Transcript Inflation

Social Security Financing in Zimbabwe: From crisis
to stability
Henry N. Chikova (Dr)
INTRODUCTION
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Zimbabwe – Background
The National Social Security Scheme
Economic developments since 2000
Prescribed Actuarial Reviews to address
challenges
• Ad hoc Actuarial Reviews
• The multicurrency period
• Looking Ahead
Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
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Montevideo, Uruguay. –April 27-28, 2010
BACKGROUND
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Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
BACKGROUND
Demographic Indicators 2008
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Population-12.4 million (male 48%, female 52%)
CDR – 19.7/1000
CBR- 25/1000
Rate of natural increase – 0.7% per year
Life expectancy 2008
– Males: 40.8 years,
– Females: 46.2,
– Total; 43.3 years
• Labour force – 6.2 million
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Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
BACKGROUND
• Economic Indicators – GDP growth
01
02
03
04
05
06
-2.7
-4.4
-10.4
-3.6 -4.0 -6.3
07
08
09*
10*
-6.9
-14.1 3.7
6.0
* Estimate
GDP per capita - $303 (2009 est.)
Total Consumption Level(a family of six):
$520
Sectors: Agriculture – 18.1%, Industry – 22.6%, Services – 59.3%
Inflation
June 2008: 231 million %
Dec 2009: -7.7%
Feb 2010: -0.7%
Currency: US Dollar, South African Rand
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Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
NATIONAL SOCIAL SECURITY AUTHORITY
SCHEME
• Founding Act of NSSA: National Social Security Act (Ch
17:04) of 1989.
• Empowers minister responsible for Labour and Social
Services to establish, abolish or amend social security
schemes through Statutory Instruments (S.Is)
• Schemes should be employment based
• Compulsorily require payment of contributions by
employers and employees, and deduction of such
contributions from any salary or wages
• Determine benefit levels to and qualifying conditions of
beneficiaries
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Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
Schemes Under NSSA
• The Authority is currently managing two
schemes
– Pension and Other Benefits Scheme (POBS) or
(National Pension Scheme) Statutory Instrument 393 of
1993
– The Accident Prevention and Workers’ Compensation
Scheme – Statutory Instrument 68 of 1990.
– Presentation will focus on the National Pension Scheme
Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
THE POBS Scheme
• Scheme’s Design
• Partial Funding /scaled premium model
• 1994 – 2007 contribution rate was 3%
employer and 3% employee adding up to
6% contribution rate.
• From January 2009 the contribution rate is
8%, equally split between the employer and
employee.
– Coverage: all formal sector, including civil servants
– 1.3 million contributors
Technical Seminar of the ISSA Technical Commission of
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The POBS Scheme
Benefits
• Retirement, invalidity and survivors pensions.
• Grants are also paid in line with the above
categories of pensions.
• Funeral Grant
Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
ZIMBABWE ECONOMIC CRISIS: A
SUMMARY
1997 War Veteran
Payouts; Financed
through public borrowing
2000: Land
Reform
Programme &
sanctions
“Important
August 1998:
DRC War
Events”
September 1999:
Emergency of
opposition politics
1998: Food
Riots
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Technical Seminar of the ISSA Technical Commission of
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ZIMBABWE ECONOMIC CRISIS: A SUMMARY
2003/2004
Closure &
Bank
Curatorship
2003/2004
Cash Shortages
(currency
rationing, sale
of Z$, Intro. of
travellers and
bearer cheques)
Inflation –
200% (12/02)
to 364%
(06/03)
Currency
Reforms – 2006
New family of
bearer cheques
with 3 zeros
lopped off
March 2007:
hyperinflation
M.O.M > 50%
Currency
Reform 2008 (1)
August 2008 Ten
zeros removed
from currency
June 2008
inflation reaches
230 million
percent
Currency
Reform 2009
February 2009
– more zeros
removed.
