U. S. Agency for International Development (USAID)

1. U. S. Agency for International Development(USAID) Pension Reform Technical Assistance February 15-18, 2005

2. USAIDHistory and Background Created in 1961, by President John F. Kennedy to provide long-range economic and social development assistance Key areas of support: • Economic growth, agriculture and trade; • Global health; and • Democracy, conflict prevention and humanitarian assistance

3. USAID’s Financial Sector Strategy Importance of Financial Sector Development • Can fuel economic growth • Help alleviate poverty through access to savings and capital • Help reduce economic instability, which disproportionately hurts the poor and vulnerable

4. Financial Sector Products and Services • SME and Microfinance • Pensions • Banking • Housing Finance • Property Registration • Insurance • Credit Rating Agencies • Credit Unions

5. Why Pension Reform? • A - Alleviate Poverty for the Elderly • Social Protection Issue • B - Budget Impact • Fiscal Stability Issue • C – Capacity to Ensure Accuracy, • Reliability, and Protect Participants’ Rights • Institutional Capacity Building Issue

6. Common Problems • Low Pension Benefits • Poor Administration • Financially Strained Systems • No Private Pension Industry • In-kind Contributions and Benefits

7. …… Problems and Constraints • Benefit Arrears • Shadow Economy • Poor Compliance • Low Retirement Age • Declining Birth Rates • Benefits Not Tied to Contributions

8. Common Policy Considerations • Age (RA) • Benefit (RR) • Contribution (CR) • Demographics (DR)

9. Common Pension Reform Expectations • Increased Savings • Increased Pension Benefits • Reduction of the Shadow Economy • Steady Cash Flow for the Capital Market

10. …….. Expectations • Reduction in Payroll Tax Rates • Timely and Reliable Reports • Reasonable Rules and Uniform Enforcement • Safety and Security of Privately Managed Accounts • Technological Advancements

11. Solutions • Reform the 1st Pillar for Sustainability • Private Pension Funds – Mandatory or Voluntary • Individual Accounts for all Pillars

12. The 3 (4?) Pillars 1st pillar PAYG Government Managed Defined Benefit 2nd pillar Mandatory Defined Contribution Privately Managed 3rd pillar Voluntary Employer-Sponsored and Individual Plans

13. Structural Pension ReformIssues • Defined Benefit vs. Defined Contribution • Earnings-related vs. flat-rate benefits • Funded vs. Unfunded • Compulsory vs. Voluntary • Government Managed vs. Privately Managed • Guarantees vs. No Guarantees

14. The Cost????? • The Transition Costs • Investment in Human Capital Before and After the Reform • Technology Upgrades • Working with International Donors

15. How Has USAID Helped? • Legal and Regulatory Framework • Actuarial Analysis and Training • Public Education • Information Systems • Compliance and Enforcement • Education, Education, Education • Internships

16. USAID’s Approach to Pension Reform TA • Grant assistance, no loans • Activities are in response to a country’s request for technical assistance (DEMAND DRIVEN) • Utilize a wide range of experts from around the globe • Daily, long-term contact with the counterparts

17. What Have We Learned? • Pension reform tends to follow other basic reforms such as banking and capital markets • Highly political and emotionally charged • It cannot be successful without broad citizen participation – weigh-in and buy-in • Each reform is similar but very different

18. Key Ingredients Appropriate legal structure Effective financial sector regulation and supervision Economic stability Empowering Citizens to Avoid Old-Age Poverty Pension reform is not a leading edge reform. Pension reform builds on other financial and economic development initiatives, providing long-term capital for sustainable grown.

19. Thank you Denise Lamaute dlamaute@usaid.gov