Delivering Social Protec0on Effec0vely
and Sustainably
Hotel Grand Hya-, Nusa Dua - Bali 10-11 December 2015
Presented by:
Mukul G. Asher
Presentation Outline
1. Focus on Household Welfare and the Bundle of
Services to the Elderly
2. Specific Pension Scheme and Pension System:
Key FuncKons and Requirements
3. AdministraKve Cost RaKos and Investment
Returns of Select Public Pension Funds in Southeast Asia.
4. GeneraKng Fiscal Space
5. Concluding Remarks
Market
Ac0vi0es(including
household Produc0on) (income earning)
The aim is to enable purchases of bundle of goods, services and assets on a life-cycle basis
Non- Market Ac0vi0es: These involve healthy and produc0ve lifestyle
management to reduce expenditure needs at different phases of life, including re0rement.
In re0rement, it involves provisioning of tangible & intangible services for which market and public sector provisions are very imperfect subs0tutes
Figure 1
3
Bundle of Services and not Monetary
Payments
“Given the deficiencies of storing current producKon, the
only way forward is through claims on future producKon.
What ma-ers, therefore, is the level of output aXer I have reKred. The point is central: pensioners are not interested in money (i.e. coloured bits of paper with portraits of naKonal heroes on them) but in
consumpKon – food, heaKng, medical services, seats at concerts, etc. Money is irrelevant unless the producKon is there for pensioners to buy.”
Funding vs Financing and Central Role
of Economic Growth/1
• The quote from Barr (2002) brings out the
central role of sustaining broad-based, high
economic growth to provide economic security for both the young and the old.
• It also makes the important difference between
funding and finance:
• Funding concerns allocaKng the share of GDP for
pension needs of the elderly populaKon
• Financing concerns the methods which funding can be
Funding vs Financing and Central Role
of Economic Growth/2
• A financing mix can be classified in several ways:
• Budgetary support • Mandatory savings • Voluntary savings
• Family and community support
• Drawing down of accumulated physical and financial
assets, including the conversion of housing equity into a reKrement income stream.
Funding vs Financing and Central Role
of Economic Growth/3
• Another way of classifying the financing mix is by
the method used, such as:
• Social insurance, usually PAYG arrangements whereby
contribuKons from the young and investment income finance the pension benefits of the current elderly.
• A Defined ContribuKon (DC), a Defined Benefit (DB), or
a hybrid of the two.
Funding vs Financing and Central Role
of Economic Growth/4
• A DC scheme defines the contribuKons to be made,
but the benefits to be realized undefined, and are therefore uncertain;
• A DB scheme defines the benefit levels but leaves
the contribuKons and other receipts needed to pay for the promised benefits as undefined.
• The fundamental disKncKon is not whether to use a
DB or DC, but whether a pension scheme (or, more accurately as a whole, a pension system) addresses
Funding vs Financing and Central Role
of Economic Growth/5
• Longevity risk is where the accumulated resources
of the pension beneficiary are exhausted before the beneficiary dies.
• Increased longevity and uncertainty of longevity
trends from potenKal technological innovaKons in healthcare makes society, as a whole, be-er able to bear this risk than individuals and families.
• A parKcular pension scheme may not address
longevity risk but the pension system, comprising of various pension schemes, should address it as a
Funding vs Financing and Central Role
of Economic Growth/6
• InflaKon risk concerns the real value of the flow
of pension benefits over Kme.
• As the inflaKon rate is posiKve, a pension benefit
in fixed nominal amounts will imply reducKons in the real benefit by the rate of inflaKon.
• Addressing this risk can be costly and must be
carefully based on long term, good quality actuarial projecKons.
Funding vs Financing and Central Role
of Economic Growth/7
• In some countries, there is over provision for a
small group of workers, such as civil servants, as pension benefits are adjusted both for prices and wage increases, creaKng fairness issues between this small group and the rest of the populaKon.
• For the large populaKon of the elderly, the
inflaKon risk, however, remains significant.
