Transcript THE WORK OF THE PENSION REFORM & ADMINISTRATION …

THE WORK OF THE
PENSION REFORM & ADMINISTRATION
COMMISSION
Marius St Rose - Chairman
Albert Matthew - Member
Richard Peterkin - Member
Jasper Scotland - Member
Outline Of Presentation
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Mandate & Terms of Reference
Commission’s Interpretation of the Objectives
Why the Imperative for Pension Reform?
Outline of an Ideal National/Regional Arrangement
Current Arrangements for Pension & Social Assistance
Limitations & Weaknesses of Existing Arrangements
Essential Areas for Reform
Challenges for any Meaningful Reform Effort
How the Commission Has Organized its Work
Conclusions
1.0 Mandate & Terms of Reference
• Source of Mandate
– Monetary Council of the Eastern Caribbean Currency
Union
– Eastern Caribbean Central Bank
• Geographical Scope
– Anguilla, Antigua & Barbuda, Dominica, Grenada,
Montserrat, Saint Lucia, St. Kitts/Nevis, St. Vincent &
The Grenadines.
• Subject Scope
– Framework & Administration of Public & Private
Pension Arrangements and Social Assistance.
1.0 Mandate & Terms of Reference (Contd.)
• Terms of Reference
– Direct the Research Staff in its research activities on
the issue of Pension Reform
– Review the economic and financial context of pension
reform
– Review the existing Government Pension System
– Review the degree to which there is integration or
coordination with national social security systems
– Review the pension arrangements in the private
sector and in statutory bodies
– Identify best practices
1.0 Mandate & Terms of Reference (Contd.)
• Identify governance, administrative and legal
gaps
• Establish benchmarks and indicators
• Make recommendations for improving and
harmonizing the administration of private and
statutory pension plans
1.0 Mandate & Terms of Reference (Contd.)
• Technical Support
– ECCB Staff from the Departments of Research and
Statistics
– Consultants for analytical work and data gathering
– Existing Literature
• Financial Support
– ECCB
– Willing Donors and International Financial Institutions
2.0 Commission’s Interpretation of the
Objectives
• Poverty alleviation with a focus on retirees (but
not restricted to that group) through the
mechanism of consumption smoothing and the
optimization of returns on investment.
• Increasing the mobilization of long term savings
and channeling it optimally to the most feasible
and appropriate investments that maximize
social and financial returns.
• Managing the resources to maximize the
sustainable returns to beneficiaries through such
means as:
2.0 Commission’s Interpretation of Objectives
(Contd.)
– Gaining economies of scale in:
• Increasing the critical mass of resources and beneficiaries under
management;
• Improved governance from regional arrangements and/or more
effective functional cooperation.
• Broadening and deepening the sub-regional capital
market to the extent that these do not compromise the
integrity, sustainability and optimization of returns to the
Funds under management.
• Managing the schemes so that that they can be seen as
another beacon and demonstration of the benefits of:
– Good governance
– Regional arrangements and functional cooperation
3.0 Why the Imperative for Pension Reform?
• Poverty Alleviation
– One of the highest priorities of the international
community and of democracies.
– Unemployment which is a major causal factor in
poverty is a waste of the human resources which is
any society/economies most valuable resource.
– Poverty particularly in economies with income
inequality is a sad reflection of an uncaring society
that does not care for those less able particularly
where those elderly who have contributed to the
development of the society and economy.
3.0 Why the Imperative for Pension Reform?
(Contd.)
– The incidence of poverty is increasing because of:
• Increasing life expectancy
• Increasing unemployment
• Increasing dependency ratio (leading to disincentive to work
&/or migration) arising from:
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Increasing longevity
Increasing unemployment
Reducing infant mortality
More time required to acquire education and skills
• Increasing rural to urban drift
• Increasing self- and subsistence employment
3.0 Why the Imperative for Pension Reform?
(Contd.)
– Poverty, particularly in a society with a skewed
distribution of income, is highly correlated with crime
which, itself:
• Is a disincentive to economic activity
• Has its own high production input cost for amelioration and
containment
• Is deleterious to harmonious community living.
3.0 Why the Imperative for Pension Reform
(Contd.)
• Resource Mobilization & Investment
Optimization
– Growth requires efficient investment which can only
be financed from somebody’s savings (denial of
present consumption)
– Investment can be financed from domestic savings,
use of the savings of foreigners through loans,
investments and grants/remittances.
– Use of foreign savings to finance investment
contributes to growth but has the following
consequences:
3.0 Why the Imperative for Pension Reform?
(Contd.)
– Increases the gap between GDP and GNP and could
result in per capita GNP being significantly lower than
per capita GDP.
