AFRICA SOCIAL PROTECTION POLICY BRIEFS Pensions KEY MESSAGES: OVERVIEW 74438 Managing income and The aim of a pension scheme is to ensure that recipients have a minimum expenditure risks in old age is level of income during their old age. Contributory pensions generally help to vital in Africa as populations maintain consumption in old age at a similar level as during the recipient’s are aging, economic volatility working life while non-contributory pensions (often called social pensions) is increasing, and traditional are usually aimed at preventing older people from falling into poverty. It is support systems are becoming increasingly clear that pensions can also mitigate the negative impact of shocks weaker. Formal pension on the elderly and their families and that they are used by older people to programs have so far been promote the wellbeing of all family members, particularly children. limited in their coverage, include few incentives for workers to Pensions in Africa participate, have encountered Coverage of Social Security Schemes administrative and governance Even though most in Sub-Saharan Africa difficulties, and in many cases African countries have Coverage of the Working Age Population are not financially sustainable. a relatively youthful 0% 5% 10% 15% 20% 25% 30% 35% Burkina Faso Some important reforms have demographic profile, Central Africa Rep. been carried out to address these traditional family-based Mozambique Nigeria issues in many countries. Looking support systems for older Guinea-Bissau forward, African countries will people are weakening in Gambia, The Chad need a comprehensive, multi- Africa. A World Bank study Burundi Tanzania pillar approach that will provide of formal contributory Lesotho the vast majority of the working pension programs in Rwanda Senegal age population with old age, a sample of 37 African Sudan Madagascar survivorship, and disability countries found that only Benin income protection. Mandatory a median of 4.8 percent Sierra Leone South Africa earnings-based contributory of those aged 15 to 19 Togo schemes should be redesigned actively contributed to Kenya Mali to promise less but to deliver a mandatory pension Niger Ghana more reliable protection. Also, scheme (see table). Botswana policymakers need to consider Most countries have Namibia Congo, Rep. the long-term fiscal affordability occupational schemes Uganda of current public service pension specifically for civil Zambia Guinea schemes. Non-contributory social servants. Median pension Cote d’Ivoire Mauritania pension programs for the elderly spending was about 0.9 Congo, Dem., Rep. poor can greatly reduce old percent of GDP in the Swaziland Cameroon age destitution if they are well- late 2000s, with large Zimbabwe targeted and fiscally affordable. variations between Cape Verde Mauritius countries depending on Source: World Bank (2012) the design, coverage, and target replacement rates of the schemes. Pension Botswana and Namibia, or by establishing independent spending is projected to rise as contributory schemes pension regulators, strengthening the regulatory mature, life expectancy after retirement increases, and authority, and improving oversight as in the case of system dependency rates increase. Kenya’s Retirement Benefits Authority. These formal pension schemes are often characterized ■ Extending pension schemes to the informal sector has by very limited coverage both of workers and older been achieved by allowing flexibility in terms of people, high administrative costs, unreliable services contributions and withdrawals, targeting those who are for beneficiaries, and the mismanagement of pension capable of making extra savings and providing them reserves. As a result, pensions systems administered by with incentives to do so, and using a broad range of governments in Africa have little credibility. service providers appropriate to the informal sector, as Non-contributory pension benefits are provided in eight exemplified by Ghana’s Informal Sector Fund. countries (Botswana, Mauritius, Namibia, Seychelles, ■ Social pensions can be resource-tested, pension-tested, South Africa, Lesotho, Swaziland, and Cape Verde), while or universal. There are tradeoffs between each of the there are pilot programs in four additional countries design options and considerable debate over which is (Uganda, Nigeria, Zambia, and Kenya). Social pension optimal. Benefit levels can be set based on the average levels in Africa range from 4 percent (Botswana) to poverty gap or relative to wages or income levels. 