Funding vs Financing and Central Role
of Economic Growth/8
• Survivor’s benefit risks: this concerns the benefits
arrangements when the pensioner leaves behind dependent family members
• This is an issue of importance for countries at all
income levels.
• This is of parKcular importance to low and middle
countries in Developing Asia where female labor force parKcipaKon rates remain low. However, with convergence to global pa-erns of women
living 3 to 7 years longer than men, a longer period
Funding vs Financing and Central Role
of Economic Growth/9
• The labor market characterisKcs in many low
income and developing countries in developing Asia exhibit a high degree of informality in
livelihood generaKon pa-erns.
• This increases in significance of just 20% to 40% of
the labor force being in the formal sector (where employee-employer benefits are idenKfiable) and accentuates the need to address survivor’s benefit risk as well as to incorporate a budget-supported
Funding vs Financing and Central Role
of Economic Growth/10
• The budget social pension arrangements, however,
require fiscal affordability and organizaKonal ability to minimize both exclusion (Type I) and
inclusion (Type II) errors in the provision of social pensions.
• Exclusion errors occur when those who qualify for
receiving benefits under the criteria are not a part of the benefit recipient.
• The inclusion error occurs when those who do not
qualify for benefits under the criteria are, nevertheless, in receipt of them
Funding vs Financing and Central Role
of Economic Growth/11
• Minimizing these errors are essenKal for both fiscal
viability and fairness.
• Lack of capacity to minimize these errors by the
public pension organizaKon is not a raKonale for universal pension schemes, as some erroneously argue.
• In some countries, provision of such support to the
elderly women also has posiKve benefits in terms of their social status.
• However, when addressing these risks, the
individual, business, and societal affordability and
Funding vs Financing and Central Role
of Economic Growth/12
• The trade-offs among the adequacy of pension
system, the robustness of the pension system to withstand macroeconomic and other shocks,
financial fiscal and economic sustainability, and improving percepKons of fairness are inevitable.
• The country and pension scheme context-specific
tradeoffs are essenKal; no single ‘internaKonal best pracKces’ can therefore be applied in a mechanical manner.
Presentation Outline
1. Focus on Household Welfare and the Bundle of
Services to the Elderly
2. Specific Pension Scheme and Pension System:
Key Func0ons and Requirements
3. AdministraKve Cost RaKos and Investment
Returns of Select Public Pension Funds in Southeast Asia.
4. GeneraKng Fiscal Space
5. Concluding Remarks
Differentiating between SpeciQic Pension
Scheme and Pension System/1
In a specific pension scheme:
• EssenKal to recognize that it is the pension
organizaKons who deliver pension services;
• Focus should be on improving the organizaKonal
performance in undertaking core funcKons of any pension scheme
Differentiating between SpeciQic Pension
Scheme and Pension System/2
• Core FuncKons of a Pension OrganizaKon:
• reliable collecKon of contribuKons/taxes and other
receipts
• payment of benefits in a correct manner
• efficient financial management and producKve investment
of assets
• maintenance of an effecKve communicaKon network
among stakeholders
• the producKon of financial statements and reports which
are Kmely and relevant for advancing good quality public policy debates on pension arrangements
Ross (2011)
Differentiating between SpeciQic Pension
Scheme and Pension System/3
• Implicit in these funcKons is for the pension
organizaKons to be governed in a manner which sustains credibility of pension promises, and
fosters trust by the pension scheme members and by the general public in those responsible for
managing the organizaKon.
• Without improvements in trust in the pension
organizaKons, essenKal reforms which require public consent are delayed, or not undertaken effecKvely as appears to be the case in some
Differentiating between SpeciQic Pension
Scheme and Pension System/4
• Trust must be earned by the authoriKes through
transparency and accountability, and not demanded.
• An important lesson for improving household
welfare through pension systems is, therefore, to focus on improving organizaKonal effecKveness.
• This is an area that has not received sufficient
a-enKon of researchers, policymakers and by the pension bureaucracy.
