africa pension

7/29/2019 Africa Pension

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PENSIONS AND SOCIAL SECURITY IN SUB-SAHARAN AFRICAISSUES AND OPTIONS1

Luca BarboneLuis-Alvaro Sanchez B.

Summary

This paper presents an overview of Social Security reform issues in Africa, based on theexamination of a number of case studies for both Francophone and Anglophone Africa.There are a number of conclusions that are drawn by the analysis of case studies: With very few exceptions (Mauritius, Botswana, and to a certain extent South Africa),

formal social security institutions have not been successful in fulfilling their mainmission, broad-based coverage of the population. What is more important, it is unlikelythat pensions and disability coverage will be extended to the informal sector, whichrepresents the vast majority of the employed population in Africa, within the next

generation. As has happened in Europe over the past century, only sustained economicgrowth, formalization of the economy and reduction of the relative weight of theagricultural labor force will create the basis for some form of universal coverage. Thus,formal social security systems in Africa are at present a perquisite of the middle class.This has implications for the strategy of reform, and, in particular, for claims of publicresources that can be made by existing institutions.

Improving governance is the first order of business for existing formal social securityinstitutions, which have all too often failed to deliver on promises to their members due

to mismanagement (and sometimes outright pillage) of assets. The main tasks involveincreasing transparency, curtailing opportunities for corruption, and most importantlyprotecting beneficiary rights. An important component of improving governance is thecreation of protective barriers around the social security organizations, to prevent undue


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c eat o o p otect ve ba e s a ou d t e soc a secu ty o ga at o s, to p eve t u due

contributions are high and benefits, at least as written, are generous. As the environmentchanges and the private sector takes the leadership in economic development, economic

agents become very sensitive to the rules of the game. Social security schemes designedfor the stronger economic agents who can contribute more, end up penalizing those atthe margin--small and medium economic concerns--leading to increased informality. Itthus seems appropriate that compulsory contributions go to finance minimum benefitstandards and that additional benefits are the result of voluntary agreements between theparts.

In pensions there are no boiler plate solutions. Much will depend on the initialconditions (benefit defined, provident fund, the level of contributions, the stock of

reserves etc), the strength of the supporting institutions (finance), and the fiscalsituation. This paper emphasizes the need for pension systems to be fully fundedbecause of reduced fiscal risk and improved savings. But investing pension reserves is adifficult issue and there are no easy solutions. Investing abroad, which probably wouldbe the best financially for the beneficiaries, is often politically unpalatable. Countriesneed thriving economies and strong financial sectors to provide profitable investmentopportunities. When this is so, pension fund reserves can profit from the opportunity.When financial sectors are weak, concentrating fund reserves in public hands to protect

them often leads pension institutions to try and become financial intermediaries withdismal results, including the further weakening of the financial institutions. This is anarea where much work needs to be done. Hopefully, as pension reserves, whether underpublic or private management, grow, financial institutions will improve and the two candevelop together. Already, as reported, countries in the continent have managed todevelop significant voluntary private pension sectors.

The transition to new designs has problems of its own and can affect the design of themost adequate solutions to be adopted. It is important to undertake rigorous technical

work before settling down on a design. It is easy to find solutions that are appealing inthe short-term, but that have detrimental long-term effects. The experience of some ofthe countries in the region already illustrated this trap. Improving administrativeperformance is another challenge that has been difficult to meet. Reducing costs, better


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I. Introduction

This paper reviews some of the main issues in social security reform in Sub-Saharan Africa,with emphasis on pensions, and evaluates reform options available to countries in thecontinent. This preliminary report is based on work the Bank is currently undertaking tostudy the pension and social security systems in Sub Saharan Africa in an effort to helpcountries arrive at improved social security designs suited to local characteristics. The Bankis not alone in these efforts. Governments and other donors also seek ways to address the

social security concerns of broad segments of the population. Consensus exists with regardto some critical areas. The importance of finding institutional designs that improvegovernance and enhance credibility is readily acknowledged by all. The need to have abroad view of social security, including those outside the formal sectors, is also a point ofconvergence. But, in spite of all the substantive and abundant work undertaken so far, muchstill remains to be done, especially when it comes to the design of equitable and sustainableinstitutions. These are auspicious times as many countries are engaged or thinking aboutsubstantial reforms of the social security systems.

The paper is organized as follows. It begins by outlining basic characteristics that framesocial security consideration in the continent. The population is young and working mostlyoutside the formal sectors. Formal security institutions in many countries have lostcredibility and it seems as if only the culture of social solidarity extended throughout thecontinent provides the basis to build a broad social protection umbrella. The paper thenprovides a brief overview of the main characteristics of the current social protectionschemes. Finally, the paper presents an overview of the main challenges ahead and

comments on the options available and their relevance in the African context. Improvinggovernance is the most critical challenge. Given the problems in the past, often business asusual is not the best option and new institutional setups must be found. The aim at the endis to protect the rights of the beneficiaries by providing better services, reducing


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by Geographical Region, 1995

60+/Total 60+/15-

Sub-Saharan Africa 4.7 9.3

II. Background

Well-designed social security policies can contribute to a better environment for economicgrowth in Africa. It would be erroneous to think that social security is a luxury to beafforded only when growth has taken place or when countries have reached a certain levelof per capita income. The fact is that there is a mutually reinforcing relationship betweeneconomic growth and societys ability to deal with the consequences of social and economicuncertainty. Adequate frameworks to deal with uncertainty will help improve the allocationof resources and hence contribute to economic growth. At low income levels there aresubstantial market imperfections that prevent people from dealing adequately with risks, and

this determines the type of activities they undertake and the efficiency of their investment.But it would also seem unwarranted not to take into account the limitations that the level ofincome imposes on the ability of government to effectuate transfers across groups. Asincome increases, it is easier for governments to tax and transfer resources to help the lessfortunate deal with the results of economic uncertainty. Disregard of the budgetary effectsand limitations will have harmful effects.

Straightforward application of external social security designs that do not take account of

the specifics of the African continent are likely to be inadequate, as the crisis of the systemsinherited from colonial times has shown. This section highlights some basic facts that framesocial security considerations in Sub-Saharan Africa. These pertain to the demographiccharacteristics of the population, the basic organizational structures of the Africaneconomies and the sources of economic uncertainty, the loss of credibility that characterizesformal social security systems, and the cooperative culture of the African continent.

Demographic considerations.

Demographic characteristics areimportant for social policy to identifyand measure the target populations.Social security difficulties are often


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By Income Level, 1995

Dependency Ratios60+/Total 60+/15-59

Sub-Saharan Africa: 4.7 9.3Low Income (n=38) 4.5 9.0

Lower Middle (n=4) 5.4 10.4Upper Middle 7.1 12.2

World:Low Income 6.1 11.2Lower Middle 9.5 15.4Upper Middle 8.7 14.5High Income 18.0 28.8

Source: World Bank HNP

Most of the countries in the continent have young populations. 2 Upper middle countrieshave older populations, with ratios of population over 60 to total population at 7.1, but

there are only five such countries with small populations. (See Table 2 and Figure 1.)

Over the long-term, expectedchanges in fertility and mortalityrates will reduce population growthrates and eventually increase theproportion of the elderly in thepopulation. But this transition will

take a long time; the bulk of theAfrican population will continue tobe young for a while. In fact, inmany countries the age dependencywill decrease over the next twentyyears. It will increase thereafter toreach, by 2040, levels similar tothose of Latin America and the

Caribbean today. The aging of thepopulation is expected to take place in the second half of the next century. (See Table 3.)The variation among countries, however, will increase for a while and decrease in the longrun, 3 meaning that countries will get older at different rates.

Table 3. Projection of Percentage of Population Over 60, Sub-SaharanAfrica

1995 2015 2040 2060 2080 2100

Sub-SaharanCountries 4.7 4.4 7.5 12.8 19.4 22.9

Low Income (n=38) 4.5 4.2 7.1 12.3 19.1 22.7

Lower Middle (n=4) 5.4 5.3 10.0 16.3 22.1 24.4

Upper Middle (n=5) 7 1 7 7 15 0 21 0 24 7 26 6


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in Agriculture, Sub-Saharan Africa, 1990

Sub-Saharan Africa 68

Low Income (n = 38) 75

Lower Middle Income (n = 4) 48

Upper Middle Income (n = 5) 32Source: ILO

Structure of the economy and sources of economic uncertainty. Social security policyaddresses problems that arise when markets do not provide adequate mechanisms to deal

with economic uncertainty or when shortsighted behavior exposes individuals tocontrollable risks. It is then necessary to ascertain the nature of the risks individuals face ina given society to tailor adequate policies. Many of the operating instruments for socialprotection in the world today have been designed to address problems characteristic ofindustrial economies, where large segments of the population have regular employment. InAfrica, rural and informal economies are very important. The formal sector (where peoplehave continuous employment and income) is very small. Moreover, in some countries,employment in the formal sectors continues to be highly dependent on the state, be it

directly or through state enterprises.

