Report No. 46221-NE Republic of Niger Towards an Integrated and Sustainable Pension System June 30, 2009 Human Development, AFTH2 Country Department AFCF2 Africa Region Document of the World Bank ACKNOWLEDGEMENTS This report was prepared by Montserrat Pallares-Miralles (co-TTL, HDNSP), David Robalino (HDNSP), and Setareh Razmara(TTL, AFTH2). The actuarial projectionsof the baseline and reform scenarios (prepared by Montserrat Pallares-Miralles) are based on data and information collected duringa visit to Niger in December 2007 and further updates in October 2008, and March2009. This report has also benefited from the findings of an earlier work that was prepared by Gustavo Demarco (MNSHD) who visited Niger in December 2006. Peer reviewers were Anita Schwarz (ECAHD), Gustavo Demarco (MNSHD), and Oleksiy A. Sluchynskyy (SASHD). Valuable comments were also received from Eva Jarawan, Ousmane Diagana, Amadou Ibrahim, Djibrilla Issa, and Andre Ryba. Administrativesupport was providedby Mohamed Diaw (AFTH2). The authors are gratefulto the authoritiesofNiger for their extensive support without which this study would not have been possible. The team particularly would like to thank the counterparts at the CNSS and FNR, from Treasury and Budget Administration, for sharing their knowledge about the Nigerien pension system and explaining the complexities of the reform programs that have been proposed. Particularly the staff of Ministry of Economy and Finance, Ministry of Public Function and Labor provided invaluable support and held discussions during the mission and follow-up discussions through VC. At the request o f the Government and as part o f the technical assistance, the World Bank team also organized a one week training (June 10-16,2009) on PROST model in order to familiarize the technical staff o f CNSS, FNR, MFPT, and MEF in the use o f this pension system reform options simulationtoolkit. ... 111 TABLEOFCONTENTS EXECUTIVESUMMARY ................................................................................................................................ v CHAPTER 1: BACKGROUND OBJECTIVES AND .......................................................................................... 1 CHAPTER2: REVIEWOFTHE NIGERIEN PENSIONSYSTEM 3 1 Description ofthe currentPension System ................................................................................ ................................................................... 3 2 Objectives of the pension system and principles to guide reform ............................................ 8 3 . Coverage and Adequacy of Benefits in the CNSS and FNR 9 4 Predictabilityand Security ........................................................................................................ ..................................................... 11 5 13 6 Incentives and Redistribution ................................................................................................... 18 7 .. .. Financial Sustainability ............................................................................................................. Administration and Governance 20 CHAPTER3: STRATEGIES FORREFORM .................................................................................................. ............................................................................................... 22 1 Government Reform Initiatives ................................................................................................ 22 2 International Perspectives 25 3 GeneralPolicy Recommendations for Reforming Niger's Pension System .......................... 26 4 .. .. ......................................................................................................... Specific Steps to Design a Robust Defined Benefit System with Pay-as-you-Go Financing ..................................................................................................................................... 29 5 Options to Expand Pension Coverage in Niger ....................................................................... 36 6 LookingForward for a sustainable pension system 38 APPENDIX 1:REFERENCES ........................................................................................................................ ................................................................ 41 APPENDIX2: PENSIONSGLOSSARY ............................................................................................................ 43 APPENDIX3: PROJECTIONMETHODOLOGY AND KEY ASSUMPTIONS ...................................................... 47 APPENDIX 4: OVERVIEW OF PROST ............................................................................................................ 53 APPENDIX 5: PENSION SYSTEMSAROUND THE WORLD ............................................................................ 56 ListofTables Table 2: Main indicatorsofthe pension system inNiger (2006)............................................................... Table 1: Financialsituationof CNSS (2002-2006).................................................................................... 5 7 Table 3: Evolutionof contributorsand beneficiariesin the CNSS and FNR........................................... 10 Table 4: ContributionRates inthe CNSS (as percentage of gross wage bill).......................................... 13 Table 6: Comparison ofparametric reformproposals ofthe ILO for CNSS........................................... Table 5: Evolutionof the Financesof the CNSS and FNR (2002-2006)................................................. 15 23 ListofFigures 10 Figure3: PensionExpendituresandPercentageof Elderly Populationaroundthe World ......................... Figure2: GrossReplacement Rates inthe CNSS andthe FNR................................................................. Figure 1: Coverage ofthe PensionSystem inNiger................................................................................... 11 14 16 Figure5: ProjectedCash-Balance and EquilibriumContributionsinthe CNSS and FNR......................... Figure4: Projected SystemDependencyRatios inthe CNSS and FNR..................................................... Figure 6: InternalRates ofReturnon Contributions................................................................................... 17 19 Figure7: Replacement Rates, MinimumPensions andCeilingsAround the World .................................. Figure8: Balanceofthe CNSS under various reformscenarios................................................................. 30 35 Figure9: Balance ofthe FNRUnder VariousReformScenarios ................................................................ 36 iv EXECUTIVE SUMMARY This report was prepared at the request o f the Government o f Niger to (i)provide a comprehensive assessment o f the Nigerien pension system, (ii)analyze current reform initiatives and recommend possible refinements and alternatives, and (iii)examine implementation challenges. To this end, the report develops a set o f general guidelines to assess reform options in terms the adequacy o f benefits, security, financial sustainability, redistribution, incentives, and administrative efficiency. The idea i s to facilitate discussions about pension reform and improve policy analysis. Indeed, although the managers and technical staff o f the pension schemes inNiger are well aware o f the general issues facing the pension system, there i s not a consistent and integrated policy framework to assess the different reform options and their possible welfare and economic implications. Moreover, current discussions might not be properly accounting for certain features o f the Nigerien economy that put important constraints on the objectives and mandate o f a contributory pension system. Namely, a low level o f income, a high prevalence o f poverty, a mostly informal labor market, and limited institutional capacity within the two pension schemes' The Government o f Niger adopted in April 2009 two decrees o f reforms that (i) increase the contribution rate o f CNSS for social security from 17 percent to 20.65 percent o f the gross salary; and (ii)increase the wage ceiling for contribution. It i s important to highlight that these measures not only do not address the financial problems o f CNSS, such changes unfortunately only postpone the implementation o f a comprehensive pension and social security reform. Indeed, the pension's problem inNiger i s not a problem o f contribution rate or investment o f reserves. The problem i s more complex and reflects the policy choices that are not compatibles with the principles o f (i)Adequacy o f benefits and universality; (ii) financial sustainability, (iii)explicit and progressive redistribution; (iv) predictability and robustness, and (v) economic and administrative efficiency. This report discusses these principles and the type o f reform that Niger would need to consider inthe near future. The core o f the report i s organized in 3 chapters. After providing a summary o f the background (Chapter l), 2 develops the policy framework and updates the assessment Chapter o f the mandatory pension systems (CNSS and FNR). The assessment looks at the financial situation o f the schemes but also discusses other problems that had been previously overlooked in terms o f the adequacy o f benefits; the type o f redistribution; as well as issues related to incentives. Chapter 3 reviews Government ongoing reform initiatives, summarizes the international experiences that are relevant to Niger, and, presents recommendations to strengthen current policies by outlining the components o f a multi-year reform program, and developing a road map towards implementation. The main messages from the various chapters are summarized next. MAIN ISSUESNIGEWEN FACINGTHE PENSIONSYSTEM Pension systems have two core objectives: (i)ensuring a minimum level o f savings so that upon retirement individuals are able to replace a certain level o f income (insurance function); ' "CaisseNationale de Securite Sociale" (CNSS) manages pensions for the private sector and the "Fonds Nationale de Retraite" (FNR) that managesthe scheme for the civil servantsas part ofthe public sector. V and (ii) ensuring that all individuals after a certain age are able to finance a minimumlevel of consumption to avoid poverty (adequacy function).2 These objectives can be met through alternative designs that reflect local conditions, It i s thus important to define a set o f general principles that can be used to evaluate current arrangements and reform options. Here the focus i s on five principles: (i)adequacy of benefits and universality; (ii)financial sustainability; (iii) progressive and explicit redistribution; (iv) predictability and robustness; and (v) economic and administrative efficiency (see Box 1). As is explained in this report, these principles are severely compromised inNiger and while the government and the pension institutions are aware o fthe needto take some urgent decisions to revert the problems, there is not an integrated approach to the different policy options and their possible implications. Coverageand adequacy The coverage of the Nigerien pension system is low and system dependency ratios are deteriorating. The current contributory pension schemes cover only 3 percent o f the labor force, mainly civil servants, and workers in the formal sector and urban areas. This i s not surprising given the country's level o f income and the structure o f the labor market where 85 percent o f the, employed operate in the informal sector. Still, there are not signs of improvement and, on the contrary, system dependency ratios3 are deteriorating as a result of the freeze in hiring in the civil service and increasing informality. Thus, in the CNSS the system dependency ratio increased from 0.39 in 2003 to 0.48 in 2006, and in the FNR from 0.32 to 0.41. The large majority of the elderly do not receive a public pension but it is unclear at this stage whetherpoverty rates among them are higher thanfor the general population. Today less than 1 percent o f the elderly receive a pension from the CNSS or the FNR, and non- contributory programs (social pensions) have not been implementedin the country. Little is known, however, about the socioeconomic situation o f the elderly. It is not clear therefore whethertargeted transfers to the elderly would have significant impacts on poverty. Benefits are quite modest in the case of private sector workers and callfor a review of the mandate of the social security system as a whole and a reallocation of payroll taxes. The replacement rates for a full career worker (40 years o f contribution) retiring at age 60 are about 55 percent for the CNSS. Although this replacement rate can be considered appropriate, the reality, however, is that few workers in the private sector are full-career. Many contribute to the pension system for only half of their active life. The effective replacement rates can therefore be below 40 percent and this raises concerns about the adequacy o f the current system to prevent poverty during old-age. Like inthe case o f wages, higher real pensions can only come from higher labor productivity. Nonetheless, the value of pensions relative to wages could increase by allocating a larger portion o f the total social security pay-roll tax to finance pensions. This would require reviewing the level of other Other objectives such as attemptingto use the pensionsystem to develop capital markets or finance social development projects are, at best, secondary. At worse, these can overwhelm limited institutionalcapacityand preclude the achievement ofthe core objectivesin an efficient way. See appendix 2 for pensions glossary vi benefits within the CNSS - particularly family allowances which arguably should not be part o f a social risk management system. On the contrary, thepension plan for civil servants is quite generous and could contribute to a regressive distribution of public expenditures. The replacement rate for a full-career civil servant retiring at age 60 i s 80 percent. Because civil servants also have longer careers replacement rates are also high. These pensions today are financed essentially out o f the general budget. Thus, other things being equal, higher pension for civil servants imply a lower budget to allocate to finance the production o f public goods, social investment in education, health and infrastructure, as well as transfers to the poor. Thus, in a country like Niger the opportunity costs o f higher pensions for civil servants is likely to be much higher than inmiddleandhighincome countries. Predictability and security There are no transparent and explicit rules to adjust the parameters of the system in response to changing economic conditions and or demographic shocks. Like in many countries with defined benefit schemes, there are no mechanisms in place that define how the statutory retirement age should be increased in response to changes in life expectancy or, alternatively, how pensions at a given age should be adjusted. Also, both pension funds (CNSS and FNR) do not link minimum pension guarantees to real variables that reflect changing standards o f living in the economy. The revalorization o f past wages and the indexation o f pensions in payments are also discretionary. In the case o f the CNSS for instance, pensions have only been adjusted once since 1981, which was in May 22,2008. In essence, the financial equilibrium o f the system has relied on ad-hoc adjustments to contribution rates, benefit formulas, andthe real value o fbenefits. The result is a system where employees, retirees, employers, and the government face uncertainty about the real value of their entitlements and the level of their obligations. Employees face uncertainty about eligibility conditions, the level o f their contributions and the ceiling on covered earnings (and therefore net wages), and future pensions. Employers face uncertainty about the cost o f labor and this can be particularly problematic inthe case o f small firms. Retirees are probably the most affected by discretionary indexation and are not well protected against the risk o f inflation. The current situation also increases the contingent liabilities of the government. Indeed, pension expenditures can be contained while pensions are not indexed. But this is not a situation that can be sustained for ever. Eventually pensions are adjusted in response to social and political pressures and usually without a proper assessment o f the financial implications. The absence o f rules to properly adjust retirement ages (or benefits) and revalorize past wages also compromise the financial sustainability o f the system and increase the implicit liabilities o fthe government. Financial sustainability Currently, both pension schemes arefinancially unsustainable; expected income flows are not enough to cover expected expenditures. At 0.7 percent o f GDP total pension expenditures vii in Niger (for both CNSS and FNR)4are high for the countries' level of income and its demographic structure. Countries with similar coverage than Niger have expenditures below 0.5 percent o f GDP. Moreover, despite the low coverage o f the Nigerien system, expenditures have been growing rapidly and there i s already an aggregated deficit o f 0.3 percent o f GDP. How this deficit changes over time will depend on the evolution o f the dependency ratios5,the growth of wages and indexation policies. In the case o f the CNSS the problem seems more manageable. In the case o f the FNR, on the other hand, the deficit i s expected to continue increasing, reaching 0.6 percent o f GDP in2020. Although the current deficits are relatively modest, they remain a cause of concern in a country like Niger where almost half of its budget isfinanced by external sources (including external aiq. Evenifmodest, the use o f public resources to subsidize