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THE WORK OF THE PENSION REFORM & ADMINISTRATION COMMISSION Marius St Rose - Chairman Albert Matthew - Member Richard Peterkin - Member Jasper Scotland - Member Outline Of Presentation • • • • • • • • • • Mandate & Terms of Reference Commission’s Interpretation of the Objectives Why the Imperative for Pension Reform? Outline of an Ideal National/Regional Arrangement Current Arrangements for Pension & Social Assistance Limitations & Weaknesses of Existing Arrangements Essential Areas for Reform Challenges for any Meaningful Reform Effort How the Commission Has Organized its Work Conclusions 1.0 Mandate & Terms of Reference • Source of Mandate – Monetary Council of the Eastern Caribbean Currency Union – Eastern Caribbean Central Bank • Geographical Scope – Anguilla, Antigua & Barbuda, Dominica, Grenada, Montserrat, Saint Lucia, St. Kitts/Nevis, St. Vincent & The Grenadines. • Subject Scope – Framework & Administration of Public & Private Pension Arrangements and Social Assistance. 1.0 Mandate & Terms of Reference (Contd.) • Terms of Reference – Direct the Research Staff in its research activities on the issue of Pension Reform – Review the economic and financial context of pension reform – Review the existing Government Pension System – Review the degree to which there is integration or coordination with national social security systems – Review the pension arrangements in the private sector and in statutory bodies – Identify best practices 1.0 Mandate & Terms of Reference (Contd.) • Identify governance, administrative and legal gaps • Establish benchmarks and indicators • Make recommendations for improving and harmonizing the administration of private and statutory pension plans 1.0 Mandate & Terms of Reference (Contd.) • Technical Support – ECCB Staff from the Departments of Research and Statistics – Consultants for analytical work and data gathering – Existing Literature • Financial Support – ECCB – Willing Donors and International Financial Institutions 2.0 Commission’s Interpretation of the Objectives • Poverty alleviation with a focus on retirees (but not restricted to that group) through the mechanism of consumption smoothing and the optimization of returns on investment. • Increasing the mobilization of long term savings and channeling it optimally to the most feasible and appropriate investments that maximize social and financial returns. • Managing the resources to maximize the sustainable returns to beneficiaries through such means as: 2.0 Commission’s Interpretation of Objectives (Contd.) – Gaining economies of scale in: • Increasing the critical mass of resources and beneficiaries under management; • Improved governance from regional arrangements and/or more effective functional cooperation. • Broadening and deepening the sub-regional capital market to the extent that these do not compromise the integrity, sustainability and optimization of returns to the Funds under management. • Managing the schemes so that that they can be seen as another beacon and demonstration of the benefits of: – Good governance – Regional arrangements and functional cooperation 3.0 Why the Imperative for Pension Reform? • Poverty Alleviation – One of the highest priorities of the international community and of democracies. – Unemployment which is a major causal factor in poverty is a waste of the human resources which is any society/economies most valuable resource. – Poverty particularly in economies with income inequality is a sad reflection of an uncaring society that does not care for those less able particularly where those elderly who have contributed to the development of the society and economy. 3.0 Why the Imperative for Pension Reform? (Contd.) – The incidence of poverty is increasing because of: • Increasing life expectancy • Increasing unemployment • Increasing dependency ratio (leading to disincentive to work &/or migration) arising from: – – – – Increasing longevity Increasing unemployment Reducing infant mortality More time required to acquire education and skills • Increasing rural to urban drift • Increasing self- and subsistence employment 3.0 Why the Imperative for Pension Reform? (Contd.) – Poverty, particularly in a society with a skewed distribution of income, is highly correlated with crime which, itself: • Is a disincentive to economic activity • Has its own high production input cost for amelioration and containment • Is deleterious to harmonious community living. 3.0 Why the Imperative for Pension Reform (Contd.) • Resource Mobilization & Investment Optimization – Growth requires efficient investment which can only be financed from somebody’s savings (denial of present consumption) – Investment can be financed from domestic savings, use of the savings of foreigners through loans, investments and grants/remittances. – Use of foreign savings to finance investment contributes to growth but has the following consequences: 3.0 Why the Imperative for Pension Reform? (Contd.) – Increases the gap between GDP and GNP and could result in per capita GNP being significantly lower than per capita GDP. – Increases the level of our external debt and the attendant debt service which contributes to a reduction of the economy’s creditworthiness – Increases the outflow of foreign exchange through profit repatriation – Reduces the domestic control over the growth and direction of our economy. 