Most of the people in Sub-Saharan Africaare still employed in agriculture, whetherthey are classified as living in the rural orthe urban areas. In 1990, 68 percent ofthose economically active derived theirincome from agriculture or agriculture

related activities. This percentage waseven higher, 75 percent, for low-income countries in the region. (See Table 4) Even whenpeople move to urban centers, they are likely to continue to derive their income fromagriculture. Urban centers have yet to generate significant sources of steady employment.So most peoples incomes are subject to the variations proper of agricultural activity or thefortuity of informal activities, which themselves may fluctuate considerably. Add to thisenvironment, the regular calamities of nature and man, and the uncertainty of life isenormous.

It is often said that traditional societies have developed mechanisms to deal with theseuncertainties, and considerable amount of work has been done to describe the socialprotection mechanisms. The adequacy and coverage of these mechanisms is not sufficiently


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Lack of credibility of the formal systems. In many of the countries in the continent, formalinstitutions, public or private, lack credibility. This extends to social security institutions,especially pensions, and derives from the poor services provided to beneficiaries and themismanagement of pension reserves. People came to view social security contributionsmore as a tax and sought to develop, within their means, alternative protection schemes. Atthe same time, financial institutions are not trusted as a result of periodic sector crises. This

generalized lack of credibility severely constrains the development of social protectionmechanisms that necessarily have to rely on savings and insurance to meet economicuncertainties. Rebuilding credibility in social security and finance institutions requiresaddressing severe governance shortcomings in the public and the private sphere.

Figure 1 Relationship between Aging and Income per Capita,Sub-Saharan Africa, 1995

0

2

4

6

8

10

12

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

Income per capita ( GNP)

Sourc e: World Bank WDI


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While most Sub-Saharan countries share broad demographic, economic and institutional

characteristics, as discussed above, there are also significant variations in the design andperformance among the existing pension and social security arrangements, formal orinformal. This variety of institutional designs and outcomes prevents easy generalizations asto the most adequate social security designs. Careful study and review of existing systems isan important pre-requisite for reform. This section looks the variety in designs, thefollowing sections will seek to identify key issues. 4

Variations in formal social security systems arise from how they were initially designed and

how they have evolved over time. Many of the arrangements were inherited from colonialtimes or adapted from foreign designs, often from industrialized countries. Still, it is thecase that even countries that shared a common origin have tended to diverge over time.

Most African countries have some form of social security arrangements for people workingin the public sector, in state enterprises, or in the enterprises in the modern sectors. Theparallel systems operating in each country are often dissimilar. Table 5 describes severalfeatures of the main social security arrangements for a broad set of countries, taken from

indirect sources.5

Social security arrangements. Most of the countries provide a broad range of socialsecurity arrangements that include pensions and other benefits. French-speaking countries,for instance, tend to fall in this category. In these systems, pension arrangements are of thedefined-benefit type.6 Besides pensions for retired and pensions for widows and survivingchildren, other benefits include work accidents, maternity and children allowances.


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Table 5. Contribution Rates for Social Security Programs

Types of Total Contributions Employer Contribution SharesSoc. Sec. All Pension Social Share of Share of Programs Soc. Sec. Pension as % of Security Pension Soc. Sec. Pension

Incl. 1/ (a) (b) Soc. Sec. (c) (d) (c/a) (d/b)

Benin 4/ O, S,W,F 23.2 10.0 45 19.6 6.4 84 64

Burkina Faso O,W,F 23.0 9.0 39 18.5 4.5 80 50

Burundi O,W 10.5 8.5 81 7.5 5.5 71 65

Cameroon O,W,F 19.0 7.0 37 16.2 4.2 85 60

Cape Verde O,S,W,F 27.0 10.0 37 20.0 7.0 74 70Cent. Af. Rep. O,W,F 20.0 5.0 25 18.0 3.0 90 60

Chad 4/ O,W,F 14.3 6.0 41 12.3 4.0 86 67

Congo, D. O,W,F 18.28 7.0 56 15.88 3.5 87 50

Congo, R. O,S,F 18.48 6.0 32 13.83 3.6 75 60

Cte d'Ivoire 4/ O,S,W,F 15.1 4.0 27 12.9 2.4 85 60

Eq. Guinea O 26.0 21.5 83

Ethiopia O 10.0 6.0 60

Gabon 2/ O,S,W,F 22.6 7.5 33 20.1 5.0 89 67

Gambia 3/ O,W 20.0 19.0 95 19.0 19.0 95 100

Ghana O 17.5 12.5 71

Guinea O,S,W,F 23.0 6.5 28 18.0 4.0 78 62

Kenya O 10.0 5.0 50

Liberia O,W 7.75 6.0 77 6.0 3.0 77 50

Madagascar O,W,F 14.0 4.5 32 13 3.5 93 78

Mali 4/ O,S,W,F 23.0 9.0 45 21.0 7.0 91 78

Mauritania O,S,W,F 16.0 3.0 19 15.0 2.0 94 67

Mauritius 5/ O, 9.0 6.0 67 9.0 6.0 100 100Niger O,W,F 17.0 4.0 24 15.4 2.4 91 60

Nigeria O,S, 7.5 5.0 67

Rwanda O,W 8.0 6.0 75 6.0 3.0 75 50


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The overall contribution rates in these systems tend to be high, as they cover pensions andother benefits. They reach up to 31/35 percent of salaries in Senegal and quite a few

countries hover above 20 percent. The average total social security contribution stands ataround 19 percent, and the median at 20 (See Table 5 column 1.) 7 Pension contributionscan be quite low in some countries. The lowest are Mauritania, Cte dIvoire andMadagascar, where the contribution for pensions stands at 3, 4 and 4.5 percent respectively(Table 5, column b). Of the 35 countries included in Table 5, 28 have pension contributionrates at or below 10 percent. The low pension contributions follow from the fact thatinitially the resources needed to pay pension benefits were small. The receipts from highersocial security contribution rates have gone to finance generous family benefits. As pension

outlays have grown at a rate faster than the allotted contributions, internal transfers havebeen necessary to finance pension obligations. (More on this below) Employers pay the bulkof the contributions, both for overall social security and for pensions (See Table 5).

Retirement ages range between 55 and 60, but most systems allow early retirement at about50 years. The minimum number of years to qualify for a pension can be quite high, reaching20 years in some countries. Failure to reach this benchmark means that the contributors canget back only his/her nominal contributions. In some countries pensions for widows and

survivors can be quite generous. Replacement rates vary with contribution rates. It canreach 80 percent for public servants in some countries (Cte dIvoire, etc.). In mostcountries the difference between basic and total wages (basic plus allowances) is a source ofambiguity that creates opportunities for evasion.

Provident Funds. Provident funds focus exclusively on retirement and do not include otherbenefits. They operate as compulsory individual savings accounts, with beneficiaries entitledto a lump sum at retirement. Although annuities are possible, often people prefer to take the

lump sum. Several provident funds have been transformed into social security arrangementswith pensions organized around a defined benefit principle. This has already happened incountries like Ghana and Nigeria. Most recently (1998) in Tanzania, Parliament approved alaw transforming the National Provident Fund (NPF) into a broad social security


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time. In Mauritius, the standard contribution to the NPF is 9 percent--6 for employers and 3for employees. However, there is a cap at a relatively low level of income and the effective

contribution for medium and high salaries is much lower.

Public Pensions. Civil servants often have one or more social security arrangements. In agood number of cases pensions are paid out of the budget and there is no pension fund perse. Often the pension rules covering civil servants or public employees vary considerably. InCameroon around seven different regimes for public servants can be found. In countries likeKenya, Uganda, and Tanzania, local governments have their independent pensionarrangements. In French speaking countries, not all public employees are covered by the

civil service rules; some of them belong to the funds covering private employees. All of thiscreates a lot of confusion and inequities.

Universal pensions. Mauritius pays a pension out of the budget to anyone over 60 yearsold. Initially Mauritius experimented with a means-tested pension scheme out of the generalbudget. Application complications led to the introduction of a universal pension, which hasbecome pretty much ingrained in the population. This pension is adjusted regularly,although no precise formula exists. The universal pension covers roughly one third of the

average wage. Total expenditure on the universal pension stands at 1.3 percent of GDP, andsurveys show that it is an important instrument to sustain income of the less fortunate.South Africa has a means-tested universal pension. Gabon also has a universal pension.

Private sector arrangements. There is a wide variety of private pension arrangements inAfrica. Some are set up by individuals and some by companies, with contributions both byemployers and employees. Three factors seem to favor the emergence of private pensionarrangements: (1) low contribution rates to the public funds, (2) adequate tax treatment,

and (3) a working financial sector with some tradition in the management of pensionaccounts. These pension accounts can be of different types: defined-contribution, defined-benefit, and provident fund. Private non-compulsory private arrangements are strong inKenya, where more than a thousand can be found. Reportedly, the preferred private option


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additional to around 70 covered by the Parastatal Pension Act. The information on theprivate arrangements is limited and it is difficult to estimate its size from available

information. It is likely that jointly, the private and the parastatal arrangements have assetsequal to half of the assets under NPF management. The private arrangements arecomplementary to the public schemes and reportedly cover mostly medium and high levelemployees, even though the law orders full employee coverage to be eligible for taxbenefits.

