Pensions in South Asia Robert Palacios World Bank Pension Course Washington DC November 18, 2010
Structure of presentation Context: Demographics, coverage and main schemes Civil service schemes India s reform 2
Context: Demographics, coverage and main schemes 3
Population ageing in South Asia 30% 25% Sri Lanka % over age 60 20% 15% 10% India Maldives Bangladesh Pakistan Nepal 5% Bhutan 0% 2000 2010 2020 2030 2040 4
South Asia aging compared to other regions 25% 20% 15% % over age 60 10% 5% 0% South Asia East Asia High Income OECD East Europe/FSU Latin America Middle East Sub- Saharan Africa 5
Main pension schemes in South Asia Country Civil servants 1 Private sector Coverage of population aged 15-59, % Afghanistan PAYG DB No 2 0.9 Bangladesh PAYG DB and Provident Fund Occupational schemes 2.1 Bhutan PAYG DC and Provident Fund Limited occupational 4.3 schemes India PAYG DB and DC scheme for Provident Fund and 8.9 new workers as of 2004 occupational schemes. Maldives PAYG DB, Provident Fund Provident Fund 18.4 Nepal PAYG DB and Provident Fund Provident Fund 2.7 Pakistan PAYG DB PAYG DB and 5.8 Sri Lanka PAYG DB and funded DB for new workers as of 2003 occupational schemes Provident Fund and occupational schemes 28.1 6
Social pensions Have significant role in Bangladesh, India, Maldives and Nepal; Sri Lanka relies on its very broad social assistance scheme New government in Nepal just increased the benefit and lowered the eligibility age to 70 spending doubled in 2010 to 0.4 per cent of GDP Maldives has the largest social pension scheme and will spend more than 2 percent of GDP next year Afghanistan, Bhutan and Pakistan do not have social pensions although Bhutan has been considering this option 7
Civil service pension schemes 8
South Asia CS pensions All have special schemes for civil servants inherited from the British Non-contributory, final salary DB that replace only part of compensation Bhutan is the exception with its own DB/DC scheme India, Maldives and Nepal have recently introduced DC schemes in Maldives, it is for everyone while for new entrants in India and Nepal 9
South Asia CS pensions One of the earliest CS pension schemes was for British civil servants in the late 17 th century 1684-1712: Port of London, Revenue Dept. etc. ran primitive scheme with ad hoc rules and no fund 1712-1830: First contributory, pooled scheme begins, rules adjusted over time, funds invested; coverage gradually extended to upper ranks, most departments. Means-testing eliminated. 1830: Legislation establishes non-contributory and unfunded DB scheme that was exported to the Empire and still exists in many countries today Many former colonies are now reforming these schemes (Hong Kong, Falkland Islands, Nepal, Nigeria, India) 10
South Asia CS pensions Important differences in parameters include: Indexation is automatic in Bhutan, Nepal and India but not in Bangladesh, Pakistan, Sri Lanka or Maldives Accrual rates range from 1.5 (India) to 3.2% (Bangladesh) per annum Commutation factors vary and amounts allowed range from 0-100% Effective share of non-pensionable compensation varies from 5-40% Minimum vesting, retirement age, early retirement, survivors benefits etc. vary somewhat Bhutan is unique in the region in its scheme design 11
Benefit levels implied by DB formulas Sri Lanka 16. 8 Bhutan 14.4 Nepal 11.9 Banglades h 12.9 Pak istan 10.6 India 8.4 0 20 40 60 80 100 120 Gross replacement rate 12
System dependency ratios India Pakistan Sri Lanka Nepal Bangladesh Afghanistan Maldives Bhutan 0% 10% 20% 30% 40% 50% 60% 70% pensioners/actives in per cent 13
Spending on civil service pensions 14% 12% 10% % of revenues 8% average non-oecd sample 6% 4% % of gdp 2% 0% Maldives Nepal Bangladesh Pakistan Sri Lanka India 14
Status of reforms in South Asia Group 1: Reforms passed In 2001, Bhutan converted CS provident fund into hybrid with 2% accrual on lifetime average earnings plus 10% true DC India introduced 20% DC scheme for new entrants from 2004 Maldives introduced a 14% DC scheme for civil servants and eventually all workers and a universal flat pension in 2009 Group 2: Reforms being designed or imminent Nepal has drafted legislation that would create a DC scheme for civil servants and for informal sector workers on a voluntary basis Group 3: No reform To our knowledge there is no reform being planned in Bangladesh Sri Lanka introduced contributory DB scheme and then reversed the reform and returned the money 15
India s systemic reform
Brief history Committee set up to review pension system in 1998 favors DC approach and avoids confronting EPFO 2001 Govmt announces intention to place new civil servants in DC scheme and to extend scheme to those not covered by other formal sector schemes 2001 Bank report shows large unfunded pension liabilities of more than one third of GDP and advocates DC type reforms Jan. 1, 2004 All new central government employees placed in DC scheme; 19 state governments follow in the next three years 2005 2007 interim regulator oversees system but pension legislation stalled in Parliament 2008 Government moves ahead with implementation by contracting a centralized recordkeeping agency (CRA) and three pension fund managers (PFMs) 17
Key features Parameters DC scheme with 20% contribution split between employer and employee (minimum 100 rupees for informal sector workers) Mandated annuitization of at least 40 per cent of balance at retirement Retirement/withdrawal at age 60 Survivor and disability benefits still unclear; default to old scheme Institutional architecture and design Centralized recordkeeper (concession based on competitive bid) Asset management contracted out to PFMs by competitive bid Limited portfolio choice with emphasis on index funds for equities (default portfolio not yet determined) Annuitization to be contracted out 18
Replacement rate for CS replacement rate 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1% 2% 3% 4% 5% 6% 7% 8% Real gross return 19
Full NPS Architecture Central Government State Governments Excluded Trusts Small Private Firms PFRDA PFM 1 PFM 2 PFM 3 I N D I V I D U A L S Banks Post Offices MFIs Others CRA Annuity Provider 1 Annuity Provider 2 Annuity Provider 3
Current status The interim regulator (PFRDA) signed a contract with a central recordkeeping authority for a ten year period based on a competitive bidding process; systems still not in place for individual accounts administration with most problems The PFRDA contracted three PFMs at 3-5 basis points of AUM Around 1 million civil servants have accounts but there are gaps in compliance in some departments of central government Funds set aside at central government level but some states have not done so and face contribution arrears Portfolio choice has not been offered as of yet recordkeeping system not ready It was opened to informal sector workers in May 2009 but takeup has been trivial In April 2010, a matching contribution was included in the budget 21
Concluding remarks Except for Sri Lanka, these are young countries that can avoid the mistakes of older, richer countries There are two major policy issues in South Asia Controling costs of civil service pensions Expanding pension coverage The most important initiatives in civil service pensions replace unfunded DB schemes with DC schemes as in India and Maldives Coverage is being addressed by expanding social pensions in Bangladesh, India, Maldives, and Nepal Coverage expansion is also being attempted through voluntary matching DC schemes in India 22