W O R L D B A N K C O R E C O U R S E O N P E N S I O N R E F O R M

W A S H I N G T O N , D . C . , M A R C H 2 0 1 4

PENSIONS CORE COURSE SUMMARY &

APPLICATION OF TOOLS

REVIEW

PENS IONS CORE COURSE

REVIEW

• Conceptual Framework • 5 Pillar typology

• Social assistance vs. social pensions

• DB vs. DC 1st & 2nd Pillars

• Occupational & Individual schemes

• Unique ID & Administrative Systems

• Regional challenges and trends • Inverting Pyramid = Central and Eastern Europe

• Sub-Saharan Africa – Coverage & design needs

• Latin America & Caribbean – Coverage & beyond pensions

Mandatory, contributory scheme –

DB, DC; PAYG, funded.

Social

assistance

for

households

&/or

elderly.

Occupational & Individual

Pensions Savings

Special incentives

for pension savings

for informal sector

(eg. MDC, ex-post

subsidies)

Individual pre-retirement wage as a % of the average wage in the economy

Pe

nsi

on

be

ne

fit

as

a p

erc

en

t o

f in

div

idu

al p

re-r

etire

me

nt

wa

ge

STYLISTIC ILLUSTRATION OF POSSIBLE MULTI-PILLAR DESIGN

4

REVIEW (CONT.)

• Tools • PROST

• Adept

• APEX

• Comparative data

• Investment Management/governance/

accounting/ financial reporting

• Regulation & supervision

• Civil service pensions

• Alternative perspectives

USING DIAGNOSTIC TOOLS – THE BULGARIA CASE

PENS IONS CORE COURSE

ENVIRONMENT AND DESIGN FEATURES

• Demographic environment

• Old-age dependency ratio set to double by 2060; accelerated by steady net emigration

• Low and protracted fertility rates well below replacement.

• Economic environment

• High labor force participation both men and women

• Low labor force participation among youth and older workers above age of 55

• Pillar 0

• Objective: poverty prevention

• Eligibility: age 70 (legislated)

• Benefit level: 110/136 leva (20% of avg. monthly salary)

• Pillar I

• Objective: income replacement (w/progressivity)

• Old age

• Eligibility: Age 65m/63f, LOS 40m/37f years; Benefit level: 289 leva (42.2% of avg. monthly salary)

• Disability and Survivor

• Eligibility and benefit level depends on degree of disability, years of contribution, age

• Pillars II and III

• Objective: savings for income replacement

• Benefit level: based on accumulated savings

REFORMED PAYG DESIGN

• Contribution Rate • Non-switchers: 17.8% to Pillar I

• Switchers: 12.8% (Pillar I) and 5% (Pillar II)

• Government: 12% of insured income

• Eligibility conditions • Age: 65m/63f

• Service: 40m/37f years

• No early retirement

• Eligibility conditions for a minimum contributory pension • Age 67 with 15 years of contributions

• Around 20% of average insured wage

• Old age pension amount dependent on: • Accrual rate (1.2% and 4% for deferred pension)

• Lifetime wages & valorization

• Indexation to inflation

8

DEMOGRAPHIC TRENDS

9

65 15 35

1

11

21

31

41

51

61

71

81

91

2011 female female

65 15 35

1

11

21

31

41

51

61

71

81

91

2053 female male male

PROST Population Pyramid

WORSENING DEPENDENCY RATES

10

0%

20%

40%

60%

80%

100%

120%

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

20

34

20

36

20

38

20

40

20

42

20

44

20

46

20

48

20

50

20

52

20

54

20

56

20

58

20

60

20

62

20

64

20

66

20

68

20

70

20

72

20

74

Old Age Dependency Rate

Population Dependency Rate

System Dependency Rate (total beneficiaries)

System dependency rate around 100%:

1 beneficiary: 1 contributor

12.8% PAYG contribution rate could only afford to pay 12% PAYG

replacement rate

PROJECTED AVERAGE REPLACEMENT RATE FOR A NEW OLD AGE PENSIONER

11

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

201

2

201

4

201

6

201

8

20

20

202

2

202

4

202

6

202

8

203

0

203

2

203

4

203

6

203

8

204

0

204

2

204

4

204

6

204

8

205

0

205

2

205

4

205

6

205

8

206

0

206

2

206

4

206

6

206

8

20

70

207

2

207

4

Avg RR male (new, non-switcher) Avg RR female (new, non-switcher)