Zimbabwe also has significant private sector pension arrangements. They are not customaryin Tanzania and Uganda, probably as a result of the high contribution rates to the public

pension systems, (which are 20 percent for Tanzania and 15 percent for Uganda), andcredibility problems of the financial sector. In French-speaking Africa and wherecontribution to the public pension system is low, private pension funds can also be found.Countries in these regions tend to have favorable tax treatment for private pension funds.Overall, there is limited information of the extent to which private arrangements are used toprovide for pensions.


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IV. Key Issues

This section reviews key pension and social security issues that have been identified in thesample countries under study. These issues are not intended as generalizations that apply toall African countries. Exceptions can readily be found. The intent rather is to present asample of the challenges faced by countries that seek to reform or improve their socialsecurity systems.

Credibility Problems. A good many formal social security systems of Sub-Saharan Africa

have experienced serious credibility problems due to many factors, such as low benefitlevels, long lead times to process claims and poor services. Credibility problems haveaffected all systems--provident fund or defined contributions. Provident funds problemsderived from the fact that the benefits they provide correspond to contributions plus returns,so that all risks are shifted to the beneficiaries. Thus the mismanagement of reserves,administration costs, and poor administrative performance led to meager pensions, in thebest of cases. In many other cases, records cant even be located. These problems helpexplain the move away from provident funds that has taken place in some countries.

The credibility problems of the defined benefit schemes are similar to those of the providentfunds regarding services provided. However, since benefits are defined, the risks of poorperformance, mismanagement of funds, etc. are transferred to the government or to futuregenerations. Unfortunately, however, beneficiaries have not been protected as well as onewould expect from theory. The reason is that often governments, either by fiat or neglect,adjust benefits downward by failing, for instance, to index them to inflation. In such cases,the consequences of poor performance are partially transferred to beneficiaries.

Serious governance problems underlie the loss in credibility. At the root of the poorgovernance is a faulty institutional design. In many countries, the key problem has been theinterference of the government in the management of the funds. This interference has been


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pension and social security systems. The oldest arrangements have been those coveringpublic servants. Some of these remain from former colonial times, with few changes.

Moreover, in many countries a considerable percentage of the people covered by formalsocial security schemes are either employed by the state or by state enterprises. In Togo, forinstance, only one third of those covered by formal social security arrangements can beconsidered to be working for the private sector. Although this percentage is higher in othercountries, public employment policies still have a significant effect on the development offormal social security schemes.

High Administrative costs and poor administrative performance. The cost of administering

social security systems in SS-Africa appears to be high. In the countries reviewed the ratioof administration costs over contributions varies considerably. It can be as low of 12percent in Mauritius when considering just the public pension fund and around 3 percent ifthe transfers for the universal pension are taken into account (1995). It reaches over 100percent in Kenya (1997)9. Certain care should be taken in interpreting this type of data. Thisindicator, administration costs over total collections, depends not only on administrativeperformance but also on the contribution rates. Thus, for instance, in Kenya administrativecosts exceed contributions, but the contribution rate is extremely low. Thus while indeed it

may be a fact that administrative expenditures are relatively high, the indicator exaggeratesthe extent of the problem in this case. Also, systems that provide a broad range of benefitswill have to have, on average, lower ratios of administrative expenditures over revenues.While it may be difficult to judge the efficacy of one organization compared to another(within a country or across countries) using broad indicators, it is still the case that in mostcountries social security organizations in Sub-Saharan Africa face considerableadministrative difficulties. A complete set of consistent comparative administrative costs forthe countries in the continent have yet to be put together.

Explanations of the poor administrative performance will vary from country to country.Often there has been a lack of incentives for the boards and management to improveadministrative performance. Existing incentives on the contrary have led to extensive


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Table 6 Labor Force and Pension Coverage

Covered - Contrib- Pens- Pens-Labor Wage Pension utors/ ioners/ Ioners/

Contrib- Force Bill/ Spending Labor persons Contrib-

Year utors Coverage Year GDP /GDP Force over 60 Utors

Benin 1989 3.5 0.4

Burkina Faso 1989 152,443 3.7 1993 0.3 3.1 2.4 9.5

Burundi 1990 4.7 1993 5.0 0.2 3.3 8.7 23.4

Cameroon 1989 597,452 13.7 1993 5.5 0.3 13.7

Cen. Af.

Rep.

1989 3.9

Chad 1990 1.1 1990 2.3 0.0 1.1

Congo, D. 1992 0.9 5.8

Cte d'Ivoire 1989 9.3 1989 11.0 9.3 5.7 12.3

Gabon 1991 7.3

Ghana 1989 1,100,000 13.3 1993 5.7 0.1 7.2

Guinea 1993 1.5

Kenya 1990 1,400,000 14.7 1993 6.8 0.5 25

Madagascar 1990 261,469 5.4 1993 5.4 4.1 8.0Mali 1990 2.5 1990 0.4 2.5

Mauritania 1989 6.5 0.2

Mauritius 1989 20.3 2.8 100

Mozambique 1986 1,248 0.5 1993 0.0

Niger 1990 108,656 2.8 1992 5.0 0.1 1.3

Nigeria 1990 1,000,000 2.4 1993 0.1 1.3

Rwanda 1989 315,217 9.3 1993 9.7 9.3 5.6 4.9

Senegal 1990 220,542 6.9 1992 6.9

Tanzania 1990 642,600 5.1 1992 4.3

Togo 1993 0.5 6.6 5.4

Uganda 1989 0.1 0.8

Z bi 1989 359 620 13 8 1994 0 1 10 2


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tasks on behalf of the government. To carry out multiple missions within a singleorganization has proven complex.

Difficulties managing pension reserve funds. Most pension funds in Sub-Saharan Africa,provident or otherwise, have generated surplus resources. Management of these reserveshas proven problematic and has contributed to existing and forthcoming difficulties. Thereare multiple reasons why management of funds has been difficult. To begin, governmentshave had a considerable degree of say on how pension surplus funds are utilized. In almostall countries, government has either borrowed or appropriated resources from the pensionfunds. The ways in which this was done vary by country. Only in a few countries and very

recently, have treasuries issued debt at market interest rates to the pension funds. As aconsequence, in many cases the interest rates were below market returns, and in some casesbelow inflation. Countries are finding it increasingly necessary to clarify the accountsbetween the government and the pension funds. 10

Besides the direct use of resources by the public treasury, governments have also directedpension funds to invest in specific projects or companies. These investments have notalways been fortunate. There have also been problems with the decisions of fund

management regarding where to invest. A favorite area of investment has been real estate.Problems in this area have come from inflated purchase prices and high construction costs.

The end result has been that pension funds are not adequately funded. This shows up andposes different problems in provident funds and in defined-benefit arrangements. Inprovident funds, the impact of fund mismanagement falls on the contributors. Thus, thereturns to investment that are credited are often below the market rate of return. Even so itmay be that not enough funds are available to cover the obligations in the books to

beneficiariesthe sum total of savings plus the returns. In this case the provident fund itselfis unfunded.11 In cases like Kenya and Uganda, the extent to which provident funds canactuarially cover their obligations to the beneficiaries depends on successfully finishing on-going real estate projects and the returns to previous real estate investments.


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than the social security crisis. The result has been a loss of credibility in both the public andprivate sectors.

Issues specific to the defined benefit schemes. Defined benefit schemes as found in French-speaking Africa face their own specific problems. These systems, as mentioned, combinepension and non-pension benefits, and pension contribution rates have been low, as pointedout above. Initially, these schemes generated operating surpluses. Over time, however,pension obligations have grown faster than contributions. This may appear odd in countrieswith young populations and fast growing economically active populations. However, thedemographics of the formal pension systems are considerably different from the population

at large. The number of beneficiaries contributing to the formal pension funds stagnatedover the last decade, while the average age of its membership increased. As a consequence,the ratio of beneficiaries over contributors increased dramatically over time12, resembling thecharacteristics of a quickly maturing pension system. In Cameroon, between 1991 and 1996the ratio of total beneficiaries to contributors increased from 8.8 to 16. In the public sectorthe same ratio has gone from 9.7 in 1990 to 31.25 in 1997. In Cte dIvoire the number of

Figure 2. Pension Contributions and Benefits in Cote d'Ivoire .

15,000

20,000

25,000

30,000

35,000

40,000

MillionsofFra

ncCFA

Tot. Contribs.

Tot. Benefits

Pension Contribs.

