Download Pension systems and financial crisis

Pension Systems and Financial Crisis:
An Overview
Regional (ECA) Workshop
Pension Systems in Times of Financial Crisis
Brussels, May 7, 2009
Robert Holzmann
World Bank
Outline
I.
II.
III.
IV.
V.
Nature of Crisis and Implications
for Pension Systems
Pre-crisis Situation of Reformed
Pension Systems
Policy Actions with the Onset of
the Crisis: Legislated and
proposed
Assessment of Crisis Shock and
Policy Actions on Fiscal, Financial
and Social Outcomes
Directions for Policy Actions
I. Nature of Crisis and
Implications for Pension Systems

Financial turned economic crisis
• pressure on pension systems world-wide
• low or negative GDP growth linked with
falling employment, wages, and asset
prices

Both unfunded and funded systems
are adversely affected but timing and
magnitude of impacts quite different
Crisis impact on pension schemes

PAYG (first pillar)
• Fiscal pressure primarily via lower revenue
due to lower wages and employment
• Expenditure same or increase via more
beneficiaries (early retirement; disability)
• If benefit levels unaffected, bound to lead
to deterioration of fiscal balance of scheme
• Happens at a time of lower general gov.
revenues and increased demand elsewhere
(unemployment benefits; social assistance)
• Transition deficit (2nd pillar) accentuated
Crisis impact on pension schemes

PAYG (first pillar)
• Recent discretionary benefit increases to
catch-up with strong wage-increase
• Recent benefit reforms to compensate
transition generations

Funded (second pillar)
• Direct impact on asset and benefit level,
but limited in effect as few retiring
• Fiscal impact if budget provides
compensation for affected individuals
II. Pre-crisis Situation of
Reformed Pension Systems

Most ECA countries have undertaken
some pension reform with transition
• 13 countries introduced 2nd pillar; some
legislated but have not yet introduced
• Most others did parametric reforms to
address fiscal, incentive and social issues
• All introduced some form of voluntary
savings schemes, with diff. in regulation
• Many countries introduced/strengthened
social assistance and/or social pensions
Pre-crisis situation



Despite reform efforts, only a few
countries have been successful in
achieving both long-term financial
sustainability and long-term benefit
adequacy in the pre-crisis state
Situation aggravated by advanced and
projected further demographic aging
Stark trade-off between financial
sustainability and benefit adequacy is
result of low effective retirement age
Post-Reform Pension System Fiscal Balances as a Percent of GDP
BULGARIA
CROATIA
20
15
15
Expenditure
Expenditure
Expenditure
-10
20
20
15
15
15
-5
Deficit
-10
-5
2049
2044
2039
Revenue
2050
0
2050
2040
2030
2020
2010
0
5
2008
Percent of GDP
5
2000
Percent of GDP
0
Expenditure
10
Revenue
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Percent of GDP
Expenditure
10
Revenue
2029
ROMANIA
20
5
2024
Deficit
POLAND
Expenditure
2019
-5
-10
HUNGARY
10
2014
2009
2040
2035
2030
2025
2020
2015
Deficit
2040
-10
-5
0
2020
Deficit
Revenue
5
2010
-5
0
2040
2015
2010
2005
2000
0
5
2010
Revenue
Revenue
2005
5
10
Percent of GDP
10
Percent of GDP
10
2034
15
Percent of GDP
CZECH REPUBLIC
20
2030
20
-5
Deficit
Deficit
-10
-10
SERBIA
SLOVAKIA
SLOVENIA
20
20
20
15
15
15
Expenditure
Expenditure
-5
-5
5
Deficit
Deficit
-10
-10
2050
2040
2030
2020
-5
Deficit
-10
2010
0
2045
2035
2025
0
Revenue
2005
Revenue
Percent of GDP
5
2015
0
10
Expenditure
2005
5
Percent of GDP
10
Revenue
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Percent of GDP
10
Pre-crisis situation



