Provident funds in Asia: Some lessons for pension reformers

As the British were dismantling their empire in the 1950s, they generally left behind a pension legacy consisting of two elements. One was a conventional defined benefit pension scheme for government workers, basically budget–supported. The other was a provident fund for those in the industrial and urban formal sector. Some components of the empire chose to ignore London's advice to create a provident fund — notably Hong Kong, which only recently has created an employer–based system for its workforce. Three features traditionally define state provident funds: central management (with some contracting–out exceptions), a formal structure of individual accounts, and lump sum withdrawals. The term has begun to migrate, however. In Hong Kong, the new mandatory system is called a mandatory provident fund, though it works on a very decentralized basis through employers and requires workers to make their own investment choices. The term is also used in Thailand to describe various schemes that apply to government workers and some private sector firms, along with an evolving pensions system. This paper will concentrate on the four "classic", colonial–era–derived provident funds of Singapore, Malaysia, India and Sri Lanka.     

Provident funds and investment in developing countries in the Pacific

This report describes the current avenues of investment used by provident fund schemes in seven island nations in the Pacific; the returns on these investments; the criteria for their selection; and the governments' guidelines and restrictions on these schemes. New investment guidelines from 1988 to 1992 are summarized and the reasons for them are explained. Limitations on permitted investment avenues are briefly described. The latter part of the report, and its main focus, analyses the problems faced when trying to balance the interests of provident fund members with national interests when selecting investments. The report concludes with some recommendations for solutions to the problems related to limited investment outlets and government restrictions. To gather information for this report, a questionnaire was sent to the provident fund schemes in the Pacific and the available annual reports were analysed. Responses, when received, have been included.     

Recent developments in China's social security reforms

China is one of the few developing countries which have managed to establish a comprehensive social security system encompassing social insurance (for pension, medical care, unemployment, employment injury and maternity), social assistance and a housing provident fund. The past two decades have witnessed a continuous process of reform in the Chinese social security system. This article highlights the latest developments in each of the schemes and offers some insights into the problems confronting the system and the prospects for the reform.     

Income security for older people: An Asian perspective

In Asia and the Pacific, as in other developing regions, the continuing growth of the aged population has a great impact on social security programmes generally and, in particular, on the income security of older persons. In societies where traditional support systems are breaking up, their need for social security protection is increasingly important. A system of social security for the elderly population exists in most countries of the region. Many are provident fund schemes, which are basically saving schemes, and their coverage is low. Where social insurance pension schemes exist, the levels of benefits provided are also low. The focus for future development, therefore, lies in converting the savings schemes into multitiered pension schemes, extending their coverage and raising the level of benefits. In this context the critical question concerns the role of the State and the type of schemes used. The need for public pension schemes is great in Asia and the Pacific, where the level of poverty is comparatively high. Building pension schemes, whether public or private, involves a set of issues that need to be addressed. This article considers the systems currently in place and the challenges and limitations faced when considering the future development of social security in this area.     

Reforming formal social security systems in India and Sri Lanka

This paper analyses the formal social security systems of India and Sri Lanka. While many of the social, demographic, and economic indicators differ markedly between the countries, the structure of the social security systems, challenges, and reform directions are quite similar. Thus, the provident fund organizations in both countries need to modernize and benchmark their governance, operations, and investment policies. The dualism in their systems, which has resulted in relatively generous non–contributory pensions being provided to civil servants, also needs to be addressed. This dualism and the fiscal unsustainability of current civil service pension arrangements lend urgency to reforms in this area in the two countries. The prospects for voluntary tax–advantaged private sector schemes are encouraging, particularly in India. The conditions for reforms are more favourable now owing to hopeful signs of an end to longstanding conflict in Sri Lanka, and decade–long experience with financial sector reforms in India.     

Notional defined-contribution schemes: Old wine in new bottles?

Until recently, most pension benefit formulae in social security schemes resembled each other. They were all defined-benefit formulae that were either generous or mean, while defined-contribution formulae were exclusively used in private and occupational pension schemes and some national provident funds. Then came the mandatory retirement savings model, introduced in Chile and subsequently in other Latin American countries. It did not seem possible that such a formula could be used on any large scale in the pay-as-you-go environment of OECD pension schemes. In the early 1990s, however, Swedish social security experts devised the notional defined-contribution (NDC) system: individual social insurance pension contribution records are converted into a fictitious savings amount at retirement, whereupon the defined-contribution approach is followed. This article analyses how much of this approach is new. The conclusion is that it is a novel pension policy instrument rather than a new type of pension formula, and most of its potential financial and distributive effects could also be achieved by a classical, linear defined-benefit formula. It is the packaging that differs and, in politics, that often is what matters.     