Pension Benefits


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sectors as economic recovery gets underway. In some countries, like Cameroon, recentgrowth has taken place outside the formal sectors, and so membership and contributions to

the social security institutions has not picked up.

So far the solution has been to redirect resources from other benefits to pay for pensions. Insome countries this is no longer feasible. In countries like Cameroon, Togo, and CtedIvoire, pension expenditures already equal pension revenues, so that they do not coveradministrative expenditures. (See Figure 2 for the case of Cte dIvoire.) Now countriesface hard choices. The expedient solution is to increase the contribution rates. Thishowever, can have undesirable side effects in the medium term, as it can contribute to a

continued stagnation of the membership. Also, it can create pressure to increase the benefits(replacement rates) with the consequence that the beneficial effect of the increase in rateswill only be short-lived. A more considered approach will have to include rethinking thelevel of other benefits, reaching an understanding with government on the outstandingobligations and the form of payment, and, most importantly, taking measures to improvegovernance and performance before committing to increase pension contribution rates.

Public service pension obligations. Social security and pension obligations for public

employees raise important problems of their own. When there are independent pensionsystems for public employees, a problem has been that governments did not pay theircontributions, thus de facto appropriating the surplus that would have been generated. Withpension funds in problems, it is necessary to clear the accounts between the government andthe funds, and agree on mechanism for reimbursement.

In the absence of a public pension fund, all of the current obligations fall on the budget. Theend result has been that the payments for pensions have been increasing. This has been

further accelerated by retrenchment. Additionally, civil service reforms have impliedsubstantial salary increases, leading to higher pension outlays now and in the future. Thishas led some countries to try and set new public pension funds. Salary increases have beenused to allow employees to contribute to the funds. Uganda is going through this process


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the contributor has met the minimum years of work to qualify for a pension, movement willimply a loss, since often the person can only take his/her contributions and not the

employers. There are other examples. Movement across countries, as in West Africa, willimply loss of accrued benefits. Portability is also important in company pension schemes.Movement from one pension to another will imply a loss of pension benefits, when theemployee can only take its contribution and not the employers. Lack of pension mobilitythen becomes a mechanism to retain labor.

Regulation. There is very limited experience in pension regulation in Sub-Saharan Africa.Public pension schemes are subject to the laws that created them. The Ministries of Labor

and Finance often exercise oversight. Private pension funds often fall under the jurisdictionof insurance regulators. Pension specific regulation has recently been introduced in Kenya.In French-speaking Africa, CIPRES plays the role of a regulator, but is still in a developingstage.


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V. The Path of Reform: Challenges and Options

The challenge in many African countries continues to be the building up of credible andsustainable social security institutions, anchored on a clear concept of equity and supportedby rules of the game that assure adequate governance. Development of a broad approach tosocial security that includes all persons both inside and outside the formal system, can onlybe developed gradually and as a result of the efforts countries undertake to design andimplement new social protection schemes.

The initial focus will in most cases be on the reform of formal social security arrangements,to an extent greater than is probably warranted. But, there is hardly any choice given thecurrent difficulties with formal social security systems. In doing so, it is necessary toproceed gradually and by taking careful stock of the existing situations. Social securityreform is a difficult area of social policy, since the entitlements it creates are difficult toreverse later on, and long-term effects are difficult to visualize without the support ofdetailed technical analysis. Solutions that may appear attractive in the short-term can end up

having very negative long-term effects. Countries must avoid at all costs strategies that cannot be sustained over time.

Improving social protection for the informal and traditional societies is going to take time,as it requires identifying mechanisms that are tested and feasible. This can only be done byusing the lessons that will be gathered from the multiplicity of efforts to improve socialprotection coverage in the continent. Overtime, it is likely that the problems with the elderlyin the informal sector will increase. By then, hopefully the mechanisms will be in place to

allow societies to supply them with adequate protection.

The overriding motif of what follows is governance understood in a broad sense.


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privileged segment of the population. This is a very valid concern and certainly exclusiveemphasis on the formal system would be unwarranted at the present time. Unfortunately,

however, countries need to meet head-on the difficulties of the on-going social securityconcerns and, in some cases, doing so requires substantial budgetary transfers to meet pastobligationscontributions that were not paid or resources taken that have not beenreturned. Moreover, honoring entitlements in the current benefit schemes may requireadditional budgetary transfers, if increases in contribution rates are not desirable or feasible.

Towards the future, states will have to depart from previous practices that have usedarguments of equity and solidarity to the benefit of a few. This is very germane for countries

considering significant overhauls of their social security systems. The danger now as in thepast is to increase entitlements without regard for budgetary limitations or concern for thoseexcluded from the formal systems. For even though social security arrangements appear asmechanisms of solidarity amongst clearly defined populations, the fact is that often the stateends up guaranteeing the benefits promised. For instance, in the case of compulsory definedbenefits pension schemes the state, in many countries, has in effect been liable for pensionbenefits when the funds have not been available to meet them.

Governance

The foremost priority in the reform of formal social security systems in SS-Africa is toimprove governance and by doing so, build up their credibility. If governance issues are notforcefully addressed, other actions to deal with the present problems will only have a short-term and limited effect. For instance, contribution rate increments to eliminate deficits willserve only as temporary palliatives and problems will resurface later on. Indeed, it isadvisable that governments first address governance issues before or as part of engaging in

social security reform.

Experience worldwide shows that social security systems (particularly the pensioncomponents) have easily been captured by special interests that proceed to distort the


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On-going social security reform activity all over the world, especially in the pension area, is

seeking to grapple with these issues. To do so, reforms have sought to radically overhaulthe governance structures. Key elements have been: Redefinition of the role of the state, focusing priorities on the provision of adequate

social security frameworks and limiting direct management and financial exposure. Unbundling the provision of social security services, to facilitate management, increase

transparency and facilitate clear assignment of responsibilities. Redefinition of the role and composition of the managing boards providing

administrative and legal autonomy, defining clear responsibilities, and introducingoversight and control mechanisms. Making explicit any intra and inter generation transfers. Introduction of competition into the management of social security reserves. Providing beneficiaries with a greater menu of options, either by allowing them to select

the pension provider or by having various pillars to introduce diversification. Introduction of regulatory frameworks to guarantee that resources are well managed,

that the state is kept at arms length, and that beneficiaries are well informed on funds

performance. Taking account of the consequences of social security reform on other sectors, like

labor and financial markets.The adequacy of these reforms can only be considered on a country by country basis.However, in all there is an urgent need to improve governance.

Unbundling

A useful first step of where to begin the reform of the formal pension system is to takestock of the different services provided by the various social security institutions andevaluate the convenience to have the same institution provide them. In the simplest case,


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The size of the Formal Social Security Sector

As has been shown, the formal economic sectors are small in most Sub-Saharan Africaneconomies. Social security contributions center on a limited number of incorporatedenterprises and the public sector. Over the long-term, countries should look for the socialsecurity systems to expand at rates equal to or greater than economic growth. High andsustained growth will come under the leadership of the private sector. A buoyant socialsecurity sector will come about only if the economic agents have the incentives toincorporate and work in the formal economy that provides continued employment andsalaries. This will not happen if the appropriate set of policies is not in place.

There is a long-term trade-off between the size of the formal social security system and itscoverage. Policies that seek extended and sizeable benefits for formal sector employees willhave the effect of reducing the contributory base. The reason is that higher replacementrates, for instance, require larger contribution rates, that in turn have negative consequenceson the labor market. Participation in the formal system decreases. This is a problemeverywhere but more so in Sub-Saharan Africa where the supply of capital and labor to theformal sectors is very elastic.13Solutions can be tried to mitigate these effects. For instance,they can increase investment in enforcement, but at some point the higher administrativeexpenses can significantly reduce the resources available for benefits.14 Benefits can betailored to induce people to remain in the systemminimum pensions and family benefitsare an example. But this itself is limited by the budget available to provide these incentives.

These considerations are quite timely given that African countries face pressure to increasesocial security contribution rates to close fiscal gaps or improve benefit coverage. There isnot a precise mathematical formula that can be used to calculate adequate contributionlevels. Experience shows that the level of the social security contributions to thecompulsory systems goes up with per capita income, partly because it is easier to collectcontributions. From a more substantive perspective, it must be noted that highly competitive

i k di f i d l M i i hi h i hi hl


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Of course, total social security coverage is not determined exclusively by the compulsory

formal system. Complementary arrangements between employers and employees or byemployees themselves play an important role in developed and developing countries, andhave to be taken into consideration when taking stock of social security coverage.

Pensions

The three-pillar pension framework has become a standard reference that can serve as aframework within which to analyze the options available to Sub-Saharan countries. Options,however, are rarely independent of the existing conditions, because transition can be costlyand difficult.

The Three Pillar Framework

The first pillar of a pension system seeks to provide a minimum income to the elderly,usually defined as those over 60 years of age. Countries often finance this pillar from thegeneral budget, but do not cover all of the elderly and use means testing to determineeligibility. As mentioned above, Mauritius and to a lesser extent Gabon provide a universalpension. For most Sub-Saharan countries, fiscal limitations and difficulties with meanstesting prevent consideration of this option for a while. However, limited support can stillbe given to the elderly in the context of anti-poverty programs. (See below.)

