IOPS Principles by 907R84

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									                   Fiona Stewart
                   OECD/ IOPS



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


                                          1
The Challenge of Coverage
Developing 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 Workers
 Pension reform has been widely observed around the globe
 However, focus has been given to formal sector workers;
  thus the informal sector left out
    Definition of informal sector employees: low income, self-
     employee, small firm, farmer, part-time/seasonal, etc
    Higher 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                                 5
             Background: some statistics (ILO 2002)
Table 1. Informal employment as % of non-agricultural employment, 2000

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

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


                                                                         6
 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




                                                                        7
 Countries taking actions to address this
 issue

 Non-contributory arrangements
 Contributory arrangements
 Others




                                            8
I. Non-contributory arrangements

  Broaden access to social assistance program (old-age)
     No contribution necessary
     Means-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




                                                                9
I. Non-contributory arrangements

  Broaden access to social assistance program (old-age)
     No contribution necessary
     Means-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




                                                                10
Examples of universal and means
tested schemes
               Age limit          US$     % of GDP
Bangladesh       57               2       0.03   means tested
Bolivia          65               18      1.3    universal
Botswana         65               27      0.4    universal
Brazil (Rural)   60 (M) 55 (W)    140     0.7    means tested
Chile            65               75      0.38   means tested
Costa Rica       65               26      0.18   means tested
India            65               4       0.01   means tested
Mauritius        60               60      2      universal
Moldova          62 (M) 57 (W)    5       0.08   means tested
Namibia          60               28      0.8    universal
Nepal            75               2              universal
South Africa     65 (M) 60 (W)    109     1.4    means tested
Thailand         60               8       0.005  means tested
Vietnam          60               6       0.5    means tested

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

                                                                 11
II. Contributory arrangements: Encourage voluntary
contribution
 Flexible 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


                                                          12
13
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)




                                                                           14
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)




                                                                           15
Some policy suggestions
 Old-age pension guarantee
 Flexible terms
 Target those capable of extra saving
 Utilize existing infrastructure
 Centralised admin. agency




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However…
 Any reform options (in developing countries) MUST be
 considered in line with country-specific conditions, which
 are a function of various parameters
   economic growth
   income level
   consumption preference
   financial markets
   governance, etc




                                                              17

								
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