Transcript Slide 1

REGULATORY REFORM
A KEY DRIVER TO SOUND
GOVERNANCE PRACTICES
Mr. James Olubayi
Executive Director & Resident Actuary
Alexander Forbes Financial Services (East Africa) Limited
Zimbabwe Association of Pension Funds (ZAPF)
39th Annual Congress - Elephant Hills Resort, Victoria Falls
14 – 17 May 2014
Agenda
 Part A : Situation Analysis: Africa
 Part B : Pension Fund Reform in East Africa
 Part C : Lessons Learnt from Reforms in East Africa
 Part D: Question & Answer
Slide 2
Part A
Situational Analysis: Africa
Africa Statistics
Slide 4
More Statistics…
Country
% Living on
Less than $1.25
a day
Total
population
Number living
on Less than Life Expectancy
$1.25 a day
Eastern Africa
Burundi
81.3%
8.60
6.99
50.4
Kenya
43.3%
41.6
18.0
57.1
Uganda
38.0%
34.5
13.1
54.1
Rwanda
63.2%
10.9
6.90
55.4
Tanzania
67.9%
46.2
31.4
58.2
Zimbabwe
72%*
13.2
9.50
53.9
Zambia
70%*
14.1
9.87
57.0
Southern Africa
data.worldbank.org
*% living below the poverty line
Slide 5
Africa has a history of Poverty
The East is taking big strides to
alleviate poverty; in Sub-Saharan
Africa, poverty is tightening its grip
Slide 6
Out of 1.3bn people living on less
than US$1 per day, 380 million
reside in Sub-Saharan Africa
Relevant Demographic Characteristics - Aging
Projected Percent of the Population over Age 65
Sub
Saharan
Africa
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
3.1
3.2
3.2
3.4
3.6
3.8
4.1
4.5
5.0
5.8
Asia
6.4
6.8
7.6
8.9
10.1
11.7
13.5
15.1
16.2
17.5
Slide 7
South
America
6.4
7.0
7.9
9.1
10.5
12.2
13.7
15.2
16.8
18.5
Europe
15.9
16.2
17.4
18.9
20.7
22.6
24.2
25.5
26.5
27.6
Cumulative Real per Capita GDP
Slide 8
Gross National Savings as % of GDP
Slide 9
Sub-Regional Macroeconomic Indicators
Indicator
East
Africa
North
Africa
South
Africa
West
Africa
Central
Africa
Africa
Real GDP
Growth Rate %
6.2
4.6
3.3
6.7
4.7
4.9
GDP per Capita
(US$)
657
3,421
3,314
1,049
777
1,668
Inflation
9.3
7.1
6.4
10.4
5.5
7.7
Gross Domestic
Savings (% of
GDP)
22.6
31.2
18.2
23.6
27.6
24.6
Gross National
Savings (% of
GDP)
16.3
31.8
17.8
32.9
19.8
25.4
Total External
Debt (% of GDP)
35.1
14.6
24.9
15.4
15.3
20.2
Debt Service (%
of Exports)
4.9
9.7
25.1
4.3
5.1
12.6
AfDB Africa Report 2012
Slide 10
Gap between Savings & Investment
Slide 11
Social Security Contribution Rates
35.0
30.0
25.0
20.0
20.0
15.0
15.0
10.0
10.0
5.0
0.0
Slide 12
10.0 9.5
8.0
6.0
Total Value of Pension Assets in Pension Schemes in EAC 2012
Source: Analysed Financial Statements for the period between 2009 and 2012 by various pension schemes and pension regulators in EAC
Slide 13
Holdings of Pension Funds vs Banks - Africa
Slide 14
Holdings of Pension Funds Vs Banks - Zimbabwe
 Commercial Banks Financial Holdings as % of National Assets
 76.6%
 Pension Funds Financial Holdings as % of National Assets
 2.0%
 Basically issues around CONVERSIONS / DOLLARISATION
 Inflation erosion
 Dodgy split of assets
 Arbitrary methodology?
 Regulation?
Slide 15
Part B
Pension Fund Reform in East Africa
Breakdown of Traditional Forms of Social Protection
 Traditional forms of old age protection
 Old taken care of by young
 Extended families and community support
 Cultural norms and taboos
 Gratuity schemes
 With
 Urbanisation
 Breakdown in family and social values
 Impact of AIDS/HIV
Traditional forms of old age being stretched
=>Poverty, destitution, social problems
 Change in social fabric of countries suggests that lesser reliance
can be placed on informal family support systems to keep elderly out
of poverty
Slide 17
Overview of Retirement Arrangements - EAC
Criteria
Kenya
Burundi
Uganda
Rwanda
Tanzania
Law
Legislation
Trust Law
Legislation
Contract
Legislation
Trust Law
Legislation
Trust Law
Contract Law
Legislation
Trust Law
Design
Largely DC
Few large DB
& Civil Service
Scheme
DB
Few private
DC Schemes
DC
Except Civil
Service
DB
Few DC
Private
Schemes
DB
Except GEPF
Control
Largely Private
sector
State
controlled
schemes
Largely State
controlled
State
controlled
schemes
State
controlled
schemes
Supervision
RBA
None
URBRA
BNR
SSRA
Management
Trustees
Asset
Managers
Custodians
Administrators
None
Trustees
Asset
Managers
Custodians
Administrators
Trustees
Asset
Managers
Custodians
Administrators
Trustees
Asset
Managers
Custodians
Administrators
Slide 18
World Bank Pillars
(i) A non-contributory or “zero pillar” that provides a minimum
level of protection or safety net
(ii) A mandatory “first-pillar” contributory system linked to
earnings and seeking to replace some portion of income for
most, if not all, people of working age
(iii) A mandatory “second-pillar” system that is essentially an
individual savings account
(iv) Voluntary “third-pillar” arrangements that are varied but
essentially flexible and discretionary in nature (e.g. private
occupational or personal pension plans)
(v) Informal intra-family or intergenerational sources of support to
the elderly, including access to healthcare and housing.
Slide 19
Uganda
Uganda Scenario
 No Social Security Policy – vague provisions in Consitution
 Early systems in 1950s catered for Europeans and Asians.
Africans left to rely on traditional system
 85% of population working in rural areas – 77% of labour
force semi-educated
 15.2% of working population are salaried, 27.4% self
employed
 Formal system does not apply to largely rural population:
caters for formal private sector and public service. 93% not
covered
 Formal SS system undermined by population growth, social
and class differentiation, urbanisation, land scarcity
Slide 21
Forms of Pension Schemes in Uganda
Public Service
Pension Scheme
(PSPS)
• Covers 2.8% of
working population
• Noncontributory – in
arrears of USH
300bn
• Covers some Public
servants
• Benefits exclude
health, education,
insurance or
invalidity
National Social
Security Fund
(NSSF)
• Covers 2.3% of
working population –
approx 300,000
members
• EE - 5%, ER – 10%
• Covers all
employees in any
firm +5
• Lump sum benefits
are retirement,
withdrawal, invalidity,
emigration, survivors
• Heavy govt control
• History of
mismanagement
Slide 22
Private Schemes
• Covers 1% of
working population
• Unregulated
• Operate side by side
with statutory NSSF
Pension Reform in Uganda
Slide 23
Pension Reform in Uganda
 Uganda Retirement Benefits Authority Bill 2010
 The objectives of the Bill are to:



provide for liberalization of the retirement benefits sector.
remove the monopoly of NSSF over mandatory contributions.
provide for fair competition among licensed retirement benefit
schemes.
 Reform of the Public Service Pension Fund

To provide sufficient funding to clear pension arrears and
transform the current system into a contributory scheme.
 Proposals advanced in the Liberalization of the
Retirement Benefits Sector Bill

PSPF to be a pre-funded DC
Slide 24
Challenges to Pension Reform in Uganda
 Regulatory framework–URBRA Act yet to be
operationalised. Liberalisation Bill–has many gaps.
 Some continuing DB plans, eg Armed forces
 Statistical data on retirement benefits schemes not
available
 Vested interests
 Lack of political will
 Lack of in country expertise
Slide 25
Tanzania
Tanzania Scenario
 Tanzania Mainland and Zanzibar different
 Policies exist: Social Security Policy and Ageing policy,
2003
 Plethora of laws as compared to other EAC states:
Socialist state?
 Conflict in constitution
 Formal security system covers only 5.4% of working
population
 Dependency on traditional social security systems based
on family, clan, community which have weakened
 Social changes eroded ability of these traditional
systems
Slide 27
National Social Security Policy, 2003 - Tanzania
Public Service Pension
Fund (PSPF)
National Social Security
Fund (NSSF)
• Set up 1999
• Central govt
pensionable employees
• Contributory
• EE = 5%, ER = 15%
• Varied benefits
• Set up 1997
• Private sector and nonpensionable parastatal
and govt employees,
self employed
Political Service
Retirement Benefits Act
Local Authorities
Provident Fund
• Provides benefits to
former or retired political
leaders- President,
Prime Minister, Minister,
MPs, Speaker
• Benefits: pension and
gratuity
• Provides benefits to
insured persons
• DB Fund
• Based on contribution
level of insured life and
investments
Slide 28
Parastatal Pension
Fund (PPF)
• Set up 1978
• Employees in public
enterprises or
parastatals, contractual
• EE = 5%/10%, ER =
10%/20%
National Health
Insurance Fund (NHIS)
• Provides health
insurance
• No more details for
purposes of this
presentation
Pension Reforms in Tanzania
 Social Security Regulatory Authority 2008 with mandate
to supervise sector
 To reduce pension liability to the government by creating
self funding schemes

Converting Civil Servant Schemes to Contributory scheme from Pay
As You Go Scheme – 1999 (DB)
 LAPF (Provident) to LAPF Pensions in 2005 (DB)
 Financing pre-99 pension liability of the civil servant
 Establish fair system


Harmonisation of benefit structure and formulae for all public and
mandatory schemes
Better coordination of mandatory funds/merger?
Slide 29
Challenges to Pension Reforms in Tanzania
 Low coverage – 5%
 Unharmonised benefits which are generous to some
groups of Population (e.g. Civil Servants)
 DB is creating financial burden to the government

Other EAC govts such as Kenya and Uganda have largely
unfunded schemes for Civil Servants which creates burden to
national budget (Kenya just starting off the ground now)
 DC returns are not competitive – tied to limited vehicles
for investment
 Effect of regulation yet to be felt
 Political interference
Slide 30
Rwanda
Rwanda Scenario
 National Social Security Policy, February 2009: Motto
‘Coverage for All’
 New constitution promulgated in Rwanda in 2003
 Unique legal system in EAC, continental rather than
common law
 Low coverage of 10%, those in formal employment
 Financial sustainability of current SS Schemes not
guaranteed
 Scattered institutions, need to harmonise
Slide 32
Forms of Social Security in Rwanda by 2020
Pension Branch
• Every resident must have pension cover – public or private
Maternity & Sickness Branch
• Mandatory for all in formal sector
• To be facilitated through organised groups
Unemployment Benefits
• Introduced once economic conditions allow for it
Occupational Hazards Branch
• Mandatory for formal sector with 100% coverage
• To be facilitated through organised groups
Healthcare Branch
• Targeting universal health insurance
Slide 33
Reform in Rwanda
 Coherent policy needs to be backed by relevant action
 Relevant laws to enable actualization of policy under
formation
 Attempt to cover a large portion of population in rich,
middle class and poor
 Funding to be from various sources


National Budget
Contributions
 Watch and see…
Slide 34
Burundi
Forms of Social Security in Burundi
National Institute of
Security (INSS)
• Set up in 2003
• For all workers
covered under the
Employment Act
Mutuelle de la
Fonction Publique
(MFP)
• Basic structure
National Pension and
Work Place Insurance
Services (ONPR)
• Set up in 2009
• Covers civil servants,
magistrates, judicial
officers and their
dependants
• Benefits: Old age,
disability and death
•Coverage by INSS and MFP are 10% of the population
•Private initiatives for pension and medical are supported by
external partners
•SS system is promising
•Watch and see….
Slide 36
Kenya
Kenya Scenario
 No Social Security Policy
 New Constitution adopted in 2010 – cognizant of right to
social security
 Several laws without a clear co-ordinated approach
 SS system similar to Uganda, though coverage is higher at
approximately 16% of Kenya’s working population
 21% are formal sector employees and the informal sector
(commonly referred to as the ‘jua kali’ sector) which covers
informal urban and agricultural workers comprise 79% of the
labour force
 Over 80% of the new jobs in the last three years have been
created in the informal sector
 Latest NRR = 22%
Slide 38
Forms of Pension Schemes in Kenya
National Social
Security Fund
(NSSF)
• Covers 1.2 million
Kenyans
• Currently providing
lump sum benefit
• DC fund
• ER = KShs 200, EE
= KShs 200
• Benefits: age
benefits, survivor,
invalidity, withdrawal
and emigration
Pension for Public
Service Employees
• Covers approx
400,000 of Civil
Service and Army
employees
• DB benefit
• Non-contributory
• Benefits: retirement
benefits
Slide 39
Private Schemes
• Occupational
Schemes cover
350,000 lives –
Conversion to DC
from DB in last
decade.
• Individual plans
cover 45,163 lives –
DC plans
• EE and ER are
customised
• Benefits: age
benefits, survivor,
invalidity, withdrawal
and emigration PLUS
insured death
benefits
The Case for Pension Reform in Kenya
Kenya population largely young, by the time today’s labour force market entrants retire,
the proportion of the population above age 55 is expected to almost triple. The
dependency ratio (ratio of elderly to active labour force) is also expected to increase from
12% to 30% by 2050
Slide 40
Pension Reform in Kenya
 Begun in 2000 with mandate of the Retirement Benefits
Authority
 Growth: KShs 40 bn to KShs 600bn in just over a decade
 Private schemes quick to realign to Retirement Benefits
Act…NSSF unwilling, PS under Pensions Act
 Has extended beyond regulation and compliance
driven…towards risk driven





Social protection systems in Kenya
Structural shortcomings in benefit adequacy and protection accorded
by current NSSF
Changes in social fabric and demography of country
Forgotten dimension of social protection
East African harmonisation
 Pension reform in Kenya now in innovation stage




NSSF Act
Micro-pensions
Member focus….
Related products: Funeral plans
Slide 41
The New NSSF Reform Model
Meeting the Real Social Security Needs of Kenyans
Slide 42
Adequacy of Benefits from current NSSF
Maximum statutory contribution limit per month
( K Shs)
400
400
400
Calculation basis : Interest on members’ funds
15%
10%
10%
Future inflation
10%
5%
10%
Estimated fund at age 55 in current money
terms (K Shs)
Average current earnings (K Shs p.a.)
119,600 182,700
45,200
420,000 420,000 420,000
Estimated fund at age 55 expressed as a
percentage of average current earnings
29%
44%
11%
Estimated pension at age 55 expressed as a
percentage of average current earnings
2%
4%
< 1%
Slide 43
Reform Objectives
Objective to improve adequacy of benefits
Increase in mandatory contributions: 6% EE, 6% ER
Objective to increase coverage
Cover full formal sector
Retain provident fund for voluntary contributions and informal sector
Objective to ensure uniformity of benefits
Uniform treatment for public and private sector workers
Objective to ensure better protection
Provide benefits as pensions rather than lump sums
Ensure full preservation of benefits
Objective to ensure sustainability and affordability
Retain largely defined contribution sector
With some level of minimum benefits on death and invalidity
Phasing in of some benefits
Modest increase in contributions and phasing in
Slide 44
Reform Objectives
Objective to ensure no crowding out of private sector occupational plans
Partial opt out for schemes meeting reference scheme test
Objective to ensure strong governance structures and compliance
Strong governance measures in Bill
Outsourced management and custody of new NSSF assets
Regulatory oversight
Objective to limit macro-economic implications, and impact on
employment costs, disposal incomes
Modest levels of contributions
Phasing in of mandatory contributions over five year period
Objective To Enhance Benefits Provided: Benefits now include
1. Retirement benefit
2. Ill health benefit
3. Death benefit
4. Survivors benefits
5. Funeral grant
6. Maternity grant
Slide 45
7. Unemployment grant
Establishment of Subfunds & Contributions
SUBFUNDS
 Act establishes two funds:
 Pension Fund Covers all employed persons in the formal sector who
>18 years of age but < pensionable age
 Provident Fund Covers self employed persons and workers in the
informal sector who wish to make voluntary contributions to the NSSF


CONTRIBUTIONS
Tier I Contributions
 Target minimum basic level of benefits
 Hence contributions as % of earnings upto average minimum wage
 Responsibility of mandatory state scheme (NSSF)
Tier 2 Contributions
 Target level of income replacement
 Contributions as % of earnings above average minimum wage
 Contracting-out of Tier II Contributions permitted for employers who
operate, establish or participate in schemes which meet reference
scheme test
Slide 46
New Look NSSF Summary & Challenges
 New look NSSF meets real social security needs of Kenyan workers
 Is workable, sustainable and affordable
 Has strong governance and institutional structures as set out in Bill
 NSSF and Kenya well positioned for further reform
Challenges
 History of gross mismanagement of public funds
 Mistrust by the Stakeholders regarding sustainability of NSSF
 Competitors in the market: Discomfort with NSSF
 Employers who do not want to increase employee costs – those
without pensions
 Political will to enforce changes...or is it too much good will?
Slide 47
Micro Pensions – Mbao Pension Plan






Targets informal sector employees
Set up as a segregated scheme
Corporate Trustee manages Fund
Contribution KShs 20 a day
Use of M-PESA to remit monies
Fastest growing personal pension plan
Statistics
2011
2013
Contributions per
month
KShs 250,000
KShs 4,000,000
Membership
8,165
41,000
Assets under
Management
KShs 12 million
KShs 80 million
Slide 48
Challenges facing Mbao




Lack of awareness by members
Challenges in market penetration
Low contribution rates by members
Constant defaulting by members and annual renewal by
members
 Overreliance on mass media promotions to reach wider
audience
 Costs involved in remitting money using mobile
technology erodes member finances
 Unhealthy competition from some existing IPP’s through
propaganda
Slide 49
Zimbabwe
Forms of Pension Schemes in Zimbabwe
National Social
Security Authority
Occupational
Funds
• Covers all
employed
members
• Provides for a
retirement benefit
+ death benefit
• DB Fund
• 3.5% EE and
3.5% ER
• Insurance
Earnings Cap
USD $700
• Reviewed to 3.5%
1 June 2013
• NRA = 60 years
• Voluntary
• DB or DC
• EE of 5% to 8%
and ER of 5% to
28%
• Employees of
industry funds
who want to set
up retirement
funds for them eg.
Mining industry,
Oil industry
• NRA of 60-65
years
Slide 51
Individual Funds
•
•
•
•
•
Personal initiative
Voluntary
DB or DC
EE of 5% to 10%
Generally no ER
contributions
• NRA of 60-65
years
• Severely
diminished during
dollarisation
Forms of Pension Schemes in Zimbabwe
Public Service Pension
Fund (‘PSPF’)
• Covers all government
employee
• Retirement benefit + death
benefit + others
• DB Fund
• 5% to 7% EE and variable
for government
• PAYG – current
arrangement
• Various reforms under way
• NRA = 65 years
Slide 52
Zimbabwe Scenario : NSSA
 Lack of ability of pensions system, as well as its funding led to
a fundamental review of the pensions system in 2008
 Actuarial investigation in 2009 led to several regulatory
changes
 Increase on contribution rates
 Change on insurable earnings cap
 Concerns on validity of occupational schemes if integration is
not permitted
 Currency conversions continue to be an issue
 Concerns around management of current arrangements
 Concerns around investment policies – is there a clearly
written Investment Policy Framework?
Slide 53
Zimbabwe Scenario : Occupational Funds
 Extremely low post conversion values
 Conversion basis still contested – no clear solution.
 Example – big fund formed in 1960 with average
membership of 5,000 given a fund value of US $ 1m at
conversion. Is this possible?
 Worsened by Employers’ failure to remit contributions
 NSSA crowding them out – NSSA targets insurance earning
of US $ 1,000
 Trustees’ capability to protect Member interests
Slide 54
Zimbabwe Scenario: Individual Funds




Vanished
Affordability
Confidence
Coverage - low
Slide 55
Zimbabwe Scenario : PSPF Government Fund
 PAYG
 Pension and other payments gobble up 20 – 25% of national
budget
 Reforms
 Government considering making the scheme funded
 What do they do about past service liability
 Talks of increasing retirement age to 65 years for everyone
Slide 56
Part C
Lessons Learnt from
Reform in Africa
Similarities in African Countries
 Socio economic context



Poor and developing countries
Majority of population in rural areas
Typically covered by an NSSF, a Public Sector Scheme and Private
Schemes
 Economies and Employment Trends


Increased employment informal rather than formal sector
Privatisation of State enterprises
 ILO Convention – Minimum Standards for Social Security

None has ratified this convention
 Coverage

Coverage of social security systems below ranges between 5%
(Tanzania) and 15% (Kenya)
Slide 58
Differences in African Countries
 Policies and Constitutional Provisions


Only present in Tanzania 2003, and Rwanda 2009
Policies yet to be backed by relevant legislation and followed
through with action
 Health Insurance as part of Social Security


All are thinking about it, only Kenya and Rwanda have well
thought out policies on this
Coverage in Kenya is 30% and in Rwanda it is 80%
Slide 59
What is yet to work for Africa?
 Development of rational Social Security Polices that are all
encompassing
 Development of relevant laws that support implementation of
set policies
 Harmonisation of various forms of Social Security
 Over-reliance on National Budgets for funding of Social
Security programs

Conversion of unfunded public service pension schemes from non
contributory DB to contributory DC
 Improvement of governance structures.
 Reduction of political interference
Slide 60
What has worked for Africa?
 Regulation has driven fundamental changes
 Establishment of Regulatory bodies with a mandate to
regulate the industry for the benefit of members
 Establishment by Private Sector of retirement arrangements
to supplement gaps of mandatory schemes, if they exist
 Focus on the informal sector as the growing population and
development of customized solutions that meet their needs
 Use of innovative means for remittance of contributions such
as mobile money transfer mechanisms : M-Pesa
 Access of member information through SMS as opposed to
internet for mass majority
 Aspiration for universal coverage..how noble 
Slide 61
Regulation alone is not enough!
Governance structures to support
implementation of the regulations are
more critical for success of pensions
systems
Slide 62
Evolution is necessary…
Slide 63
Questions?
Slide 64