A limited version of the first pillar seeks redistribution among those contributing to theformal pension system(s). Different degrees of redistribution are possible, includingproviding uniform pension to the members. But, redistribution mechanisms have incentiveconsequences whose effects have to be taken into account when considering the design ofthe pension system. Certainly a minimum pension provides an incentive to those with lowi i i h d ib if h i i i f li ibili


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low-income members. Thus it is not necessary to have a defined benefit pensionarrangement provide for intra generation solidarity.

The second pillar is a defined contribution system operating as a compulsory or forcedsavings mechanism of individual accounts. Beneficiaries receive annuities upon retirement.On the surface there are similarities between defined contribution schemes and providentfunds, as these are also schemes of individual savings accounts. A major difference betweenthe two is the institutional design that supports the contributory systems as currentlyimplemented. This institutional design introduces rules or norms to prevent poor pensionfund management. Key elements are the creation of a regulatory body to oversee pension

funds and the introduction of competition for the management of the funds. Hence, the poorperformance of the provident funds is not a sign that defined contribution schemes wouldnot work in the African context. In fact they have performed well as voluntary privatearrangements in countries where public provident funds have experienced difficulties, as hasbeen the case in Kenya.

The third pillar covers voluntary private pension arrangements. As mentioned, voluntarypension arrangements already thrive in African countries like Kenya, Mauritius, Zimbabwe,

and to a lesser extent in several other countries. A key factor that has facilitated theemergence of private pension arrangements has been tax rules. Countries in the regionexempt from taxation contributions and interest returns and tax benefits. Even though thisform of taxation is formally neutral, it has been the subject of some controversy, as it mayend up implying a transfer for those taking advantage of the tax provisions who are likely tobe relatively well off. Tax issues aside, the important point to highlight is the ability of thefinancial sector in these countries to organize and manage private savings accounts.However, because private arrangements may not be as transparent, regulation is a necessary

complement.

Countries will do best to build on existing private pension systems rather than crowdingthem out with the introduction of compulsory arrangements, either defined contributions or


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annuities. It could be said that the defined benefit approach seeks to smooth out some of therisks of the financial markets and of administrative mismanagement. The pension fund takes

these risks and eventually passes them to the government or to future generations.Unfortunately, in many developing countries, defined benefit schemes failed to keep theirpromises and have adjusted their balances by reducing benefits; failure to correct forinflation is a typical mechanism. Thus defined benefit schemes have not been a guarantee ofmore secure pensions.

Since effective pensions in the defined contribution approach can be risky as they depend onthe financial returns and costs of administration, its designers have sought to address these

potential difficulties through regulation. Some countries guarantee a minimum return toinvestments, often requiring the fund manager to put up capital to cover low or negativeinvestment returns and by imposing strict rules on portfolio allocations. Limits can also beset on administration costs. Lastly, the option for contributors to move among funds canserve to improve management performance.

Another critical difference between the two systems is the structure of incentives. In thedefined benefit systems participants do not have incentives to improve management or

monitor performance if they perceive that their pension is guaranteed. The incentives fordoing so are with the government or with coming generations, since poor performance canimply future budgetary transfers or higher contribution rates. But many times governmentsdo not take a long-term view, and future generations do participate in current policydiscussions.

With defined contribution systems, beneficiaries have a direct incentive to seek improvedmanagement and will do so if the adequate oversight instruments are available. Also,

defined contribution systems have positive effects on savings and, in a growing economywith high returns to investment, will need lower contribution rates to provide a givenreplacement rate.


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highly funded, the case is that at best in reality they are partially funded. One reason is thatwhen the schemes are introduced, pensions are paid to beneficiaries who have not fully

contributed. This generates a transfer across generations, which is not necessarily acharacteristic of defined benefit systems but that often accompanies them. This transferoperates as a tax on younger generations and affects the level of benefits the funds canprovide.

Transition issues. In moving from one pension design to another, there are a variety oftransition issues, which themselves impact the availability of feasible solutions. It seemsopportune to consider some of these transition issues at this time, as countries in the region

are likely to face them at some point or another.

The type of transition that has been studied the most is that from defined benefit to definedcontribution schemes. This has been typical of Latin American countries that have adopteddefined contribution systems. The key issue here is the financing of the debt implicit in thedefined benefit scheme. This debt corresponds to value of the acquired rights of those thathave already retired plus those that have contributed to the pension system, minus the assetsof the fund. As the defined benefit is phased out, pension contributions are no longer

available to pay for pension obligations, and instead go into the individual savings accounts.There are several options to finance the implicit debt. Existing fund reserves, if they exist,can be used. Some countries have used proceeds from privatization. More generallyhowever, these obligations have to be met with resources from the general budget orthrough borrowing, thus being paid by either current or future generations. The obligations,of course, need not be met outright and can be honored by issuing bonds to the beneficiariesto be paid as they come due in the future. In countries with small formal pension systemsthe above strategy will imply a transfer from the general budget to a small group of

individuals, a point to be considered carefully. Transition from defined benefit to definedcontribution schemes requires very prudent fiscal management and thus a necessary step inbefore undertaking a reform of this type is to calculate the implicit debt of the existingdefined benefit systems to get an idea of the fiscal requirements. Countries in fiscal


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allowing large enterprises to set substitutive pension arrangements and later on allow newpension providers to come in.

A more difficult problem is found when, within a defined benefit, countries are unable toincrease contribution rates without simultaneously raising replacement rates. As a result, theroom provided for by the rate increase is only temporary; further increases are loomingdown the line. This situation is partially alleviated if the government steps in to pay theobligations it owes to the funds, so that they become highly funded. But if the governmentdoes so the condition is set to move to defined-contribution systems.

Improving management of fund reserves. We have advocated the need for pension funds tobe funded, even if they are benefit defined. The advantage of being fully funded lies inreducing the fiscal risk and avoiding negative effects on savings. But as we have seenalready, the management of pension reserves has been highly problematic in the past, so it isfair to ask what conditions will guarantee improved results this time around. This is a verydifficult question to answer satisfactorily.

A first step is to seek professional and specialized management of pension reserves. Some

countries seek to do this by setting special investment committees, usually under theMinistry of Finance. A more aggressive move is to contract out management of pensionreserves, subject to a regulatory framework. This is roughly what defined contributionarrangements do. Something similar could be done for the reserves of the defined benefitarrangements.

Even if an appropriate governance framework is set up, the question of adequate investmentinstruments remains. In the past, investment has not been highly profitable in Africa.

Financial products are very limited, even government paper. Direct lending or investment incompanies by the pension fund would require the internal development of evaluatinginfrastructure, which amounts to converting pension funds in financial intermediaries. Thisis a path full of difficulties.


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beneficiaries. For this reason it is very important to have funded pension systems.15 Second,compulsory pensions that substitute for voluntary pension arrangements are likely to have

only limited net effects on savings. Thus, when introducing compulsory defined contributionsystems it is important to take into account the effect on private pension schemes. Thecrowding out effect on savings will thwart financial development.

Administrative issues. Administrative reform is needed to improve the quality of theservices provided and to reduce costs. Improving quality will help rebuild the credibility ofthe social security institutions. Reducing costs will help tremendously the finances of theinstitutions over the long-term. Most countries need improvements in both areas. Significant

improvement most likely will not come about through traditional strategies that havecentered their efforts on the information management techniques, for instance. As it is wellknown, effectiveness of new technologies will depend on the ability to streamline processesand realign objectives and incentives within the institutions. This often requires majorreforms similar to those needed in tax administration.

Administrative reforms need to deal with the multiplicity of functions that social securityinstitutions undertake. Some of these areas are hardly related with each other. One of these

areas is the collection of contributions. Some institutions considered efficient byinternational standards, like the social security administration in the US, focus on a limitedset of activities, mainly record keeping and providing services to beneficiaries. The InternalRevenue Service collects social security contributions as part of the tax collection. Somecountries have recently separated out the collection of social security contributions andassigned the task to a specialized agency.

There is a certain reticence in many countries, and not only in Africa, to trust tax

administrations with the collection of social security contributions. There are two mainreasons for this mistrust. The first is that social security contributions are likely to be amarginal activity for tax agencies and thus they may not assign the sufficient resources toenforcement and book keeping. Moreover, social security often requires keeping personal


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This issue is important within as well as among countries. Within countries, there is themobility between the public and private and pension systems. Some countries, like Cte

dIvoire, are taking measures to assure portability. The basic idea is to permit contributorsto sum up the number of years worked in each system in determining eligibility for benefits.Since the two systems offer different benefits, final pensions are paid in proportion to theyears worked by each one of pension institutions. Pension portability is also highly relevantin countries that have developed complex private pension schemes. When moving from oneemployer to another, workers run the risk of losing benefits. This mechanism can be used toblock labor mobility and hoard labor. Mauritius has introduced legislation mandatingmobility in new pension arrangements. Portability problems are also important between

countries. This is particularly the case when there is considerable labor mobility amongcountries, like in French-speaking Africa. Here workers can work a lifetime and not qualifyfor any pension benefits.