Avg RR male (new, switcher) Pillar I and II Avg RR female (new, switcher) Pillar I and II

last cohort retiring with full

pension in 2023m/2021w. After that minimum pension provided at age 67

First cohort of switchers start to receive pensions from Pillar II in 2023w/2025m

Pillar II introduced in 2002 (mandatory for those born

after 12.1.1959)- first cohort to retire from Pillar

II was 42 in 2002

PROJECTED AVERAGE REPLACEMENT RATE FOR AN EXISTING OLD AGE PENSIONER

12

Funded Pillar Replacement Rate: Assuming real interest earned on individual

account is 3 percent annually.

0%

10%

20%

30%

40%

50%

60%

Avg PAYG RR Avg RR (Pillar I and Pillar II)

40% of contributors insured at half avg. wage; 20% insured at min.; Many will receive the minimum contributory pension & could impair contribution compliance.

Minimum pension with 15 years of service = 20% of average insured wage

COVERAGE OF THE WORKING AGE POPULATION

13

0%

20%

40%

60%

80%

100%

120%

15 25 35 45 55 Contributor Age

male contributors female contributors male beneficiaries added female beneficiaries added

High rates of youth

unemployment

Low

density

Roughly 55% of WA population contributed

in 2011

Movement

between formal and informal employment

PROJECTED ANNUAL CURRENT BALANCE, % GDP

14

Graph on the

left shows the

projected

deficit with and

without the

estimated

additional cost

of financing

social pensions

for people

without rights

to the pension

system

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

201

2

201

4

201

6

201

8

202

0

202

2

202

4

202

6

202

8

203

0

203

2

203

4

203

6

203

8

20

40

204

2

204

4

204

6

204

8

205

0

205

2

205

4

205

6

205

8

206

0

206

2

206

4

206

6

206

8

207

0

207

2

207

4

Projected PAYG Deficit, % GDP

PAYG Balance, %GDP accounting for government contribution (baseline)

PAYG Balance, %GDP without government contribution (baseline)

Accounting for additional cost for people without pension rights with gov. contribution

Accounting for additional cost for people without pension rights without gov. contribution

OPTION TO INCREASE THE CONTRIBUTION RATE

15

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

20

34

20

36

20

38

20

40

20

42

20

44

20

46

20

48

20

50

20

52

20

54

20

56

20

58

20

60

20

62

20

64

20

66

20

68

20

70

20

72

20

74

An increase of 6 percentage points improves the fiscal state

PAYG Balance, %GDP accounting for government contribution +6% increase + costs for ineligible persons

PAYG Balance, %GDP without government contribution and 6% increase to contribution rate + costs for

ineligible persons

EQUALIZATION OF RETIREMENT AGES BETWEEN MEN AND WOMEN AT 65

16

Projected fiscal savings (2024-2050) of about 0.3 percent of GDP (accounting for roughly 20 percent of the system’s

deficit)

Why the savings are not even

greater: Currently the actual

difference in effective retirement

ages between men and women is

smaller than the gap in official

retirement ages

Women tend to work until later

ages in order to meet the length of

service requirement (lower

contribution density due to more

career breaks, especially due to

having children)

On top of that, more men retire

before the official pension age

because mostly men work under

labor categories I and II

(dangerous occupations, military,

police, etc.) where retirement ages

can be lower

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

20

12

20

15

20

18

20

21

20

24

20

27

20

30

20

33

20

36

20

39

20

42

20

45

20

48

20

51

20

54

20

57

20

60

20

63

20

66

20

69

20

72

20

75

PAYG Balance, % GDP: baseline vs. reform

PAYG Balance, %GDP (equal) PAYG Balance, %GDP (baseline)

Equalization

complete by 2024

17

Two tiers of pension system in Bulgaria

Individual earnings, multiple of average

0.5 0.75 1.0 1.5 2.0

Gross pension level (% of average earnings) 33.8 50.7 67.6 101 110.8 Gross replacement rate

(% of individual earnings) 67.6 67.6 67.6 67.3 55.4 Gross pension wealth, male (multiple of average earnings) 9.1 9.1 9.1 9.1 7.5