the pensions o f a small share o f formal sector workers, civil servants, and the military would be very regressive. If general revenues are going to be used to subsidize pensions these should focus on individuals with no savings capacity - the long term poor. But even then, with many challenges to achieve better human development indicators (e.g., enrollment rates, mortality rates) Niger needs to be very selective in the allocation o f the government budget between social protection, education, and health programs. The main cause behind thefinancial problem is the ad-hoc determination of contribution rates, benefits and eligibility conditions. Both the CNSS and the FNR are financed by contributions that are high for a low-income country. CNSS total payroll tax contribution is 17 percent (including 4 percent for pension, 11 percent for family allowances and 2 percent for work injury). For FNR, the total contribution i s 20 percent o f the gross wage bill (14 percent notionally paid by the Government and 6 percent paid by employee). But there i s a fundamental misalignment between the contribution rate and benefits paid at various retirement ages; the rules that guarantee the financial sustainability of a defined benefit pensions systems financed on a pay-as-you-go basis are not respected. As previously discussed, in the case o f the CNSS pensions are relatively low, but well above those that could be financed with a 4 percent contribution rate. The FNR, on the other hand, i s not operating as a contributory system; pensions are paid directly from the general budget. The implicit contribution rate o f the government i s thus much higher than 6 percent. By definition the planis inbalance but at the cost ofcrowding out a growing share o fpublic expenditures. I n the case of the CNSS, weak administrative systems, the accumulation of government arrears and a low performance of investment policies aggravate the financial problems. Inefficient/outdated administrative systems affect the finances o f the system in two ways: First, by increasing administration costs that inthe case o f the CNSS are highby international standards; Second, by limiting the capacity o f the institution to enforce enrollment and collection. Although reliable data are not available it is likely that evasion rates among employers are high. In addition, the government has been accumulating arrears both related As earlier already mentioned CNSS covers private sector workers and some public employees, FNR covers civil servants and military personnel See definitions of dependency rations (population or old age vs. system ) in pensions glossary, appendix 2. ... VI11 to unpaid contributions and loans. Finally, the portfolio o f investmend shows scarce diversification, and strong reliance on fixed rent and real estate. In2002, most o fthe portfolio was allocated to Treasury bills (non negotiable), loans and real estate. ',Asin many other countries, CNSS plays the role o f direct creditor and real estate investor, acting beyond its mandate to invest reserves inthe best interest of planmembers. Redistribution and incentives Adverse income redistribution is taking place within the pension systems, betweenformal and informal sector workers, and between current andfuture generations. One indicator o f the type o f redistributiontaking place within a pension system i s the implicit rates of return on contributions (IRR) received by different plan members. The analysis in Chapter 2 shows that inboth the CNSS and FNR these rates vary substantially as a function o f career histories, and enrollment/retirement decisions. The two main reasons are benefit formulas that do not take into account life-timeearnings in the calculation o f the pension and accrual rates that do not vary as a function o f the retirement age. As a result, individuals whose wages grow faster get more out o fthe system thanindividuals with flat wages -usually unskilledworkers. Also those who can afford to retire early receive higher rates o f return. But the main source o f adverse redistribution results from the unfunded implicit liabilities that both schemes are accumulating. These need to be financed by higher tax or lower expenditures in programs that are likely to have higher social rates of return for current and future generations. Non-transparent and implicit redistribution also induces unwanted behaviors and generates inefficiencies. As mentioned in the previous paragraph, the rate o f return on contributions that individuals receive depends on their behaviors. Certain behaviors are thus rewarded by the pension system and others penalized. Unfortunately, current benefit formulas and eligibility conditions rewardbehaviors that are undesirable both for the pension system and the economy at large. First evasion or informality: individuals who enroll late in the system and have incomplete contribution densities receive higher rates o f return on contributions than individuals who enroll early and contribute continuously. Second early retirement: individuals who retire early receive higher rates of return on contributions than individuals who delay retirement. Early retirement not only increases the cost o f the system but can also promote informality as retiredworkers enter the informal sector. Another issue that deserves careful attention is the high level of the tax wedge (gap between the cost of labor and the net wage that workers take home) that can reduce employment levels and provide further incentivesfor informality. In the case of Niger, given the high level o f informality and the needto help improve the competitiveness o f the private sector in terms o f economic efficiency, it is important to pay attention to the level o f the tax-wedge. For CNSS, at 17 percent, the contribution rate to the social security can be considered high. The tax wedge in Niger is estimated at around 15 and 20 percent, which is very high for a low-income country. This tax-wedge is close to the level in the United States, Korea and Vietnam. This raises two issues: (i) employers are not able to pass the cost o f higher when contributions to employees through lower wages, they are likely to reduce demand for labor -- 'ReservesBIT2005 refer to all branches of CNSS, not only the branch of pensions which is actually in deficit Source: ix particularly unskilled labor; and (ii) employers and employees have incentives to evade both and prefer to operate in the informal sector - particularly low productivity firms. But it is important to clarify that this problem o f a high tax vyedge i s not related exclusively to the pension system. It i s a problem o f the social security system and in particular the family allowance branch(whichhas the highest contribution rate). Inessence, through this program, the government istaxing labor to top-up the salaries offormal sector workers. Thefragmentation of the current pension system into a schemefor private sector workers and anotherfor public sector workers also raises questionsin terms of equity and economic efficiency. Dual systems are common around the world but unfortunately not because of sound technical and economic reasons. First, separate systems for public and private sector workers are inequitable, since they usually benefit a segment o f the labor force at the expense o f the other group without a clear and transparent redistributive objective. The consequence i s that, for any given level o f income and saving effort, the public sector employees will benefit from higher income protection than the private sector employees. Second, the fragmentation o f the pension system can affect the mobility o f the labor force. This is definitely the case when there is limitedor no portability o f acquired rights - like inthe case o f Niger. But even with full portability the asymmetry in expected benefits can reduce incentives for workers to leave the system with the most generous benefits. In several countries, regulatory convergence i s considered as a first step towards the adoption of an integrated national pension system'. Afinal issue regarding economic efficiency has to do with the high administrative costs is the CNSS us well us FNR. These are exorbitant when compared to similar PAYG pension systems. The costs o f administration absorb 45 percent o f total revenues o f CNSS and about 30 percent in the FNR. These shares are much higher than in other countries in the region (Ghana 25 percent, Senegal and Cape Verde about 15 percent). In part, high administrative costs reflect the fragmentation o f the system, outdated administration processes, lack of adequate information systems, limited access to information technologies, and weak institutional capacity. A more rigorous analysis is needed to assess ways for reducing administrative costs based on the affordability o fthe pension systems. TOWARD INTEGRATEDREFORMPROGRAM AN To date the government and the pension funds have evaluated a multitudeo f reform scenarios and commissions have been set-up to pilot the reform program. This note has introduced an analytical framework to guide policy choices and narrow down the set o f plausible reform options. The framework distinguishes between two levels o f discussion or two types of policy choices: 9 First,macro-level discussions where choices are made regardingthe role andmandate o fthe public pension scheme; P Second, micro-level discussions to define the best mechanism and the most desirable institutional configuration to implement this mandate. See chapter 3 section 3 for pros and caveats of integrated pension systems A I n the case of Niger a reformed pension system should maintain pay-as-you-go financing and defined benefitformulas. There is little rationale at this stage to consider more structural reforms. The focus o f any reform would rather be on improving current arrangements so that the pension system is able to better meet the general principles outlined above in terms o f adequacy o f benefits; financial sustainability and affordability; progressive and explicit redistribution; predictability and robustness; and economic and administrative efficiency. I n term of institutional organization, on the other hand, it is important to carefully analyze whether maintaining a dual system is the best strategy tofollow. Ideally, Niger should aim to an integrated pension system that covers civil servants and private sector workers alike. As discussed in the main text, this could be achieved gradually. Having a single mandatory pension fund would not only reduce administration costs, but it would also be more equitable and contribute to facilitate the movement o f workers between the public and the private sectors. Even if Niger preserves a dual system, it is advisable to harmonize the system and particularly avoid the creation of a new institution (CARENO9from scratch. Creating a new independent organization from scratch to manage the scheme for civil servants can be a very complex and expensive undertakenand one that is difficult to justif4r. The creation of CARENI would not address thef m a l problems the government is concerned about. On the contrary, there would be potentially large costs related to the set-up o f the new institution and the creation o f CARENI does not guarantees that proper governance structures and investmentsopportunities will be inplace. Finally, in terms of administration and governance, given limited institutional capacity, it . would be important to keep reforms simple and to invest in human resources and better administrative and IT systems. In the short term, basic functions such as collection o f contributions, recordkeeping, reconciliation, and benefit payments would need to be improved before thinking about more efficient investment policies. Once the PAYG system is considered to be at the core of the public system, in any configurations integrated or dual system, benefit formulas and eligibility conditions should be reviewed to (i) increase the likelihood that the system will be financially sustainable over the long run; (ii)ameliorate equity; and (iii) improve economic efficiency. In this context six general parametric reforms are proposed: 1. Gradually introduce career wages inthe calculation o f the pension; past wages should be indexed as a function o f the system's average wage or the covered wage bill. The objective o f this policy is not to reduce pensions but to improve equity as well as incentives to declare and contribute. 2. Align the retirement age with the respectively calculated life expectancy, the contribution rate, and the selected accrual rate." Basically, once the accrual rate has CARENI stands for "Caisse Autonome des Retraites du Niger" lo The accrual rate is the percentage of the incomemeasure that becomes a pension. The income measure is an average of the salaries that count toward the pension. In the proposed reforms the income measures should be the average of all salaries, appropriatelyrevalorized, on which individualspaid contributions. xi beenselected to achieve the targeted level o f income replacement for the average full- career worker, and given a contribution rate that can be supported by the economy, then the retirementage has to be computed according to actuarial principles to ensure the financial sustainability ofthe scheme. As life expectancy increases,the "statutory retirement age should be increased automatically - this i s in order to maintain " constant the mandate o f the system. Thus, as individuals live longer, in order to keep the same level ofpensions, they would also need to work longer. 3. It i s desirable that individuals have some flexibility in terms o f the retirementage, but individuals retiring early should receive a lower accrual rate. Similarly, those delaying retirement should receive a higher accrual rate. This policy ensures that all individuals, regardlesso fthe retirement age, receive the same implicit rate o f return on their contributions. 4. If policy (2) i s adopted, then it i s desirable to gradually eliminate the vesting periods as well as maximumreplacement rates. 5. After the adoption o f policy (2), it i s also recommended to introduce an automatic indexation mechanism for pensions. It i s recommended to use the consumer price index. It i s important to emphasize, however, that this policy can only be sustainable understable conditions andifthe government has an inflation target. 6. Review the mechanism usedto compute and allocate the minimumpensionto improve incentives to work and contribute, while ensure the financial sustainability o f the system. There is urgent needfor developinga reliable information systemfor thepension schemes. Currently the CNSS has the institutional capacities to collect reliable information on the members and assess the revenues and expenditures. Nevertheless further improvement in record keeping is required. For FNR, given poor existing member records, accurate assessment o f liabilities and a pre-funding exercise is required. Particularly if systemic reform i s anticipated, the past rights o f individuals require proper record and monitoring system. Government has already initiated some work to improve the information system of both CNSS and FNR. This effort should be continued in order to develop a transparent record-management system for the civil servants. Steps need to be takenfor improving regulation and governance. The investment process of pension funds deserves particular attention both from the administrative and governance perspectives. Interms o f governance, the government needs to improve investment policies and accountability, and shieldmanagement as much as possible from political influence. For better accountability, transparency is a key factor. The operations o f the funds, including the results o f investment policies, should be fully disclosed with publications o f annual reports, including the complete reports from external auditors and the governing body for managing the funds would need to report regularly to the parliament. Investment strategies would also need to be designed and executed by investment committees constituted by qualified professionals. Over the medium term, once the reforms discussed above have been implemented, the government would need to investigateoptions to expand the coverage of thepension system to the informal sector and the long term poor. While there are policies that can be xii considered to improve incentives to enroll inthe contributory system and reduce evasion, the results are not likely to produce a substantial increase in the coverage rate. The limited coverage o f the current system responds to causes having to do with the structure o f the economy, the labor market, and the distribution o f income. In any foreseeable scenario, the contributory pension system o f Niger will continue to benefit a small segment o f the labor force. The implication i s that more substantial expansions o f the pension system require the design o f targeted interventions that unavoidably involve subsidiedtransfers. This can be either in the form o f incentives for informal sector workers with some savings capacity or transfers to the elderly poor (Le,, social pensions). The implementation of these programs in. Niger, however, i s constrained by the frail fiscal stance. Reallocating limited public resources to finance retirement income transfers might not be welfare increasing when there are important challenges to improve human development indicators and reduce poverty. Nonetheless, a gradual approach could be considered over the mediumterm. Development partners should provide Technical Assistance to the Government for strengthening the institutional capacities of both CNSS and FNR. To support the reform process for both the CNSS and FNR, Development Partners (particularly the World Bank given its technical comparative advantage) should consider providing technical