The relevance of pension regulation. It is difficult to overstate the importance of adequateregulation in improving governance of social security arrangements, pensions in particular.Regulation is relevant both for private as well as publicly mandated systems. In the case of

private arrangements (be it individual or enterprises), regulation is important to increasetransparency and protect beneficiaries. Private pension arrangements as they have emergedin some countries often fail to provide accurate information regarding costs, returns andbalances, making it difficult for beneficiaries to compare among different providers.Insurance companies as part of their life business often provide private pensionarrangements. Insurance regulation not only tends to be new but also does not have theexpertise to monitor private pension providers. Pension specific regulation can help.

Regulation is also important and relevant for the mandatory social security schemes.Traditionally, the statutes that created them bind formal social security arrangements, andoversight and control corresponds to the oversight Ministry, often Finance, Labor or Socialsecurity. In some cases there is dual oversight. In Mauritius, for instance, the general


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guidelines, and require minimum financial returns. It can also set rules to increasetransparency requiring timely production of yearly balances and mandatory actuarial

reports. The regulator can also solve disputes that arise between parties in the sector. Asidefrom enforcing regulation, the regulator can take a pro-active role in the development ofsocial security framework over time.

Kenya has recently introduced pension-specific regulation--the Retired Benefits Authority(RBA)-- to oversee all pension arrangements, including NSSF and public service. Theresults will provide a valuable input the development of other regulatory agencies in thecontinent. The tasks faced by the new regulatory agency are considerable, and they have

chosen to implement legislation gradually. The Kenyan experience shows that there isconsiderable overlapping between pension, insurance, capital markets, and bankingregulation. This points to the need to consider a broader regulatory agency covering all ofthese areas, as has already happened in other countries. Indeed, Kenya is planning tointroduce a Financial Services Authority that would include all financial sector regulation.Similar plans are underway in Mauritius. CIPRES, in the French-speaking Africa, reportedlyplays the role of regional regulator.

A Broad Social Security Net

A sizeable percentage of the children born today in Africa will spend their lives in thetraditional or informal sectors, with little hope they will be covered by formal social securityarrangements. Thus, the most pressing challenge in most African countries is thedevelopment of a broad social security umbrella that covers a significant portion of thepopulation. Many isolated efforts are taking place. These include the reform of the formalsystems, as discussed above, and initiatives to develop forms of social security coverage in

the informal and traditional sectors. Communities, NGOs, governments, and internationaldonors have been involved in these initiatives. Comprehensive and feasible social securitystrategies have yet to be developed.


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of credibility and enforcement. Unfortunately, most information on existing arrangements isdescriptive and thus it is difficult to ascertain their coverage and effectiveness. Still, some

broad observations can be made. Traditional or informal social security arrangementsgenerally focus on specific products rather than broad coverage schemes. For instance,tontines (in West Africa) represent alternative saving mechanisms. Often the members of atontine make a cooperative arrangement to help procure medicaments or pay for basicmedical expenses. Community organizations may procure medical service packages for theirmembers for specific interventionsmalaria, etc. Pooled resources are often used toaddress critical bottlenecks such procuring ambulance services to guarantee reachinghospitals in time.

All of these isolated packages point to the areas of importance to the communities, as wellas the ease to contract and enforce obligations. Income smoothing and health concerns aredefinitely a priority. The parallel financial arrangements found in the informal sector resultfrom the lack of credibility in the formal institutions and the high transaction costs in usingthem. That is, people perceive a high risk of losing their savings and an inability to provideresources when in time of need. Thus, the development of credible and efficient financialsystems that takes into account the needs of the poor and those in the informal sector is a

necessity to help people smooth their income flows and have resources to deal withuncertainty. This requires creating legal and institutional frameworks that allow the informalinstitutions to operate without burdening them with excessive formal requirements, andproviding security for the participants. Community or group financing of health servicesmust be an integral part of country health strategies.

As opposed to income smoothing and health insurance mechanisms, the emergence ofpension arrangements in the informal and the traditional sectors is far more difficult.

Reportedly, traditional agricultural societies have mechanisms to provide for the elderly.These mechanisms vary from place to place, but generally are tied to the ownership of land.The elderly retain control of the land as a mechanism to guarantee care from their children. 17

These mechanisms not withstanding, anthropological studies show that increasingly the


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and capacity to enforce agreements at the local level. The question is how to aggregatethese efforts in such a way that credibility and ability to enforce are maintained in the larger

organizations. The larger organizations will be able to benefit from economies of scale andscope and be in a better position to work with formal sector organizations.

It is likely that problems with the elderly in the traditional and informal societies can not besolved through voluntary agreements and that at some point, states will have to providesome support through budgetary resources. Given the limited availability of budgetaryresources and the multiple claims on them, it is likely that only very selective interventionsare possible. These selective interventions can take place in the context of anti-poverty

programs, be they developed by the countries or linked to debt-reduction programs. Theseinterventions would have to be based on some form of means testing and carefully targetedto avoid perverse incentives.

Clearly this is an area where there is ample scope for countries to learn from each otherexperiences.

Social Security, Pensions and the Bank

The Bank is increasingly focusing attention on social security and protection in Sub-SaharanAfrica. Two initiatives are particularly relevant. The first focuses on issues of socialprotection in traditional and informal sectors. To this effect, the Bank has developed aframework identifying the risk face by populations and the mechanisms available to mitigatethem. It has also issued guidelines for social protection work in the region. This work isintended to identify the effectiveness of social protection institutions and existing gaps. The

challenge is for governments to build institutions that protect broad segments of thepopulation with the cooperation of civil society. An in-depth pilot study has been initiated inTogo this year.


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Conclusions

This paper has emphasized the urgency of improving governance of formal social securityinstitutions and doing so within the broad framework of a social protection strategy. Abroad social protection strategy will take time to develop, and in the meantime the priorityis with the formal arrangements. Improving the social security governance is truly a test of agovernment's commitment to institutional reform. The main tasks involve increasingtransparency, curtailing opportunities for corruption, and most importantly protectingbeneficiary rights. Since governments and even social security administrations have

contributed to the mismanagement of social security institutions, an important componentof improving governance is then to create protective barriers that foster good governanceand penalize poor governance. The creation or strengthening of regulatory institutions is animportant step in this direction. Regulation is important whether management of theseinstitutions remains in public hands or is transferred to private hands. Within the context ofa strong regulatory framework, it will then be possible to grant social security institutionsadministrative and legal autonomy within clearly defined objectives. Further unbundlinginstitutions according to the different services or activities they provide will help fine-tune

the relationship between objectives, responsibilities, and incentives and thus improvegovernance.

Over the long term, formal social security institutions need increased membership to thrive.This buoyancy will not be possible if an adequate set of incentives is not in place. In manycases, rules today were developed in a context where government and its enterprises werethe main providers of formal employment. As a consequence, contributions are high andbenefits, at least as written, are generous. As the environment changes and the private

sector takes the leadership in economic development, economic agents become verysensitive to the rules of the game. Social security schemes designed for the strongereconomic agents, who can contribute more, end up penalizing those at the margin--smalland medium economic concerns--leading to increased informality. It thus seems appropriate


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countries in the continent have managed to develop significant voluntary private pensionsectors.

The paper presented a brief review of the three-pillar framework and commented on eachpillar, taking into account the experience in African countries. A broad first pillar, financedby the budget and based on means testing, would seem to be out of the reach of mostcountries in the region. Moreover, some would argue that there are more importantpriorities where such resources could be spent. A first pillar limited to those contributing tothe formal sector is possible within defined benefit or defined contribution schemes. Thesize and convenience of such a scheme will depend on the need and possibilities for

redistribution. If the pillar is targeted only for redistribution, as suggested here, the pillarwill be small. The second and third pillars are highly related. Often purely voluntary pensionschemes do not provide extended coverage, and leave people out in lower ranks or in smallenterprises. Compulsory defined contribution schemes address this difficulty, but place theresources in few hands. The solution in some countries has been to engage the privatesector in the management of the reserves. Management in a third pillar is more dispersedand hence could lead to high administration fees. However, it provides much-neededdiversification and can help the development of the financial sector. This subject has to be

further researched by studying conditions in countries with extended voluntary pensionplans, like Kenya.