34 percent (Lesotho) of per capita GDP. This evolving experience with social pensions in Africa has had several important outcomes (see box to right). Impact of Social Pensions in South Africa Key Design Elements Social pensions have had a range of productive The experience of implementing pension schemes in effects. For example, in South Africa, the social Africa has yielded several key lessons: pension has had a positive effect on the health ■ Changes to pension regimes entail several reforms such as and nutritional status of other members of the the establishment of mandatory contributory schemes recipient’s household. Girls in these households for private sector workers as in Ethiopia and Malawi, the have significantly better weight-for-height consolidation of public service and mandatory private indicators than do girls in non-transfer households. sector schemes as in Cape Verde, and the replacement There is also evidence that, when an older South of defined benefit schemes with defined contribution African begins receiving a social pension, the or hybrid schemes as in Nigeria and Ghana. likelihood of the working age adults living in the same household being employed increases. This ■ Parametric reforms to civil service schemes have is because social pensions provide resources that improved equity and increased adequacy and enable these adults to migrate in search of work affordability as in Senegal and Zambia. These reforms, and to pay for care for the children who remain in that involve changes to the benefits formula, have the household. included automatic wage and/or price indexation, South Africa’s social pension has reduced the extending the wage reference period to lifetime wages poverty gap by 54 percent among households and indexing the reference wages, including non-wage that include older people, while the poverty gap allowances in the pensionable wage base, increasing the has almost disappeared among older people retirement age, and adjusting the accrual rate to reflect living alone. At the same time, the country’s the long-term cost of anticipated benefit promises. comprehensive system of cash transfers has ■ The management and supervision of pension reserves doubled the share of national income that the has been improved by outsourcing investment poorest 20 percent of the population receives. management to licensed investment managers, as in 2 AFRICA SOCIAL PROTECTION POLICY BRIEFS COUNTRY EXAMPLES OF PENSION PROGRAMS IN AFRICA South Africa’s Social Grants Program is the largest social pension program in Sub-Saharan Africa. It includes several types of means-tested grants targeted to the elderly, poor families with children, foster families, the disabled, and war veterans. The old age grant, which applies to poor people over 60 years of age, covers a little over 2 million people. The basic grant is currently about US$140 per month and is means-tested for individuals earning less than $5,800 annually or below a certain asset level. These old age grants have been proven to have a positive impact on human development and poverty reduction (see box above). Extending Pensions to the Informal Sector in Ghana. With roughly 80 percent of Ghanaian labor force in the informal sector, there is a strong demand for retirement savings schemes for informal workers. Therefore, the Social Security and National Insurance Trust (SNNIT) established the Informal Sector Fund (SIS) in early 2008, based on the success of a pilot started in 2005. The SIS is a voluntary contributory pension scheme with no fixed rate contributions. Contributions are credited in equal parts to two individual member sub-accounts: (i) the Occupational Scheme Account (OSA) and (ii) the Retirement Account (RA). Members may make periodic withdrawals from the OSA after they have made five months of initial contributions, provided that the account has a credit balance. The RA funds are only accessible in the event of old age, disability, or death. The SIS, in partnership with The HFC Bank and a microfinance institution, offers attractive retirement savings options to informal workers as well as valuable financial services. The SIS had 90,000 members by late 2011 and is expected to reach its targets of 2 million members by 2013 and 5 million by 2015. Reforming Senegal’s Pensions for Long-term Financial Sustainability. Social security legislation in Senegal requires that all employers offer pension plans to their employees. The Social Security Fund supports: (i) the Social Insurance Institute for Old Age Pensions (IPRES) covering private employees and roughly one-sixth of civil servants and (ii) the National Retirement Fund (FNR) covering all remaining government employees. By 2003, the accumulation of significant arrears threatened the sustainability of the system. In 2004, the Government of Senegal began reforming the pension schemes to ensure their financial sustainability. The reforms restructured the contribution and benefit rules, raised the retirement age from 55 to 60 years, decreased the accrual rate, increased the averaging period, and changed the employer and employee contribution rates. Other reforms were enacted in 2006, including indexing the pensions to inflation and opening a notional account for the current defined benefit schemes. To further strengthen the governance of the system, the government established an Interim Supervision Committee to oversee the Social Security Fund and an oversight