Projected benefits of reformed systems
remain often generous (as measured by
gross and net replacement rate)
Projected replacement rates in multipillar schemes based on conservative
assumption of net interest rate-wage
growth differential of 1.5%
Performance of pension funds since
inception has in many cases not yet
lived-up to expectations
Chart
90 1: Gross Replacement Rates for Male Full Career Workers
High Benchmark
70
60
Bulgaria
Romania
Poland
Slovak Republic
Hungary
Slovenia
Croatia
Czech Republic
50
40
30
20
10
Middle Benchmark
Low Benchmark
Earnings as Multiple of Average Wage
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0
0.5
Replacement Rates (Percent)
80
Chart
120 2: Net Replacement Rates for Male Full Career Workers
Replacement Rate (Percent)
100
80
60
40
20
Low, Middle and High Benchmarks
0
0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0
Earnings as Multiple of Average Wage
Hungary
Romania
Bulgaria
Poland
Slovak Republic
Slovenia
Croatia
Czech Republic
ECA Ave
World Ave
Ave Poverty Line
Table 1: Rate of Return of Pension Funds since Inception till end 2007
(in real terms and as differential over GDP growth)
Year of Inception Real Rate of
Return
2002
Bulgaria
2002
Estonia
1998
Hungary
2001
Latvia
2004
Lithuania
1999
Poland
2005
Slovakia
Sources: World Bank staff using data from national sources
3.2
4.9
2.6
-3.5
5.7
8.9
0.9
RoR over GDP
growth
0.5
0.6
0.6
-0.3
0.7
2.2
0.1
II. Policy Actions with the Onset of the
Crisis: Legislated and proposed


As fiscal impact of crisis was felt quickly,
many countries initiated or proposed deficitreducing measures
Revenue increasing measures
• (Re-) increase in contribution rate
• Diversion of 2nd pillar contributions
• Delaying movement to second pillar

Expenditure reducing measures
• Changes in indexation
• Increase in retirement age
• Elimination of early retirement option
Table 2: Policy Actions In ECA Countries – Legislated and Considered
Policy Action
Legislated
Considered
Increase in
Overall Contribution Rate
-Romania: From 27.5% in 2008 to
31.3%.
- Russia: From 20% to 26%, and
moving contributions from basic
pension to NDC pension.
Adjustment to
Second Pillar Contribution Rate
-Romania: Contribution rates to the
second pillar frozen at 2% (instead of
legislated increase to 2.5%)
-Lithuania: Second pillar contribution
rates reduced from 5.5% to 3% 2009
and 2010, to go back to 5.5% in 2011.
-Latvia: Diverting part of
contributions from second to first
pillar.
-Estonia: Diverting 4% of 2nd
pillar contributions to 1st pillar
Allowing Opting
in/out of Second Pillar
- Slovak Republic: First option (Jan –
June 2008) and second option (Jan –
June 2009) to switch in/out of the
second pillar.
-Croatia: Allowing second pillar
participants (age between 40-50 ) to
switch back to the first pillar, with
the individual saving accounts
transferred to treasury in exchange
for the full first-pillar guaranteed
pension benefit.
,
Making Second Pillar
Voluntary to New Entrants
-Slovak Republic: Second pillar
participation for new participants
voluntary as of January 2008.
Changing Indexation/
Minimum &Basic Pension
-Serbia : Suspension of indexation for
2009 per GoS agreement with the IMF
Increase in
Retirement Age
Measures to Address
Early Retirement
-Latvia: Elimination of wage
indexing of contributory pensions.
-Hungary: Switch to Swiss or pure
inflation indexation depending on
the GDP growth.
-Ukraine: Increase in retirement
age to 62 for both men and women
-Hungary: Increase in retirement
age from 62 to 65 by 2016.
-Poland: Elimination of numerous
early retirement schemes (previously
available to some 1 million people) .
-Hungary: Increase in penalties for
early retirement and introduction of
bonuses for delayed retirement.
-Ukraine: Gradual elimination of
special and early pension regimes
IV. Assessment of Crisis Shock and
Policy Actions: Preview

Fiscal outcomes:
• Depends very much on assumptions on depth and length of
crisis/transitional reduction in wages and employment
• While fall in wages and employment will eventually translate
into lower future benefits and expenditure, transitional fiscal
gap can be large and are policy dependent

Financial sector outcomes:
• Crisis as well as policy reaction to the crisis have an effect on
the size and structure of the financial sector and its ability to
deliver expected rates of return for funded benefits

Social Outcomes
• Assessment of both replacement rate as well as benefit level
(compared to other groups) is important
• Short-term impact is largely determined by selected price
indexation (1st pillar) and changes in asset values (2nd pillar)
• Medium and long-term impact is more difficult to assess as
depending on real developments (wage and employment
growth path) as well as structure of pension benefit system
V. Directions for Policy Actions


Actions will need to be country specific and
useful to consider in a short and long term
framework, and by ranking the policy options
General recommendations for the short run:
• Avoid hasty actions that promise quick fixes for
the fiscal pressure but risk doing harm in the long
term to fiscal sustainability and/or benefit
adequacy
• Avoid irreversible decisions that are based on
incomplete information about the state of the
world

General recommendation for the long-run:
• Use the crisis as an opportunity to initiate or
complete reform to exit stronger from it