The transition to new designs has problems of its own and can affect the resultinginstitutional arrangement. It is important to undertake rigorous technical work beforesettling down on a design. It is easy to find solutions that are appealing in the short-term,but that have detrimental long-term effects. The experience of some of the countries in theregion already illustrated this trap. Improving administrative performance is another

challenge that has been difficult to meet. Reducing costs, better service, and good recordkeeping is at the core of providing better services and eliminating the opportunities forcorrupt behavior. But this is easier said than done. Worldwide experience shows that effortsto improve information management to be effective have to be accompanied by changes in


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A endix Table 1. Demo ra hic Indicators Sub-Saharan Africa 1997GNP Total Growth Infant Fertility Life Death Rate, HIV

Income Per Cap Populatio Rate 2/ Mortality Rate 3/ Expectanc crude AIDSClass. Atlas (mills) 1997-2010 Rate (thou.) at Birth (per 1000) Rate 4/

Angola L 260 11.7 48.6 125 6.7 46.5 18.6 1.0Benin L 380 5.8 45.4 88 5.8 54.7 12.2 0.9Botswana UM 3,310 1.5 35.2 58 4.2 50.3 13.2 12.5Burkina Faso L 250 10.5 53.9 99 6.6 46.0 17.9 3.3Burundi L 140 6.4 41.4 119 6.3 47.1 16.6 4.1Cameroon L 620 13.9 44.5 52 5.4 56.5 11.2 2.3Cape Verde LM 1,090 0.4 38.8 56 3.6 66.5 6.9

Cen. Afr. Rep. L 320 3.4 32.1 98 4.9 48.6 16.6 5.3Chad L 230 7.2 29.4 100 5.5 48.6 16.9 1.3Comoros L 400 0.5 93.2 65 4.6 59.8 9.1Congo, D. L 110 46.7 51.4 92 6.2 52.9 13.7 2.0Congo, R. L 670 2.7 46.9 90 5.9 50.9 14.9 3.6Cte d'Ivoire L 710 14.2 35.6 87 5.0 53.6 12.3 4.9Djibouti LM 1/ 781 0.6 106 5.4 50.3 15.0 5.2Eq. Guinea LM 1,060 0.4 43.5 108 5.5 50.0 16.4 0.6Eritrea L 230 3.8 28.4 62 5.8 55.0 11.8

Ethiopia L 110 59.8 51.6 107 7.0 50.0 16.2 4.3Gabon UM 4,120 1.2 31.8 87 5.0 55.1 14.2 2.0Gambia L 340 1.2 28.6 78 5.2 53.2 13.0 1.1Ghana L 390 18.0 46.4 66 4.9 59.1 9.7 1.2Guinea L 550 6.9 53.1 120 5.7 46.5 17.3 1.0Guinea Biss. L 230 1.1 32.6 130 6.0 43.8 21.2 1.1Kenya L 340 28.6 38.2 74 4.4 58.1 9.3 5.6Lesotho L 680 2.0 48.4 93 4.5 58.6 10.4 4.0Liberia L .. 2.9 55.5 116 6.3 51.5 15.4 1.8Madagascar L 250 14.1 68.7 94 5.7 58.5 10.5 0.1

Malawi L 210 10.3 39.5 133 6.4 42.8 20.5 7.0Mali L 260 10.3 64.8 118 6.6 50.4 15.9 0.8Mauritania L 440 2.5 33.3 92 5.0 53.5 13.5 0.3Mauritius UM 3,870 1.1 19.9 20 2.1 71.6 6.3


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Appendix Table 2. Projected Dependency Ratios, Sub-Saharan Africa.1995 2015 2040 2060 2080 2100

60+ / 60+ / 60+ / 60+ / 60+ / 60+ / 60+ / 60+ / 60+ / 60+ / 60+ / 60+ /total 15-59 Total 15-59 total 15-59 total 15-59 total 15-59 total 15-59

Angola 4.6 9.7 4.2 8.1 5.9 9.5 11.3 17.6 19.3 32.1 24.7 44.1Benin 4.5 9.5 4.3 7.9 7.0 10.9 12.6 19.8 19.2 32.0 22.7 39.6Botswana 3.9 7.5 3.6 5.8 7.4 11.4 13.7 21.8 18.4 30.5 21.6 37.2Burkina Faso 4.8 9.8 3.5 6.5 5.1 8.0 9.9 15.3 16.7 27.1 20.7 35.3Burundi 4.3 8.7 3.6 6.6 6.0 9.4 10.5 16.3 16.7 27.2 20.3 34.6Cameroon 5.6 11.1 4.9 8.9 7.8 12.1 14.0 22.2 21.5 36.8 24.4 43.2Cape Verde 6.3 12.1 4.3 6.7 15.2 24.5 22.8 39.5 27.0 49.7 28.1 52.6

Cen Afr Rep. 6.0 11.9 4.5 7.9 7.1 10.9 12.6 19.8 18.3 30.5 20.9 35.8Chad 5.2 12.1 3.5 6.7 5.0 7.8 11.1 17.3 18.7 31.0 22.8 39.6Comoros 4.5 9.2 5.4 9.1 10.6 16.2 18.9 31.3 24.2 43.0 25.7 46.4Congo, D. 4.5 9.2 4.1 7.9 5.9 9.6 10.8 16.7 17.8 29.1 23.0 40.3Congo, R. 5.1 10.4 4.0 7.5 6.4 10.1 11.7 18.3 19.0 31.7 23.1 40.3Cte d'Ivoire 4.5 8.9 4.0 7.0 7.3 11.2 13.3 21.0 18.8 31.5 21.4 36.8Djibouti 5.1 9.6 5.7 10.1 9.2 14.5 13.7 21.7 19.8 33.4 22.5 39.0Eq. Guinea 4.5 8.9 4.4 7.9 6.8 10.5 10.1 15.6 16.6 27.

22.7 39.5

Eritrea 4.6 9.3 3.5 6.6 5.1 8.1 12.7 19.8 19.6 32.9 20.6 35.0

Ethiopia 6.5 12.7 6.0 10.8 8.3 13.1 10.1 15.6 16.6 27.0 23.2 40.5Gabon 8.8 16.8 7.5 13.5 9.2 14.1 14.7 23.4 21.1 36.0 23.2 40.6Gambia 4.9 9.0 5.9 10.5 8.0 12.4 13.6 21.5 20.0 33.7 23.1 40.2Ghana 4.7 9.4 5.5 9.5 10.2 15.7 17.1 27.9 23.2 40.7 25.0 44.7Guinea 4.2 8.6 4.6 8.1 7.4 11.4 12.6 19.9 18.1 30.0 20.7 35.3Guinea Biss. 6.5 12.9 5.6 10.2 6.8 10.6 11.7 18.3 17.1 28.2 19.9 33.8Kenya 4.5 9.2 3.8 6.5 8.8 13.5 15.4 24.7 20.7 35.4 23.0 40.2Lesotho 6.3 11.9 6.4 10.8 10.7 16.5 17.5 28.6 22.6 39.4 24.4 43.2Liberia 4.4 8.7 4.5 8.4 6.6 10.4 11.1 17.2 17.8 29.3 21.6 37.1Madagascar 4.7 9.5 5.0 9.0 8.4 12.9 14.9 23.8 21.7 37.2 24.1 42.6

Malawi 4.2 8.5 4.0 7.4 6.2 9.8 10.9 16.9 16.8 27.4 20.3 34.4Mali 5.2 11.0 3.8 7.3 5.7 9.1 8.9 13.6 17.3 28.2 22.4 38.9Mauritania 5.0 9.8 5.3 9.4 8.6 13.3 14.3 22.7 20.4 34.6 23.1 40.3Mauritius 8 5 13 2 13 7 21 1 24 9 44 2 27 5 50 9 28 0 52 2 28 5 53 4


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A endix Table 3. A in in Sub-Saharan Africa.Population

60+

% of 60+

that are(thous.) Growth rate Economically Active1995 1995-2010 1995 2010

Angola 50 51. 61. 58.Benin 24

47.

58.

55.

Botswana 5

52.

47.

44.Burkina Faso 45

41.

63.

60.

Burundi 26

33.

57.

58.Cameroon 73

45.

53.

51.

Cape Verde 2

(4.0 36.

29.

Cen Afr. Rep. 20

27.

76.

72.Chad 36

35.

50.

45.

Comoros 2

66.

62.

62.Congo, D. 2,03

52.

54.

53.

Congo, R 13

35.

65.

61.Cte d'Ivoire 62

51.

55.

53.

Eq. Guinea 2

28.

44.

43.Eritrea 15

70.

63.

62.

Ethiopia 2,55

58.

59.

58.Gabon 9

34.

53.

50.

Gambia, The 5

68.

68.

64.Ghana 80

68.

77.

76.

Guinea 30

39.

59.

56.Guinea-Biss. 7

26.

57.

55.

Kenya 1,21

31.

64.

61.Lesotho 12

54.

50.

47.

Liberia 11

105.

53.

50.Madagascar 62

57.

67.

65.

Malawi 41

41.

80.

76.

Mali 44

51.

57.

55.Mauritania 11

45.

52.

48.

Mauritius 9 45. 11. 9.Mozambique 88 40. 82. 77.


