Post on 26-Jul-2020
Simplifyingthe Ultimate 3P Partnership Model
Pension Reform in Africa
How did it all get so complicated?
If we’re going to effectively tackle the problem
We need to vastly simplify the discussion
We need to make the discussion relevant to emerging economies
We need to make the discussion relevant to Africa
Most importantly:We need to understand the objectives/agendas/conflicts of the different players
The Ultimate PPP Partnership Model
PublicSector Private Sector
PeoplePersonnelPersonal
Inherited systems,Reform needs,
Enabling environment
The ChallengeHow to cope with:
Competing objectives Competing agendas Competing “hot points”
The bottom line:
Getting it right isn’t about compromising to address immediate political/economic demands of each party
Getting is right is about not-compromising the futures of multiple generations of a nation.
The Ultimate PPP Partnership Model
What’s everyone’s requirement – their objectives?
Public Sector• Govt needs to provide basic social protections:•Old age, child and unemployment income
• Health/Education/ Housing
• Infrastructure
Private Sector•Employer/employee compact
•Employee wellness = greater productivity
People•Security:
•Income :•Loss of job•Disability/Death •Post-retirement
•Health• General Well-being• Family
What’s everyone’s requirement – their agendas?
Public Sector•Political legitimacy•Redistribution or wealth
•Develop capital markets
•Greater global legitimacy
•Target investing to “national” interests
Private Sector•Whatever is provided must make economic sense
•Minimise financial burden on company
People•As a citizen/ employee, this is my right•The financial dependency of a family/extended family/ village/etc.
What’s everyone’s requirement – their constraints?
Public Sector•Fiscal demands•Limited skills in:
• Administration• Good governance• Finance
•Limited regulatory framework
• Limited capital markets
Private Sector•Weak or non-existent human capital development skills
•Not core business•Financial constraints
People•Choice is a bad option
•Financial literacy –even literacy
• Immediate needs take precedence over the end game or even the financial journey
TRUST?
How well the system can maintain: Adequacy Affordability Sustainability Equity Predictability Robustness
Secondary objectives: Minimize labor distortions Contribute to savings mobility Contribute to financial market development
Source: Robert Holzmann PENSION SYSTEMS AND REFORM CONCEPTUAL FRAMEWORK 2008
A Pension System’s Success is Predicated on:
How to start – the decisions to be madePublic Sector Social protection or
financial wellness? Private Sector
Non-contributory Is this a basic right? Safety net vs. ladder
Contributory
Publicly managed Who do you trust? What’s cheapest?
Privately managed
Compulsory Social protection vs. savings vehicle
Voluntary
Means tested Redistribution vs. social solidarity
Universal
Unfunded / PAYG Multigenerational vsindividual risk/benefit
Funded
Pension Annuitize savings vstake lump sum
Provident
Defined Benefit State/employer risk vs. employee risk
Defined Contribution
Single Pillar Single vs multiple stakeholder agendas
Multi-pillar
Group Scheme Paternalism vsindividual choice
Personal Pension Plan
Can multigenerational systems work in emerging economies where political and economic stability is fragile?
Does a tighter “contribution-to-benefit” link limit capability to redistribute income?
Should pensions and related insurance programs be integrated?
Are pensions appropriate to assist the poor because social structures are crumbling? Or do welfare grants/pensions accelerate social breakdown?
Does a solid pension program encourage more entrepreneurial risk taking? Or is there potential for moral hazard?
How much should be mandated and is tax the right incentive?
Should public servants continue to have a separate scheme?
These are pension investments, not venture capital opportunities.
Other important debates
Since the early 1990’s a marked change in direction of reform for emerging economies Central and Eastern Europe shift to market
economies Latin America and the Chilean success story
Introduction of the multi-pillar system
How the World Bank/OECD et alia steered the debate
Multi-pillar system provides risk diversification: Unfunded pillars allocating savings to pay-as-you-go
asset Funded pillars allocating to financial assets
Different pillars have varying degrees of importance to key target groups: Formal sector Informal sector Lifetime poor
Multi-pillar provides an important starting point
The Five Pillar ConceptZero Pillar Pillar 1 Pillar 2 Pillar 3 Pillar 4
Poverty reduction and redistribution
Mandated Poverty protection and first level consumption smoothing
Mandatedoccupational or personal pension plans
consumption smoothing
VoluntaryIndividual or company levelProvides choice
Voluntary Informal (family),market-based, public support (e.g. health care) to elderlyHomeownership, reverse mortgages etc.