0

.5

1

1.5

2

2.5

Gross r

ela

tive p

en

sio

n leve

l

0 .25 .5 .75 1 1.25 1.5 1.75 2

Individual earnings, proportion of average earnings

DC Earnings-related

0

.25

.5

.75

1

1.25

Gross r

ep

lace

me

nt rate

0 .25 .5 .75 1 1.25 1.5 1.75 2

Individual earnings, proportion of average earnings

DC Earnings-related

0

.25

.5

.75

1

1.25

Ne

t an

d g

ross r

epla

cem

en

t ra

tes

0 .25 .5 .75 1 1.25 1.5 1.75 2

Individual earnings, proportion of average earnings

Net Gross

19

PENS IONS CORE COURSE

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Kosovo 2011

Kazakhstan 2011

Georgia 2010

Azerbaijan 2011

Tajikistan 2011

Armenia 2011

Albania 2011

Turkey 2010

Kyrgyz Republic 2011

Russia 2011

Moldova 2012

Macedonia 2010

Slovakia 2010

Lithuania 2010

Estonia 2010

Bulgaria 2010

Czech Republic 2010

Romania 2010

Latvia 2010

Belarus 2009

Croatia 2010

Hungary 2010

Montenegro 2011

Slovenia 2010

Poland 2010

Serbia 2010

Ukraine 2010

Pension Spending over GDP

Total Pension Spending

(most recent year available)

0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%

Bosnia and Herzegovina 2009

Bosnia Republika Srpska 2009

Macedonia, FYR 2009

Croatia 2010

Armenia 2008

Serbia 2010

Montenegro 2007

Moldova 2009

Latvia 2010

Hungary 2010

Romania 2010

Estonia 2010

Poland 2010

Bulgaria 2010

Lithuania 2010

Azerbaijan 2007

Tajikistan 2004

Turkey 2008

Slovenia 2010

Kyrgyz Republic 2008

Albania 2009

Czech Republic 2010

Kazakhstan 2009

Ukraine 2010

Slovak Republic 2010

Belarus 2008

Russian Federation 2007

Uzbekistan 2005

Beneficiaries / Population 65+

(most recent year available)

0% 20% 40% 60% 80% 100% 120%

Armenia 2008

Azerbaijan 2007

Albania 2008

Kyrgyz Republic 2008

Serbia 2007

Macedonia, FYR 2009

Turkey 2008

Ukraine 2010

Kazakhstan 2009

Bosnia and Herzegovina 2009

Russian Federation 2011

Bosnia Republika Srpska 2009

Romania 2008

Moldova 2011

Croatia 2010

Bulgaria 2008

Slovak Republic 2003

Poland 2008

Lithuania 2009

Slovenia 2008

Latvia 2009

Hungary 2008

Belarus 2008

Estonia 2004

Czech Republic 2007

Active Contributors / Labor Force

(most recent year available)