39/42

Appendix Table 4. Pension Structure, Sub-Saharan Africa.Pension Pension Reserves Payroll Tax % of recent avg.Spending Spending/ LCU Reserves/ for Pensions earnings paid as

Year LCU, GDP *** Year thou. GDP (%) (%) a pension*, 1991

Benin 1986 7,040 0.40 9.0 60Burkina Faso 1986 4,800 0.30 1981 11,81

3.6 9.0 40

Burundi 1985 39

0.20 1981 1,19

1.3 8.5 50Cameroon 1986 17892 0.30 7.0 45Cape Verde 7.0Cen Af Rep. 1986 874 0.26 5.0 45Chad 0.00 6.0 48

Congo, D. 6.0Congo, R 0.90 6.5 50Cte d'Ivoire 0.80 4.0Eq Guinea 26.0Ethiopia 1986 114 0.90 10.0Gabon 1986 - 0.70 45Ghana 0.10 1986 3,18

0.6

Guinea 1986 58 0.00 4.0Kenya 1989 82

0.50 1989 19,76

11.5

Liberia 6.0 51Madagascar 4.5Malawi 1987 - 0.42Mali 1986 4021 0.40 7.0Mauritania 1986 615 0.20 3.0 40Mauritius 1990 1,043 2.80Mozambique 1986 73 0.04Niger 1986 1649 0.10 1980 7,65

1.4 40

Nigeria 0.10 1988 97

0.7Rwanda 1989 49

0.26 1979 2,87

3.0 6.0 45

Sao Tome 10.0Senegal 1989 23,27

1.6 8.8

Seychelles 1981 10 10.4 15.0Sudan 1982 13 2.0 14.0 50


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AppendixTable 5 Summary of Old-Age Pension ProgramsSpecial Source of Funds Max Earnings

Main No. System for Insured Employer For Contrib.Program of Public (% of (% of & Benefit

Type Types Employees Payroll) Payroll) Total Gov't. Purposes

Benin Soc. Insurance 3 Yes 3.6 6.4 10.0 0

Botswana Pub. Employees 1 OnlyBurkina Faso Soc. Insurance 1 Yes 4.5 4.5 9.0 0 200,000 francs

Burundi Soc. Insurance 2 Yes 3.0 5.5 8.5 0 80,000 francs

Cameroon Soc. Insurance 3 Yes 2.8 4.2 7.0 0 300,000 francs

Cape Verde Soc. Insurance 2 yes 3.0 7.0 10.0 0

Cent.Af.Rep.

Soc. Insurance 1 no 2.0 3.0 5.0 0

Chad Soc. Insurance 2.0 4.0 6.0 0

Congo, D. Soc. Insurance 3 yes 3.5 3.5 7.0 SubsidyCongo, R. Soc. Insurance 2 yes 2.4 3.6 6.0 0 (23,500 francs)

Cte d'Ivoire Soc. Insurance 2 yes 1.6 2.4 4.0 0 1,647,315 francs

Eq. Guinea Soc. Insurance 1 no 4.5 21.5 26.0 25% SS

Ethiopia Soc. Insurance 2 yes 4.0 6.0 10.0 0

Gabon Soc. Insurance 3 yes 2.5 5.0 7.5 0 1,500,000 francs

Gambia Provident 2 yes 0.0 19.0 19.0 0

Gambia Pension Scheme 1 5.0 10.0 15.0 0

Ghana Soc. Insurance 1 Army 5.0 12.5 17.5 0

Guinea Soc. Insurance 1 No 2.5 4.0 6.5 0 400,000 francs

Kenya Provident 2 Yes 5.0 5.0 10.0 0 1,600 shillings

Liberia Soc. Insurance 1 No 3.0 3.0 6.0 0

Madagascar Soc. Insurance 2 Yes 1.0 3.5 4.5 0 100,000 francs

Malawi 1 Only

Mali 2/ Soc. Insurance 2 Yes 2.0 7.0 9.0 0

Mauritania Soc. Insurance 2 Yes 1.0 2.0 3.0 0 35,000 ougiyas

Mauritius Soc. Insurance 2 Yes 3.0 6.0 9.0 0 Rs55,500

Mauritius Universal 1 0.0 0.0 0.0 All Rs55,500Niger Soc. Insurance 2 Yes 1.6 2.4 4.0 0 250,000 francs

Nigeria Soc. Insurance 2 Yes 2.5 5.0 7.5 0 48,000 naira

Rwanda Soc Insurance 1 No 3 0 3 0 6 0 0


41/42

Appendix Table 6 Summary of Old-Age Pension Programs

--------- Qualifying Conditions --------- ---------------------- Benefits -------------------- Old-age grant for

% increm. Minimu Maximu Non-qualif.Contrib.Min. Retire- % of Avg. Base For every Pension Pension Benefit: Min.

Yrs. Of Mos. of Over How Ment Monthly Period 12 mos. Of (% of (% of Automatic Mos. wages Mos. of

Age Insurance Contrib. Many yrs? Necess.? Earnings (yrs) Insurance min Earnings) Adjustment per year Contrib.

Benin 55 20 60 10 yes 30 3-5 2 60 80 Cost of liv. 1 12

Botswana *

Burkina Faso 55 15 180 yes 20 3-5 1.33 60 80 Cost of liv. 2

Burundi 55 15 no 30 3-5 2 60 80 1

Cameroon 60 15 yes 30 3-5 1 50 80 1

Cape Verde 65(60) 3 36 20 5 1.50 4200 esc.

Cent. Af. Rep. 55 (50) 20 60 10 yes 30 3-5 2/ 1 60 80 1 12

Chad 55 15 60 10 yes 30 3-5 1.2 60 80 1

Congo, D. 63 (60) 5 60 10 yes 1.67 ** 50 Wage index

Congo, R. 55 20 60 5 yes 40 3-5 2 60 80 Cost of liv. 1

Cte d'Ivoire 55 10 yes 1.33 ** Yes

Eq. Guinea 60 10 40 2 4/ 2 80

Ethiopia 55 10 30 3 4/ 1 60 Yes

Gabon 55 20 60 10 yes 40 3-5 2/ 1 1

Gambia 55 5 Yes

Ghana 60 20 240 50 3 2/ 1.5 80

Guinea 55 15 Yes 2 ** Yes

Kenya 55 yes *** Yes

Liberia 60 8.3 100 yes 25 3/ 1 Yes 12

Madagascar 60 (55) 15 28

quarters

10 yes **** 30 min

wage

1 60 40 Cost of

living

Proportion.

Reduced

100 quarters

Malawi *

Mali 55 10 yes 1.67 5 60 cost of liv.

Mauritania 60 (55) 20 60 10 yes 20 3-5 1.33 60 80 cost of liv. 1

43


42/42

Appendix Table 6 Cont. Summary of Old-Age Pension Programs

--------- Qualifying Conditions - -------- ---------------------- Benefits - ------------------- Old-age grant for

% increm. Minimum Maxim Non-qualif.Contrib.Min. Retire- % of Avg. Base for every Pension Pension Benefit: Min.

Yrs. Of Mos. of Over how Ment Monthly Period 12 mos. of (% of (% of Automatic Mos. wages Mos. of Age Insurance Contrib. Many yrs? Necess Earnings (yrs) Insurance Min wage) Earning Adjustment per year Contrib.

Mauritius 60 12 yrs of 0.83 Contrib. Gov. adjust. Rs177/ 33.3 min decree

Mauritius 60 0 yes Rs1,055/mo

Niger 60 20 60 10 yes 20 3-5 1.3 60 80 1

Nigeria 60 10 120 yes 30 final 1.5 80 65 12

Rwanda 55 20 60 10 yes 30 3-5 1 50 Cost of liv.

Sao Tome 62 (57) 10 120 no 35 5 1 30 Wage index

Senegal 55 1 12 yes 1.33 **

Seychel les 63 5 yrs . Rs1,100 cost of liv. Rs1,100/mo

Seychelles 63 5 yrs. residence preceding retirement. Based on workers voluntary contribs. to Pension Scheme.

South Africa 65(60) Must be R470

Sudan 60 (55) 12 50 5,250 pnds 75 yes (see sheets)

Swaziland 50 Yes ***

Tanzania 55 5/ 15 Yes ***

Togo 55 20 60 10 Yes 20 3-5 1.33 60 80 cost of liv. 1

Uganda 55 ***

Zambia 50 ***

Zimbabwe 60 10 1-1/3% ** 1/12 of annual

Source: U.S. Social Security Administration, 1997.

Retirement ages in parentheses are for Women.

* Special system for public employees only.

** Multiplied by the number of years of insurance coverage.*** Total employer and employee contributions, plus interest.

**** Plus 20% of average earnings during last 10 years.

2/ For every 12 monthly contributions in excess of 240.

3/ For every 10 monthly contributions in excess of 100.

4/ For every year of contribution over 10 years.

5/ Source: Ejuba, 1999

43

africa pension

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