‘NEW”
currency rarely
used (forex &
fuel coupons
replaced local
currency)
Official value
of Z$ not
known at this
stage
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Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
ZIMBABWE ECONOMIC CRISIS: A SUMMARY
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Unbudgeted for civil service salary increments
Fixing of the exchange rate at Z$55 and later to Z$824
Job “stay-aways”, which negatively affected production in the economy
Multiple interest and exchange rate regimes - which provided arbitrage
opportunities and encouraged speculative behavior.
The low interest rates fuelled consumptive and speculative borrowing which
spurred on inflation.
The low official foreign exchange rates also fuelled the foreign exchange
parallel market, as a few influential individuals who accessed foreign currency
at ridiculously low rates, off loaded it on the parallel market for a huge profit in
Zimbabwe dollars.
The “burning of money” phenomenon
Price freezes were introduced by government – led to shortages, hoarding
products found on the parallel market at ridiculously high prices.
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Technical Seminar of the ISSA Technical Commission of
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Montevideo, Uruguay. –April 27-28, 2010
FINANCING DURING ECONOMIC CRISIS
Financing of the POBS
– Contributions
– Surcharges
– Returns on Investments
Presentation seeks to show how economic crisis affected the
financing of the scheme, and how NSSA reacted to the challenges?
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Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
FINANCING DURING ECONOMIC CRISIS
General framework for projection assumptions
Demographic Factors;
Mortality: - Mainly influenced by HIV/AIDS, prevalence at 25% in 2002
for the adult population, but generally decling.
Fertility: Since 1982 fertility has been generally declining in Zimbabwe
Migration: Difficult to measure, depended on economic performance;
assumed to be zero or negligible in most valuations.
GDP Growth: Due to harsh economic conditions, GDP expected to
decline in the short run, except for 2009 projections
Unemployment: Difficult to authenticate the projection figures due to
differences in definitions
Wages Growth: Prior to 2009, mainly influenced by inflation
Inflation: Prior to 2009, very high levels of inflation
Interest Rates: Generally tracked inflation
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Technical Seminar of the ISSA Technical Commission of
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Assumptions: Major Actuarial Reviews
Indicator
2002-2052
2005-2055
2009-2059
Mortality (ex):
Male (Base):
Male (End) :
Female (Base):
Female: (end) :
39.5
69.0
45.1
75.9
37.5
70.2
49.6
73.9
50.8
70.9
53.2
74.7
Fertility
Base 5.5; End 2.1
Base 4; End 2.1
Base 3.49, End 2.1
Migration
0
6,287 throughout
5,000 throughout
GDP Growth
Base -7%; End 2%
Base -4%, End 2%
Base 2.9; End 1%
Unemployment
6% throughout
6% throughout
Base 9%, End 2%
Wages Growth
Base 390%, End 5.5%
Base 1,016%, End 5.5%
Base 12%, End 5.5%
Inflation
Base 598.7%, End 5%
Base 1,355%, End 5%
Base 15%, End 5%
Interest Rates (nominal)
Base 87%, End 6%
Base 1600%, End 6%
Base 17.8%, End 6%
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Technical Seminar of the ISSA Technical Commission of
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RESULTS OF MAJOR RIEVIEWS
Indicators
System Dependency
Ratio
Funding Ratio
PAYG Rate
2002-2052
Base: 1:14
End : 1.1.4
Base: 15.4
End: -8.8
Base: 1.3%
End: 16.0%
Year
2005-2055
Base: 1:12.8
End : 1:1.15
Base: 1.06
End: -12.07
Base: 6.2%
End: 22.2%
2009-2059
Base: 1:5.9
End : 1:0.88
Base: 2.06
End: -15.98
Base: 3.6%
End: 31.5%
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Technical Seminar of the ISSA Technical Commission of
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Montevideo, Uruguay. –April 27-28, 2010
YEARS 2005 TO 2008
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These years witnessed unprecedented hyperinflation levels
Numerous company closures
Administrative costs skyrocketed
Currency Reforms (25 zeros lopped off in a period of 3 years)
Benefits became valueless
The scheme depended on ad hoc actuarial reviews
– Yearly recommendations
– Half yearly
– Quarterly, and
– Monthly
• Finally ceiling on insurable earnings was removed, and
• Benefits increases were pegged on contribution increases
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Technical Seminar of the ISSA Technical Commission of
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AD HOC REVIEWS
Some assumptions for Ad hoc Actuarial Reviews
Parameter
1 July 07
3500%
Period
1 January 08
1 July 08
9000%
66,212%
Wage Inflation
Nominal Rate of
Return
Cap Recommended
Pension Increase
2625%
2800%
6750%
7200%
49,659%
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Z$2,000,000
2100%
Z$140,000
5400%
Z$5 billion
500%
Administration
23.5% of
contributions
42% of
contributions
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Inflation
October 08
No official figure,
actuaries used
100%
Cap removed
Pensions to be
increased by 30%
of increase in
monthly
contributions
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Technical Seminar of the ISSA Technical Commission of
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Montevideo, Uruguay. –April 27-28, 2010
Recommendations of Actuarial reviews
S.I.
