Accrual rate 2.5% 2.5%Gross replacement rate 82.5% 95.0%Net replacement rate(average earner)

106.7% 122.3%

Pension age 60 65Indexation half prices pricesLifetime benefits(x annual salary)

13.2 11.2

Benefit/cost ratio 2.0 1.5Equilibrium contribution rate 40% 38%Sustainable replacement rate 41% 50%

Individual-level model

Baseline Age 65: same accrual

Age 65: loweraccrual

Contribution rate 20% 20% 20%Contribution years 33 38 38Lifetime contributions (x annual salary)

6.6 7.6 7.6

Accrual rate 2.5% 2.5% 2.2%Gross replacement rate 82.5% 95.0% 82.5%Net replacement rate(average earner)

106.7% 122.3% 106.7%

Pension age 60 65 65Indexation half prices prices pricesLifetime benefits(x annual salary)

13.2 11.2 9.7

Benefit/cost ratio 2.0 1.5 1.3Equilibrium contribution rate 40% 38% 26%Sustainable replacement rate 41% 50% 64%

Pension possibilities

Three key variables:

accrual rate

pension eligibility age

contribution rate

Look at the sustainable combinations

Pension possibilities

0

5

10

15

20

25

30

35

40

45

50 55 60 65 700

0.25

0.5

0.75

1

1.25

1.5

50 55 60 65 70

0

0.5

1

1.5

2

2.5

0 5 10 15 20 25 30 35

Contribution

rate (%)

Pensionable age

Accrual rate: 2% Accrual

rate (%)

Pensionable age

Contribution rate: 17%

Accrual

rate (%)Pensionable age: 60

Contribution

rate (%)

Pension possibilities:

replacement rates

0

10

20

30

40

50

60

70

80

50 55 60 65 70

0

10

20

30

40

50

60

70

80

0 5 10 15 20 25 30 35

Pensionable age

Contribution rate: 17%

Replacement

rate (%)

Replacement

rate (%)

Contribution rate (%)

Pensionable age: 60

Flexibility and portability

Civil service schemes are inflexible: ill designed to deal with people without full careers

But flexible schemes are increasingly important

‘revolving doors’: cross-fertilisation between public and private sectors

transfer of employees due to privatisation or contracting out

Penalties to moving jobs

Vesting periods: when individual qualifies for a pension

<1 year in Finland, Netherlands, Sweden, Switzerland, UK

5 years in Belgium, Germany, Ireland, Italy

15yrs in Austria, France, Spain, Mauritius, Senegal

people can leave with nothing

Treatment of ‘early leavers’: what happens to the benefit between leaving the job and claiming the pension?

full transferability (Finland, Netherlands, Sweden)moves to occupational plan with same benefits in private sector

full preservation (France)accrued rights uprated in line with civil-service earnings

In other countries, a pension cost to moving jobs

Example: Mauritius

age25 30 35 40 45 50 55 60

Value of accrued

pension

Example: Mauritius

age25 30 35 40 45 50 55 60

Value of accrued

pension

Staying to retirement:

1/50th of final salary

Example: Mauritius

age25 30 35 40 45 50 55 60

Value of accrued

pension

Lump sumDeferred pension:

1/50th of current salary

Staying to retirement:

1/50th of final salary

Example: Mauritius

age25 30 35 40 45 50 55 60

0

2

4

6

8 Cost of leaving,

proportion of

earnings

Example: UK

age25 30 35 40 45 50 55 60

0

.5

1

1.5Cost of leaving,

proportion of

earnings

Early leaver’s benefit depends on

earnings uprated in line with prices:

‘partial preservation’

Germany

age25 30 35 40 45 50 55 60

0

2

4

6Cost of leaving,

proportion of

earnings

Early leaver is retrospectively transferred

to national scheme with lower benefits

Reforms to improve portability

Shorten vesting periods

Preserve pension rights of early leavers

Extend averaging period for ‘final salary’

career average uprating eliminates the mobility problem

also deals with problems of incentives for abuse

but requires improvements in record-keeping

Introduce a defined contribution scheme

fully portable

Conclusions

Reform of civil-service pension schemes is important in low- and middle-income countries

often, larger expenditure than national schemes

crowds out important social programmes

Many options to put civil-service pension schemes on a sustainable footing

Structural issues as important as fiscal ones

single national scheme would be more administratively efficient, equitable and increase labour-market flexibility

equity and efficiency also improved by longer averaging periods for earnings, shorter vesting periods, preservation for early leavers, DC option