– Increases the level of our external debt and the
attendant debt service which contributes to a
reduction of the economy’s creditworthiness
– Increases the outflow of foreign exchange through
profit repatriation
– Reduces the domestic control over the growth and
direction of our economy.
3.0 Why the Imperative for Pension Reform
(Contd.)
• Good Governance and Management Efficiency
– Society’s long term savings should be treated with (and even
more than) the same sort of respect and sanctity as the
treatment of the national currency.
– The benefits to pension funds under management is very
sensitive to the plan design, the level of returns and the cost of
administration. This is more so in the long term. At a base of 5%
every one per cent change in cost and/or in returns could lead to
a difference in benefits of 11.1%, 19.1% and 28.1% over 20, 30
and 40 years respectively. Similarly from a base of 8% a one per
cent change would result in the following changes in benefits
over the corresponding timeframes:11.8%,20.3% and 30.4%
3.0 Why the Imperative for Pension Reform?
(Contd.)
– Absence of scale economies can lead to higher per
capita administrative costs and lower average returns
– Without appropriate strategies there is higher risk and
more limited choices in investing in small risk prone
economies.
– Small societies can cause constraints and
compromise to effective and objective governance
– The comparatively small scale of national projects in
small economies could lead to lower returns than that
which could be obtained from projects in larger
counterparts.
3.0 Why the Imperative for Pension Reform?
(Contd.)
• Financial intermediation & Capital Market Development
– Sub-region has high ratio of financial assets to GDP – similar to
much more developed economies
– Unfortunately, most of the assets are held with commercial
banks which have their short term maturity transformation focus
on consumption and working capital financing.
– Financial sector has breadth in terms of the number of
comparatively small institutions particularly commercial banks,
insurance companies and credit unions but little depth in terms
of institutions that provide long term, venture and other capital
that could develop productive activity.
– Not surprisingly in one of the economies savings is estimated at
22% of GDP, with heavy foreign investment, high external debt
service and yet an investment ratio of only 20% of GDP!
3.0 Why the Imperative for Pension reform
(Contd.)
– Small size of operations lead to:
• high cost of operations through wide margins that make
consumption and working capital financing particularly in
distribution much more lucrative than long term productive
sector investment.
• Limited scope for innovative financing for productive sector
green-field (start- up) ,operations or even brown-field
(expansion) operations.
4.0 Outline of An Ideal National Social
Assistance Arrangement
• An ideal national social assistance arrangement should
have the following inter-related, coordinated and
mutually reinforcing pillars:
– Social assistance to the indigent including the elderly
– Social Security
– Occupational Pension Plans
• State Pension Schemes
• Private Occupational Plans
– Supplementary Personal Savings
• Private Savings
• Reverse Mortgages
• The structure should encompass all.
4.0 Outline of An Ideal National Social
Assistance Arrangement (Contd.)
• Each pillar must have the following seven
internal inherent attributes:
– Adequacy, of objectives and of provisions to meet
these objectives
– Affordability, to the beneficiaries of the scheme’s
provisions and costs
– Sustainability, of the scheme to meet its provisions
and promises to all its beneficiaries and stakeholders
– Robustness, to withstand the inherent vulnerabilities
and associated possible fluctuations that 5the
scheme would inevitably face given its almost
indefinite life
4.0 Outline of An Ideal Social Assistance
Arrangement (Contd.)
– Equity and Fairness, such that the schemes benefits
are transparently based on member’s relative
contributions to the schemes and subject only to
natural randomness. It should not be used as a policy
instrument for social and political engineering; and
– Predictability, to deliver on the promises, whatever
their longevity, without surprises bearing in mind that
the arrangement is a long lifetime one.
4.0 Outline of an Ideal National/Regional
Arrangement (Contd.)
• Social Assistance
– Eligible to all whose income falls below a given
threshold tied to indigence and poverty
– Level of assistance brings that existing income to the
minimum prescribed level
– Recipient must be willing to accept gainful
employment &/or be prepared to receive skills training
– Assistance granted can be recovered from existing or
future assets above a certain level but within a statute
of limitation period.
4.0 Outline of an Ideal National/Regional
Arrangement (Contd.)
– Non-contributory but financed by:
• Appropriations from central government finances
• Social Security levy of say 1.5% of income on all factors of
production
– Managed by Social Security or a dedicated
government department such as Social or Human
Services or Social Transformation.
4.0 An Outline of an Ideal National/Regional
Arrangement (Contd.)
• Social Security
– Features
• Compulsory participation and contributions from all workers
including the self employed and from first employment.
• Eligibility for assistance would be from retirement age or from
permanent incapacity.
• It would be a defined contribution scheme with contributions
between employer and employee in a 50:50 ratio of a
predetermined salary level tied to a multiple of per capita income.