as well as financial help to (i)evaluate various options for parametric reforms; (ii)build technical capacities o f the existing institutions at various level; (iii)improve the information system; and (iv) implement reform options to move towards a more efficient and sustainable mandatory public pension system for Niger. ... Xlll ISSUES Action Plan &Time Frame Required Technical Assistance & Responsibilities 2009-2010 2010-2012 Coverage & Adequacy c - Low coverage for - Analyze the 2007108 formal sector in urban enroll inthe contributory Introducingnon- HBS (WB-poverty areas: only 3% LF i s system andreduce contributoryprograms update) covered evasionthrough adequate (e.g., targetedsocial parametric reforms. pensions) - Less - DPs supports (WB & than 1% of Others) elderly receivepension - Reinforce administrative capacity. - Basedon 2007/08 HBS reviewthe socio- economicsituation of - Replacementratesmay elderly For bothCNSS & FNR: be adequate for private - Review - Use PROSTmodelto targeted evaluate scenarios (WB) sector (53%) butare replacementrate & generous for public accrualrates. sector (80%) (for the same numberofyears of -Introduce sustainable service -40) minimumpension financed by separate contributionrate(without increasingthe total contributionrate) Predictability & Securit - No transparentrules to - Introduce changes in - UsePROSTmodelto adjust parameters ofthe benefitsformulas and evaluate scenarios(WB) system (CNSS & FNR) eligibility conditionsthat - All will include: automatic stakeholders indexationofpensions (employees, retirees, with inflation, and employers, government) automatic indexationof face uncertainty interms the retirement age with o f entitlements and life expectancy. And, obligations and avoidbalancingthe contingent liabilities of finances of the system the government are through increaseinthe increasing contributionrate. Financial sustainability Both Schemes (CNSS & - Adopt benefit formulas - Implement reforms Use PROSTmodelto FNR) are financially and eligibility conditions options to movetowards evaluate scenarios(WB) unsustainable:0.7% of that ensurethe financial an efficientand GDP expenditures and sustainability of a pay-as- sustainablemandatory 0.3% of GDP deficit you-go system. Key is publicpension(CNSS Trainingon designof to link the accrual rateto &FNR), use life time DB with pay-as-you-go the retirement age andthe wages for calculating financing. contributionrate, given pensions, link accrual life expectancy at rate, retirement age & retirement. contributionrate, and xiv apply automatic -Reallocatethe indexationoncethe contributionrate from the previous measures are in family allowances to place. pensionbranch. - Initiatereview of -Initiatea study to reformoptions for consider reforms for the survivorshipand TA from Development family allowancebranch. disability pensions. partners Incentives & Progressiv Redistribution Both systems (CNSS & -Addressthe financial FNR) are accumulating problems ofthe system evaluate scenarios(WB) unfundedimplicit (see above). liabilities with adverse redistributionresults For CNSS current - Adopt policies -Assess options for benefitformulas and (parametric reforms)that introductionof evaluate scenarios(WB) eligibility conditions will allow to equilibrate voluntarypension promote evasion & the finances ofthe system schemes (for bothand informality: High without increasingtotal public sector workers) payroll taxes (17% for payrolltaxes. CNSS) Pensionsystem is - Introduce gradually an - Close FNRto new TA from Development fragmented and raise integrated system for both entrants andtransfer partners equity and economic privateand public sectors new civil servantsto efficiency issues: no with similar benefits and CNSS to ensure all new portability between increase links with workers (private and public and private contributions. public sectors) will sectors gradually contributeto a unique scheme. Economic & Administrr ive Efficiency (Governanc I There is no investment - Design investment - Introduceinvestment TA from Development regulations andreturns regulationbasedon best regulations for partners on investmentportfolio practices. managingaccumulated are Door reserves. Administrativecosts are For bothPrivate& Public - Improveregulation & TA and financial high (45% for CNSS sector (CNSS & FNR): governance. support from ongoing and 30% for FNR) -Assess ways to reduce financial sector administrative costs operation (WB) basedon affordabilityo f the pensionsystem TNsupport from other Enrollmentand Developmentpartners collectioncapacities are -Develop reliable weak (CNSS & FNR) informationsystem: improve recordkeeping There is no adequate system of recording system in contributorsheneficiaries. place (particularlyfor FNR) -Upgradeadministrative process. -Invest inhumanresource (institutionalcapacity building) and IT systems xv CHAPTER1: BACKGROUND OBJECTIVES AND 1. The Nigerien pension system is small in terms of coverage and relatively expensive. There are two mandatory schemes: (i)the "Caisse Nationale de Securite Sociale" (CNSS) which covers private sector employees, and (ii)the "Fonds Nationale de Retraite" (FNR) which covers civil servants, the military and local administration employees. The first is an autonomous institution supervised by the Ministry o f Public Function and Labor. The second i s a department within the Treasury that does not receive or manages government and employees contributions. It simply pays pensions out of general revenues. Both funds together cover only about 3 percent o f the labor force. The low coverage rate i s explained, in part, bythe structure ofthe economy andthe labor market, where 82 percent o fthe population i s inrural areas and over 85 percent o f the labor force is inthe informal sector. 2. Although expenditures in both systems are low by international standards (about 0.7 percent of GDP), they are risingfast and are high relative to the country's level of income. In FNR growing pension expenditures put direct pressure on the budget. In the CNSS the consolidated accounts still `display a surplus, mainly due the cross-subsidization from the family allowance scheme, but the pension scheme is indeficit due to a contribution rate that is very low relative to benefits (4 percentage point out o f 17 percent o f total payroll tax). In addition to financial imbalances and low coverage, other concerns include the weak administrative systems which are not conducive to an efficient management of the pension plans. In the CNSS administrative costs are estimated at 45 percent of revenues - considerably highby international standards. 3. The Government is concerned with the situation of both pension plans and has initiated discussions regarding pension reform. Various assessments o f the FNR and the CNSS have been prepared since 2003 and two reform proposals are now under consideration. The government has also created two committees (one for each fund), with the mandate to diagnose the main problemskhallenges facing the CNSS and FNR, propose reform options, and then supervise their implementation. Inthe case of the CNSS the reform proposal under study consists in: (i)reallocate 5 percentage points o f the total social security contribution rate from the family allowance branchto the pension branch, so that the effective contribution rate to finance pensions increases from 4 to 9 percent; (ii)guaranteeing the automatic indexation o f pensions benefits; and (iii) diversifying the investment o f the pension portfolio including reserves. In the case o f the FNR the reform i s considerably more complex as it involves the creation o f a new and independent institutionthe "Caisse Autonome des Retraites duNiger" (CARENI) - separate from the Treasury - to manage the pension system for civil servants and the military. The legislative texts o f CARENI have been drafted and are expected to be finalized and implementedduring2008/2009. 4. In this context, the Governmentof Niger has requested Bank technicalassistance to: (i)evaluate the mandatory pension schemes for both private and public sector workers; and (ii) provide technical views on the reform options under consideration. This report is a 1 response to this request and a follow-up to an initial work that was prepared in December 2006. Overall the preparation o f this analytical work has benefited from strong participation o f the Ministry o f Economy and Finance, Ministry of Public Function and Labor, and technical counterparts from "Caisse Nationale de Securite Sociale" (CNSS) and "Fonds Nationale de Retraite" (FNR), and other development partners (mainly EU). Given the ownership o f the Government, a local task force was established in spring 2008 to help with the preparation o f this report. The outline and objectives o f this report were discussed with the task force, composed o f representatives from the relevant ministries, and their comments have beentaken into account. 5 . The report has three speczjic objectives. First, to define a policy framework that can be used to guide the desigdassessment o f alternative reform programs taking into account the very low level o f income o f the country, a mostly informal labor market, and limited institutional capacity to implement reforms. These features o f the Nigerien economy put important constraints on the objectives and mandate o f a contributory pension system. Thus, any reform would need to look at the role o fthe social protection system as a whole, aiming at a more efficient and equitable use o f very limited public resources and a low tax-wedge. The second objective i s to use the policy framework to update the assessment o f the situation o f the two pension plans, analyze the current reform proposals, identify areas where they could be improved, and assess their potential fiscal and welfare implications. The final objective is to outline a road map towards implementation that identifies (i) measures that could be policy considered in the short and medium term, and (ii) in terms o f technical assistance that needs could be provided and financed by various development partners. 6. The organization of the report is aligned with these objectives. Chapter 2 develops the policy framework and presents an updated assessment o f the mandatory pension system (CNSS and FNR). Inaddition to updating the analysis o f the financial situation o f the funds, the chapter analyzes other dimensions that had been previously overlooked in terms o f the adequacy o f benefits; the type o f redistribution; as well as issues related to incentives. Chapter 3, reviews the Government's ongoing reform initiatives, summarizes other international experiences with pension reform that can be relevant for Niger, and presents recommendations to strengthen the reform strategy while estimating their fiscal and welfare implications. It also outlines a multi-year work program to fine-tune and implement reform plans. 7. This report indicates that it is necessary to provide technical assistance to those Nigeriens who are in charge o f implementing political reforms for a comprehensive pension system. This technical assistance, based on the priorities described inthis report, could focus on (i) the reinforcement of competencies among the policy makers, in order to improve their understandingo f the importance o f a pension system reform in the context o f Niger, and (ii) the reinforcement o f the institutional capacity through training o f the technical personnel (PROST training). 2 CHAPTER REVIEW OFTHENIGEFUEN 2: PENSIONSYSTEM The core objectives of a mandatory public pension system is to ensure that individuals are able to replace a certain level of income when they retire and this income is adequateso the elderG do not fall into poverty. Thepension system in Niger,for both private (CNSS) and public (FNR) sector workers, isfailing to achieve these objectives in a financially sustainable, equitable, and efficient way. According to the available information, the pension system only covers around 3 percent of the labor, reflecting the economic characteristics of the country, where about 85 percent of the laborforce is in the informal sector. The two schemes are notflnancial sustainablegiven an ad- hoc determination of benefit formulas, eligibility conditions, and the contribution rate. Moreover, these parameters are subject to discretionary adjustments that create uncertainty for retirees, employees and employers. There are also problems in terms of redistribution and incentives. The current arrangementsmight benefit more high than low income workers. The system also rewards early retirement, late enrollment, and the strategic manipulation of wages and promotions. I n addition, the high level of the tax wedge and separateschemesfor public andprivate sector workers afSect the labor market in terms of employment levels, informal employment, and labor force mobility. Finally, weak governance arrangements and administrative systems aggravate all these problems. This chapter starts with a general discussion about the objectives of a mandatorypublic pension system in a country such as Niger and proposes a set of principles to guide discussions about pension reform. Using this framework the chapter updates the assessment of the main problemsfacing the CNSSand the FNR. 1 DESCRIPTIONOFTHECURRENTPENSIONSYSTEM 8. As discussed earlier, Niger has a contributive Pension system that provides income protection to a small group o f the population. The two different pension schemes provide pensions to workers o f the public and private sector. "Caisse Nationale de Securite Sociale" (CNSS) manages pensions for the private sector and "Fonds Nationale de Retraite" (FNR) those o f the public sector. This section highlights the main differences between the two systems. CNSS-was created in 1965, but some rules have been modified since then. On the other hand, was created earlier, in 1961, and since then there have not been any significant changes o f its rules and regulations. 9. The institution o f CNSS manages three social security branches: family allowances, work injuries, and pensions (old-age, invalidity, and survivors). It also manages a "social and health fund"' On the other hand, FNRpays only old-age pensions, invalidity, survivorship, plus family allowances. FNRis not anautonomous body, but completely linked to Treasury. 10. The contribution rate in CNSS i s 17 percent (15.4 from employer, and 1.6 from employee) o f individual's covered earnings, however only 4 percent i s for the pension branch (see Table 1). The contribution rate for family allowances i s 11 percent and 2 percent i s for work injury. InApril 2009, the council o f Ministers have assessed and adopted some decrees, "Theobjectiveofthisfundistoprovidehealthbenefitstothemembersandtheirfamilies,howeverithasalsocovereda larger population through various social-medicalcenters of CNSS. 3 by the Minister of Fonction Publique (( D, proposing few modifications to the pension system administrated by the CNSS. These modifications will increase the contribution rate from 17 percent to 20.65 percent (the contribution rate for the pension branch will increase from 4 percent to 10.5 percent o f the gross salary) and the contribution ceiling will increase from 250,000 FCFA to 425,000 FCFA for the CNSS12. FNR i s also supposed to collect contributions fiom both employees (6 percent of payroll), and the government-employer (14 percent), however it does not receive the mandatory employer's contribution on a regular basis. 11. The pension branch in CNSS has been in deficit for a few years already (see Tablel), while the other two branches (family allowance, and work injury) have been having surplus. Indeed expenditures inCNSS have been higher than revenues for a while, basically due to the pension branch where expenditures have been considerably increasing while revenues have only slightly increased during the last few years. The branch of family allowances, on the other hand, is inthe best shape due to the fact that the contribution rate for such branch is the highest, and expenditures are lower thaninthe pension branch. 12. The legal retirement age in CNSS is 60, however individuals with 20 years of being registered (and 60 months of coverage in the last 10 years), can retire earlier. On the other hand, the average retirement age in FNR is lower than in CNSS, 50 is actually the actual retirement age in FNR (although the statutory retirement age is 55, there are various conditions that allowed employees to retire earlier, even with "full pen~ion")'~.However, it is important to highlight that the retirementage for civil servants has been increasedto 60 years of age in 2009, and it will be effective in 2010. Likewise, the retirement age for other Government employees ("auxilliaires de l'Etat"), which is currently 58 years of age, is plannedto increase to 60 years, and for the army and military personnel the retirement age can vary from 45 to 60 depending on the grade. 13. Old-age pension inCNSS is 20 percent of the insured's average covered earnings inthe last 3 or 5 years (whichever is higher), plus 1.33 percent of average covered earnings for each year of coverage exceeding 15, up to a maximum of 80 percent. The benefit formula for pension calculation in FNR is more generous. The wage base i s the last earnings of the individual, and the accrual rate is 2 percent. The maximum number of years considered for pension calculation is 40, which supposes a maximum replacement rate of 80 percent. Hence, with 40 years of service inCNSS the replacement rate is only 53 percent while inFNR for the same number of years of service the replacementrate i s 80 percent. The projections in this report do not take into considerationthese recent reforms which are not going to take place until January Ist, 2010.. l3Until recently, in order to qualify for a full pension there was a double condition of age 55 and 30 years of service. However since 2002 this rule was changed and any of both conditions separately are valid in order to obtain a regular full pensions. In addition, these conditions are reduced to 50 years of age and 25 years of service for certain categories o f civil servants. Other circumstances where individuals can retire before the age of 55, are mainly due to invalidity and layoffs. 4 Table 1:Financialsituationof CNSS (2002-2006) Contribution rates 2002 2003 2004 2005 2006 For pensions: employer 2.4 2.4 2.4 2.4 2.4 employee 1.6 1.6 1.6 1.6 1.6 For family allowances: employer 11 11 11 11 11 employee For work injury: employer 2 2 2 2 2 employee Total employer 15.4 15.4 15.4 15.4 15.4 employee 1.6 1.6 1.6 1.6 1.6 Total 17 17 17 17 17 REVENUES (in h4n.OfFCFA): 7060.99 6406.28 6984.67 7204.92 8565.64 From pension contributions 1661.41 1507.36 1643.45 1698.49 2015.44 Fromfamily allowances 4568.88 4145.24 45 19.49 4659.25 5542.47 contributions Fromwork injury contributions 830.70 753.68 821.73 847.18 1007.72 EXPENDITURES(inMn. of FCFA): 7649.04 6728.38 7687.84 8356.41 8702.65 3621.56 3047.28 4263.00 4593.34 4735.41 3529.80 3047.28 2761.86 3101.10 3217.62 For work inju 597.68 633.83 662.99 661.97 749.62 Total balance CNSS -588.05 -322.10 -703.17 -1151.49 -137.02 14. As earlier mentioned the pension branch in CNSS, as well as FNR, provide both disability and survivorship pensions. InCNSS the disability pension is equal to 20 percent o f the insured's average covered earnings inthe last 3 or 5 years (whichever i s higher), plus 1.33 percent o f average covered earnings for every 12-month periods of coverage exceeding 180 months, up to a maximumo f 80 percent. A 6-month coverage period i s credited for each year that a claim is made before age 60 (age 58 for covered public-sector workers) and it is replaced by an old age pension o f the same value. Inorder to receive a,disability pension, the employee has to have been registered with the CNSS for at least 5 years, and have at least 6 5 months o f coverage in the 12 months before the disability began. In FNR, members have the right to invalidity pensions at any time and those are calculated as proportional old-age pension. 15. To qualify for a survivorship pension, inboth CNSS and FNR, the deceased should have qualified for the old age pension or disability pension (either was a pensioner at the time of the death, or had at least 180 months o f coverage inthe case o f CNSS, or one year o f service in the case of FNR). Eligible widow(er) receives 50 percent o f the deceased's pensions. If there is more than one widow, the pension i s split equally among them. The widow(er) pension ceases on remarriage, and separated or divorced women do not have pension rights. Each eligible orphan in CNSS receives 25 percent o f the deceased's pension; 40 percent for each full orphan, on the other hand in FNR orphans receive 10 percent o f the old-age or proportional pension o f their father (but the payments are limited for 6 children). In both systems, all survivor benefits combined must not exceed 100 percent o f the deceased's pension otherwise the pensions are reduced proportionately. If survivors do not qualify for a pension, they only receive a lump-sum payment (survivor settlement). Table 2 presents the main indicators o fthe pension system inNiger, as well as the proposal o f CARENI. 6 Table 2:Main indicatorsof the pension system in Niger (2006) CARENI Indicators D E S I G N RetirementAge and/or qualifymg conditions 60 55 60 Contribution Rates from Employers & Employees: 4% 20% 22% (asO/O of covered wage) Required Length of Service for Basic Replacement Rate 15 15 15 Basic Replacement Rate 20% 30% 30% Incremental Replacement Rate 1.33% 2.00% 2.00% Maximum Replacement Rate 80.00% Number of Last Years for Wage Base Calculation 3 o r 5 * 1 1 Post-retirement Indexation None Adhoc Adhoc Survivors Pensions (with respect to OldAge Pensions) 50% 50% DEMOGRAPHICS Number of Contributors (total) 39,511 43,633 Mer 30,423 Womer 9,088 Number of Beneficiaries (total) : 18,912 17,683 OldAgc 7,093 Invalidit. 27 Survivor 11,792 System Dependency Ratio: 0.48 0.41 PERFORMANCE IAverage Wage 1,370,803 1,229,618 Mer 1,015,345 Womer 1,482,096 OldAgc 313,438 510,895 Invalidit! 330,276 Survivor! 74,536 Orphanr 53,354 lOldAge Replacement Rate 22.9% 41.5% Source :Official data from CNSS and FNRand estimatesfromthe World Ink *The number of years depends on which is the higher average salary. 7 2 OBJECTIVESOFTHE PENSIONSYSTEMAND PRINCIPLESTO GUIDEREFORM 16. I n a country such as Niger the core objectives of the pension system shouldfocus on insurance and adequacy functions. The insurance function consists in mandating a minimum level o f savings so that, upon retirement, individuals are able to replace a certain level o f income. The adequacy function, on the other hand, i s to ensure that all individuals after a certain age are able to finance a minimum level o f consumption to avoid poverty. Other objectives such as usingthe pension system to develop capital markets or finance social development projects are, at best, secondary. At worse, these can overwhelm limited institutional capacity and preclude the achievement o f the core objectives inan efficient way. Box 1: Principlesof a mandatorypublic pensionsystem Adequacy of benefits and universality. The benefits provided by the pensionsystem needto be sufficient to maintain a certain standard of living after retirementand be designedtaking into account the needs of different population groups. There is no absolute in terms of what should be considered an adequate benefit. Countries make different choices that reflect, inpart, social and cultural preferences. Inall cases, however, it is important that these choicesare explicit andthat their financiayfiscal consequencesare well understood. Financial sustainability and affordability. Sustainability implies that the benefits offered by the pension system can be covered out of future revenues. Affordability means that the tax-burdennecessary to mobilize these revenues can be supported by the economy. A pension system that offers 100 percent net replacement rates on pensions can be sustainable if the tax-wedge is high enough, but it is unlikely to be affordable. The pension system does not have to be financed exclusively out of payroll taxes and social security contributions. General revenues can have an important role financing non-contributory arrangements. Proiected Dublic spending. however, needs to be consistent with the fiscal framework and the broader Objectives of the governmentregardinethe allocation ofDublicexpendituresacross sectors. Progressive and explicit redistribution. Redistribution is an important function of the pension system. The form of redistribution, however, matters both in terms of equity and incentives. Redistribution should be progressiveand focus transfers onthe most vulnerable individuals. It shouldalso be explicit inthe sense that the beneficiaries, the costs, andthe financing mechanismsare identifiedup front. Predictability and robustness. Benefit formulas and eligibility conditions shouldnot be subjectto sudden and discretionarychanges. Planmembers (and employers) shouldbe able to foresee what their obligations with the system are andthe levelof benefitsthat they can expect to receive. Retireesshouldnot face uncertainty interms o f how their pensions are adjusted each year. At the same time, the system needs to be able to adapt to demographic and macroeconomic shocks. This requires having in place transparent rules to adjust certain parametersofthe system when these shocks materialize. . Economic and administrativeefficiency. This principlestates that the objectivesof the pensionsystem should be implementedat the lowest possible social cost. At the level of the economy, this implies paying attentionto how the pension system affects incentives to work, save, invest, and create jobs - particularly in the formal sector. How the system is governed and administered is also important. Governance and administrative structures affect the incentives facing managers and employees in the pension find, and therefore their performanceand ultimately the cost o f the system and the quality of services provided. Governance structures are, for instance, centralto the performanceof investmentpolicies. SourceHOlZmaM, R, andR. Hinz(2005). 17. There are several alternatives in terms of how pension systems can be structured to achieve the core objectives. Designs differ on the choices of benefit formulas, financing 8 mechanisms, and management/administrative arrangements. Countries make choices that better respond to local conditions and thus pension systems around the world vary widely. In all cases, however, choices cannot be arbitrary and need to take into consideration five standard principles need to be respected: (i)the adequacy of benefits; (ii)financial sustainability; (iii) progressive and explicit redistribution; (iv) predictability and robustness; and (v) economic and administrative efficiency. (see Box 1). As discussed in this chapter, these principles are severely compromised in Niger, and while the government and the pension institutions are aware o f the need to take some urgent decisions to revert the problems, there is not an integrated approach to the different policy options and their possible implications. 3. COVERAGE AND ADEQUACY OF BENEFITSIN THE CNSSAND FNR 18. Coverage in Niger is very low although aligned with the country's level of income. Only 3 percent o f the labor force (and 4 percent o f the elderly) are covered by either the CNSS or the FNR. But other countries in the Africa region with similar income per capita such as Burundi, Guinea Bissau, Tanzania, Malawi, and Democratic Republic o f Congo, have coverage rates below 3 percent o f the labor force. A few African countries have slightly higher coverage rates, but overall the average for the region is about 10 percent of the labor force.14 The average coverage rate inthe world i s around 25 percent. 19. The number of contributors has been falling in both pension schemes increasing system dependency ratios. In the CNSS, there were 39.5 thousand contributors in 2006, relative to 55.6 thousand in200215. They represent around 1 percent o f the labor force. The number o f beneficiaries on the other hand has increased from 14.7 in2002 to 18.9 thousand in 2006 because the system i s maturing (Le., there are many old people retiring). They represent around 2 percent o f the population o f age 65 and above16. So while de endency ratios remain m,thenumber favorable in the population, they have deteriorated within the CNSS IF(see Table 3). In the o f contributors has also fallen from 44.7 thousand in2003 to 43.5 thousand in 2006. This is as a consequence of a policy o f freeze-hiring in the civil service, and the possibility to retire without an age condition. Today, around 1percent o f the labor force is in the civil service. The number o f beneficiaries increased from 14.3 thousand in2002 to 17.6 in 2006 -a 23 percent increase. 20. Low coverage rates can be largely explained by the structure of the economy and the labor market.I8 According to 2005 household survey, around 85 percent o f the labor force in Niger is working in the informal sector and/or is self-empl~yment.'~At the same time, the 14 Cape Verde and, particularly, Mauritius havethe highest coverage rates in the region. In Cape Verde 27 of the labor force are active members ofthe pension system, while in Mauritius around 50 percentof the labor force are currently active membersof its pensionsystem. 15 This large drop in contributorsis mainly due to the increaseof informal sector as well as some improvementin record-keeping 16 More than halfof 18.9thousandbeneficiariesare youngerthan 65 years old, hencenot included in this rate 17 The number of beneficiariesover contributors is only increasing in CNSS, becauseof the increase in life expectancy and the fact that there are only very few youngpeoplejoining the system 18 Ministere de I'Economie et des Finances (2006) is the source of information on rurahrban population. The informal sector in Niamey was estimated as equivalent to 82.7 percentage of total employment in Niamey in 2002 (Direction de la Statistique et des Comptes Nationaux,2003), and the proportion is presumablyhighernationwide. 19 Accuracy of the informal sector size needs to be checkedwith the authorities. 9 agricultural and service sectors, which are mainly o f informal nature, represent 40 percent and 43 percent of total value added respectively. According to administrative records o f CNSS and FNR, the evolution o f contributors and beneficiaries i s presented inTable 3 below. Indicators 2002 2003 2004 2005 2006 CNSS Active Contributors 55,670 51,850 44,007 36,258 39,5 11 Beneficiaries 14,729 15,023 16,216 17,179 18,912 CNSS system dependency ratio 0.26 0.39 0.37 0.47 0.48 FNR Active Contributors 44,705 43,533 Beneficiaries 14,370 17,683 FNR system dependency ratio 0.32 0.41 21. It is very unlikely that coverage will be expanded substantially through the contributory system in the years to come. Evidence at the international level suggests that coverage i s strongly correlated with income per capita (see Figure 1). As economies grow, their productive structure changes, institutional and enforcement capacity increase, formal employment expands, and so does coverage. But even when countries approach income levels o f USD 10,000 per capita, the informal sector remains an important source o fjobs and the coverage o fthe pension system does not go over 50 percent o f the labor force. InBrazil, for instance, income per capita is USD 8,730 and the coverage of the social security i s only 44 percent o f the labor force. Inthis context, ensuring access to old-age income protection to a majority of the population requires special interventions to target the long term poor and individuals with limited savings capacity. Section 3 will discuss some policy options and their viability ina county such as Niger. Figure 1: Coverage of the Pension System in Niger Source: Him, and Pallares-Miralles (2008) 10 22. I n terms of the level of benefits, the CNSS offers relatively modest replacement rates. Full-career workers (ie., individuals joining the system at age o f 20 and contributing continuously until the statutory retirementage) receive a gross replacement rate o f 45 percent ifthey retire at age 60 or close to 50 percent ifthey retire at age 65 (see left panelFigure2). Partial career workers, who join the system after age o f 20 and who do not contribute continuously can, receive replacement rates below 30 percent. The minimumpension i s also on the low-end o f the internal distribution; it represents around 16percent o f average earnings (compared to an international average o f 25 percent) and only individuals with incomes below 30 percent o f the average are likely to benefit. Inprinciple, this relatively restrained mandate o f the CNSS provides incentives to diversity savings for retirement through voluntary arrangements. The extent to which individuals inNiger save outside the CNSS, however, i s unclear. N o data are available at this time to assess how the net earnings o f workers change upon retirement and whether low-income workers could be exposed to poverty. Data from the 2008 Household Budget Survey, which will be available before end o f 2008, could provide valuable information on the characteristics o f the retirees. 23. On the contrary, replacement rates for civil servants are considerably high. Full- career civil servants can receive gross replacement rates between 70 and 80 percent depending on the timing o f the retirement (net replacement rates are higher). As discussed in the next chapter, these are highreplacement rates by international standards. Indeed, ina sample o f 56 countries for which data i s available, the average gross replacement rate for the average full career worker at the statutory retirement age is close to 60 percent. In the FNR this i s the replacement rate received by individual who retires at age 50. Inpractice, FNR does not offer a minimumpension and there are no ceilings on covered earnings. As a result, replacement rates do not vary by level o f income (see right panel Figure 2). In other words, the level of the pension only depends on the number o f years o f contributions. Figure 2: Gross Replacement Rates in the CNSS and the FNR 4. PREDICTABILITY AND SECUFUTY 24. There are two dimensions that are important interms o f predictability and security: 11 > First, the parameters of the system -contribution rates, benefit formulas and eligibility conditions- should not be subject to sudden ad-hoc changes. Unfortunately, often in the case o f Defined Benefit (DB) systems financial problems tend to be resolved by sudden changes inthe contribution rate, the ceiling on covered earnings, cuts in benefits, or changes in retirement conditions. The main reason i s that, from the start, the pension system is not designed taking into account future, uncertain, changes in labor markets and demographic conditions - including life expectancy. The consequence i s that both employers and employees have less capacity to plan and that the credibility o f the system i s eroded. Sudden changes in contribution rates, for instance, affect the cost o f labor and can harm employers, particularly inthe case o f small/low productivity firms. Employees, on the other hand, might discount the value o f future pension promises and have fewer incentives to enroll and contribute. > Second benefits in payment should not be indexed in a discretionary way. Unfortunately, this is another common feature o f DB plans. Pensions are either kept constant in absolute terms for long periods o f time - inpart, for financial reasons, or they are adjusted erratically as a function o f the growth rate o f wages and/or prices. The implication is that retirees face uncertainty about the purchasing power o f their pensions. To the extreme, minimum pension guarantees can become insufficient to ensure that low income individuals do not fall into poverty during old-age. Discretionary adjustments can also negatively affect the finances o f the system since they are typically not budgeted or planned. 