Civil-Service World Bank Core Course on Pensions Washington, May 2015 Agenda Institutional arrangements for public-sector workers’ pensions Demographic pressures on finances Flexibility and portability of civil-service pensions Origins Civil-service pension schemes usually set up before national programmes independence of civil servants make working for the public sector attractive shift the cost of remunerating civil servants into the future Separate schemes then often persisted after national schemes established: ‘dualism’ Institutional arrangements around the world South Asia 7 Africa 32 7 Middle East/ North Africa 7 4 Separate East Asia 9 6 Integrated OECD 13 12 Latin America/ Caribbean 12 15 Eastern Europe/ Central Asia 27 0 25 50 75 100 Institutional arrangements Fully Institutionally Fully integrated Partially Entirely separate integrated separate with with top-up integrated with institutions and similar benefits arrangements top-up scheme benefits Chile Denmark Australia United Kingdom Austria Czech Republic Finland Canada Belgium Estonia Iceland Ireland France Hungary Israel Italy Germany Mexico Netherlands Japan Greece Poland New Zealand Korea Slovak Republic Norway Luxembourg Slovenia Portugal Spain Turkey Sweden Switzerland United States Institutional arrangements Separate Partially integrated 1 Integrated Angola Botswana Cape Verde Benin Lesotho Central African Republic Burundi Mauritius Chad Cameroon Namibia Ethiopia Congo, DR South Africa Ghana Congo, R Swaziland Nigeria Cote d’Ivoire Rwanda Gambia Sao Tome e Principe Guinea Partially integrated 2 Seychelles Guinea-Bissau Liberia Sierra Leone Kenya Zambia Madagascar Malawi No private-sector Mali scheme Mauritania Mozambique Eritrea Niger South Sudan Senegal Sudan Tanzania Togo Uganda Zimbabwe Dualism Arguments against Integration gives civil servants direct, personal interest in the plan being well managed Economies of scale Mobility and portability Equity Transparency Long-term goal should therefore probably be integration of civil-service and national pension plans Economies of scale Relative cost per beneficiary 4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 Number of beneficiaries Central-government employment per cent of total population early 1980s early 1990s Africa 1.8 1.1 Asia 2.6 1.1 Latin America 2.4 1.5 All developing countries 2.2 1.2 OECD 2.9 1.9 Ageing central-government workforce Percentage aged 50 and over Percentage aged 50 and over 50 50 Italy Iceland Sweden Germany United States 40 40 Denmark Belgium Norway Israel Netherlands Canada Ireland Greece Switzerland United Kingdom 30 30 France Finland New Zealand Mexico Australia Austria Japan Estonia Chile Portugal 20 20 Korea 10 10 1995 2000 2005 2009 1995 2000 2005 2009 Example: Egypt Example: Morocco 5 CMR CNSS 4 RCAR 3 2 1 0 20 25 30 35 40 45 50 55 60 Labour-force demographics: central government vs population Central government employees Total labour force Italy Austria Iceland Hungary Sweden Portugal Belgium Switzerland Germany United Kingdom United States France Denmark New Zealand Slovak Republic Slovenia Greece Poland Israel Mexico Norway Australia Finland Estonia Netherlands Japan Canada Chile Ireland Korea 0 10 20 30 40 50 0 10 20 30 40 50 Percentage aged 50 and over Percentage aged 50 and over Reform options 1 ‘Parametric’ reforms to defined benefit plans reduce replacement rate index pensions in payment to prices rather than civil-service earnings introduce/increase member contributions raise pensionable age extend averaging periods for ‘final’ salary ‘Systemic’ reforms introduce new system for new civil servants with some element of pre-funding of obligations Any reform must take account of all aspects of civil-service terms and conditions Reform options 2 Increasing contributions: employer contributions are just re-labelling, unlike national systems employee contributions may have an effect on wages or productivity Increasing pension age: Civil service schemes are ‘closed’ systems so increasing retirement age has different effects than it does in national schemes: labour supply effect in national schemes Increase in retirement age cuts duration of benefit payments, but without downward adjustment of accrual rates to compensate, benefit values increase people might retire on higher pay if earnings continue to grow with age affects both pay and pension bills Lump-of-labour fallacy across countries Employment rate, 60-64 year olds 0.6 NLD 0.5 GBR IRL 0.4 DEU FIN SWE DNK POL SVK 0.3 GRC CZE AUT 0.2 LUX ESP ITA BEL PRT HUN FRA 0.1 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 Employment rate, 20-24 year olds Lump-of-labour fallacy over time Employment rate, 60-64 year olds 0.8 2010-12 New Zealand 0.7 2004 0.6 2001 2000 0.5 1995 0.4 1992 0.3 1983 1985 2012 0.2 2005 1990 1995 0.1 2000 France 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 Employment rate, 20-24 year olds Individual-level model: Morocco Baseline Contribution rate 20% Contribution years 33 Lifetime contributions 6.6 (x annual salary) Accrual rate 2.5% Gross replacement rate 82.5% Net replacement rate 106.7% (average earner) Pension age 60 Indexation half prices Lifetime benefits 13.2 (x annual salary) Individual-level model Baseline Contribution rate 20% Contribution years 33 Lifetime contributions 6.6 (x annual salary) Accrual rate 2.5% Gross replacement rate 82.5% Net replacement rate 106.7% (average earner) Pension age 60 Indexation half prices Lifetime benefits 13.2 (x annual salary) Benefit/cost ratio 2.0 Equilibrium contribution rate 40% Sustainable replacement rate 41% Individual-level model Baseline Age 65: same accrual Contribution rate 20% 20% Contribution years 33 38 Lifetime contributions 6.6 7.6 (x annual salary) Accrual rate 2.5% 2.5% Gross replacement rate 82.5% 95.0% Net replacement rate 106.7% 122.3% (average earner) Pension age 60 65 Indexation half prices prices Lifetime benefits 13.2 11.2 (x annual salary) Benefit/cost ratio 2.0 1.5 Equilibrium contribution rate 40% 38% Sustainable replacement rate 41% 50% Individual-level model Baseline Age 65: same Age 65: lower accrual accrual Contribution rate 20% 20% 20% Contribution years 33 38 38 Lifetime contributions 6.6 7.6 7.6 (x annual salary) Accrual rate 2.5% 2.5% 2.2% Gross replacement rate 82.5% 95.0% 82.5% Net replacement rate 106.7% 122.3% 106.7% (average earner) Pension age 60 65 65 Indexation half prices prices prices Lifetime benefits 13.2 11.2 9.7 (x annual salary) Benefit/cost ratio 2.0 1.5 1.3 Equilibrium contribution rate 40% 38% 26% Sustainable replacement rate 41% 50% 64% Pension possibilities Three key variables: accrual rate pension eligibility age contribution rate Look at the sustainable combinations Pension possibilities 45 1.5 Accrual 40 Accrual rate: 2% 1.25 rate (%) 35 Contribution 30 rate (%) 1 25 Contribution rate: 17% 0.75 20 15 0.5 10 0.25 5 Pensionable age Pensionable age 0 0 50 55 60 65 70 50 55 60 65 70 2.5 Accrual Pensionable age: 60 rate (%) 2 1.5 1 0.5 Contribution rate (%) 0 0 5 10 15 20 25 30 35 Pension possibilities: replacement rates 80 80 Replacement Replacement 70 rate (%) 70 rate (%) 60 60 50 50 40 40 30 Contribution rate: 17% 30 Pensionable age: 60 20 20 10 10 Pensionable age Contribution rate (%) 0 0 50 55 60 65 70 0 5 10 15 20 25 30 35 Flexibility and portability Civil service schemes are inflexible: ill designed to deal with people without full careers But flexible schemes are increasingly important ‘revolving doors’: cross-fertilisation between public and private sectors transfer of employees due to privatisation or contracting out Penalties to moving jobs Vesting periods: when individual qualifies for a pension <1 year in Finland, Netherlands, Sweden, Switzerland, UK 5 years in Belgium, Germany, Ireland, Italy 15yrs in Austria, France, Spain, Mauritius, Senegal people can leave with nothing Treatment of ‘early leavers’: what happens to the benefit between leaving the job and claiming the pension? full transferability (Finland, Netherlands, Sweden) moves to occupational plan with same benefits in private sector full preservation (France) accrued rights uprated in line with civil-service earnings In other countries, a pension cost to moving jobs Example: Mauritius Value of accrued pension 25 30 35 40 45 50 55 60 age Example: Mauritius Value of accrued pension Staying to retirement: 1/50th of final salary 25 30 35 40 45 50 55 60 age Example: Mauritius Value of accrued pension Staying to retirement: 1/50th of final salary Lump sum Deferred pension: 1/50th of current salary 25 30 35 40 45 50 55 60 age Example: Mauritius 8 Cost of leaving, proportion of earnings 6 4 2 0 25 30 35 40 45 50 55 60 age Example: UK Cost of leaving, 1.5 proportion of earnings 1 .5 Early leaver’s benefit depends on earnings uprated in line with prices: ‘partial preservation’ 0 25 30 35 40 45 50 55 60 age Germany Cost of leaving, 6 proportion of earnings 4 2 Early leaver is retrospectively transferred to national scheme with lower benefits 0 25 30 35 40 45 50 55 60 age Reforms to improve portability Shorten vesting periods Preserve pension rights of early leavers Extend averaging period for ‘final salary’ career average uprating eliminates the mobility problem also deals with problems of incentives for abuse but requires improvements in record-keeping Introduce a defined contribution scheme fully portable Conclusions Reform of civil-service pension schemes is important in low- and middle-income countries often, larger expenditure than national schemes crowds out important social programmes Many options to put civil-service pension schemes on a sustainable footing Structural issues as important as fiscal ones single national scheme would be more administratively efficient, equitable and increase labour-market flexibility equity and efficiency also improved by longer averaging periods for earnings, shorter vesting periods, preservation for early leavers, DC option.