Year
Min. RP
393 of 1993
288 of 2001
27 of 2003
145 of 2004
242 of 2004
226 of 2005
187 of 2006
261 of 2006
131 of 2007
49 of 2008
49 of 2008
122 of 2008
122 of 2008
122 of 2008
122 of 2008
122 of 2008
122 of 2008
17 of 2009
Oct 1994-Sep 2001
Oct 2001-Dec2002
Jan 2003-June 2004
Jul 2004-Dec 2004
Jan 2005-Dec 2005
Jan 2006-Jun 2006
Jul 2006-Dec 2006
Jan 2007-Jun 2007
Jul 2007-Dec2007
Jan 2008- Apr 2008
May 2008
Sep 2008
Oct 2008
Nov-08
Dec-08
Jan 2009
Feb 2009
April 2009
160
230
518
80,000
160,000
252,000
5,000
12,900
250,000
10,000,000
100,000,000
20
50,000
367,175
2,460,000
100 trillion
1,600
USD25.00
C.R
(%)
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
8
8
8
Ceiling
4,000
7,000
48,000
500,000
750,000
5,000,000
50,000
130,000
2,000,000
140,000,000
5,000,000,000
No Ceiling '01/08/08'
No Ceiling '01/08/08'
No Ceiling '01/08/08'
No Ceiling '01/08/08'
No Ceiling '01/08/08'
No Ceiling '01/08/08'
No Ceiling '01/08/08'
Comment
3 zeros removed
10 zeros removed
12 zeros removed
KEY: S.I.- Statutory Instrument, Min. RP – Minimum Retirement Pension, C.R.-Contribution Rate
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Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
TOWARDS STABILITY
• Important Events
– January 2009, national budget announcement authorised the
scheme to collect contributions in foreign currency
– February 2009; new inclusive government is formed
– Month on month CPI drastically drops- becoming negative
• However: scheme was expected to pay benefits in foreign
currency, without the foreign currency reserves
• 1st April 2009, scheme set minimum pensions sustainable
by funding from rentals and very low contributions
• Minimum retirement pension set at USD25.00
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Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010
MARCH 2009 Full Review
• Upheld the level of pensions of 1st April 2009
– Cautionary approach: economic environment not yet stable
– Advised to reduce administration expenses to 10% of
contributions.
• Ad hoc review of 1 January 2010
– Recommended minimum pension of USD40.00
– Administration costs, now at 7%
• Recommendations not implemented yet due to mixed
ministerial directives
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Technical Seminar of the ISSA Technical Commission of
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LOOKING AHEAD
 Use of multi-currency
 Funding benefits in foreign currency, where contributions were
made in Zimbabwe dollars has been a challenge
 Removal of ceiling and increase of the rate of contribution
 Realigning liabilities to funding
 Low levels of inflation (M.O.M inflation (2009), June: 0.6%, July:
1.0%, August : 0.4%
Annualised inflation rate: 1.08%
 Pensions have value
 Stakeholder confidence
 Upsurge in the uptake rate
 Easy to plan for the future
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Technical Seminar of the ISSA Technical Commission of
Statistical, Actuarial and Financial Studies
Montevideo, Uruguay. –April 27-28, 2010