3.0 Why the Imperative for Pension Reform (Contd.) • Good Governance and Management Efficiency – Society’s long term savings should be treated with (and even more than) the same sort of respect and sanctity as the treatment of the national currency. – The benefits to pension funds under management is very sensitive to the plan design, the level of returns and the cost of administration. This is more so in the long term. At a base of 5% every one per cent change in cost and/or in returns could lead to a difference in benefits of 11.1%, 19.1% and 28.1% over 20, 30 and 40 years respectively. Similarly from a base of 8% a one per cent change would result in the following changes in benefits over the corresponding timeframes:11.8%,20.3% and 30.4% 3.0 Why the Imperative for Pension Reform? (Contd.) – Absence of scale economies can lead to higher per capita administrative costs and lower average returns – Without appropriate strategies there is higher risk and more limited choices in investing in small risk prone economies. – Small societies can cause constraints and compromise to effective and objective governance – The comparatively small scale of national projects in small economies could lead to lower returns than that which could be obtained from projects in larger counterparts. 3.0 Why the Imperative for Pension Reform? (Contd.) • Financial intermediation & Capital Market Development – Sub-region has high ratio of financial assets to GDP – similar to much more developed economies – Unfortunately, most of the assets are held with commercial banks which have their short term maturity transformation focus on consumption and working capital financing. – Financial sector has breadth in terms of the number of comparatively small institutions particularly commercial banks, insurance companies and credit unions but little depth in terms of institutions that provide long term, venture and other capital that could develop productive activity. – Not surprisingly in one of the economies savings is estimated at 22% of GDP, with heavy foreign investment, high external debt service and yet an investment ratio of only 20% of GDP! 3.0 Why the Imperative for Pension reform (Contd.) – Small size of operations lead to: • high cost of operations through wide margins that make consumption and working capital financing particularly in distribution much more lucrative than long term productive sector investment. • Limited scope for innovative financing for productive sector green-field (start- up) ,operations or even brown-field (expansion) operations. 4.0 Outline of An Ideal National Social Assistance Arrangement • An ideal national social assistance arrangement should have the following inter-related, coordinated and mutually reinforcing pillars: – Social assistance to the indigent including the elderly – Social Security – Occupational Pension Plans • State Pension Schemes • Private Occupational Plans – Supplementary Personal Savings • Private Savings • Reverse Mortgages • The structure should encompass all. 4.0 Outline of An Ideal National Social Assistance Arrangement (Contd.) • Each pillar must have the following seven internal inherent attributes: – Adequacy, of objectives and of provisions to meet these objectives – Affordability, to the beneficiaries of the scheme’s provisions and costs – Sustainability, of the scheme to meet its provisions and promises to all its beneficiaries and stakeholders – Robustness, to withstand the inherent vulnerabilities and associated possible fluctuations that 5the scheme would inevitably face given its almost indefinite life 4.0 Outline of An Ideal Social Assistance Arrangement (Contd.) – Equity and Fairness, such that the schemes benefits are transparently based on member’s relative contributions to the schemes and subject only to natural randomness. It should not be used as a policy instrument for social and political engineering; and – Predictability, to deliver on the promises, whatever their longevity, without surprises bearing in mind that the arrangement is a long lifetime one. 4.0 Outline of an Ideal National/Regional Arrangement (Contd.) • Social Assistance – Eligible to all whose income falls below a given threshold tied to indigence and poverty – Level of assistance brings that existing income to the minimum prescribed level – Recipient must be willing to accept gainful employment &/or be prepared to receive skills training – Assistance granted can be recovered from existing or future assets above a certain level but within a statute of limitation period. 4.0 Outline of an Ideal National/Regional Arrangement (Contd.) – Non-contributory but financed by: • Appropriations from central government finances • Social Security levy of say 1.5% of income on all factors of production – Managed by Social Security or a dedicated government department such as Social or Human Services or Social Transformation. 