Differentiating between SpeciQic Pension
Scheme and Pension System/5
• Pension System comprises of a variety of pension
schemes. Each scheme need not provide the
desired level of benefits. It is the combined system that is relevant.
• This aspect is given insufficient recogniKon in
designing pension schemes, parKcularly in the civil service and formal sector pension schemes.
• As noted, a pension system, as a whole, needs to
meet adequacy, affordability, robustness, and
Differentiating between SpeciQic Pension
Scheme and Pension System/6
• The system will use a variety of funding and
financing mix methods for different components.
• What ma-ers is the net result in addressing
longevity, inflaKon and survivor’s benefits risk, while sustaining high broad-based economic growth and fairness in pension system
arrangements.
Differentiating between SpeciQic Pension
Scheme and Pension System/7
• A framework which may be useful for assessing the
pension system is provided in Figure 2
24
Figure 2
Differentiating between SpeciQic Pension
Scheme and Pension System/8
• As pension systems provide pension services, it
may be useful to examine two performance
criteria of select public pension organizaKons in Southeast Asia:
1. AdministraKve cost raKos;
2. Real rates of return.
Differentiating between SpeciQic Pension
Scheme and Pension System/9
• When social protecKon reforms involve transiKng from one type of
arrangement for e.g. from public management of investment funds to private management as announced in November 2015 by
Kazakhstan or as in the case of Indonesia shiXing to social insurance philosophy, transiKon issues need to be carefully planned.
• In some countries such as India when civil service pension
arrangements were changed from DB to DC type in 2004, only those joining aXer 2004 were shiXed to a DC type due to the recogniKon that India’s fiscal posiKon was less than robust to accommodate accrued pension liabiliKes of all civil service personnel.
• The transiKon issues are also quite important in terms of
organizaKon effecKveness as new skill sets will be needed when significant pension reforms are implemented.
Presentation Outline
1. Focus on Household Welfare and the Bundle of
Services to the Elderly
2. Specific Pension Scheme and Pension System:
Key FuncKons and Requirements
3. Administra0ve Cost Ra0os and Investment
Returns of Select Public Pension Funds in Southeast Asia.
4. Concluding Remarks
Administrative Cost Ratios of Select Public
Pension Organizations in Southeast Asia
EPF
AdministraKve costs as
a share of assets 0.18 1.99 0.08 0.49
AdministraKve costs as a share of gross
contribuKons 2.05 7.42 0.88 4.73
AdministraKve costs as
a share to gross income 3.00 22.21 2.39 12.48 ContribuKons as a share
of GDP 5.17 0.67 7.16 1.19
Net contribuKons as a
share of GDP 2.11 0.08 2.72 0.60
Assets as a share of
GDP 58.44 2.51 71.29 11.47 28
Table 1
Average Real Rates of Return Credited to
Members of Select Public Pension Funds (%)
0
Figure 2: EsKmated from various sources
Note that returns are sensiKve to the Kme period chosen.
Investment Policies and Performance
Challenges/1
• The current global regime of near-zero or, in
some cases negaKve, real rates of returns on
financial assets is posing parKcular challenges to investment policies and performance of pension funds.
• The challenges are illustrated by the current
tendency of even large corporaKons who can be presumed to be sophisKcated investors to keep a large porKon of their excess cash holdings into low yielding bank deposits.
• Gillian Te- (2015) terms these as ‘Zombie funds’.
Investment Policies and Performance
Challenges/2
• In Southeast Asia, Malaysia and Thailand have been
parKcularly aggressive in invesKng overseas markets. These may presumably provide higher returns, but they also pose higher risks.
• The capacity to manage global porsolios by public
pension organizaKons, and the fiscal capacity to bear conKngent liabiliKes that arise from such investment strategies need to be be-er incorporated into the overall investment policy assessments.
• Premature global diversificaKon may therefore pose
significant risks to the credibility of pension promises and to fiscal sustainability.