23

PENS IONS CORE COURSE

Average Transfer Value - Targeting

Total XP MP NP

All social protection 48.3 44.6 67.7 47.3

All social insurance 43.4 32.2 59.1 43.0

Old age pension 37.4 26.4 50.2 37.2

Disability pension/allowance 4.7 4.6 6.6 4.6

Survivorship pension 1.3 1.2 2.2 1.2

All labor market programs 0.4 0.4 0.3 0.4

Unemployment benefit 0.4 0.4 0.3 0.4

All social assistance 4.5 12.0 8.3 3.9

Social assistance 0.2 0.4 0.6 0.1

Child allowance, up to 2 yo 1.6 2.5 1.9 1.5

Other family allowances 0.2 0.0 0.2 0.2

Monthly child allowance 1.3 2.4 1.7 1.2

Heating allowance 0.3 1.8 1.4 0.2

Guaranteed minimum income 0.7 4.8 2.5 0.3

Other sa benefits 0.3 0.1 0.1 0.3

All remittances 6.1 1.0 2.4 6.6

Remittances 6.1 1.0 2.4 6.6

Table 3_2 : Average Transfer Value, Per Capita

All households

Coverage

Total Q1 Q2 Q3 Q4 Q5

Direct and indirect beneficiaries

All social protection 70.5 88.6 81.8 73.0 62.2 47.2

All social insurance 54.5 68.8 65.9 60.2 45.4 32.1

Old age pension 46.5 59.3 57.4 50.5 39.6 25.8

Disability pension/allowance 16.2 22.3 19.6 18.1 11.6 9.5

Survivorship pension 8.5 10.2 9.4 9.3 7.8 5.9

All labor market programs 2.2 1.6 3.1 2.5 2.7 1.4

Unemployment benefit 2.2 1.6 3.1 2.5 2.7 1.4

All social assistance 27.5 39.0 29.4 23.6 25.9 19.6

Social assistance 0.7 2.3 0.6 0.0 0.3 0.3

Child allowance, up to 2 yo 5.9 8.5 7.3 3.6 6.3 3.9

Other family allowances 0.8 0.6 0.6 1.2 1.1 0.5

Monthly child allowance 20.7 24.2 21.2 18.8 22.3 16.8

Heating allowance 4.2 15.7 2.7 1.7 0.4 0.3

Guaranteed minimum income 3.8 12.6 4.5 0.8 0.5 0.5

Other sa benefits 1.8 2.3 2.2 2.0 1.7 0.8

All remittances 4.3 3.4 4.9 3.1 4.4 5.6

Remittances 4.3 3.4 4.9 3.1 4.4 5.6

Table 5_3 : Coverage

Generosity

Total Q1 Q2 Q3 Q4 Q5

All social protection 29.5 62.9 41.2 29.5 20.5 11.6

All social insurance 33.8 66.2 45.2 32.5 24.3 14.2

Old age pension 34.0 64.8 44.4 33.1 24.0 14.6

Disability pension/allowance 12.9 22.9 16.7 12.4 10.3 6.3

Survivorship pension 5.9 11.9 8.2 6.0 3.7 3.1

All labor market programs 8.2 24.3 12.6 6.2 5.2 5.1

Unemployment benefit 8.2 24.3 12.6 6.2 5.2 5.1

All social assistance 7.8 20.1 9.9 6.4 5.6 3.7

Social assistance 14.0 19.4 11.7 9.6 10.3 9.1

Child allowance, up to 2 yo 13.6 27.0 15.3 16.1 11.5 8.1

Other family allowances 11.7 23.8 21.5 10.6 8.1 8.8

Monthly child allowance 3.0 7.8 3.6 3.1 2.3 1.6

Heating allowance 5.5 7.0 5.1 2.3 3.5 1.3

Guaranteed minimum income 14.5 21.3 9.5 15.0 2.7 8.3

Other sa benefits 6.2 9.4 13.3 3.6 3.7 0.9

All remittances 51.5 56.6 55.3 51.2 34.0 57.1

Remittances 51.5 56.6 55.3 51.2 34.0 57.1

Table 9_3 : Generosity

Direct and indirect beneficiaries

Notes:

Generosity is the mean value of the share transfer amount received by all beneficiaries in a group as a share of total welfare

aggregate of the beneficiaries in that group.

SIMULATED POVERTY IMPACT (% POOR)

27

Reduction in % Poor

Poverty Rate

After

pensions

income

Poverty

Rate with no

pension

income

Poverty

Reduction

with Pensions

Income

Individual level

Population 50.8% 58.8% 8.0%

Youth (0-14) 62.0% 66.5% 4.6%

Working Age (15-60) 47.2% 52.5% 5.3%

Elderly (60+) 35.0% 76.1% 41.1%

Elderly (60-74) 35.6% 73.8% 38.2%

Elderly (75+) 33.3% 82.8% 49.5%

Non-Elderly (0-59) 52.2% 57.2% 5.1%

Household level

Elderly-only households 4.1% 85.1% 81.0%

Some elderly households 48.2% 72.8% 24.7%

Non-Elderly Households 43.3% 45.5% 2.3%

Total 42.0% 53.2% 11.2%

SUMMARY

• PROST pointed out beneficial impact of increasing retirement age & contribution rate. But system dependency rates severe and will worsen

• Problem of adequacy, with low income replacement yet little

room to increase benefits. Elderly overage projected to contract => creating additional fiscal pressure

• Sustained low fertility will burden current and future generations.

• ADEPT HHS data highlighted importance of social assistance expenditures for families aimed to support growth in fertility.

• Pensions also found to have profound anti-poverty impact.

• Some SA expenditures could be better targeted.

• But much of such expenditures may be necessary in recent economic conditions.