Global Patterns of Pension Provision

Robert Palacios, Lead Pensions, World BankPension Core Course, April 27, 2015

1689 1889 1982 Today

Evolution of global pension policy

Design and performance

• Design

– Mandatory contributory scheme design - defined benefit or Defined contribution?

– Voluntary private pensions

– Non-contributory (social) pensions

– Civil service pensions

• Performance

– Adequacy

– Coverage

– Sustainability

3

THE RISE OF DB SCHEMES:1935

“…the old age pensions he called for

came to be financed with wage based

taxes was an accident.”

THE RISE OF DB SCHEMES: 1975

THE RISE OF DB SCHEMES: 2015

12

3

67

8

12

1415

17

21

2324

2728

2928

2728

0

5

10

15

20

25

30

35

1980 1988 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2011 2012

Nu

mb

er

of C

ou

ntr

ies

Chile

Peru Uruguay

Mexico

Bolivia

El Salvador

HungaryKazakhstan

Poland

Sweden

Hong Kong

Costa Rica

Bulgaria

Croatia

Estonia

NigeriaSlovakia

United Kingdom

Argentina

Australia

Dom. Rep.Kosovo

RomaniaMacedonia

Argentina closed

Hungary closed

Czech Republic

THE RISE OF DC SCHEMES: FROM SANTIAGO TO PRAGUE

Share of benefit from DC

Colombia Costa Rica

0

0

0.25

0.5

0.75

1

0.5 1 1.5 2 2.5 3

Private DC

Minimumpension

0

0.25

0.5

0.75

1

0 0.5 1 1.5 2 2.5 3

Private DC

Public DB scheme

Proportion of benefit from private DC vs public DB

Low income Low incomeHigh income High income

9

GLOBAL PENSIONS BY TYPE OF MANDATED

CONTRIBUTORY SCHEME

Mandated pensions today

Publicly-

managed DB,

PAYG

43%

Publicly-

managed DC

7%

Public PAYG DB

+ Private funded DC

18%

Publicly- managed

partially funded DB

31%

Privately-

Managed, funded DC

4%

Note: Select countries: only national contributory schemes included

11

VOLUNTARY PRIVATE PENSIONS ARE IMPORTANT

IN ONLY A FEW COUNTRIES

Generosity of the Mandatory Systems is the Strongest Incentive:

Income Replacement Rates and Voluntary Private Pension Coverage in OECD

Source: OECD, Pensions at a Glance, 2007

13

CIVIL SERVICE PENSIONS

14

THE ROLE OF SOCIAL PENSIONS IS GROWING

Performance - CAS

Sustainability

Adequacy Coverage

16

IMPLIED TARGET REPLACEMENT RATES

17

Implied Target RR

TARGET VERSUS ACTUAL REPLACEMENT RATES

Pension spending and ageing

y = 0.4362x - 1.0813R² = 0.6867

-2

0

2

4

6

8

10

12

14

16

18

20

0 5 10 15 20 25 30 35

Pu

blic

pen

sio

n s

pen

din

g as

% o

f G

DP

Percent of population 60+

Mongolia

Hong Kong

Timor

KoreaThailand

Vietnam

Lao

PhilippinesJapan

China

Cambodia, Indonesia,Myanmar

Life cycle of PAYGO scheme

-30

-20

-10

0

10

20

30

40

50

60

0 0.05 0.1 0.15 0.2

elderly/workers

su

rplu

s/r

eve

nu

es

Parametric and systemic reforms

• Parametric

– Raising effective retirement ages and linking with longevity

– Raising contribution rates

– Reducing future accrual rates and taking into account longer wage periods

– Moving to price indexation

– Notional accounts or NDCs

• Replacing part or all of DB with DC

Contribution rates

21

Pension incentives to work/retire

-30 -20 -10 0 10 20 30

Portugal

Belgium

Italy

Australia

Canada

OECD

United States

New Zealand

United Kingdom

Ireland

Sweden

Japan

Spain

France

Hungary

Finland

Germany

Poland

Netherlands

Turkey (-34), Greece (-90),Luxembourg (-76)

Change in pension wealth from working an additional year,between ages 60 and 65, per cent of annual earningsSource: OECD Pensions at a Glance

23

MANDATORY CONTRIBUTORY PENSION

COVERAGE

Pension coverage and income level

Elderly coverage

25

Summary and looking forward• For a century, public DB plans spread across the globe and

dominated pension provision but…

• Unfunded liabilities are catching up with maturing systems as the demographic transition unfolds resulting in cuts

• In the last two decades, prefunding and especially DC plans have taken on a greater role raising new issues of costs, investments, payouts and supervision

• Coverage has emerged as the key issue for most low and middle income countries with policy discussion centered on the potential role of social pensions and innovative ways of incorporating the informal sector workforce

• Will younger countries learn from the experience of the older countries (or repeat their mistakes)? How will older countries strike the balance between sustainability and adequacy?

Thank you!

See us at www.worldbank.org/pensions