4.0 An Outline of an Ideal National/Regional Arrangement (Contd.) • Social Security – Features • Compulsory participation and contributions from all workers including the self employed and from first employment. • Eligibility for assistance would be from retirement age or from permanent incapacity. • It would be a defined contribution scheme with contributions between employer and employee in a 50:50 ratio of a predetermined salary level tied to a multiple of per capita income. • Level of assistance begins from the floor of what is provided from social assistance and is supplemented by Social Security based on an annuity derived from the value of accumulated direct contributions on the individuals behalf in the Social Security Fund 4.0 Outline of an Ideal National/Regional Arrangement (Contd.) – Social Security Features • Retirement period commences ten years before the life expectancy for the country and adjusted every ten years. • Portable within countries particularly among Caricom and the OECS. 4.0 Outline of an Ideal national/Regional Arrangement (Contd.) – Social Security Governance • Independently professional, objective and competent: – Board of Directors/Trustees appointed for a fixed term by Government and including persons nominated by government and opposition taking care to ensure continuity. – Management team (CEO, COO, FC, Auditor) appointed by the Board of Directors with Parliamentary approval. • • • • Regional regulatory arrangements Independent external Auditors Independent triennial actuarial review Annual reports to parliament and public and individual reports to each contributor/member • Benchmarks, indicators and performance targets based on comparable best practice performances. 4.0 Outline of an Ideal National/Regional Arrangement (Contd.) • Occupational Pension Plans: State or Private – Features • Voluntary but with heavy encouragement for all workers and employers to participate. • Supplementary to what is available under Social Security and should with Social Security endeavour to cover 85% of final year’s income in first five years of retirement and 75% thereafter. • Can be provided by employer or could be purchased from regulated fund management providers • Defined contribution arrangement in fixed proportions with at least equal contributions from employer and employee with employer having the option to take a greater share. • have limited inflation adjustment, provide guaranteed pensions, and with independent provisions for dependents 4.0 Outline of an Ideal National/Regional Arrangement (Contd.) • Occupational Pension Plan Features – Benefit would be an annuity that can be purchased from value of the individual’s accumulated benefits in the Fund – Portable between employees &/or countries. – Defined Contribution preferred over Defined Benefit Plan because: » Potential heavy burden on employers to maintain obligations and hence affecting economic competitiveness of businesses particularly small ones » Of the unpredictability of burdens because of current accounting standards – Retirement and Incapacitation eligibility would be harmonized with Social Security. 4.0 Outline of an Ideal National/Regional Arrangement (Contd.) – Occupational Plan Governance • Strong Regulatory Framework of laws, regulations and institutional arrangements to guide, monitor, ensure compliance with appropriate punitive measures if necessary to help schemes maintain their solvency and credibility and optimize their benefits to their members. – – – – – – Reputable and Knowledgeable Board of Trustees Professional Management Team Independent Auditors and Actuaries Overall Regulatory Authority Annual Reports to the Public at large Comparative Analysis of Annual Reports against indicators, benchmarks and targets. – Individual annual reports to scheme participants. – Annual Meetings and provisions for special meetings. • 5.0 Current Arrangements for Pension & Social Assistance Social Social Assistance Security State Pension Private Pensions Reverse Mortgages Other ANG Limited Fairly Adequate Being Removed Limited None Limited ANU Limited Fairly Adequate Limited None Limited DOM Limited Fairly Adequate Considering Limited Removal None Limited GND Limited Fairly Adequate Limited None Limited MNI Limited Fairly Adequate Limited None Limited SLU Limited Fairly Adequate Recent Removal Limited None Limited SKI Limited Fairly Adequate Fairly Generous Limited None Limited SVI Limited Fairly Limited None Limited 6.0 Limitations & Weaknesses of Existing Arrangements • Social Assistance – Resource appropriations are far below needs. • Resources are hardly sufficient to satisfy the needs of the indigent 6.0 Weaknesses & Limitations of Existing Arrangements (Contd.) • Social Security – Poor Scheme Design • Defined Benefit arrangements • Benefits outweigh contributions & earnings – Weak Governance • • • • Limited professional skills at board & management levels Limited independence & autonomy Coverage is limited particularly among the self-employed Weak enforcement of provisions – Sub-optimal use of long term savings – Not integrated with such supplementary schemes as state & private pension plans 6.0 Weaknesses & Limitations of Existing Arrangements (Contd.) • State Pension Schemes – Many are being considered for elimination – Non-contributory and unfunded thus increasing the burden on the current fiscal – Gives employees false sense of security of the adequacy of resources available to them at retirement. – Very limited inflation adjustment – Not integrated with the main plank of Social Security and hence limited benefits to participants – Not a model for private occupational plans – Limited portability provisions. – Inequity between tenured and contractual staff in terms of retirement benefits. 