SLIDE 1
1
2
Pension policy and financial assessment of a new defined benefit - - PowerPoint PPT Presentation
Pension policy and financial assessment of a new defined benefit - - PowerPoint PPT Presentation
Pension policy and financial assessment of a new defined benefit pension scheme UNECOSOC conference Achieving sustainable development through employment creation and decent work for all 24-25 February 2015 Jakarta, Indonesia Hiroshi Yamabana
SLIDE 2
SLIDE 3
3
- 1. Major dimensions of pension design
1. Coverage (horizontal dimension)
- Beneficiaries vs. potential target beneficiaries
- Contributors vs. potential target contributors (in
case of insurance schemes) 2. Benefits (vertical dimension)
- Benefit level vs. poverty line / minimum wage
- Benefit level vs. average wage (in case of social
insurance scheme) 3. Financing (as a backbone)
- Long-term financial sustainability / equilibrium
SLIDE 4
Two-dimensional strategy for the extension of social security coverage: Building comprehensive social security systems
4
Coverage
Access to essential health care and minimum income security for all Social security benefits
- f guaranteed levels
Voluntary insurance under government regulation
level of protection
high high low low
Horizontal dimension: Guaranteeing access to essential health care and minimum income security for all Vertical dimension: progressively ensuring higher levels of protection guided by C.102 and higher-level standards
floor level higher levels (minimum C.102)
SLIDE 5
5
- 2. Current situation in Indonesia
1. Coverage
- Different schemes for civil servants, army and
police and private-sector workers
- No coverage for informal economy workers
2. Benefits
- Labour Law (Severance and service reward pay):
lump sum
- Provident Fund for private-sector workers: lump
sum
- Pension for civil servants: periodical payments
3. Finance
- Labour law: employers’ direct compensations
- Provident Fund: external, individual accounts
- Pension: external, collective financing
(redistribution)
SLIDE 6
6
- 3. Policy and design issues in Indonesia
1. Coverage
- Wage earners: coordination
- Informal economy workers: extension (incl. tax-
based schemes) 2. Benefits
- Wage earners: predictable and periodical
payments with proper benefit adjustment / indexation (DB) as the main tier
- All the elderly: poverty alleviation basic pension
3. Finance
- External funding
- Inter- and intra-generational transfers /
redistribution as needed
SLIDE 7
7
- 4. DB / DC / NDC discussions
1. Defined contributions (DC) scheme
- Individual saving, easy to understand; but
- Lump sum spent up in several years
- Amount substantially influenced by unpredictable
investment return for decades
- Require high contribution rate (e.g. 20%) for
substantial amount to be accumulated, from the beginning of the scheme, at the time of developing stage of economy
- Scare investment opportunities at the time of
developing stage of economy => Some countries to revert back to DB, e.g. Argentina, Poland
SLIDE 8
8
- 4. DB / DC / NDC discussions (contd.)
2. Notional defined contributions (NDC) scheme
- ‘Notional’ individual saving, similar to DC, but not
all amount in the account;
- Require high contribution rate (e.g. 20%) for
substantial amount to be accumulated, from the beginning of the scheme, at the time of developing stage of economy
- Scare investment opportunities at the time of
developing stage of economy
- Cannot cater for disability or survivors’ pensions
=> Adopted by countries with already high contribution rates, e.g. Sweden, Poland, Italy
SLIDE 9
9
- 4. DB / DC / NDC discussions (contd.)
3. Defined benefit (DB) scheme
- Benefit formulae and benefit conditions (e.g.
