Fiona StewartOECD/ IOPS

MENA Workshop on Private Pension Supervision March 1-2 2011Amman, Jordan

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The Challenge of CoverageDeveloping Economies Social change means less ability to rely on family support – yet

only a small % of the population have any formal retirement income

Thailand 27% Bolivia

China 25% Peru <20%

India 11% Colombia

More worryingly it is often the poorest sections of society most in need of pensions who are not covered

Chile 23% independent workers contribute to retirement accounts vs. 57% of employees

South Africa c1/3 total coverage – 80% formal sector workers (1/3 of workforce) but only around 10% of informal sector workers (2/3 of workforce)

The Challenge of Coverage

Developed Economies Basic social security may be in place, but as government

provision declines, private pension participation rates remain low in many countries

Germany 43% Italy 10%

Spain 10% Portugal 7%

More ‘vulnerable’ groups have consistently lower coverage rates – e.g. women, part-time or migrant workers, rural inhabitants+ agricultural workers, self-employed

USA - around 60% full time workers have an occupational pension vs. only 20% of part-timers + in some age groups women are half as likely as men to belong to a pension scheme

Ireland - coverage rates for men 55% vs. women 44%

Coverage is challenge in OECD and non-OECD countries

What can be done? Wide range of policy responses to raise pension coverage have

been tried- Labour Market reforms and Economic growth (China)- Comprehensive pension reform (Chile, Mexico)- Linking 1st and 2nd tier pensions (Sweden)- Making occupation pensions compulsory (HK, Australia)- Tax incentives (USA)- Improving portability / vesting rights (Korea)- Ensure equal access (Korea - smaller firms / more sectors)- Encouraging collective schemes (Netherlands) - Automatic enrolment (New Zealand, UK)- Control charges (UK)- Adjusting size of contribution rate (Japan)- Building trust in the pension system as a whole (UK)- Using financial education and awareness (Ireland)

Research suggests that government policies do influence coverage

Which are appropriate will differ according to the situation in each country

Informal Sector WorkersPension reform has been widely observed around the globeHowever, focus has been given to formal sector workers;

thus the informal sector left outDefinition of informal sector employees: low income, self-employee,

small firm, farmer, part-time/seasonal, etcHigher income owners (e.g. lawyer, consultant) excluded

Despite the importance of the informal sector (number of people and contribution to GDP), pension coverage is very low

No reliable/official statistics found, however it is estimated to be very low, i.e. well below 5-10%.

Experiences from both OECD & non-OECD countries presented

Some policy suggestions proposed

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Background: some statistics (ILO 2002)

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Table 1. Informal employment as % of non-agricultural employment, 2000

North Africa 48 Latin America 51Algeria 43 Bolivia 63Morocco 45 Brazil 60Tunisia 50 Chile 36Egypt 55 Colombia 38Sub-Saharan Africa 72 Costa Rica 44Benin 93 El Salvador 57Chad 74 Guatemala 56Guinea 72 Honduras 58Kenya 72 Mexico 55South Africa 51 Rep Dominicana 48Asia 65 Venezuela 47India 83Indonesia 78Philippines 72Thailand 51Syria 42

MemoDeveloping world (non-agriculture) 60-70 (approx)Developing world (all) 80-90 (approx)European countries (15) 15-25

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Table 2. Contribution of informal sector to GDP in %, 1990-2000

North Africa 27 Sub-Saharan Africa 41

Algeria 26 Benin 43

Morocco 31 Burkina Faso 36

Tunisia 23 Burundi 44

Latin America 29 Cameroon 42

Colombia 25 Chad 45

Mexico 13 Cote d'lvoire 30

Peru 49 Ghana 58

Asia 31 Guinea Bissau 30

India 45 Kenya 25

Indonesia 31 Mali 42

Philippines 32 Mozambique 39

Republic of Korea 17 Niger 54

Senegal 41

Tanzania 43

Togo 55

Zambia 24

Countries taking actions to address this issue

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Non-contributory arrangementsContributory arrangements Others

I. Non-contributory arrangements

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Broaden access to social assistance program (old-age)No contribution necessaryMeans-tested or universal

Particularly relevant to the poor who are too poor to save

It operates in some African countries, e.g. Botswana, Mauritius, South Africa, and Kenya is considering a “zero pillar” pension

I. Non-contributory arrangements

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Broaden access to social assistance program (old-age)No contribution necessaryMeans-tested or universal

Particularly relevant to the poor who are too poor to save

It operates in some African countries, e.g. Botswana, Mauritius, South Africa, and Kenya is considering a “zero pillar” pension

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Examples of universal and means tested schemes

Age limit US$ % of GDPBangladesh 57 2 0.03 means testedBolivia 65 18 1.3 universalBotswana 65 27 0.4 universalBrazil (Rural) 60 (M) 55 (W) 140 0.7 means testedChile 65 75 0.38 means testedCosta Rica 65 26 0.18 means testedIndia 65 4 0.01 means testedMauritius 60 60 2 universalMoldova 62 (M) 57 (W) 5 0.08 means testedNamibia 60 28 0.8 universalNepal 75 2 universalSouth Africa 65 (M) 60 (W) 109 1.4 means testedThailand 60 8 0.005 means testedVietnam 60 6 0.5 means tested

Source: Willmore (2006). Universal pensions for low income countries

II. Contributory arrangements: Encourage voluntary contributionFlexible terms:

contribution requirements (reduced contribution, periodic contribution)

vesting policies (earlier withdrawal, e.g. due to emergency, housing, foods)

Financial incentives: tax credit, tax reduction, and matching contributions

Financial education: enhance financial/pension awareness. ADB project in India (2006); similar schemes in the UK

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II. Contributory arrangements: compulsory contribution

The main logic: individuals have reluctance, inertia in making complex financial decisions

Semi-compulsory (or auto enrolment), e.g. the NEST in the UK, KiwiSaver in NZ, and similar schemes in Italy

Compulsory, e.g. Chile, Hong Kong, Kenya (under consideration)

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III. Other routes Utilization of existing (non-pension) infrastructure: banks,

post offices, depository agencies

Utilization of existing (non-pension) financial intuitions - micro-finance

Creation of new institutions to reduce transaction costs, e.g. central clearing house (India, Sweden and UK)

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Some policy suggestions

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Old-age pension guaranteeFlexible termsTarget those capable of extra savingUtilize existing infrastructureCentralised admin. agency

However…

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Any reform options (in developing countries) MUST be considered in line with country-specific conditions, which are a function of various parameterseconomic growth income levelconsumption preferencefinancial marketsgovernance, etc