Pensions in South Asia

Robert PalaciosWorld Bank Pension CourseWashington DC November 18, 2010

2

Structure of presentation Context: Demographics, coverage and

main schemes Civil service schemes India’s reform

3

Context: Demographics, coverage and main schemes

4

Population ageing in South Asia

0%

5%

10%

15%

20%

25%

30%

2000 2010 2020 2030 2040

% o

ver a

ge 6

0

Sri Lanka

India

Bhutan

NepalPakistan

Bangladesh

Maldives

5

South Asia aging compared to other regions

0%

5%

10%

15%

20%

25%

South Asia East Asia High IncomeOECD

EastEurope/FSU

LatinAmerica

Middle East Sub-SaharanAfrica

% o

ver a

ge 6

0

6

Main pension schemes in South Asia

Country Civil servants1 Private sector Coverage of population aged

15-59, % Afghanistan PAYG DB No2 0.9 Bangladesh PAYG DB and Provident Fund Occupational schemes 2.1 Bhutan PAYG DC and Provident Fund Limited occupational

schemes 4.3

India PAYG DB and DC scheme for new workers as of 2004

Provident Fund and occupational schemes.

8.9

Maldives PAYG DB, Provident Fund Provident Fund 18.4 Nepal PAYG DB and Provident Fund Provident Fund 2.7 Pakistan PAYG DB PAYG DB and

occupational schemes 5.8

Sri Lanka PAYG DB and funded DB for new workers as of 2003

Provident Fund and occupational schemes

28.1

7

Social pensions Have significant role in Bangladesh, India, Maldives

and Nepal; Sri Lanka relies on its very broad social assistance scheme

New government in Nepal just increased the benefit and lowered the eligibility age to 70 –spending doubled in 2010 to 0.4 per cent of GDP

Maldives has the largest social pension scheme and will spend more than 2 percent of GDP next year

Afghanistan, Bhutan and Pakistan do not have social pensions although Bhutan has been considering this option

8

Civil service pension schemes

9

South Asia CS pensions All have special schemes for civil servants

inherited from the British Non-contributory, final salary DB that replace

only part of compensation Bhutan is the exception with its own DB/DC

scheme India, Maldives and Nepal have recently

introduced DC schemes – in Maldives, it is for everyone while for new entrants in India and Nepal

10

South Asia CS pensions One of the earliest CS pension schemes was for British civil

servants in the late 17th century 1684-1712: Port of London, Revenue Dept. etc. ran primitive

scheme with ad hoc rules and no fund 1712-1830: First contributory, pooled scheme begins, rules

adjusted over time, funds invested; coverage gradually extended to upper ranks, most departments. Means-testing eliminated.

1830: Legislation establishes non-contributory and unfunded DB scheme that was exported to the Empire and still exists in many countries today

Many former colonies are now reforming these schemes (Hong Kong, Falkland Islands, Nepal, Nigeria, India)

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South Asia CS pensions Important differences in parameters include:

Indexation is automatic in Bhutan, Nepal and India but not in Bangladesh, Pakistan, Sri Lanka or Maldives

Accrual rates range from 1.5 (India) to 3.2% (Bangladesh) per annum

Commutation factors vary and amounts allowed range from 0-100%

Effective share of non-pensionable compensation varies from 5-40%

Minimum vesting, retirement age, early retirement, survivors benefits etc. vary somewhat

Bhutan is unique in the region in its scheme design

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Benefit levels implied by DB formulas

0 20 40 60 80 100 120

India

Pakistan

Bangladesh

Nepal

Bhutan

Sri Lanka

Gross replace ment rate

16.8

14.4

11.9

12.9

10.6

8.4

13

System dependency ratios

0% 10% 20% 30% 40% 50% 60% 70%

Bhutan

Maldives

Afghanistan

Bangladesh

Nepal

Sri Lanka

Pakistan

India

pensioners/actives in per cent

14

Spending on civil service pensions

0%

2%

4%

6%

8%

10%

12%

14%

Maldives Nepal Bangladesh Pakistan Sri Lanka India

% of revenues

average non-OECD sample

% of gdp

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Status of reforms in South Asia Group 1: Reforms passed

In 2001, Bhutan converted CS provident fund into hybrid with 2% accrual on lifetime average earnings plus 10% true DC

India introduced 20% DC scheme for new entrants from 2004 Maldives introduced a 14% DC scheme for civil servants and

eventually all workers and a universal flat pension in 2009 Group 2: Reforms being designed or imminent

Nepal has drafted legislation that would create a DC scheme for civil servants and for informal sector workers on a voluntary basis

Group 3: No reform To our knowledge there is no reform being planned in

Bangladesh Sri Lanka introduced contributory DB scheme and then

reversed the reform and returned the money

India’s systemic reform

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Brief history Committee set up to review pension system in 1998 – favors DC

approach and avoids confronting EPFO 2001 – Govmt announces intention to place new civil servants in

DC scheme and to extend scheme to those not covered by other formal sector schemes

2001 – Bank report shows large unfunded pension liabilities of more than one third of GDP and advocates DC type reforms

Jan. 1, 2004 – All new central government employees placed in DC scheme; 19 state governments follow in the next three years

2005 – 2007 – interim regulator oversees system but pension legislation stalled in Parliament

2008 – Government moves ahead with implementation by contracting a centralized recordkeeping agency (CRA) and three pension fund managers (PFMs)

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Key features Parameters

DC scheme with 20% contribution split between employer and employee (minimum 100 rupees for informal sector workers)

Mandated annuitization of at least 40 per cent of balance at retirement

Retirement/withdrawal at age 60 Survivor and disability benefits still unclear; default to old scheme

Institutional architecture and design Centralized recordkeeper (concession based on competitive bid) Asset management contracted out to PFMs by competitive bid Limited portfolio choice with emphasis on index funds for equities

(default portfolio not yet determined) Annuitization to be contracted out

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Replacement rate for CS

0%10%20%30%40%50%60%70%80%90%

100%

1% 2% 3% 4% 5% 6% 7% 8%

Real gross return

repl

acem

ent r

ate

Full NPS Architecture

CRA

INDIVIDUALS

PFRDA

PFM 1

PFM 2

PFM 3

Annuity Provider 1

Annuity Provider 2

Annuity Provider 3

MFIs

Banks

PostOffices

Others

Small Private Firms

State Governments

Excluded Trusts

Central Government

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Current status

The interim regulator (PFRDA) signed a contract with a central recordkeeping authority for a ten year period based on a competitive bidding process; systems still not in place for individual accounts administration with most problems

The PFRDA contracted three PFMs at 3-5 basis points of AUM Around 1 million civil servants have accounts but there are gaps

in compliance in some departments of central government Funds set aside at central government level but some states have

not done so and face contribution arrears Portfolio choice has not been offered as of yet – recordkeeping

system not ready It was opened to informal sector workers in May 2009 but take-

up has been trivial In April 2010, a matching contribution was included in the budget

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Concluding remarks Except for Sri Lanka, these are young countries that

can avoid the mistakes of older, richer countries There are two major policy issues in South Asia

Controling costs of civil service pensions Expanding pension coverage

The most important initiatives in civil service pensions replace unfunded DB schemes with DC schemes as in India and Maldives

Coverage is being addressed by expanding social pensions in Bangladesh, India, Maldives, and Nepal

Coverage expansion is also being attempted through voluntary matching DC schemes in India