• Level of assistance begins from the floor of what is provided from
social assistance and is supplemented by Social Security based on
an annuity derived from the value of accumulated direct
contributions on the individuals behalf in the Social Security Fund
4.0 Outline of an Ideal National/Regional
Arrangement (Contd.)
– Social Security Features
• Retirement period commences ten years before the life
expectancy for the country and adjusted every ten years.
• Portable within countries particularly among Caricom and the
OECS.
4.0 Outline of an Ideal national/Regional
Arrangement (Contd.)
– Social Security Governance
• Independently professional, objective and competent:
– Board of Directors/Trustees appointed for a fixed term by
Government and including persons nominated by government
and opposition taking care to ensure continuity.
– Management team (CEO, COO, FC, Auditor) appointed by the
Board of Directors with Parliamentary approval.
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Regional regulatory arrangements
Independent external Auditors
Independent triennial actuarial review
Annual reports to parliament and public and individual reports
to each contributor/member
• Benchmarks, indicators and performance targets based on
comparable best practice performances.
4.0 Outline of an Ideal National/Regional
Arrangement (Contd.)
• Occupational Pension Plans: State or Private
– Features
• Voluntary but with heavy encouragement for all workers and
employers to participate.
• Supplementary to what is available under Social Security and
should with Social Security endeavour to cover 85% of final year’s
income in first five years of retirement and 75% thereafter.
• Can be provided by employer or could be purchased from regulated
fund management providers
• Defined contribution arrangement in fixed proportions with at least
equal contributions from employer and employee with employer
having the option to take a greater share.
• have limited inflation adjustment, provide guaranteed pensions, and
with independent provisions for dependents
4.0 Outline of an Ideal National/Regional
Arrangement (Contd.)
• Occupational Pension Plan Features
– Benefit would be an annuity that can be purchased from
value of the individual’s accumulated benefits in the Fund
– Portable between employees &/or countries.
– Defined Contribution preferred over Defined Benefit Plan
because:
» Potential heavy burden on employers to maintain
obligations and hence affecting economic
competitiveness of businesses particularly small
ones
» Of the unpredictability of burdens because of current
accounting standards
– Retirement and Incapacitation eligibility would be
harmonized with Social Security.
4.0 Outline of an Ideal National/Regional
Arrangement (Contd.)
– Occupational Plan Governance
• Strong Regulatory Framework of laws, regulations and institutional
arrangements to guide, monitor, ensure compliance with appropriate
punitive measures if necessary to help schemes maintain their
solvency and credibility and optimize their benefits to their
members.
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Reputable and Knowledgeable Board of Trustees
Professional Management Team
Independent Auditors and Actuaries
Overall Regulatory Authority
Annual Reports to the Public at large
Comparative Analysis of Annual Reports against indicators,
benchmarks and targets.
– Individual annual reports to scheme participants.
– Annual Meetings and provisions for special meetings.
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5.0 Current Arrangements for Pension & Social
Assistance
Social
Social
Assistance Security
State
Pension
Private
Pensions
Reverse
Mortgages
Other
ANG
Limited
Fairly
Adequate
Being
Removed
Limited
None
Limited
ANU
Limited
Fairly
Adequate
Limited
None
Limited
DOM
Limited
Fairly
Adequate
Considering Limited
Removal
None
Limited
GND
Limited
Fairly
Adequate
Limited
None
Limited
MNI
Limited
Fairly
Adequate
Limited
None
Limited
SLU
Limited
Fairly
Adequate
Recent
Removal
Limited
None
Limited
SKI
Limited
Fairly
Adequate
Fairly
Generous
Limited
None
Limited
SVI
Limited
Fairly
Limited
None
Limited
6.0 Limitations & Weaknesses of Existing
Arrangements
• Social Assistance
– Resource appropriations are far below needs.
• Resources are hardly sufficient to satisfy the needs of the indigent
6.0 Weaknesses & Limitations of Existing
Arrangements (Contd.)
• Social Security
– Poor Scheme Design
• Defined Benefit arrangements
• Benefits outweigh contributions & earnings
– Weak Governance
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Limited professional skills at board & management levels
Limited independence & autonomy
Coverage is limited particularly among the self-employed
Weak enforcement of provisions
– Sub-optimal use of long term savings
– Not integrated with such supplementary schemes as state &
private pension plans
6.0 Weaknesses & Limitations of Existing
Arrangements (Contd.)
• State Pension Schemes
– Many are being considered for elimination
– Non-contributory and unfunded thus increasing the burden on
the current fiscal
– Gives employees false sense of security of the adequacy of
resources available to them at retirement.
– Very limited inflation adjustment
– Not integrated with the main plank of Social Security and hence
limited benefits to participants
– Not a model for private occupational plans
– Limited portability provisions.