retirement age) set in advance;
- Calculate the required contribution rate for the
defined formulae and benefit conditions
- Gradually increase the contribution rate in future,
with rationalizing benefits and conditions (e.g. retirement age)
- Adjusting benefits, contributions and reserve
funds in line with demographic, economic and social conditions
- Usually include disability or survivors’ pensions
=> Adopted by many developed as well as east Asian countries (e.g. Japan, ROK, China, Thailand, the Philippines, Viet Nam, Lao PDR)
SLIDE 10
10
- 5. Proposed pension design (outline at the time of
study, no agreement yet)
1. Coverage
- All wage earners working for an employer with 20
employees or more
- Civil servants, military and police: integration in 2029
2. Benefits 2.1 Old-age pensions 2.1.1 Qualifying conditions
- 15 years of contributions
- Retirement age: 56 -> 57 (in 2037) -> ……. -> 65 (in
2085) 2.1.2 Benefit formulae
- 1% x contribution years x individual career-average
salary 2.1.3 Benefit adjustment / indexation
- 50% of inflation
SLIDE 11
11
- 5. Proposed pension design (outline)
2.2 Disability pensions 2.1.1 Qualifying conditions
- 15 years of contributions; or
- 30 monthly contributions / 36 most recent months
2.1.2 Benefit formulae (Same as old-age pensions)
- 1% x contribution years x individual career-average
salary 2.1.3 Benefit adjustment / indexation (Same as old-age pensions)
- 50% of inflation
SLIDE 12
12
- 5. Proposed pension design (outline)
2.3 Survivors’ pensions 2.1.1 Qualifying conditions
- 15 years of contributions; or
- 30 monthly contributions / 36 most recent months
2.1.2 Benefit formulae
- Widow: 70% x old age pensions
- Orphan: 50%
- Mother, father: 20%
2.1.3 Benefit adjustment / indexation (same as old-age pensions)
- 50% of inflation
3. Financing
- Contributions on wages:
5% by employers, 3% by employees
SLIDE 13
13
6. PAYG cost rate
IC = EB where: IC: Annual contribution income EB: Annual benefit expenditure While IC = NC * AW * CRPAYG EB = NB * AB where: NC: Number of contributors AW: Average wage of contributors CRPAYG: PAYG cost rate NB: Number of beneficiaries AB: Average benefit
SLIDE 14
14
- 6. PAYG cost rate (contd.)
Hence, NC * AW * CRPAYG = NB * AB NB * AB NB AB CRPAYG =
- =
- ---- * -------
NC * AW NC AW = RD * RF where: RD: Demographic ratio (i.e. what is the percentage of the number of pensioners compared with the number of contributors?) RF: Financial ratio (i.e. what is the average benefit level compared with the average wage?)
SLIDE 15
15
- 6. PAYG cost rate (contd.)
CRPAYG = RD * RF Example: Think of the following cases to calculate CRPAYG (Demographic dividend / aging) 1. Young scheme with young demography: RD = 20% RF = 40% 2. Mature scheme with aged population: RD = 50% RF = 60%
SLIDE 16
16
Demographic ratio of the proposed scheme
10 20 30 40 50 60 2016 2023 2030 2037 2044 2051 2058 2065 2072 2079 2086 2093 2100 2107 2114
- ld age pension
Invalidity pension Survivors pension Orphan pension cash benefits
SLIDE 17
17
Financial ratio of the proposed scheme
5 10 15 20 25 30 35 2,016 2,047 2,078 2,108 Old age pension Invalidity pension Survivors pension
SLIDE 18
18
PAYG cost rate of the proposed scheme
5 10 15 20 25 30 2016 2047 2078 2108
SLIDE 19
19
Replacement ratio 50 % Old-age pensions Contributions 40 years 20 years 60 years old
SLIDE 20
20
- 7. Financing of pensions
(1) PAYG financing method Contribution rate will be annually increased annually. Preparing for aging beforehand, by levying higher contribution rates than PAYG cost rate and relying on investment return on the reserves as well as advance savings. (2) General average premium / contribution (GAP) method
- Constant contribution rate for a long period, sometimes
assumed as forever. (3) Scaled premium / contribution (SP) method:
- Constant contribution rate (for a certain period)
SLIDE 21
21
Scaled premium contribution rates
5 10 15 20 25 30 2016 2047 2078 2108 PAYG Base scenario Scaled premium
SLIDE 22
22
- 8. Some points for consideration
(1) Tax-based universal pensions (2) Social insurance system to provide higher benefit level for wage earners (as partial income replacement) (3) Faster scheme integrations for formal economy (4) Better annual accrual rate (4/3% instead of 1%) to comply with C.102 (5) Better minimum pensions for disability and survivors’ pensions to comply with C.102, especially for those with short contributing periods (6) Indexation in line with the wage increase or inflation (not 50% of inflation) (7) Faster increase in the retirement age (and above 65 as needed) (8) Scaled premium financing method (9) Contribution level gradually adjusted in years to come, taking into account aging, affordability of contributions and investment opportunities
SLIDE 23
23
- 8. Some points for consideration
(10) Establishment of the design, financing and investment strategies, and the overall governance structure of a new scheme, including demographic decision making process through tripartite consultations (11) Tripartite Governance of the new pension scheme, building trust among tripartite partners and governance
- f the scheme
(12) More effective social security system, e.g. more emphasis on job matching and vocational training for unemployed (13) Coordinated systems of social security, more emphasis
- n periodical benefits than lump, more emphasis on