Actuarial valuation of the public pension scheme of Viet Nam 3 August 2012 Junichi Sakamoto (Nomura Research Institute, (NRI)) Tatsuji Ohguri (NRI) Hiroshi Yamabana (ILO FACTS) ILO Financial and Actuarial Service (ILO FACTS) E-mails: yamabana@ilo.org hiroshi.yamabana@gmail.com 1
Structure of the presentation 1. Scheme structure 2. Data and assumptions 3. Status-quo projection 4. Reform options 5. Results from different options 6. Conclusions and recommendations 2 2
Main pension benefits 1. Scheme structure - Retirement pensions (Ret age 60 (M) / 55 (F)) Min (45% + 2 % (M) / 3% (F) * (cont. years -15), 75%) * (average wage) Average wage: 10 yrs. avr. (pub.) vs whole avr. (pri.) Indexation: GDP / inflation Revalorization of wages: min. wage (pub.) / CPI (pri.) - Survivors pensions 50% / 70% of the minimum wage for each survivor, up to four survivors 3 3
Financing 1. Scheme structures (contd.) Contribution rates (percentage) Fund - 2009 2010-11 2012-13 2014 - Total 16 18 20 22 General Employers 11 12 13 14 RSAF Employees 5 6 7 8 Total 16 18 20 22 Military Employers 16 18 20 22 Employees - - - - VSIF 16 18 20 22 4 4
1. Demography 2. Data and assumptions Same as the GSO estimate - Life expectancy at birth: 70.2 (2009-14) => 73.7 (2044-49) 75.6 (2009-14) => 79.7 (2044-49) - Total Fertility Rate (TFR) 2.03 (2009 Census) => 1.85 (2044-49) - Demographic ratio := working age pop / old-age pop Current definition: 19.4% (2009) => 59.5% (2049) 65+: 10.9% (2009) => 30.7% (2049) 5 5
2. Data and assumptions 2. Macro economic environments (labour and economy) In line with ILO estimate (labour) and IMF estimate (macro economic indicators) up to 2020 and gradually stabilized afterwards - Annual real GDP growth: 6.8% (2010) => 2.2% (2049) - Annual real productivity growth 4.9% (2010) => 2.4% (2049) - Annual employment growth 1.8% (2010) => -0.2% (2049) - Annual inflation (CPI increase) 9.2% (2010) => 2.1% (2049) - Annual real individual wage growth 16.0% (2010) => 4.5% (2049) 6 6
2. Data and assumption 3. Public pension scheme coverage Extension of the coverage with the speed in line with the speed observed 2001 and 2010 till it reaches nearly 50% in 2049 and kept constant afterwards. 7 7
3. Status-quo projections 1. Demographic projections Number (million) Demographic ratio (percentage) Pensioners Contributors Total Old-age Survivors Total Old-age Survivors 2010 9.80 0.90 0.89 0.01 9.2 9.1 0.1 2014 11.38 1.35 1.31 0.04 11.8 11.5 0.4 2019 13.15 2.00 1.86 0.13 15.2 14.2 1.0 2024 14.40 3.01 2.76 0.25 20.9 19.1 1.7 2029 15.38 4.20 3.80 0.40 27.3 24.7 2.6 2034 16.32 5.52 4.93 0.60 33.8 30.2 3.6 2039 17.36 7.03 6.17 0.85 40.5 35.6 4.9 2044 18.21 8.65 7.47 1.18 47.5 41.0 6.5 2049 18.87 10.29 8.70 1.59 54.5 46.1 8.4 8 8
3. Status-quo projections 2. Replacement rate of retirement pensioners Year Total Public Private 2014 114.8% 95.4% - 2019 107.2% 87.9% 48.9% 2024 97.5% 86.1% 47.7% 2029 90.5% 84.3% 46.2% 2034 86.3% 83.8% 44.9% 2039 83.4% 84.2% 43.7% 2044 81.2% 85.3% 43.1% 2049 79.5% 86.4% 43.1% 9 9
3. Status-quo projections 3. PAYG cost rate vs. current contribution schedule PAYG cost rate = demographic rate * replacement rate 10 10
4. Reserve ratio 3. Status-quo projections Reserve ratio := reserves / total expenditure 11 11
4. Reform options 1. Increasing the retirement age up to 65 Increase both males and females retirement age in 2016 to 61 and 56 and continue to increase it by one year every two years till they reach 65 and kept constant afterwards. As there is no incentive in the pension formula to continue to contribute even in the case of the retirement age increase, the retirement behaviour is assumed not to change from the status-quo projection (i.e. not continue to work till 65.). 2. Adjustment of the replacement rate (pension formulae) The current average annual accrual rate of 2.5% favouring the short-career workers into the annual flat pension accrual rate of 2.0% over 20 years, starting from 2016. This option also includes a change in the way of the revalorization of the wage used for the calculation of the pension from the inflation to the average wage both for civil servants and private-sector workers and the prolongation of the period of reference wage for civil servants from current 10 years to the whole career average. 12 12