25. In Niger the rules of the pension system (in both the CNSS and FNR) are not designed to face future changes in macroeconomic and demographic conditions in a transparentand explicit manner. Currently there are no mechanisms in place that define how retirement ages would be adjusted if life expectancy increases. Or, how benefits would be adjusted if coverage expands and labor productivity (and therefore the growth rate o f wages) accelerates. These issues will be discussed in more detail below and in the next chapter when assessingthe financial sustainability o f the system and when discussing options for reform. 26. Pensions are not adjusted to reflect changes in standards of living and the cost of living. In the CNSS, the minimum pension guarantee is defined in absolute terms. As average earnings inthe economy increase, the role o f the minimumpension becomes less and less important and can ultimately become irrelevant. At the same time, none the funds adjusts pensions in payment systematically and responsible to protect retirees from inflation while ensuring the financial sustainability o f the system. Inthe case o f the CNSS pensions have not beenadjusted since 1981. Thus, for those who retired in 1995 the real value o ftheir pensions has decreased by 25 percent. On the other hand, the FNR has a discretionary adjustment o f pensions with wage growth, which contributes to worsen the financial problems o fthe system. 12 5. FINANCIAL SUSTAIN ABILITY 27. Like the majority of countries, CNSS and the FNR are expected to finance pensions out of pay-roll taxes and social security contributions, which today seem high for a country withNiger'slevel ofincome. For the CNSS, the total contribution rate is 17 percent (15.4 percent financed by employers and 1.6 percent by employees). The contribution rate to finance pensions i s 4 percent, while 11 percent i s used to finance family allowances, and 2 percent is for work injury. The FNR was also designed as a contributory system with a total contribution rate o f 20 percent (14 percentage points paid, notionally by the government and 6 percentage points paid by the employee). In practice, however, there are no contributions that accumulate in a given fund and the pensions are simply paid directly from the general budget. Inthe Government recurrent expenditures, pension payments to the civil servant represent roughly 15 percent o f the total public sector wage bill. The resulting tax- wedge can be considered highand, as discussed inthe next section, there are serious concerns about potential effects on employment levels and the size o fthe informal sector. Table 4:Contribution Rates in the CNSS (as percentageof gross wage bill) Contributionrates 2006 Forpensions: employer 2.4 employee 1.6 For family allowances: employer 11 employee For work injury: employer 2 employee Total employer 15.4 employee 1.6 Source: CNSS, 2008. 28. At 0.7percent of GDP, totalpension expenditures(includingCNSSand FNR) are also at the high end of the distribution for countries with the same income level and demographic structures. Indeed, among countries with a similar GDP per capita, pension expenditures range between0.1 percent and 1 percent o f GDP (see Figure 3). The average in Sub-Saharan Africa is 0.7 percent. Clearly, when comparing with the rest o f the world, the level o f pension expendituresis low. The average pension expenditure in OECD countries i s 10.5 percent, in the ECA region 7.3, in L A C 3.6, in the MENA region 3.2, and in Asia 2.0. But these are countrieshegions with much higher incomes per capita, larger coverage, and also older populations. Niger, on the other hand, is a very young country, with only 3.2 percent of its populationbeingover 65 years old. Various countries with similar percentage o f elderlyhave higher coverage rates and yet expenditures are below 0.5 percent o f GDP 13 (See Figure 3). The explanation is that the average pension in Niger is high relative to GDP per capita -this i s despitethe fact that average replacementrates are low inthe CNSS.*' 29. Despite low coverage, pension expenditures have been growing and the overall deficit of the pension system (CNSS and FNR) is around 0.3 percent of GDP or 37 percent of the governmentprimary deficit. Inthe CNSS expenditures have been growing by around 10percent per year and are now at FCFA 4.7 billion (almost 0.3 percent of GDP). With revenues of only FCFA 2 billion, the CNSS is displaying a deficit of around 0.15 percent of GDP (see Table 3). This deficit of the pension branch is currently financed by the surplus of the family allowance one. Inthe FNR, the expenditureshave increased at a faster pace (around 14 percent per year) and in2006 these reached FCFA 9.8 billion (0.5 percent of GDP). The deficit of the system is estimated at 0.19 of GDP. So the overall deficit of the mandatory pension system is close to 0.3 percent of GDP or almost 40 percent of the aggregatedprimary deficit ofthe government which accounts for almost 1percent of GDP. Figure 3: Pension Expenditures and Percentageof Elderly Population around the World b1 :8 '. ... .. * 2 ..... 0 i y'c s q d _- - /*. 1. hn, 0 5 IO 15 10 i5 0 1 2 1 1 5 6 1 I 9 10 P r s n l q m dpC@.UO"o w ss P*a~*popd*lo"w.ss Source: Hinz, and Pallares-Miralles (2008) 20 Pensionexpenditures as ashare of GDP can be decomposed into the productof: (i) the averagepensionrelative to GDP percapita; (ii)the share o fthe elderly population that receive a pension (say population over 60); and (iii) the share of the population over 60 in the total population. In Niger (ii)and (iii)are lower than in other countries. Higherpensionsexpendituresas ashare of GDP canthen only be explainedby a higher averagepensionrelative to GDPpeicapita 14 Indicators 2002 2003 2004 2005 2006 CNSS (In M n FCFA): Revenues 1661.41 1507.36 1643.45 1698.49 2015.44 Expenditures 3521.56 3047.28 4263.00 4593.34 4735.41 CNSS deficit (as % of GDP) 0.12 0.10 0.17 0.16 0.15 FNR I (In FCFA): Mn Revenues I 5851.11 1 5920.36 1 6033.12 I 6386.34 Expenditures 8230.65 7727.82 8142.58 9822.60 FNRdeficit (as % of GDP) - 0.15 - 0.19 30. Thefuture evolution of thefinances of the system will depend, in part, on how the ratio of retires to contributors (system dependency ratio) evolves over time, the growth rate of wages, as well aspensions indexation policies, 2' These three factors will affect the future revenues and expenditures o f the two systems. Some preliminary projections are presented below. These projections are based on the model PROST22which follows single age/gender cohorts over time and.generates population projections, which, combined with labor market assumptions, are used to forecast future numbers o f contributors and beneficiaries. These in turngenerateflows ofrevenuesandexpenditure. The model thenprojects fiscal balances. 31. Contrary to what happens in many countries, in Niger demographics are likely to improve as opposed to strain thefinances of the CNSS. The system dependency ratio inthe CNSS is likely to remain more or less stable over the medium term. Given the population growth rate o f above 3 percent, and assuming that the percentage o fpeople contributing to the CNSS by age and sex i s constant over time, the system dependency ratio is projected to slightly decline over the next few years and then increase steadily going from 48 percent today to 56 percent by the end o f the simulation period (see left panel Figure4). Thus, due to favorable demographics, if coverage does not deteriorate further, the cash-balance o f the CNSS could improve over the coming years. Even over the long-term when system dependency ratios increase and pension expenditure start to grow faster than revenues, the ~~ 21 Dependencyratio (d) is definedas the ratio of beneficiariesto contributors.Replacement ratio (I) is the ratio o f benefitsto contributorywages, and can also be expressedas the product of the accrual ratio (a) times the years of contribution (y) : r=a.y. each period of time, equilibrium of revenues and expenditures requires: c.w.A=r.w.B, where A is the number of contributorsand B is the number of beneficiaries. Simplifying w and defining d=B/A results the equilibrium conditionc=r.d. 22 See appendix 4 and 5 for more details 15 deficit o f the systemcould remain below 0.5 percent o f GDP (see top left panel o f Figure 5).23 Nonetheless, to restore the financial balance of the system without changes to benefit formulas and eligibility conditions the contribution rate would need to increase from the current 4 percent to 8 percent.24(see bottom left panel of Figure 5). 32. Thesituationis differentin the case oftheFNR where thesystem dependencyratio is increasing rapidly. There are two factors explaining the increase in the system dependency ratio o f the FNR: (i) recruitment inthe public sector i s frozen to control the wage bill; and (ii)the number of new retirees in the public sector has been growing exponentially since 1998, in part, as a result o f qualifying conditions that allow individuals to retire before the legal retirement age iftheir length o f service reaches 30 years. Thus, ifthe number o f civil servants remains constant at the current level the system dependency ratio o f FNR could increase from 40 to more than 100 percent over the next 20 years, putting considerably strain on the finances o f the system. Even under the assumption that the number o f civil servants increases so that the size o f the civil service remains constants in relation to the total population, the system dependency rate could increase rapidly to 100 percent (see right panel Figure 4). Figure 4: Projected System Dependency Ratios in the CNSS and FNR CNSS FNR o m, Source: PROST output files 33. As a result, in the FNR, the current deficit is likely to continue to deteriorate reaching 0.7 percent of GDP by year 2020. Assuming that the FNR operates as an independent contributory system, its equilibrium contribution rate could range between 15 and more than 40 percent depending on the assumption regarding the size o f the civil service. It is important to emphasize that having more civil servants today does not address the financial problem. Even if the FNR was an autonomous fund and more civil servants could effectively bring more contributions today, and thus reduce the deficit slightly, future pension liabilities would also increase. Thus, inthe scenario where the number o f civil servants grows in line with the total population, the long-term deficit reaches 1.2 percent o f GDP instead o f 23 The mainassumptiondriving this result is that the coverageofthe system will remainlow., Coverage is assumed to be constant by age group during the entire simulationperiod. 24 That is the equilibrium contributionrate, the one that equalsrevenuesand expenditures . 16 0.5 percent in the scenario where the number of civil servants remains constant (see bottom right panel Figure 5). 34. It is very importance to realize that net wages and pensions of civil servants are ultimatelypaid by thegovernment and thus creating a new institutionsuch as the CARENI does not address thefinancial problem. For all practical purposes, today, the government pays net wages to civil servants (that depend on their category) and the pensions of those retired - the contributions from employees and the contributions from the government are only registeredfor accountingpurposes. Ifa new institution such as the CARENI was created to manage the scheme for civil servants things would not change from the point of view of the government. It would still pay the same net wages and now, instead of paying pensions directly, it would have to transfer "collected contributions" to the CARENI. The larger the number of civil servants the higher the level of expenditures on wages and contributions transferred to the CARENI. So bringing more civil servants only aggravates the fiscal problem today and inthe future. And, solving the financial problem ofthe pension fund is not a good reasonto bring more civil servants inthe first place. Figure 5: Projected Cash-Balance and Equilibrium Contributions in the CNSS and FNR CNSS FNR Q.UU 4.4% 1 35 . The financialimbalancesin both systems simply reflect the ad-hoc determination ofcontributionrates, benefits, and eligibiilifyconditions. As discussed in Chapter 3, a DB- 17 PAYG can be financially self-sustainable as long as the accrual rate, the retirement age, and the contribution rate are properly aligned. There are specific formulas that link these three parameters and whenthese are not respected the result i s a system that sooner or latter will not have enough revenues to pay pensions. For a given contribution rate and a given accrual rate there i s only one retirement age that can guarantee the financial sustainability o f the system. Over time, as life-expectancy increases, maintaining the financial equilibrium without reducing benefits and without increasing the contribution rate would require increasing the retirement age. 6. INCENTIVESAND REDISTRIBUTION 36. Defined benefit pension systems affect both the redistribution of income and incentives to contribute/retire. Income is redistributed because not all individuals receive the same level o f benefits relative to their contributions. Depending on their level o f income, careers histories and decisions about enrollment and retirement, some individuals can receive higher benefits relative to their contributions. This implies that redistribution i s not transparent and that, in some cases, it can even be regressive (i.e., going from low to high income workers). Also, because redistribution depends on career histories and contribution densities, the pension system might implicitly reward some behaviors over others. For instance, individuals might have incentives to retire early or to keep low contribution densities.25 37. In the case ofboth the CNSSand theFNR thereis a large variationin internalrate of return ~ R 8 s sthat can imply adverse redistribution. The IRRs 26 vary depending on ) the age of enrollment in the system, the retirement age, the level o f income, and the growth rate o f wages (Figure 6). In the CNSS, for instance, for the same level of income, an individual who joins the system at age 30 and retires at age 60 would receive a higher IRR thanan individual who joins at age 20 (10.5 percent Vs 9 percent). Also, individuals earning 50 percent o f the average wage receive the same IRRs than individuals earning the average wage as long as wages growth at the same rate. But if the wages o f high income workers grow faster than those of low income workers, they will receive higher IRRs. For instance, an individual with wages growing at 4.5 percent per year would receive IRRs which are 2 percentage points higher than those received by an individual whose wage grows at 3 percent per year. Similar patterns are observed in the FNR, although IRRs there are lower, mainly due to a higher contribution rate. The main reason for this is that the benefit formulas do not include life-time earnings in the calculation o f the pension. The implication i s that considerable redistribution takes place within both systems, but it likely going from low to highincome workers. 25 The contribution density is the share of active-life that individuals contribute to the social security. For instance, 50 percent of the time over a period of 40 years (betweenage 20 and 40) would imply, on average, 20 years of contributions. 26 To calculate Internal Rate of Return (IRR) on contributions, the pension system can be assimilated to a bank account. Individuals "deposit" contributions while active and then "withdraw" pensionswhen they retire. It is therefore possible to calculate the implicit interest rate on these contributions or IRR. Income is redistributedwithin and across cohorts when different individuals receivedifferent IRRs. Also, individuals might have incentivesto retire early, under declare wages, or keep short contribution densities ifby doing so they receive higher JRRs. 18 38. Theresults also show that the two systemsprovide incentivesfor earlyretirement. Indeed, in both systems (CNSS and FNR) individuals who retire early receive higher internal rates o f return on contribution than individuals who retire late. In practice, 20 percent o f individuals inthe CNSS retire before the age o f 60, although only around 2 percent before the age o f 55. In FNR more than 25 percent retire before the age of 55 and almost 100 percent retire already at this age. Inboth cases, IRR for those retiring earlier are higher because the accrual rates do not change as a function of the retirement age. Figure 6: Internal Rates of Return on Contributions CNSS FNR " 11 I * ' * .... .............. * 1 1 b I d & i i A 4 , 10 66 10 '6 70 m 66 I O 86 70 R.Ur.m.nl &a R.Ut.rn."t A#. Source: author's calculations 39. I n the case of CNSS, given that only the last three to jive years of salaries count towards the pension, the system might also be providing incentive to under-declare wages. This is simply because salaries received during most o f the career do not affect the value o f the pension. Thus, individuals might have incentives to declare only part of their salaries and thus pay lower contribution rates. This is a common problem with DB systems around the world. In the case o f Niger, the extent o f the problem i s not knoivn, since there i s no mechanism to monitor/audit the balance sheet o f employers. Back o f the envelop calculations, however, suggest that the revenues o f the CNSS represent around 60 percent o f the potentialrevenues. 