Csaba Feher

1. Structural Reforms: Expanding Coverage, Multi-Pillar SystemsRegional Pension Policy WorkshopMajuro, April 25-29, 2016 Csaba Feher Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management

2. Expanding Coverage Background – forces behind partial coverage • “Original informality”: the boundaries of the state and society do not coincide • Historical reasons: from occupational schemes to universal ones • Traditional safety nets dissolved but not replaced automatically • Contracting coverage/compliance in some developed countries • Fragmented careers Pension systems’ objectives: poverty alleviation and consumption smoothing when insured risks materialize • Economic rationale: misery’s negative externalities • Ethical considerations • Social contract

3. How to Expand Coverage - I Mandate to participate! (Easier said than done….) Participation = mandate to pay + entitlement to receive Constraints to expanding mandate to pay/save • Inadequate registries > limited collection, enforcement • Insufficient monetary income > very high discount rates • Low per capita income > subsidized entitlements Constraints to receipt • Inadequate control over uptake, delivery mechanisms • Fiscal space

4. How to Expand Coverage - II Incentives to voluntarily participate! A. Financial incentives • Tax advantages • Matching contributions • Subsidized/guaranteed rates of return Constraints/Concerns • Expensive • Only works for DC schemes (because of hard-to predict inflows) • Avoiding inequities makes design complicated and prone to errors B. Administrative approaches - Auto-enrollment

5. How to Expand Coverage - III Non-contributory arrangements • Universal basic flat or quasi-flat benefits • Age and residency but not contribution or employment • Most redistributive, by nature • Most expensive, too – but fiscal cost can be addressed through tax claw-back • Pension-tested social pension • Age and residency • No other pension received • Means-tested social pensions • Administratively difficult to control income and asset test • Least expensive • Strongest incentives to participate in contributory arrangements

6. Basic Pensions – Selected Issues Serves public schemes’ primary objectives >> it should be preferred over consumption smoothing Adding to existing schemes: expensive • Return on contributions cannot be reduced to zero overnight and last liabilities must be honored > long transition or > large increase in unfunded liabilities and debt Replacing earnings-related schemes: • Needs special circumstances (i.e. hyperinflation, post-conflict discontinuities) or • Hard budget constraint on social security Basic pension (guaranteed poverty alleviation) is necessary for enforcing budget constraint on social security schemes

7. Funded Reforms Partial or full replacement of public DB schemes with privately or publicly managed DC schemes Stated Objectives • Reducing public pension liabilities • Changing division of responsibilities • Improving compliance • Foster capital market development • Fiscal discipline ( to create room for transition deficit) Actual Impact • Geographic and issuer diversification • Different risk exposure/profile – but political risks remain dominant • Gradual lowering of public liabilities • Transition deficit financed from debt

8. Funded Reforms First wave - Latin-America – starting with Chile in 1980 • Relatively well-prepared, proximity to developed markets • Still, reversals and revisions Second wave • Eastern and Southern Europe – starting in the late 1990s • Preconditions partly missing • Every one of them reversed Third wave • Central Asia, Africa • Preconditions often entirely missing • Doomed to failure, state capture, pure theft If replacing DB: substantial liquidation/transition costs If augmenting DB: additional labor costs

9. Funded Reforms – Preconditions I Funded schemes: legal constructs relaying a broad range of services – all of which must respond to high standards. Administrative • Reliable registries • Persons • Property/Claims/Collaterals • Taxpaying entities • Collection capacity • Technical capacity • Political capacity (various levels of government as employers) • Technological constraints • Scheme level • Regutor/Supervisor

10. Funded Reforms – Preconditions II Accounting and Valuation Standards • IFRS-compliant accounting at scheme and all service providers • Asser valuation rules observed Objective Efficiency Constraints • Per capita taxable income (level, monetization, definition) • Average scheme size • Market structure and competitive pricing of services Availability of Services • Custody and account management • Asset management

11. Funded Reforms – Constraints III Macroeconomic and Monetary Preconditions • Fiscal and labor tax space • Stable inflation • Clear fiscal/debt financing strategy • Availability of foreign exchange and access to markets Market Conditions • Deep and liquid securities market including • Sufficiently long yield curves • Readily available pricing information • Efficient settlement and clearing mechanisms • Market structure enabling competition • Experienced regulator/supervisor

12. Funded Reforms – Preconditions IV Political commitment across the spectrum • To ensure preconditions • To avoid reversals • To make sure that fiduciary duties are not compromised by fiscal/political goals Systemic preconditions • Strictly earnings-related nature requires poverty alleviation elsewhere • Longevity and disability risk must be assumed by someone even without access to annuity markets/providers

13. Funded Reforms – Preconditions IV Political commitment across the spectrum • To ensure preconditions • To avoid reversals • To make sure that fiduciary duties are not compromised by fiscal/political goals Systemic preconditions • Strictly earnings-related nature requires poverty alleviation elsewhere • Longevity and disability risk must be assumed by someone even without access to annuity markets/providers

14. Thank you! Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management