Pension systems and prospects in Asia and the Pacific

There is a diversity of pension systems in the Asia and Pacific region. A growing number of countries have social insurance pension schemes, but many others which have provident funds have not set up any mandatory pension system at all. Demographic, social and economic changes mean the need for a regular income in old age will increase enormously. Existing schemes should be extended to all employees, benefits should meet certain minimum standards, administrative arrangements must adapt to structural change, and the budgeting both of governments and of households must be adjusted to take account of changing age dependency ratios.     

Old–age security in Bhutan: From lump–sum payments towards a pension scheme

At present, Bhutan's old–age security still is mostly based on an extended family network. Formal old–age provision is mainly for civil servants, providing, however, only lump–sum payments. This paper analyses the present conditions and obvious deficits of the existing arrangements and outlines possibilities for introducing a pension scheme which provides regular (monetary) income in old age. Income in old age could be increased and costs could be reduced by transforming the existing provident fund totally or partly into a pension scheme. This can be combined with pay–as–you–go and funded elements.     

Assessing the impact of liberalising the one-child policy on the sustainability of China’s pension system

This article examines the effects of the so-called two-child policy on the future demographic structure and on alleviating the pension payment pressures. To this end, we provide population projections based on the cohort-component method and simulate the total fertility rate in different social-demographic scenarios. Actuarial models for pension fund budgets are calibrated. We found that the economic effects of the new fertility policy involve a time lag, with the predicted system dependency ratio significantly declining after 2035. The overall sustainability of pension balance will be improved, however, with the occurrence of both current and accumulated deficits delayed.     

A comparative study of the relationship between pension plans and individual savings in Asian countries from an institutional point of view

Hur MH. A comparative study of the relationship between pension plans and individual savings in Asian countries from an institutional point of view Int J Soc Welfare 2010: 19: 379–389 © 2009 The Author, Journal compilation © 2009 Blackwell Publishing Ltd and the International Journal of Social Welfare. This study identifies various saving plans used as alternative pension plans in Asian countries and examines the extent to which these saving plans contribute to their pension schemes. Data were collected from six Asian countries: China, Hong Kong, Japan, Korea, Singapore and Taiwan. The comparison concentrates on an examination of differences and similarities in individual countries' privately managed pension schemes and saving plans. This study suggests that a pension system does not have to be a privately managed plan to encourage individual savings. A critical point for individual savings was avoiding a defined benefit plan. On the basis of these findings, a typology of relationships between second and third pillars and provident funds and incentive systems for individual savings was developed.     

Southeast Asia's social security systems: Need for a system–wide perspective and professionalism

This paper provides an assessment of the social security arrangements in Southeast Asian countries, and suggests broad directions for reform. Noting the absence of functioning multitier social security systems in these countries, the analysis highlights wide variations in various characteristics of systems in Southeast Asia. The paper underscores the need to enhance professionalism in the performance of core functions of the provident and pension fund organizations in these countries; and to take a system–wide perspective. It recommends constituting a Provident and Pension Fund Authority (PPFA) in each of the Southeast Asian countries to undertake the above tasks.     

The Future of Retirement Protection in Southeast Asia

This paper analyses the formal retirement protection systems in five economically successful, rapidly industrializing, and globalized economies of Southeast Asia: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. It finds that while there are major differences in the formal retirement protection systems of the five countries in terms of coverage; contribution rates; scope and nature of preretirement schemes; investment patterns, practices and performance; replacement rates; administrative and compliance efficiency; and regulatory structures, the main common feature (with the exception of the Philippines) is aversion to social insurance and predominant reliance on individual provision through publicly mandated and managed provident funds. While these systems do minimize the fiscal burden on the State and thereby help maintain international competitiveness, they provide socially inadequate levels of retirement protection and are weak in ensuring efficiency of the saving-investment process. Moreover, several design and institutional features prevent full realization of many of the advantages of the provident funds found in these countries. They may, therefore, benefit by following the worldwide pension reform debate more closely, particularly concerning design and institutional and regulatory structures for mandatory defined-contribution schemes.     

The Impact of Neo-liberalism on South Korea's Public Pension: A Political Economy of Pension Reform

This article examines the recent Korean pension reforms from a political economy perspective. It argues that these reforms are of particular interest because, unlike major pay-as-you-go pension schemes in Europe, the Korean pension scheme is a funded one and, therefore, is subject to market exposure. Also in contrast to the problems that public pension reforms have encountered in European and other OECD countries, especially 'blame avoidance', the more radical Korean reforms were implemented without significant challenge or resistance. First of all, the National Pension Scheme is described prior to the 1997 Asian economic crisis. Then the impact of this crisis on the Korean welfare state and, especially, its pension system are analysed. The main part of the article consists of a political economy of the pension reform process, in which the key roles of the international governmental organizations and the domestic neo-liberal policy elite are pinpointed. This neo-liberal ideology was critical in developing and sustaining an influential discourse on the 'crisis' in Korea's national pension fund. The article concludes by arguing, against the neo-liberal tide, for the inclusion of a pay-as-you-go element in the national pension in order to tackle escalating poverty in old age.     