40. I n the FNR salaries cannot be manipulated but promotions can. Indeed, for civil servants, only the last salary counts towards the pension. It i s quite common inthese cases to observe that promotions are granted prior to retirement. This increases the salary o f the individual and the pension in the same proportion. For instance, if the promotion increases the wage by 30 percent the pension will increase by as much. On the contrary, when all salaries are included inthe calculation o fthe pension a 30 percent increase inthe salary might increase the pensionby only 1percent ifthe person contributed for 3 years (0.3%/30 year^).^' Incentives for arbitrarypromotions are therefore much lower. 27 Assumes past salariesare indexedwith the growth rate of the average wage and that the new salary resultingfrom the promotion ifproportionto the average life-time salary excludingthe promotion. 19 41. Finally, the pension system might be providing incentives to reduce employment levels and createmoreinformaljobs. There i s strong evidence at the international level that the gap betweenthe cost of labor and the net wage that workers takes home (the so calledtax- wedge) increases employment levels. It is estimated that a 10 percent increase in the tax- wedge reduces employment levels by around 4 percentage points. Inthe case o f Niger there is no data for an exact estimation o f the tax-wedge, but it could range between 15 and 20 percent. This i s a very high level (close to the United States, Korea and Vietnam) for the country level o f income. The high tax wedge raises two issues. First, if employers are not able to pass the cost o f higher contribution rates to employees (through lower salaries) they are likely to reduce the demand for labor. Second, and more relevant in the case o f Niger, both employers and employees might have incentives to evade the social security and prefer to operate in the informal sector. Among low productivity firms this can be simply an issue o f not being able to afford the pay-roll tax if output per worker i s below the minimumcost o f labor. Among workers, the higher the tax-wedge, the lower the gap in net earnings between formal and informal sectors jobs and, therefore, the lower the incentives to contribute to the pension system. Thus, based on experience in other countries, any reform of the pension system inNiger should aim at reducing -- or at least not increasing -- the tax-wedge. 7. ADMINISTRATION AND GOVERNANCE 42. Bothpensionplans suffer from important administrativeproblems. Key processes related to the collection o f contributions, reconciliation, record keeping, and benefit payments are compromised by the lack o f appropriate information technology (IT), inadequate procedures, systems and weak institutional capacity. 43. The costs of administration of the CNSSare exorbitant when compared to similar PAYGpension systems. Currently, the administrative costs o f the CNSS are absorbing about 45 percent of its revenues. In other countries in the region, such as in Ghana, administrative costs represent between 22 and 25 percent o f the total revenues. In Senegal, and Cape Verde administrative costs are less than 15 percent. Inthe richest countries, as well as in the ECA region, administrative cost usually represents less than 8 percent of revenues. In the most effective systems the cost of administration can be as low as 4 percent of revenues. High administrative costs in the CNSS reflect, in part, outdated administrative processes, limited access to technology and scarcity o f well trained and motivated personnel. Administrative costs could be highly reduced, because o f economies o f scale, if all processes related to collection o f contributions, recordkeeping, etc. could be centralized in one institution 44. The CNSS also faces problems related to governance and investment policies. The portfolio o f investments o f CNSS shows scarce diversification and strong reliance on fixed rent (particularly treasury deposits), loans to plan members and real estate. Deposits at the Treasury are not negotiable instruments. As inmany other countries worldwide, CNSS plays the role o f direct creditor to the government. This i s largely explained by inappropriate governance structures and lack o f proper accountability. The CNSS is managed by a traditional tri-partite board with representatives from government, employers, and employees. The Director of the CNSS is appointed and removed by the Executive Power. Thus, current arrangements fail to shield the fund from political pressure and do not provide incentives to its 20 managers to invest the reserves o f the system inthe best interest o f plan members. A policy question i s thus whether the CNSS should be allowed to accumulate reserves beyond a minimumbuffer stock that would be deposited inBanks. 45. The administrativeprobJems of FNR are not Jess challenging than those of the CNSS. At 30 percent of contributions, adminjstration costs are lower than in the CNSS -- although the FNR also manages a narrower set o f benefits. At the moment, FNR i s managed by two different departments of the Ministry of Economy. The General Budget Direction is responsible for budgetaryallocation o f civil servants' pension, and the Treasury i s responsible of pension payments. This particular organizational structure produces an internal fragmentation that is inefficient. Moreover, given the lack o f adequate information system, financial monitoring and managerial decision making are severely limited. Overall, the system faces enormous difficulties to deal with the most basic administrative processes such as record keeping. The administrative circuits are incomplete or not defined; there i s no central coordination; procedures are manual; and records do not satisfy minimum security standards. The main challenge is to eliminate administrative internal fragmentation and consolidate systems and processes. 21 CHAPTER3: STRATEGIESFORREFORM Given the structuralproblemsfacing the twopension plansfor private andpublic sector (CNSS and FNR) as discussed in theprevious chapter, the Government has initiated various assessments since early 2000 and certain reform proposals are now under considerationfor both CNSS and FNR. However, theseproposals are not addressing issues of equity, security, efficiency and affordability. They may reduce temporarily the deficit of thefunds by addressing short-termfiscal issues, but they will deteriorate the financial sustainability of the system in over the long term. Of particular concern is the FNR reform program, which isfocusing on the creation of a new and independent institution (the Caisse Autonome des Retraites du Niger - CARENI), that will only add to administrativecosts and deterioratethefinancial situation of thepublic sector. This chapter makes thefollowing recommendations: (I)Niger should maintain a defined benefit system with pay-as- you-go financing, but benefit formulas and eligibility conditions need to be reformed to improve jinancial sustainability, security, incentives, and equity (e.g., by gradually moving to career wages in the calculation of thepension; aligning retirement ages with the accrual rate, the contribution rate, and life expectancy; and indexingpensions with inflation); (2) Ideally, Niger should consider an integrated system for public and private sector workers. This could be achieved gradually by to the CNSS But even if a dual systempersists, current replacement ratesfor civil servants would closing the FNR to new entrants andprobably transferring theyounger generations of civil servants need to be reviewed whilepreserving the administration of the system under the FNR; and (3) In terms of increasing the coverage of thepension system, policies need to mainlyfocus on improving incentives to enroll in the contributorysystem and reduce evasion. Given the substantial challenges to improve human development, reallocatinglimited public resources tofinance retirement income transfers might not be werfare increasing. Nonetheless, over the medium term, options to expand thepension to the informal sector and the long termpoor could be investigated 1. GOVERNMENTREFORMINITIATIVES 46. The Government has been studying options for reforming the pension system for some time. Inthe case of the CNSS, an actuarial report was produced by ILO in2003.28 The report flagged the financial problems o f the system and recommend to address through a number of measures, including: (i)adjustment of contribution rates, explicitly transferring incomes of other branches to pension^;^' (ii)gradual increases of contribution rates in subsequent years, eventually reaching 15 percent to the pension branch in 2035; (iii) automatic indexation of pensions; and (iv) portfolio diversification, including foreign investment options. The resentation of the report was followed by the creation of an ad hoc "Validation Commission.3%, . 47. The Validation Commission adopted some of the recommendation of theILO and proposed alternatives but without looking at their fiscal implications. In essence, the proposal of the Commission is more permissive and thus fails to address the financial *'See 28 : BureauInternationalduTravail (2005) The proposalof ILO (2005) is to increase the initial contribution rate to pensions from the current 4 percent to 9 percent, and reducing contributions to family allowances from the current 11 percent to 6.2 percent, and those of workers' compensationfrom 2 percent to 1.8 percent. 30See : Ministtre de la FonctionPublique et du Travail (2006) 22 problem. It reflects preferences o f the members o f the Commission and the not a rigorous analysis o fthe financial and welfare implications o f the proposals. The main differences with the proposal o fthe ILO are highlighted inTable 6. Table 6:Comparison of parametric reform proposalsof the ILO for CNSS reate mvestment Source: Staff estimates based on information from Ministtre de la Fonction Publique et du travail (2006) and Bureau International du travail (2005). 48. A study tour to Mali was also organized to learn from the reform experiences in that country. The mission was composed by six members representing different government agencies (including FNR and CNSS), and the labor unions as well. The report produced by the mission3' highlighted the achievements o f the neighbor country in addressing critical reform issues including: changes in asset valuation and accounting procedures, actuarial audits, manuals o f procedures, improvement o f record systems and statistical information, development o f an IT plan, and training program for staff o f the pension administrations. While these recommendations are in the right direction, there i s not a clear articulation with the reform proposal supported by the Validation Commission. 49. For FNR, the Government is also contemplating reform options. In 2003, the Government o f Niger created an inter-ministerial committee in charge o f administering and supervising the preparation o f an actuarial study for the FNR. The committee was composed o f civil servants, magistrates, military and other representatives from plan members. The group elected a local consultant to conduct the study. The objectives were to review the financial situation o f FNR and propose some eventual changes to guarantee the financial sustainability o f the system over the medium term. The study was prepared in three phases: 1) revision o f the data files o f the FNR, 2) production o f the actuarial evaluation, and 3) designand assessment o f reform alternatives. The study highlighted issues related to: (i) the 31 See : Ministerede I'Econornieet des Finances(2006b) 23 unequal treatment o fpublic sector employees;32(ii)the problem o f a contribution rate that has been frozen since 1961 while benefits provided by FNR have considerably increased;33 and the issue of very lax retirement conditions. 34. However, the study ignored impacts on the wage bill when assessing the fiscal implications o f alternative policies 50. The main recommendations of the study on FNR were the creation of an independentagency. The proposal ofthe committee was to revise the legislation ofthe FNR in order to create a new pension fund, the "Caisse Autonome des Retraites du Niger" (CARENI) for military and civil servants. More specifically, the recommendations were as follows: (i) separation o f FNR from Treasury and creation o f an autonomous social security agency; (ii)establishment o f a transition period where Treasury will still be responsible for pension payments and arrears (due contributions, etc); (iii)enforcement o f the law that mandates the'government to pay as an employer contributions to the new agency; (iv) improve the collection mechanisms o f FNR particularly from the "detached" civil servants; (v) creation o f a CNRI account that the Treasury cannot access to; (vi) creation o f a partially funded regime with specific administration conditions; (vii) redefinition o f the role o f the Treasury in the management o f potential pension assets; and (vii) revisions o f the qualifying conditions for retirement (taking into account both age and years o f services) The legislative texts o f the CARENI have been already revised and the implementation i s planned for 2008/2009. However, the Government recognized that further in-depth analyses are needed to assess the sustainability o f the proposed reforms. With the support o f donors, starting in 2009, it i s planned to implement a reliable database o f civil service and military beneficiaries that will help the establishment o f CARENI. 5 1. Additional studies and evahations were also launched to assess impact of various reforms under considerationfor FNR. Based on the 2003 actuarial study of FNR, the main recommendation to improve the financial sustainability o f the system was to increase the retirement age from 55 to 60, and to recruit more civil servants (eliminate the policy o f `frozen recruitment'). The Ministry o f Labor was then asked to assess the impact of the proposed reforms based on a new census o f FNR civil servants and military beneficiaries in July 2006. The final recommendations were as follows: (i)retirement age set at 60; (ii) recruitmentof military and para-military personnel and additional 1,500 civil servants3'; (iii) increase contribution rates o f employees from 6 to 8 percent and ensure that the 14 percent o f the employer is effectively paid; and (iv) implementation of a one year transitory phase (2008) where Treasury will ensure the payment o f pensions (plus contributions). This period would be used to create the administration departments o f CARENI (Administration board, general director, and technical services) and to create a partially-funded regime. The legislative texts o f CARENIhave beendrafted but they are not yet finalized and implemented. Further work is needed to ensure the technical soundness o f the policy recommendations and 32 Some public sector employees are covered by FRN, others (employees of public enterprises) are covered by CNSS. The central government does not contribute to the treasury as it should, as employer of civil servants, however the employers of other public sector employees (public enterprises) pay instead contributionsfor pensionsto CNSS. 33 Including family allowancesand `bonifications' 34 The study recognized that the change in qualifying conditions in FNR that took place four years ago allowing individuals to retire with 30 years of contributionregardlessof the age was very costly. As a resultthe averageretirementage decreased from 55 to 50.7. 35 That would only represent a small temporary fix 24 particularly better information and actuarial studies are needed to assess the short and long term viability of the FNR. 2. INTERNATIONAL PERSPECTIVESJ6 52. Countries around the world have adopted different designs for their pension systems. In general it is possible to distinguish two broad categories: (i) earnings related (ER) systems that are financed, at least partially, on a pay-as-you basis; and (ii)defined- contribution (DC) systems which are fully-funded. The first category includes defined- benefit (DB) systems; point systems; and Notional Defined Contribution (NDC) systems. Many countries combine both ER and D C systems. Inaddition, several countries incorporate non-contributory arrangements that aim at ensuring that all individuals have access to a minimumlevel of income duringold-age. 53. Pension systems also differ in terms of institutional organization. Many countries that have introduced structural reforms have also integrated schemes for various occupational categories (e.g., Civil Servants and private sector workers) to generate economies o f scale, improve labor mobility, and also improve equity (since all workers are then treated in the same way by the public system). There are also differences in the extent o f involvement of the private sector. In countries like Argentina, Chile, Colombia, and Mexico pension funds are managed by the private sector - both in terms o f administration and the investment of assets. In Chile the systems i s fully decentralized with various Pensions Administration Funds (AFPs) in charge of directly collecting contributions. In Mexico, on the other hand, collection i s centralized in a private agency created by the AFPs and in Argentina it is implemented by the Tax-Authority. , Countries such as Sweden have maintained public administration o f the system but funds are invested by private asset managers. Appendix 5 provides information about the designo f pensions systems invarious countries. Clearly, there is a large variation in terms o f structure. In all cases, however, it is necessary to ensure that the pension system i s consistent with the general principles outlined inChapter 2. 