Publicly managed
Publicly managed
Privatelymanaged
Privately managed –more flexibility than 2nd pillar
Universal for elderly/ means tested young
Guarantee of minimum pensions
Mandatory – tax incentive
Voluntary – tax incentive
Budget/General revenues
Contributions/financial reserves
Earnings related funding – financial assets
Earnings related funding – financial assets
Financial and non-financial assets
DB/NDC DB / DC DB/ DC
Life-time poorDependent on
budget/reserves
Formal sectorPublic pension
plan DB/NDC
Formal sectorEmployer or
individual DB/DC
Formal/ informal
More flexible
New generation
thinkingNon-financial
Perhaps the most controversial recommendation:
Shift from publicly managed unfunded defined benefit schemes to privately managed, fully funded defined contribution schemes (World Bank 1994)
Why this made sense for emerging economies
How the World Bank/OECD et alia steered the debate
What was on offer: Investment banking and capital market development Custodial skills Administrative, distribution and communication skills Asset Management skills Insurance and employee benefit products Financial Planning Skills Credit and Debt management skills
Bonus points: An imported regulatory context with international players
The Financial Service Company as the new intermediary
Can a financial service company serve two masters?
The tightrope walk between fiduciary and profit centre
Building trust / Depending on regulations?
The Challenge
The Lessons from Benefits Barometer* (South Africa)
It was important to change the conversation:Think of employee benefits as a critical social protection that government has “outsourced” to the private sector
It was important to understand that in the DB to DC shift, the real risk that was transferred was financial planning risk Individuals are simply not equipped
With employers stepping away – financial service companies filled the gap – do they understand their role here?
The cultural context is key
*http://benefitsbarometer.co.za
Are government mandated defaults the answer?
Our most significant conclusions
Not engaging with members means we will miss out on the most significant opportunity to turn the tides of financial literacy in this generation.
But, the extreme diversity of the African demographics means that if engagements are going to be far-reaching, “vanilla” solutions are not going to address the issues that most Africans face.
And most importantly….
The whole journey matters
How to derail a pension reform process
Lessons learned from the South African context
The debate cannot remain fragmented
Robert Holzmann – World Bank
What’s been learned about pension reform in emerging economies
Readjustment of objectives: Refocus on basic protection Need to address aging and deferred retirement Capacity of funded schemes to manage risks in question:
i.e.GFC Need for broader coverage
The ILO returns to the debate with the “social floor” concept
Push for complementary reform approaches
Reforming the pension reform process
African interpretations of multi-pillar
Source: African Alliance Securities 2013
Pillar zero Pillar threeOld age grants/social grants
The Missing Link? occupational schemes pension and provident funds
Poverty reduction/ restribution
Minimum pension safety net?
Formal sector
Means tested / qualify
Potential financial sector conflicts:• Costs• Control
Voluntary – no govtmandated participation or annuitization
Budget/generalrevenues
More inclusive coverage of informal?
Funded / earnings linked / tax incentive
Publicly managed Separate structures Privately managed Civil workers vs Private workers
DB /DC
The South African interpretation of multi-pillar
Source: Ben Yen, Pension Reform in a small African country 2009
How the full five pillar model can work
The Challenge:•Political discretion• Labor market
concerns• Long term
solvency
•NDC schemes• Promised
solvency• Addresses
social changes
The Challenge:• Requires
meaningful investment options (lifecycle)
• Measures to reduce costs and fees
• Relaxation of investment constraints
• Focus on payout phase
The Challenge:• Often precedes
mandated 2nd
pillar• Coverage to
informal sector• Better
incentives: matching contributions
• Cost and communication and appropriate solutions
But it definitely demands tweaking for Africa!
Multi-pillar includes everyone – but also recognizes the weaknesses in each of the players
Mind the gaps – and close them before they create an impossible chasm
For emerging economies: Social protections need to be protected from politics Separation of public servant funds may be problematic The private sector (financial service companies) must play a
pivotal role because of lack of funding and skills– but their mandate on compulsory investments needs to be clear
The design of the plan has big influence on member behaviour Appropriate defaults/mandations Appropriate investment options Understand the investment culture
The employer needs to play their role in the greater scheme The regulatory/fiduciary environment will be the deciding
factor
Takeaway thoughts
Getting it right isn’t about compromising to address immediate political/economic demands of each party
Getting is right is about not-compromising the futures of multiple generations of a nation.
Most importantly:
Benefits Barometer, Alexander Forbes, 2013, 2014
Pension Privatization in Africa, Michael Kpessa 2013
Pensions in Africa, Fiona Stewart and Juan Yermo 2009
Pension Trends in Emerging Markets – The Rise of DC Plans and Its Consequences, Allianz Global Investors
Pension Reform in Sub-Saharan Africa, Randolph Oosthuizen –African Alliance Securities- 2013
Pension Systems and Reform Conceptual Framework; Hlozmann, Hinz, Dorfman
Global Pension Systems and Their Reform – Robert Holzmann
Pension reform – lessons from a small African coun
Reforming pensions: Myths, truths, and policy choices – Nicholas Barr
Analytical Review of the Pension System in Kenya, Sundeep Raichura
Nonfinancial Defined Contribution Pension Schemes in a Changing Pension World: Holzmann, Palmer,Robalino
Sources: