45728 World Bank Pension Reform Primer The World Bank Pension Public Disclosure Authorized Conceptual Framework Background – Evolution of the The conceptual framework for the Bank’s pension Framework work is presented in the 2005 report, Old Age Income Support in the 21st Century: An International Since the mid 1980’s, the World Bank has Perspective on Pension Systems and Reform. The findings Public Disclosure Authorized responded to the need to strengthen social of these and important regional reports illustrate insurance and contractual savings systems the evolution of thinking within the Bank and the providing old age income support in developing importance of a policy framework that is countries. Such support has also been driven by sufficiently flexible to address diverse country pressures of global population aging, the erosion conditions. This note draws upon and refines the of informal and traditional family support systems, framework presented in the 2005 report and in the and weaknesses in the governance and 2007 Bank Board Discussion Paper. administration of existing pension systems. The importance of effective formal sources of Although the Bank’s experience suggests that there retirement income is accentuated by changes in are no universal solutions to the complex array of work and family patterns including the increasing pension issues nor a simple reform model that can participation of women in formal employment, be applied in all settings, the Bank has developed Public Disclosure Authorized rising divorce rates, diminishing job stability and principles of analysis and a conceptual framework increases in local and international labor migration. to guide its’ work. This framework suggests an assessment of initial conditions and capacities and The Bank’s conceptual framework has emerged setting out core objectives (Table 1). It then suggests from its experience in Bank-supported reforms evaluating potential modalities for pension systems and the changing conditions and needs in client by applying a multi-pillar model of potential reform countries. Following the important work of the designs. These possible designs should then be mid-1990’s, Averting the Old Age Crisis that evaluated against a set of primary and secondary established key principles and concepts, the Bank’s evaluation criteria in an attempt to reach an outcome attention has increasingly focused on refining that is contoured to country-specific conditions, system designs to adapt these principles to widely needs and objectives. Finally, the Bank applies varying conditions and better address the needs of additional design principles in evaluating reform diverse populations to manage the risks in old age. Public Disclosure Authorized This briefing is part of the World Bank’s Pension Reform Primer: a comprehensive, up-to-date resource for people designing and implementing pension reforms around the world. The findings, interpretations, and conclusions expressed herein are those of the author(s), and do not necessarily reflect the views of the International Bank for Reconstruction and Development / The World Bank and its affiliated organizations, or those of the Executive Directors of The World Bank or the governments they represent. For more information, please contact the Social Protection Advisory Service, The World Bank, 1818 H Street, NW, MSN G7-703, Washington, DC 20433, USA, Telephone: (202) 458-5267, Fax: (202) 614-0471, E-mail: [email protected]. All Pension Reform Primer material is available on the internet at www.worldbank.org/pensions. 2 The World Bank Pension Conceptual Framework choices and suggests considerations for the reform progressive? What measures should be taken to process. strengthen the enabling environment which are conducive to reform options best satisfying the Initial conditions core objectives? Once these core objectives have been identified, one can then identify the mandate An assessment of the initial conditions establish of the public pension system, the balance between the motivation for, and constraints on, feasible insurance and adequacy functions and appropriate reform options. Initial conditions include inherited system design options. systems, the reform needs of such systems, and the enabling environment which may or may not be Modalities and Reform Options – The conducive to potential elements of a reform design Five Pillar Framework and process. The inherited system includes existing mandatory and voluntary pension systems, the The Bank’s policy framework flexibly applies a acquired rights of workers and retirees, related five-pillar model defining the range of design social security schemes, existing family and elements to determine the pension system community support of retirees, and old age modalities and reform options that should be vulnerability and poverty prevalence. Reform considered. Country-specific conditions require a needs are determined by applying the adequacy, tailored and tactically sequenced implementation affordability, sustainability and robustness criteria of the model that will substantially define the range discussed below to existing schemes. Finally, the of feasible options. Consideration of the full range enabling environment includes the demographic of possible elements at this stage and seeking to profile; the macro-economic environment; the incorporate multiple elements of the model in capacity of administrative, regulatory and design is based on the view that a diversified supervisory institutions; and the breadth, depth system can deliver retirement income more and efficiency of financial markets, particularly effectively and efficiently. Multipillar designs with respect to long-term instruments. provide more flexibility than monopillars and are therefore typically better able to address the needs Setting out core objectives of the main target groups in the population and provide more security against the economic, Having evaluated the initial conditions and the demographic, and political risks faced by pension capacity to improve the enabling environment, the systems. Single pillar schemes are also less policy framework then focuses on how best to effective than multipillar designs when measured work within these to achieve the core objectives of in terms of the four evaluation criteria discussed pension systems--protection against the risk of below. The five pillars are: poverty in old age and smoothing consumption from one’s work life into retirement. In setting A non-contributory “zero pillar” (e.g. out the objectives of the pension system, in the form of a demogrant, social pension, or policymakers need to consider broader questions general social assistance typically financed by of social protection and social policy which the local, regional or national government), consider the poverty and vulnerabilities of fiscal conditions permitting, to deal explicitly different income groups. Key questions for with the poverty alleviation objective in order consideration in this context are, for example, to provide all of the elderly with a minimal should scarce fiscal resources be devoted towards level of protection. This ensures that people providing old-age poverty protection in those with low lifetime incomes are provided with societies where data suggests that there are other basic protection in old age, including those groups such as children that may face greater who only participate marginally in the formal poverty prevalence or vulnerability? How much economy. Whether this is viable—and the should a society aim to redistribute income specific form, level, eligibility and through the pension system and how can it ensure disbursement of benefits depends upon the that this redistribution is made transparent and prevalence and need of other vulnerable The World Bank Pension Conceptual Framework 3 groups, availability of budgetary resources and other individual financial and non-financial the design of complementary elements of the assets (such as home ownership and reverse pension system; mortgages where available). A mandatory “first pillar” with Certain pillars are better suited to address the contributions linked to varying degrees to needs of the lifetime poor, informal sector workers earnings with the objective of replacing some at risk of becoming poor once they stop working, portion of lifetime pre-retirement income. and workers covered by formal pension First pillars address, among others, the risks of arrangements while also providing diversification individual myopia, low earnings, and for all income groups. For example, a zero pillar inappropriate planning horizons due to the social pension is well suited to address the need for uncertainty of life expectancies, and the lack or basic income support of the lifetime poor while risks of financial markets. They are typically also providing a foundation that covers gaps in financed on a pay-as-you-go basis and thus are, coverage and benefit adequacy in societies with in particular, subject to demographic and mandatory first and second pillar schemes that political risks; may not be reaching workers through their full working lives due to their movement in and out of A mandatory “second pillar” that is formal employment. Similarly, in societies that typically an individual savings account (i.e. have only been able to achieve limited coverage of defined contribution plan) with a wide set of mandatory first and second pillar schemes, design options including active or passive developing well-supervised