54. Pension reformin SubSaharan countriesis onlygradually becomingan important part of Government's policy agenda. The region reflects a colonial legacy of defined- benefit schemes and provident funds and, ina few countries, there i s some presence o f private pension funds organized along occupational lines. Non-contributory schemes, financed by general revenues that reach most o fthe elderly, including the poor, are only found in Southern Africa (Botswana, Mauritius, Namibia, and South Africa). With the exception o f occupational schemes in Namibia, South Africa, and to a lesser extent Kenya, pension promises in the region are largely unfunded. This i s clearly the case for the civil service schemes but i s also true for the partially funded defined-benefit schemes that cover the relatively small proportion o f formal private sector workers. The main problems are similar to those o f Niger: (i) coverage; (ii) administration; (iii)unsustainable mandates; low weak (iv) poor management of reserves; and (v) separate schemes for civil servants and private sector workers. 36 See appendix5for more detailson internationalpatternsand reforms 25 55. To date reforms have beenfew and often motivated by the problems of the schemes for civil servants. Although the problems o f the schemes that cover private sector workers have become increasingly evident, the motivation for reform in Sub-Saharan Africa region has come more frequently from the fiscal pressures o f civil service pensions. In several countries, the need to address this short-term fiscal issue has led policy makers to reconsider overall pension policy. Some countries have moved to integrated pension systems. Ghana, for instance, unified its schemes decades ago, and Cape Verde did it two years ago. In other countries in the region, such as Gambia, discussions toward integration are also taking place. Ingeneral, however, most reform initiatives under way retain a dual system. Also, with the exception o f Nigeria, Ghana, and South Africa reforms have preserved DB-PAYG arrangements. Nigeria is the only country that has adopted a mandatory defined contribution funded system;37in Ghana and South Africa the pro osal for a second pillar with privately managed individual accounts is under consideration?' Kenya approved an integrated DC-FF system in 2007 but it is voluntary. The other reform initiatives have focused on the expansion o f coverage. In Namibia, for instance, in 2005 the government launched the "Namibia Agricultural Retirement Fund" to cover specifically agricultural laborers, service providers, and people employed by agricultural training institutions, which is a funded defined contribution system.39 3. GENERAL POLICY RECOMMENDATIONS FORREFORMINGNIGER'S PENSIONSYSTEM 56. Thefirst questionthat theNigeriensocieiyneeds to address is "Whatshould be the role and mandate of thepublic pension system?" In most middle-income countries (e.g. most OECD countries) the focus i s on replacing income for low-income workers and in this context the gross replacement rates are reduced as income increases. The choices about income replacement patterns ultimately reflect social preferences and cultural factors (e.g., the role o f the family in providing support during old age). These choices, however, need to be affordable for both CNSS and FNR. For a country like Niger, where over 80 percent o f the labor force i s outside o f the formal sector, replacement rates that need to be financed by a 17 percent contribution rate or transfers from the central budget are not affordable. The high level o f taxation will negatively affect labor markets and the competitiveness o f the economy. Large public expenditures on pensions for a minority o f the labor force, on the other hand, compromises the efficient production o fpublic good, reduces necessary investments inhuman capital, and i s inequitable. 57. In terms of system design defined benefit systems with pay-as-you-go financing should be`preserved but it is necessary to change benefit formulas and eligibi-iv conditions. In the case o f Niger there is little rationale at this stage to consider more 37 Nigeria implementeda new compulsorysystem of fully funded retirementsavings account. The pensionreform act o f2004 went into effect for public-sector employees, and it was implementedfor private-sectorworkers in 2005. The new system replaced the earnings-related but non-contributory PAYG, DB in the public sector (including the military); the National Social InsuranceTrust Fund OJSITF), a shared contributory private-sectorsystem for companieswith five or more employees; and voluntary employer-sponsoredretirementplans(both DC and DB). Taken together these planscover roughly I O percent of the population. 38 For more details see appendix 5 39 The fund is supplementingthe country's existing social pension, which pays an identical flat monthly benefit to all Namibiansat age 60, regardlessof need. That benefit is noncontributory and financed from general governmentrevenues. Namibia's agricultural sector makes up 47 percent of the country's total labor force. Beforethe launchof the agricultural fund, only 20 percent of economically activeNamibianshadaccessto a retirementfund. 26 structural reforms. For instance, with the current level o f development o f the financial sector, the introduction of a DC-FF component is likely to bring more costs than benefits. There is also little institutional capacity to implement complex reforms. So the focus should be instead on improving current arrangements so that the pension system i s able to meet the principles discussed in Chapter 2. The necessary changes are discussed below. These are technical recommendations that should be subject to little debate. Various stakeholders can have different views on what the mandate o f the pension system should be. But once there is an agreement at that level, the implementation o f the mandate should respect the rules o f DB systems with pay-as-you-go financing (see Table 7). Not respecting these rules simply compromises the financial sustainability o f the scheme, economic efficiency, and/or equity. It can be argued that mandatory pension schemes do not need to be self-sufficient and that budget transfers to finance part o f the pensions are a perfectly defensible policy. This may well be a social choice, but the costs in terms o f lost efficiency and the equity implications need to be acknowledged. The resources used to finance the pensions o f a few, usually well- off, formal-sector workers, are necessarily diverted from the production of public goods that bring higher social and economic benefits while affecting a larger share o f the population (e.g., education, health, and well-targetedassistance programs). Table 7: Best Practicesin the Design of a DB-PAYG System PARAMETER BESTPRACTICE BENEFITFORMULAS IncomeMeasure All salaries included in the calculation of the pension indexed by the growth rate of the average covered wage. Accrual Rate Set in relation to the replacement rate targeted to a full-career worker retiring at the normal retirementage (see below). Adjusted downwardfor individuals retiring before the normal age and upward for individuals retiringafterward. "Minimum Pension" Could range between 15% and 25% of economy wide average earnings. Cost of this minimum pensions and financing mechanismshould be explicit. Index For Pensions Inflation. ELIGIBILITY CONDITIONS Normal Retirement Age and Basic Given the targeted accrual rate, the expected growth rate of wages, and Contribution Rate mortality rates, the choice of one of these parameters implies the level of the other. Preferably, the contribution rate should be fixed. In this case, the normal retirementage needs to increase gradually to take into account changes in life expectancy (Le., survival probabilities in equation 1). Vesting Period No vesting period if accrual rate is properly set except for the minimum pension. Around 20 years could be considered. ource: World Bank 2005. 58. I n terms of institutional organization, on the other hand, it is important to carefully analyze whether maintaining a dual system is the best strategy tofollow. Ideally, Niger would aim to an integrated pension system that covers civil servants and private sector workers alike. This could be achieved gradually, for instance, by closing the FNR to new entrants who would then enroll in the CNSS (after the necessary reforms have been 27 introduced to make the fund solvent and more efficient). Inthis case the government would continue to pay the pensions of current retirees and in addition would transfer contributions for new civil servants to the CNSS - which initially would be a relatively small amount. Having a single mandatory pension fund would not only reduce administration costs, but it would also contribute to facilitate the movement of workers between the public and the private sector. If in the context of its humanresource management policies the Government, as an employer, would like to provide additional pension benefits to civil servants that could be done through complementary (probably voluntary) occupational plans. 59. Even ifNigerpreservesa dualsystem, itis not advisable to createa newinstitution (CARENI)from scratch. Creating a new independent organization from scratchto manage the scheme for civil servants can be a very complex and expensive undertaken and one that is difficult to justify. As previously discussed, the creation of CARENI would not address the fiscal problems the government is concerned about. On the contrary, there would be potentially large costs related to the set-up of the new institution (office space, information systems, and personnel). For the operation to be worthwhile (i.e., to be able to generate long- term benefits that compensate for the costs of setting-up the new institution) the CARENI would need to be able to pay higher pensions relative to current net wages than the FNR. However, this could only happen if the CARENI finances part of its liabilities (Le., has a sizable portion o f its liabilities backed-up by financial assets) and if it i s able to invest those funds efficiently. Even assumingthat the government is able to afford the cost of increasing the level of funding of the CARENI (which implies continuing to pay pensions and in addition paying contributions that would accumulate in the CARENI fund), nothing guarantees that proper governance structures and investments opportunities will be there to maximize the risk adjustedrate of returnon investments. It could be a very risky operation. Box 2: Pros and caveats of an integrated I harmonized system There are separate pension schemes for civil servants in about half of the world's countries, including some of the largest developing economies, such as Brazil, China and India. However, there appear to be strong arguments for integration, particularly in smaller and /or low income countries. Various countries have already followed this path. The long-term goal thus should be a single, national scheme for reasons of equity, administrative efficiency and labor-market flexibility. This does not preclude, however, additional top-up schemes designedto achieve specific humanresource objectives. The mainpros of harmonizingand integratingthepension systems can be summarizedas follows: a) Labor market distortions and inequity betweenformal sector workers inthe same country are reduced. There i s no obvious reason public policies dealing with lifetime consumption smoothing or survivor's insurance should differ betweenpublic andprivate sectors ( except perhaps, for military personnel). b) With integration, duplication of administrative functions, such as recordkeeping, is not needed.To the extent that there are economies of scale in recordkeeping, payment of pensions and other activities of mandatory pension funds, with no integration, this duplication represents an unnecessary cost that ultimately reduces the financially sustainablebenefit level. c) To harmonize the pension rules of the civil servants with the ones of the national pension system would mean a reduction of pension liabilities. Indeed the fiscal implications of harmonizing can be considerable. Civil servants pension schemes offer more generous terms, tend to have lower funding ratios and have higher per member liabilities than other schemes. In many countries, civil service pensions are becoming a major fiscal burden, threatening to crowd out other programs, especially in low-income countries with limited tax bases. With harmonization and integrationfiscal liabilities decrease. 28 The main cuveuts that needto be consideredwith integration can be summarizedas follows: a) Integration may involve a new budget outlay, as the government makes its employer contributions to, a parastatalinstitution. It is important thereforeto estimate the path of transition financing and determine the pace ofthe integrationaccordingly. b) A rapid integrationwill imply higher transition financing needs but will eliminate some of the distortions of dualism more quickly. On the other hand, a slower transition, for example, one wherein only new hires were obliged to join the national pension scheme, would be easier to accommodate in the short run, easier to administer and more politically palatable. Slow transitions would, however, allow distortions to persist for decades and would not go as far inimproving the long term fiscal situation. c) It is very important to look at the adequacy and sustainability of the national scheme into which civil servants would be integrated. Clearly reforms to the two schemes should be linked. Parametric reforms to the civil service scheme that are phased in over time can reduce the disparities between the two and make integration easier. Reforms that increasethe solvency and credibility of the main national scheme increasethe benefitsfrom integration. Inshort, pension system reform should, to the extent possible,be holistic. 60. Gradual as well as timely introduction of reforms can ease resistance. Reforming pension systems, particularly reducing the level o f the accrual rate, i s difficult politically. To ease resistance, reforms might preserve acquired rights and should be implemented gradually. Gradualism i s only possible, however, if the reforms are not delayed. Waiting to intervene then requires more drastic adjustments in the future. Future adjustments are also inequitable as they penalize the new generations, rich but also poor. 4. SPECIFIC STEPS TO DESIGN ROBUST A DEFINED BENEFITSYSTEMWITH PAY-AS- YOU-GoFINANCING 61. Regardless o f the institutional organization that is chosen at the end, this section (i) provides specific policy recommendations to improve the performance o f the DB schemes; and (ii) analyzes the fiscal and social impacts o f the reforms. Inthe medium term, it will be also necessary to discuss some general arrangements that could be considered to ensure that, gradually, all individuals have access to a minimum level o f income during old-age. Any reform inNiger, for bothpublic andprivate sector (FNR and CNSS) would need to proceed in two steps. 62. The first step would be to review the mandate of the pension systems and make explicit choices regarding the replacement rates offered at variouslevels ofincome. This implies setting the value o f the minimum pension guarantee, ceilings on covered wages, and the replacement rate for the average full-career worker. Figure 7 shows variations o f these three parameters at the international level. The CNSS and FNRcould proceed as follows. P Review the targeted replacement rate and the accrual rate: In the case of the CNSS the replacement rate for a full career worker (40 years o f contribution) is around 53 percent which can be considered appropriate. Nonetheless, many workers are likely to have considerably shorter career and would receive lower replacement rates. This might call for a revision o f the accrual rate (ifaffordable) and the level o f the minimum pension guarantee (see below). In the case o f the FNR, however, the current replacement rate is 100 percent which i s considerably high by any norm and therefore should be reduced. Once the replacement rate has been set, the accrual rate 29 would be computed by simply dividing by the number of years of contributions - 40 in the case of this example. The accrual rate would be constant across time. The system should not have accrual rates that are higher for the early years of the career and lower for the latter years. These distort incentives and redistribution. 9 Adopta minimumpension. Bothsystemsshouldalso considerthe introduction ofa minimum pension guarantee for individuals reaching age 65. Ideally, the minimum pension would be set as a function of economy wide or covered average earnings. A level of 15 to 20 percent of average earnings could be considered. But, the cost ofthis minimumpensionshould be assessedcarefully and it should be financed by an explicit -separate contribution rate (unless coverageis universal). It cots are too onerous given career histories and the growth of wages, and alternative would be to link the minimum pension to a basis consumption basket, close to the poverty line. In all cases, it is also advisable to move from apensiontop-up as today, to a flat pensionthat i s reduced as aproportion of the contributory pension. 9 IntroduceP ceilngon covered earning. This is important to containthe mandateof the pension system and allow high-income individuals to diversify savings outside of the mandatory system. The ceiling could be between 2 and 2.5 times economy wide average earnings. Figure 7: Replacement Rates, Minimum Pensionsand Ceilings Around the World I A" .I.0. C.L.... ..I D - * . I *..-I. L.,. .,.I. Y r r l r " "*I.". a"..,. ... .."l.... I.*) "I "I ... LY..I"I, """I." *.'"I I.,... I "I.. ,","I .. .,.."