住房公积金亟待破解制度瓶颈

住房公积金制度是我国政府为解决职工家庭住房问题,主要借鉴新加坡的成功经验,于1994年开始在我国全面推行的一种政策性融资渠道。但通过十几年的实际运行结果来看,效果并不明显,不仅丧失了其对中低收入阶层的住房保障功能,而且进一步拉大了贫富差距。应采取公积金和养老保险相结合的反按揭模式等相关对策,使公积金制度真正惠及广大中低收入者。     

Regulation and supervision of pension funds: Principles and practices

This paper examines the current principles and practices of pension fund regulation and supervision around the world. First an overview of the main approaches in OECD and non-OECD countries and the most important issues and their relevance for different types of pension plans will be given. Then the paper will focus on a selection of issues which are the subject of intense debate at the moment, particularly in the Latin American context: the imposition of quantitative restrictions on pension fund investments, state guarantees for private pensions, and fee and cost controls.     

Micro‐pensions in India: Issues and challenges

This article aims to fill a gap in the social security literature on India by examining the role of micro‐pensions. The analysis suggests that because of the heterogeneity of the target population, micro‐pension products — with microfinance institutions (MFIs) as the main, but not only sponsors — should be voluntary and portable and permit experimentation in their design and in the delivery of services. Accordingly, decentralized micro‐pension schemes that operate within an appropriate regulatory framework and according to sound governance practices are deemed more fitting for the Indian context than centralized schemes with limited flexibility. The article discusses two case studies of recently‐initiated micro‐pension schemes in India, which reveal the need for rigorous analytical research on the micro‐pension sector, particularly concerning the structuring of pay‐out options and innovative delivery mechanisms. The article concludes that micro‐pensions have the potential to be one of the most useful components in India's multi‐tiered social security system, and should be encouraged.     

Public–Private Partnerships in European Old‐Age Pension Provision: An Accountability Perspective

Over the last few decades, the boundary between public and private responsibility in old‐age pension provisions has been redrawn throughout Europe. A new, public–private mix has emerged, not only in pension policy, but also in pension administration. The purpose of this article is to map and conduct a comparative analysis of the administrative design of public–private partnerships (PPPs) in European pension regimes, with a specific focus on how accountabilities are institutionally enforced within the PPP design. Previous literature has recognized accountability as an important factor in promoting trust in mandated pension schemes. However, as the literature on PPPs suggests, institutional arrangements of accountability are more complex in the case of PPPs than has been suggested by previous studies on pension administration. Thus, there is a need for further elaboration of existing comparative models. This study's analysis examines 19 old‐age pension schemes that existed in 18 European countries at the beginning of 2013. The findings suggest that significant variations in accountability structures exist, even among schemes that are similar in terms of their pension policy targets. It is concluded that various schemes suffer from ineffective accountability structures that may compromise the legitimacy and sustainability of PPP‐type pension schemes.     

Financial management and control of supplementary pension schemes

As a result of demographic, financial and other pressures on social security schemes, governments are increasingly seeking to promote the development of complementary pension schemes and a partnership between the public social security system and private provision through occupational pension schemes or individualized pension arrangements. This paper considers the different aspects of complementary pension schemes which might be subject to some degree of regulation and deals briefly with some of the options available for establishing a satisfactory system of regulation and supervision.     

Pension financialization and collective risk sharing in Canada and Finland

This article contributes to the debate concerning pension financialization and how countries are adapting their pension systems to respond to demographic ageing. We do so by examining the statutory pension systems of Canada and Finland, which diverge interestingly from current international trends. The Canadian and Finnish public pension schemes reflect two tendencies often associated with pension financialization: an increasing reliance on financial markets and an investment policy with a diversified asset allocation. However, unlike in many other countries, this has not resulted in heightened individual risks in old-age income security caused by a shift from defined benefit to defined contribution pensions – an otherwise common trend internationally.     

Pension Reform and International Organizations: From Conflict to Convergence

Analysis of pension schemes and recommendations for their reform have been one of the main items on the agenda of international organizations in recent years. However, the ideas and recommendations of the various organizationsinvolved in pension policy sometimes vary considerably. This paper will explore and compare the ideas on pension policy held by the International Labour Office, the International Social Security Association, the World Bank, the International Monetary Fund and the Organisation for Economic Co-operation and Development. Although, initially, the discussion of pension reform was characterized by fierce debate with a marked ideological bent, all the participants are now aiming at mutual understanding and, in particular, coordination and cooperation in member States and recipient countries. The previous, dogmatic approach has given way to a predominantly pragmatic position.