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Improving Pension System Coverage

Improving Pension System Coverage. Fiona Stewart OECD/ IOPS. MENA Workshop on Private Pension Supervision March 1-2 2011 Amman, Jordan. The Challenge of Coverage. Developing Economies

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Improving Pension System Coverage

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  1. Improving Pension System Coverage Fiona Stewart OECD/ IOPS MENA Workshop on Private Pension Supervision March 1-2 2011 Amman, Jordan

  2. 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)

  3. 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

  4. 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

  5. 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

  6. Background: some statistics (ILO 2002)

  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. 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

  11. 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)

  12. 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)

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

  14. 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

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