– Inequity between tenured and contractual staff in terms of
retirement benefits.
6.0 Weaknesses & Limitations of Existing
Arrangements (Contd.)
• Private Occupational Pension Plans
– Very limited coverage amongst private sector employees
• Prevalent only among large statutory bodies and the few private
companies that employ more than 100 employees.
– Defined Benefit Arrangements
• Fixed contributions from employees and heavy residual burden on
employer
• Benefits vary widely between plans and sometimes within the same
company.
– Limited portability and unfair vesting provisions.
– Weak plan governance compounded by lax supervisory and
regulatory arrangements
• Plan management is largely outside the ECCU area
• Limited information to and interest by beneficiaries
6.0 Weaknesses & Limitations of Existing
Arrangements (Contd.)
• Reverse Mortgages & Other
– Absence of reverse mortgages in a society/economy where
much of household savings go into home ownership and where
retirement resources are very limited.
– Avenues for long term investing are
• limited &/or
• avoided by savers
• Preferred avenues and instruments do not offer opportunities for
generous net returns except in real estate.
7.0 Essential Areas for Reform
• Scheme Design to better align benefits with contributions
and earnings to ensure scheme sustainability &
predictability
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Defined Benefits to Defined Contribution
Improving benefits package
Greater and more proportionate contribution from beneficiaries
Improving equity and transparency
• Broadening Coverage and Participation
– Stricter sanctions, enforcement for greater compliance
– Ensuring that unemployment is minimized through training and
special employment programmes to increase the proportion of
dependents and their contributions to the programmes.
7.0 Essential Areas for Reform (Contd.)
• Strategies to make much better use of the long term
resources mobilized to:
– Impact more meaningfully on economic development
– Deepen and broaden the financial infrastructure
– Optimize returns to fund beneficiaries
• Enhancing operational efficiencies through
– Mergers &/or functional cooperation
– Operational and organizational system design improvements
– Stronger internal governance
• Qualified management and committed board
• Greater independence and autonomy
• Integration and streamlining of Social Assistance, Social
Security and other Pension provisions and benefits.
7.0 Essential Areas for Reform (Contd.)
• Periodical adjustment of statutory retirement age with
national life expectancy.
• Institutionalization of Reverse Mortgage but including
strong systems, regulatory arrangements and effective
sanctions to ensure compliance to protect the financial
institution and the home owner.
8.0 Challenges Facing Any Meaningful Reform
Effort
• Capacity and Willingness to Save affected by:
– High propensity to consume
– High poverty levels
– Limited concern for future needs
• Governments weak fiscal and high debt levels restricts
governments ability to contribute much more to social
assistance and pensions
• The quality and sustainability of national economic
management as pension arrangements have value only
if deferred consumption can be satisfied at retirement.
• The level of development of the real economy and the
financial systems to give productive opportunities and
reasonable returns on long term savings.
8.0 Challenges Facing Any Meaningful Reform
Effort (Contd.)
• Governments’ willingness to give more autonomy to:
– Professional management
– Regional management arrangements
9.0 Operational Work Programme
• Background Reading
– Pension and Social Assistance theory and comparative regional
and international practice by
• IFI’s e.g World Bank, IMF, CDB, IDB
• Dedicated specialist research institutions e.g.International Centre
for Pension Reform
• Academic Journals e.g Journal of Economic Perspectives
• Data Gathering/Mining
– Data and legal information already available in the ECCB e.g
economic and census reports
– Requests for data and other relevant legal information from
national contact points e.g Social Security
– Consultancy research assistance to gather other economic,
private pension, demographic and social data.
9.0 Operational Work Programme (Contd.)
• Public Consultations
– Meetings with institutions involved with pensions and social
assistance
– Country town hall meetings with the interested public
– Web page on the ECCB website to
• provide relevant information
• sensitize the public on the imperatives and issues surrounding
pension reform
• Solicit views and reactions
– Media presentations particularly national radio and TV talk
shows.
9.0 Operational Work Programme (Contd.)
• Analysis
– Discussion among Commissioners and ECCB Staff on data
obtained, research findings.
– Participation at CARTAC sponsored conference on Pension
Reform
– Consultancy by a regional firm of actuaries funded by CDB to do
analysis and research particularly on
• Private pension plans in the sub-region
• Formulating regional arrangements for the harmonization of national
pension schemes to
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Improve governance and managerial autonomy
Diversify risks
Minimize administrative costs
Optimize financial and economic returns on investments
9.0 Operational Work Programme (Contd.)
• Report Writing
– Inception Report
– Interim Report
– Final Report
10. Conclusion
Thank You
Questions and Comments
Marius St Rose
[email protected]