Presentation Outline
1. Focus on Household Welfare and the Bundle of
Services to the Elderly
2. Specific Pension Scheme and Pension System:
Key FuncKons and Requirements
3. AdministraKve Cost RaKos and Investment
Returns of Select Public Pension Funds in Southeast Asia.
4. Genera0ng Fiscal Space
5. Concluding Remarks
A Framework for Generating Fiscal Space
Genera0ng Fiscal Space
Enhancing Rate of Growth
and broadening its base Improving Revenue performance
BeYer Expenditure
Management to obtain value for money
Use growth Drivers, including knowledge genera0on, applica0on& diffusion more competently, & technology adapta0on
Use Demographic Trends For growth
Improve overall Produc0vity Trends
Conven0onal Sources Non-Conven0onal Sources
Reform Procurement Prac0ces including in manpower
Reforming subsidies and tax expenditure with emphasis on efficiency societal outcome rather than spending. Broaden tax base, Use sunset clause
Reform Public enterprises obtain beYer u0liza0on resources interested to them Tax Reforms to broaden base,
Improve compliance, reduce administra0ve compliance costs, preserve tax base and minimize tax-base shi]ing. Technology enabled instruments, e.g. new IT tool to check PAN transac0ons history; re-nego0a0ng double taxa0on treaty with
Mauri0us etc. taxa0on treaty with
Use government assets(e-g-land mining assets) more
produc0vely using post offices for telecom towards is a good example
Appropriate for set policies cost recovery and user charges Address willingness to charge issues
Reform and use Capital Markets, e-g for state and municipal bonds, mone0zing housing, gold & other such assets
BeYer use of Regulatory charges and levies
Improve Policy coherence and organiza0onal Co-ordina0on to make real resource saving in transac0on costs.
BeYer Align exis0ng expenditure alloca0on with society’s long-term priori0es Complementary reforms in
such sectors as labour markets, regulatory regimes Improve Debt management including managing difference between ”sustainable” ,actual debt levels
Financial Transac0on Tax (FTT)
RemiYances from abroad
Source: Constructed by Asher December, 2015 (revised) Use Public Sector current and
capital expenditure to crowd-in Private sector domes0c and foreign investment
State Electricity Board Reforms Improve treasury Management
Regulatory levies and seang procedure to channel surplus(in agreed manner) of regulatory agencies with the
Presentation Outline
1. Focus on Household Welfare and the Bundle of
Services to the Elderly
2. Specific Pension Scheme and Pension System:
Key FuncKons and Requirements
3. AdministraKve Cost RaKos and Investment
Returns of Select Public Pension Funds in Southeast Asia.
4. GeneraKng Fiscal Space
5. Concluding Remarks
Concluding Remarks/1
• There are four broad shiXs in thinking about public
pension funds which may be suggested:
1. Focus on both market and non-market components of household welfare to provide a bundle of goods and
services needed in reKrement rather than just monetary benefits.
2. There an urgent need to shiX the focus of public pension organizaKons and other stakeholders such as the
so-termed ‘civil society groups’ from welfare-orientaKon to professionalism in pension design and performance of
Concluding Remarks/2
3. There is a need to analyze public pension arrangements from a systemic perspecKve to manage longevity,
inflaKon and survivor’s benefit risks, rather than adopKng an ad hoc scheme-based approach.
4. The importance of innovaKon and design of pension products and services (an area not explored in this talk) needs greater recogniKon. There are several interesKng experiments along these lines including micro-pension design and delivery in an environment providing long-term reKrement saving security and confidence.
• A regional or sub-regional forum discussing these
and other pension issues and developments merits
Selected References
Asher, MG & AS Bali (2015), “Public Pension Programs in Southeast Asia: An Assessment,” Asian Economic Policy Review, 10; pp.225-245.
Barr, N (2002), “Reforming Pensions: Myths, Truths, and Policy Choices,” Interna7onal Social Security Review, 55; pp.3-36. Te-, G (2015), “The Economy is Infested with Zombie Corporate
Cash,” Financial Times, 14 August 2015.