3. Combination of 1 and 2 4. Reform options 4. Notional Defined Contributions (NDC) It is assumed that old-age pension is calculated based on the notionally accumulated individual amount, based on the assumed internal interest rate the same as the average wage increase and that the notionally accumulated amount would be converted into the pension by dividing the life expectancy at the time of the pension award. It is assumed that 16% out of 22% of the contribution rate can be allocated to the NDC scheme since the remaining 6% should be used to pay other benefits such as survivors benefits, the transfer to the health insurance scheme and the administration cost. It is also assumed that the retirement behaviour will not change from the statusquo projection. 13 13
PAYG cost rate 5. Reform projections 14 14
Reserve ratio 5. Reform projections 15 15
Summary of results 5. Reform projections Year Year 2049 Options PAYG cost rate exceeding 22% Depletion of reserves PAYG cost rate (%) Replacement rate of retirement pensions (%) Total Civil servants Private-sector workers 0 Status-quo 2024 2034 45 79 86 43 1 2 Retirement age increase only 2033 2048 34 82 86 43 Pension formulae change only 2028 2041 37 60 54 50 3 Pension formulae change combined with retirement age increase 2039 2057 29 61 55 50 4 Notional Defined Contribution (NDC) 2038 2057 27 40 37 35 16 16
6. Conclusions and recommendations 1. Reform of the existing public pension scheme 1.1 Increase of the retirement age 1.2 Rationalization of the pension formulae 1.3 Combined reform of 1.1 and 1.2 1.4 NDC scheme 1.5 Investment of reserves 1.6 Periodical actuarial valuations and data 2. Toward a more comprehensive pension scheme 2.1 Coverage of the pension scheme of the VSS 2.2 Supplementary voluntary pension schemes 17 17
6. Conclusions and recommendations 1.1 Increase of the retirement age - Delay the depletion of the reserves for 14 years. - Not good enough to maintain financial sustainability by this measure only. - Proper incentive to work longer necessary (e.g. more equitable pension formulae, proper actuarial reduction factors). - Tightening up the early retirement provisions with more proper actuarial reduction factors (e.g. order of the annual reduction of 5-6%) necessary. - Important in order to have sufficient labour force amidst the decrease of the working-age population. 18 18
6. Conclusions and recommendations 1.2 Rationalization of the pension formulae - Current pension formulae with the imbalance of benefits between civil servants and private-sector and the replacement rate of the private-sector workers as well as the scheme financing become unpredictable and unstable. - The current pension formulae favours short-career workers and does not provide any incentives for long-career workers. - 2.0% flat annual accrual rate combined with the revalorization of the wage in line with the average wage will lead to the delay in the depletion of reserves to 2041 and the equalization of the replacement rate between civil servants and private-sector workers, above 50% of the wage. 19 19
6. Conclusions and recommendations 1.3 Combined reform - Combined reform of 1.1 and 1.2 will delay the depletion of reserves till 2057 and recommended to implement. However, it should be noted that further reform measures are necessary in years to come and those reforms will be done based on future periodical actuarial valuation. 1.4 NDC - It may not be very well realized among tripartite partners what the NDC means on the adequacy of benefits through automatic adjustment of pension level in line with the longevity increase. Additional study on the design of the scheme as well as serious consultations should be necessary in case the Government of Viet Nam would like to pursue this option. 20 20
6. Conclusions and recommendations 2.1 Coverage of the pension scheme of the VSS - It is recommended that the Government should formulate an umbrella strategy of aiming at a comprehensive coverage of the whole population with basic pensions based on the current (compulsory and voluntary) social insurance and tax-based pension scheme for the elderly. - As it is unavoidable to gradually reduce the replacement rate in the future, full compliance of the wage registration will become more essential for the pension adequacy as well as the financial sustainability of the scheme. 21 21
6. Conclusions and recommendations 2.2 Supplementary voluntary pension schemes - Voluntary pension schemes should play a role of supplementing the current provisions of the VSS pension by providing top-up benefits to be reduced in the future. 22 22