agency for the funding process. As a result, the deficit of the Social Security Fund was eliminated by early 2008. Cape Verde’s Multi-pillar Approach. Cape Verde has a social insurance system with one of the highest coverage rates in Sub-Saharan Africa. In 2006, Cape Verde established a social pension by merging two existing non-contributory pension schemes. It is a means-tested scheme, managed by the National Center of Social Pensions (CNPS), for the elderly (60 years of age or older) and the disabled. Accountability in the social pension system has been increased with the introduction of identification cards. The amount of benefit is currently about US$65 per month. The pension currently covers 23,000 people, or more than 90 percent of the target population, at a cost of 0.4 percent of GDP. The contributory pension is part of the social insurance scheme managed by the National Social Security Institute (INPS). The public and private social security schemes have merged, which is likely lead to greater efficiencies in social security in the future and to encourage an increase in the availability of long-term resources needed for investment. Moreover, the INPS has made significant investments in computerizing its operations, which has resulted in improvements in management. The INPs currently supports 60,000 retirees. AFRICA SOCIAL PROTECTION POLICY BRIEFS 3 CHALLENGES AND OPPORTUNITIES Policymakers seeking to provide social protection for Investigate the possibility of expanding the coverage of older Africans should: the pension system to the informal sector. Strengthening Consider the long-term fiscal affordability of public service voluntary savings arrangements is probably the best pension provisions. The age profile and benefit design way to increase coverage and adequacy alike, though of pension schemes in several Africa countries suggest other design and implementation options are only just that fiscal costs will be rising substantially over time, beginning to be explored. potentially crowding out other fiscal priorities. Civil Consider implementing a social pension to close coverage service pensions can only be reformed within the gaps and improve the welfare outcomes of the elderly. context of overall civil service compensation. In addition, Careful assessment is needed of the behavioral and many schemes have provisions that put limits on the distributional consequences of different kinds of social preservation of a worker’s pension rights or otherwise pensions, including of the choice between providing create strong incentives against labor mobility. Remedies social assistance to poor households or to categorical for these issues can be developed through parametric groups such as the elderly. Targeting methods need to be reforms to public service schemes and/or measures to carefully evaluated, including for any possible unwanted harmonize and integrate such schemes with equally behavioral effects. Programs should take into account reformed schemes for private sector workers. fiscal realities. Redesign mandatory earnings-based contributory schemes. Develop a reliable information system and evidence base These schemes should aim to provide pensions at to guide reform options. A reliable database should be earnings replacement levels that are affordable for developed to keep accurate records of existing members employers and employees alike. Regardless of their and of liabilities, particularly if policymakers are aiming to design, mandatory contributory earnings-based schemes reform the pension system. An actuarial model such as will only be able to achieve reasonable levels of coverage PROST can be used to systematically evaluate the inter- of the labor force if the contribution rates are sufficiently generational effects and the costs and benefits of both affordable for employers and employees and if these current provisions and different reform options. schemes deliver what they promise. Additional Resources and Readings: Holzman R., D. Robalino, and N. Takayama (eds) (2009). Closing the Coverage Gap: The Role of Social Pensions and Other Retirement Income Transfers. World Bank, Washington D.C. Hu Y. and F. Stewart (2009). “Pension Coverage and Informal Sector Workers: International Experiences.� OECD Working Papers on Insurance and Private Pensions, No. 31, OECD, Paris. Katarikawe, M. (2005). “World Bank Group’s Support to Pension and Social Security Systems in Africa.� World Bank, Washington D.C., July. Stewart, F. and J. Yermo (2009). “Pensions in Africa.� OECD Working Papers on Insurance and Private Pensions, No. 30, OECD. World Bank (2012). Africa Social Protection Strategy. World Bank, Washington D.C. World Bank (2012). “Pensions in Sub-Saharan Africa.� Human Development Unit, Sub-Saharan Africa Region. World Bank, Washington D.C. Further guidance and toolkits on design and implementation issues regarding pensions can be found on the World Bank’s Social Protection and Labor website: www.worldbank.org/sp. December 2012