International trends - are we leading or following?
A fundamental question in the global design of all pension and social security schemes is: who should bear the risks, individuals or government? Globally, there is a growing trend of transferring some of the risk from the state to individuals, whilst still providing basic protection to vulnerable retirees.
Many low and middle-income countries have introduced basic provisions in the form of social pensions, assuming that, over time, workers would move towards formal sector employment and participate in a funded retirement scheme like that of an employers’ fund. However, despite this government effort, retirement coverage has remained low. In Latin America, for example, eight out of 18 countries have a 30% pension coverage rate of the labour force.
Different strokes
To offer some coverage to those employed in the informal sector in low and middle-income countries, personal voluntary pensions such as retirement annuities in South Africa, are becoming popular. Personal voluntary pensions are receiving increasing levels of interest from policy makers as a means of offering individuals an opportunity to compensate for reduced state benefits.
To motivate voluntary participation, some countries are offering subsidies and advocacy methods. Kenya, for example, has a voluntary programme entitled Mbao Pension Plan, which dramatically reduces transaction costs for people who enrol and contribute to the program using their mobile phones.
South Africa, despite a lack of mandatory retirement systems, has a high coverage rate of 50% of the working population. This is similar to the UK and USA and higher than most developing economies, such as in Latin America. Government is planning to introduce mandatory schemes to cover the six million workers who do not belong to their employer’s pension fund.
Some high-income countries like USA and the UK have responded to low coverage rates by introducing auto-enrolment to increase retirement savings. The withdrawal from auto–enrolment schemes in UK is currently around 10%, implying that 90% of auto-enrolled individuals are now saving for retirement.
Universal benefits or a means tested approach?
Low pension coverage has raised the important issue of poverty reduction. Social schemes are now ubiquitous in developed countries, and are increasingly gaining traction in low and middle income countries like South Africa. For low and middle income countries, the fiscal affordability, disincentive effects, and administrative issues of universal benefits compared to means tested approaches remain a challenge.
The South African government is planning to remove the means-testing for the state old age grant from 2016. This is mainly driven by the need to encourage retirees from provident funds to convert their lump sums at retirement into monthly or regular income. In high income countries, the coverage in contribution based systems has reduced due to increasingly high unemployment among the youth and increasing mobility of workers between formal and informal wage employment.
Impact of global financial crises
The slowdown of global economic growth has increased pressure on public finances. Prior to the global crises, governments adopted some pension reform initiatives in order to relieve pressure on public finances. This included replacing pre-existing social security pay-as-you-go pension systems with individual, private pension savings accounts (pension privatisation). Yet, while pension privatisation reduces a government’s long term ?scal exposure, it increases government debt in the short and medium term.
Despite the global financial crises having slowed down pension privatisation, it is expected that pension privatisation will increase as global financial markets recover. This is because governments are under pressure to reduce the effect of the ageing population on their balance sheets by transferring the risk and the responsibility to the individuals.
