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Global Patterns of Pension Provision

Robert Palacios, Head, Pensions Team World Bank

Core Pension Course

Washington DC, March 2013

1689 1889 1982 Today

Pension evolution (one version)

THE RISE OF DB SCHEMES IN 1935

“…the old age pensions he called for

came to be financed with wage based

taxes was an accident.”

THE RISE OF DB SCHEMES IN 1975

THE RISE OF DB SCHEMES IN 2012

Life cycle of PAYGO scheme

6

-30

-20

-10

0

10

20

30

40

50

60

0 0.05 0.1 0.15 0.2

elderly/workers

su

rplu

s/r

eve

nu

es

OECD countries at end of the life-cycle

7

0 50 100 150 200 250 300

Switzerland

USA

New Zealand

Germany

Denmark

UK

Finland

Sweden

Italy

Unfunded pension liabilities as share of GDP (retirees only)

Source: Beltrametti and De la Valle (2011)

Developing country IPDs

8

0

100

200

300

400

500

600

0 2 4 6 8 10 12 14 16

Un

fun

de

d P

en

sio

n L

Iab

ilitie

s a

s %

of G

DP

Pension spending as % of GDP

Aging and pension spending

9

Parametric and systemic reforms*

Parametric

Raising effective retirement ages and linking

with longevity

Raising contribution rates

Reducing future accrual rates and taking into

account longer wage periods

Moving to price indexation

Notional accounts or NDCs

Replacing part or all of DB with DC

*(Integration of civil service schemes to be discussed in later session) 10

1 2

3

6 7

8

12

14 15

17

21

23 24

27 28

29 28

27 28

0

5

10

15

20

25

30

35

1980 1988 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2011 2012

Nu

mb

er

of C

ou

ntr

ies

Chile

Peru Uruguay

Mexico

Bolivia

El Salvador

Hungary Kazakhstan

Poland

Sweden

Hong Kong

Costa Rica

Bulgaria

Croatia

Estonia

Nigeria Slovakia

United Kingdom

Argentina

Australia

Dom. Rep. Kosovo

Romania

Macedonia

Argentina closed

Hungary closed

Czech Republic

THE RISE OF DC SCHEMES: FROM SANTIAGO TO PRAGUE

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Share of benefit from DC

Colombia Costa Rica

0

0

0.25

0.5

0.75

1

0.5 1 1.5 2 2.5 3

Private DC

Minimum pension

0

0.25

0.5

0.75

1

0 0.5 1 1.5 2 2.5 3

Private DC

Public DB scheme

Proportion of benefit from private DC vs public DB

Low income Low income High income High income

DC schemes in 2012

13

14

Mandated pensions today

Publicly-

managed DB,

PAYG

43%

Publicly-

managed DC

7%

Public PAYG DB

+ Private funded DC

18%

Publicly- managed

partially funded DB

31%

Privately-

Managed, funded DC

4%

Note: Select countries: only national contributory schemes included

But most workers not covered…

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Coverage, per cent

(number of countries)

80 to 100 (15)

60 to 80 (21)

40 to 60 (15)

20 to 40 (26)

0 to 20 (37)

Contributory scheme coverage

16

y = 0.0002e1.8464x R² = 0.7712

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2.0 2.5 3.0 3.5 4.0 4.5 5.0

Active

me

mb

ers

(%

Wo

rkin

g A

ge

Po

pu

lation

)

Log Income per capita

Active coverage vs Income per capita

Elderly coverage

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RETURN OF SOCIAL PENSIONS

MATCHING CONTRIBUTIONS

Countries attempting

coverage expansion by

matching contributions of

informal sector workers:

China, Colombia, India,

Mexico, Peru, Thailand,

Turkey, Vietnam

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Summary and looking forward

For a century, public DB plans spread across the globe and dominated pension provision but…

Unfunded liabilities are catching up with maturing systems as the demographic transition unfolds resulting in cuts

In the last two decades, prefunding and especially DC plans has taken on greater role raising new issues of costs, investments, payouts and supervision

Coverage has emerged as the key issue for most low and middle income countries with policy discussion centered on the potential role of social pensions and innovative ways of incorporating the informal sector workforce

What will younger countries learn from the experience of the older countries?

Thank you!

See us at

www.worldbank.org/pensions

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