6.0 Weaknesses & Limitations of Existing Arrangements (Contd.) • Private Occupational Pension Plans – Very limited coverage amongst private sector employees • Prevalent only among large statutory bodies and the few private companies that employ more than 100 employees. – Defined Benefit Arrangements • Fixed contributions from employees and heavy residual burden on employer • Benefits vary widely between plans and sometimes within the same company. – Limited portability and unfair vesting provisions. – Weak plan governance compounded by lax supervisory and regulatory arrangements • Plan management is largely outside the ECCU area • Limited information to and interest by beneficiaries 6.0 Weaknesses & Limitations of Existing Arrangements (Contd.) • Reverse Mortgages & Other – Absence of reverse mortgages in a society/economy where much of household savings go into home ownership and where retirement resources are very limited. – Avenues for long term investing are • limited &/or • avoided by savers • Preferred avenues and instruments do not offer opportunities for generous net returns except in real estate. 7.0 Essential Areas for Reform • Scheme Design to better align benefits with contributions and earnings to ensure scheme sustainability & predictability – – – – Defined Benefits to Defined Contribution Improving benefits package Greater and more proportionate contribution from beneficiaries Improving equity and transparency • Broadening Coverage and Participation – Stricter sanctions, enforcement for greater compliance – Ensuring that unemployment is minimized through training and special employment programmes to increase the proportion of dependents and their contributions to the programmes. 7.0 Essential Areas for Reform (Contd.) • Strategies to make much better use of the long term resources mobilized to: – Impact more meaningfully on economic development – Deepen and broaden the financial infrastructure – Optimize returns to fund beneficiaries • Enhancing operational efficiencies through – Mergers &/or functional cooperation – Operational and organizational system design improvements – Stronger internal governance • Qualified management and committed board • Greater independence and autonomy • Integration and streamlining of Social Assistance, Social Security and other Pension provisions and benefits. 7.0 Essential Areas for Reform (Contd.) • Periodical adjustment of statutory retirement age with national life expectancy. • Institutionalization of Reverse Mortgage but including strong systems, regulatory arrangements and effective sanctions to ensure compliance to protect the financial institution and the home owner. 8.0 Challenges Facing Any Meaningful Reform Effort • Capacity and Willingness to Save affected by: – High propensity to consume – High poverty levels – Limited concern for future needs • Governments weak fiscal and high debt levels restricts governments ability to contribute much more to social assistance and pensions • The quality and sustainability of national economic management as pension arrangements have value only if deferred consumption can be satisfied at retirement. • The level of development of the real economy and the financial systems to give productive opportunities and reasonable returns on long term savings. 8.0 Challenges Facing Any Meaningful Reform Effort (Contd.) • Governments’ willingness to give more autonomy to: – Professional management – Regional management arrangements 9.0 Operational Work Programme • Background Reading – Pension and Social Assistance theory and comparative regional and international practice by • IFI’s e.g World Bank, IMF, CDB, IDB • Dedicated specialist research institutions e.g.International Centre for Pension Reform • Academic Journals e.g Journal of Economic Perspectives • Data Gathering/Mining – Data and legal information already available in the ECCB e.g economic and census reports – Requests for data and other relevant legal information from national contact points e.g Social Security – Consultancy research assistance to gather other economic, private pension, demographic and social data. 9.0 Operational Work Programme (Contd.) • Public Consultations – Meetings with institutions involved with pensions and social assistance – Country town hall meetings with the interested public – Web page on the ECCB website to • provide relevant information • sensitize the public on the imperatives and issues surrounding pension reform • Solicit views and reactions – Media presentations particularly national radio and TV talk shows. 9.0 Operational Work Programme (Contd.) • Analysis – Discussion among Commissioners and ECCB Staff on data obtained, research findings. – Participation at CARTAC sponsored conference on Pension Reform – Consultancy by a regional firm of actuaries funded by CDB to do analysis and research particularly on • Private pension plans in the sub-region • Formulating regional arrangements for the harmonization of national pension schemes to – – – – Improve governance and managerial autonomy Diversify risks Minimize administrative costs Optimize financial and economic returns on investments 9.0 Operational Work Programme (Contd.) • Report Writing – Inception Report – Interim Report – Final Report 10. Conclusion Thank You Questions and Comments Marius St Rose [email protected]