..I w I...." I"... I,...". o ~ z i 4 6 e 7 e o m C d h g onCw-d WqolMultlpb ffAus.Ernlngs1 Source: author's calculations 30 63. The second step would be to review current benefit formulas and eligibility conditions to address the financial problems of the system, improve incentives to contributeand work, andgeneratea moreprogressiveredistribution. Interms of benefit formulas and eligibility conditions both pension funds should consider the gradual move towards the following three standards: P Usinp life-time wages in the calculation of the pension. This reform is mainly introduced to improve incentives to contribute and to increase equity - not to reduce pension expenditures. In order to allow information systems to adapt, the reform would be introduced gradually. For instance, each year an additional year o f wages could be included in the calculation o f the pension. In order to take into account inflation and productivity gains, past wage would be revalorized with the growth rate o f the average covered wage. This is particular important for low income workers > who usually have "flat" earnings profiles. Linkinp the accrual rate, the retirement age, and the contribution rate. This reform i s meant to improve the financial sustainability o f the system and to eliminate incentives for early retirement. In essence, given the targeted replacement rate actuarial calculations will indicate the possible combinations o f the statutory retirement age and the contribution rate that guarantee the financial sustainability of the system. The lower the retirement age, the higher the contribution rate would need to be and vice-versa. For instance, in the case o f the CNSS, it was estimated that to finance a 55 percent replacement rate (i.e., 1.375 accrual rate) at age 62 the contribution rate would need to be equal to 9 percent. But because it is very important not to increase the current tax-wedge, any increase in the contribution rate toJinance pensions should imply a reduction of the contribution rate used to finance other benefits. Hence, there is a limit to how high the contribution rate can be. This puts restrictions on the generosity o f the system in terms o f the replacement rate and the > retirementage. Indexing! the statutorv retirement aze with life expectancy. Since the contribution rate i s fixed, in order to avoid cutting benefits as life expectancy increases, the retirementage has to increase. This is normal. Ifindividuals are going to receive the same pensions for longer, then they also need to work longer. The statutory retirement age could therefore be automatically adjusted every 7 years or so to reflect change in life expectancy. Clearly, this also implies developing capacity to measure life > expectancy accurately and periodically inthe first place. Introducinp automatic indexation of pensions. The goal o f this important component o f the reform i s to reduce the exposure o f retirees to the risks o f inflation. Hence, each year, pensions would be indexed by the consumer price index as computed by the statistical office. Indexation would be automatic in the sense that it would not depend on decisions from the government or the managers o f the pension fund. 64. What happens with individuals who rehie before or after the statutory age? Workers retiring before the statutory age should receive lower accrual rates to take into account the fact that they will receive pensions for longer. The accrual rate at age 5 9 would be equal to the accrual rate at age 60 times the ratio between life expectancy at 59 and life expectancy at 60. It i s also possible to consider higher accrual rates for workers who retire 31 after the statutory age. Again, as life expectancy increases, the penalties for early retirement would need to be adjusted. 65. Whathappens with individuals who have short careers? It is very likely that only a minority o f workers today are "full-career." Most workers move in and out o f the social security along their lives. Probably, on average, those who have access to the social security contribute half o f the time. This implies that many individuals would receive replacement rates below 55 percent at retirement. The only way to address this problem through the pension system would be to offer higher accrual rates at the statutory retirement age. But as discussed above, this would require increasing the contribution rate which can then negatively impact employment levels and the size o f the formal sector. The problem o f short contribution histories could worsen. A sustainable solution to this problem thus is outside the reach of pension policv: longer average careers can onlv come from structural chanaes in the economy and the labor market - including more-formal work,. What the pension system c8n do, however, is to ensure that all plan members retire with a minimum pension, which as indicated above could range between 15 and 20 percent o f economy wide average earnings after a minimum number o f years o f contributions (15 to 20). The costs o f this minimum guarantee would need to be estimated separately and part o f the contribution rate explicitly allocated to its financing. 66. Can the pension system index pensions automatically without compromising its financial sustainability? The answer is year if (i)the changes to benefit formulas and eligibility conditions discussed above are introduced; and (ii) the government pursues an that inflation target and that there i s a mechanism to suspend indexation when inflation rates surpass this target. On the first condition, the idea is that from the beginning, the calculation o f the pension would need to take into account that benefits will be growing with a given (targeted) inflation rate. The second condition requires the government to define an explicit objective regarding the inflation rate (a band) that the pension fund can then use in the calculation o f pension. Also, having an explicit policy to suspend automatic indexation when the observed inflation overshoots the upper limit o f this band. In Egypt, for instance, the pension fund automatically indexes pensions as long as the inflation rate is equal or below 5 percent per year (the government target). If the inflation rate surpasses 5 percent, the compensation for the "excess inflation" i s negotiated between the government and retirees. Implications for the CNSS 67. Assuming that the mandate o f the system does not change (Le., the current accrual rate i s maintained) a reform o f the CNSS could involve: (i) an increase inthe retirement age from age 60 to age 62; (ii) the adoption o f actuarially fair adjustments for early retirement and actuarially fair compensation for delayed retirement; (iii) an increase in the contribution rate from 4 percent to 9 percent (but without increasing the total contribution rate); (iv) the gradual increase in the number of years of salaries used in the calculation of the pensions, so that by year 2020 all salaries are included (salaries would be revalorized by the growth rate o f the average covered wage); and (v) the automatic indexationo fpensions withinflation while setting the limits. 32 68. A comprehensiveparametric reform for CNSSshould include apackage of measures. Inthis report the following policy measuresare proposed and are reflected inthe projections: (i) contributionrateisexpectedtoremainconstantafterreaching9percent sothatthe the current tax-wedge does not increase; (ii) pensions will be calculated on the basis o f life-time wages and will involve actuarially fair penalties for early retirement; and (iii)the automatic indexation o f pensions will be taken into account in the benefit formula thus ensuring the financial sustainability o f the system. In the proposed reform the automatic indexation o f pensions i s recommended but there are no specific rules to ensure that it i s implemented without compromising the financial sustainability o f the system. The marginal impact o f each o fthese proposed policies on the finances o fthe system i s presented inFigure 8. The baseline scenario assumes that coverage rates by age are constant and that pensions are indexed by inflation. It i s also assumed that retirement patterns do not change after the reform. This is a conservative assumption given that, most likely, adjustments for early and delayed retirement would provide incentive for workers to stay longer inthe labor force. 69. The resultsshow that the most important reform in terms of improving thefinances of the system is to increase the contribution rate. Only increasing the retirement age and havingpenalties for early retirement would do little at this stage to reduce the deficit. Moving to life-time earnings in the calculation o f the pension could even increase expenditures - given that past wages are revalorized by the growth rate o f the average covered wage. If on top of these reforms, however, the contribution rate increases the financial sustainability o f the system could beconsiderably improved (see Figure 8)40. 70. Nevertheless, the Government has recently introduced some measures that imply to postpone the adoption of an integrated reform of the CNSS. Box 3 presents a summary o f the recent reforms adopted by the Government in April 2009, which: (i)increase the contribution rate o f CNSS for pensions ; and (ii) introduces a new wage ceiling for CNSS contributions. Not only these reforms, that will start being implemented in2010 and 2012, do not face the financial problems o f the CNSS, but in fact they also ignore and delay the real needfor the introductiono f structural reforms o fthe system. 40The effect of aminimumpensionguaranteeand different ceilings has not been modeledat this stage given the lack of data about the distributionof earnings. These two, however, are very important parameters in the reformedsystem. 33 Box 3 :Recent reformsintroducedfor the CNSS InApril 2009 the Government ofNiger adoptedthe following reforms: 0 Increase of contribution rules :the proposedincreaseofcontributionsfrom 17 percent to 20,65 percent will allow an increase, in the short term, of the revenues for the CNSS, however it could also have the negative impact on the labor market, encouraging the informality of the economy. It is certain that given the current level of pensions, the increase of contributions for employees is indeed necessary. According to the implemented reforms in April 2009, the contributionsfor the social security branches will be the following : 10.5 percent for pensions (instead of 4 percent), 1.75 percent for work injuries (instead of 2 percent), and 8.4 percent for family allowances (instead of 11 percent). However the Government should consider a more ((integrated)) package of reforms in order to assess the methodology of the benefit formula for pension calculation, the qualifying conditions for pensions., with the objective to increase the pension system sustainability in the long-term, and improve equity and economic efficiency. Inmore detail, the package ofreformscould include:(i) gradual consideration of the wages of the entire career of the individual when calculating hisher pension; (ii)link the retirement age to the life expectancy, the contributionrate, and the accrual ;(iii)gradual eliminationof the minimum length of service and the maximum replacement rate; (iv) implementing an automatic mechanism of indexationfor the retirees; and (v) revision of the mechanismfor minimum pensions in order to improve the incentives to work and contribute at the same time that the financial sustainability ofthe system is assured. 0 Increase of wage ceilingfor contriburion: It is also important to highlight that the increase of the ceilingthat has been recently introducedwill only have a minor impact on the financial situationof the CNSS. Indeed the current average annual salary is 1.4 million FCFA. With such an average salary, very few individuals will be affected by the new ceiling. Moreover,the proposed ceiling of 5.1 million FCFA is quite above the internationalnorms. In the context of structural reforms, it is recommended that the ceiling should not be above 2 or 2.5 times the average salary of the economy -hence, allowing the individualswith high salaries to diversifytheir sources of savings for retirement. and take into account other benefits - in particular thefamily allowances branch. Indeed, 71. The reform of the pension branch of the CNSS, however, needs to be comprehensive the recommendation here is to increase the contribution rate to the pension branch without increasing the total contribution rate o f the NSSF. Like in the current government proposal this could be achieved by reducing the contribution rate to the family allowance branch and therefore the value o f the allowance. This benefit i s a transfer that does not constitute a function o f a social insurance system - there are no risks involved. Depending on whether employers are able to pass the full cost o f the program to employees two extreme cases could be observed. Ifthe full cost o f the program is passedto employees, then the program would simply imply lower wages. Meaning, workers are not better off as a result o f the program. If employers, on the other hand, cannot pass the cost o f the program, then that would mean higher net wages (after the transfer) but also lower levels o f employment inthe formal sector. Inessence, the current system could penalize workers who are outside the system. Therefore, the government needsto reconsider whether the family allowance branch should be preserved as part o f the insurance system or whether it can be gradually phased out. In all cases, the CNSS should maintain separate accounts for each o fthe benefits. 34 Figure 8: Balanceof the CNSS under various reform scenarios ALL reforms 0.3% Contribution rate 9 E 0.241~ ............. 0.1% ae 0.0% Retirement age Increase -0.5% J Entire career wage base Source: PROST simulations Imdications for the FNR 72. I n the case of the FNR there is room to review the mandate of the system given its generosity. As discussed in Chapter 2, today a full-career workers contributing continuously for 40 years would receive a gross replacement rate of 100 percent. This is a very large mandateby international standards. The FNRcould consider insteadconverging to a mandate similar to that of the CNSS. This could be done gradually, initially targeting a more modest replacement rate of around 60 to 70 percent. This would imply reducing gradually the accrual rate from 2 percent today to 1.5 percent by year 2010. This reduction, however, would only affect new contributions. The accrued rights of planmemberswould be maintained. 73. Insummary, hefollowing measurescould beconsidered: (i) The statutory retirementage is gradually increasedfrom 55 (starting in2009) to 60 years for both menand women by 2013 with actuarially fair adjustments for early retirement; (ii) Pensionsare indexedby inflationwith a limit; (iii) The base wage for pensioncalculation i s gradually increased from the last salary to the entire career by the year 2015 indexedby the growth rate of the covered wage bill. (iv) Ifthe FNRistreatedas acontributory system, the contribution ratewould needto increase from 20 to 22 percent starting in 2009. What matters in the case of the FNR, however, is that benefits and the retirement age are set implicitly as a function of this "symbolic" contribution rate. Even if the contribution rate is not paid in practice (pensions are paid directly), pension expenditures would be bounded: pension expenditures would not be allowed to grow faster than the 35 growth rate o f the wage bill. Like inthe case o f the CNSS, retirement ages would needto increase when life expectancy increases. 74. The results show that if all these policies are implemented pension expenditures would be contained and reduce fiscal pressure. As previously discussed, creating a new institution does not solve the fiscal problem. If the FNR remains a department within the Treasury what matters is the value o f total pensions paid. If the CARENI i s created what matters are the transfers o f the government, which at least would need to be equal to the total pension expenditures but could be higher. The results o f the above policy reforms show that only with the entire reform package the balance o f the FNR would become positive over the long-term (see Figure 9). It i s important to notice that in the baseline scenario pensions are indexed to wages. The effect o f indexing pensions with inflation is considerable; the deficit o f the system can be reduced from 0.5 percent to 0.3 around year 2020. The reduction o f the accrual rate can also, not surprisingly, have an important effect on the knances o f the system, particularly around year 2027 when a higher number o f members start to retire. Figure 9: Balanceof the FNR Under Various Reform Scenarios Baaeilne Retirement age increaae Source: PROST simulations 5 OPTIONS TO EXPAND PENSION COVERAGE INNIGER 75. As discussed earlier, the low feveI ofcoverage is to be expectedgiven the country's fevef ofincome. Inlarge part, low coverage rates reflect the structure o fthe economy and the labor market. A sustainable expansion o f the contributory pension system can only take place as the economy develops and diversifies; the share o f the agricultural sector in valued added falls; and formal employment expands. Nevertheless, over the short-medium term, there are some interventions that the government could consider to expand coverage: First, interms o f building capacity and improving incentives within the CNSS; and second, by developing non- contributory arrangements. The benefits, costs and limitations o f these policies are discussed next. 36 76. Introducing interventions involving better incentives to contribute and better institutional capacity to enforce enrollmentin the CNSS. Better incentives to contribute will follow naturally from the reforms discussed above. First, because these reforms improve the financial sustainability o f the system and thus the perceptions that individuals have about the capacity o f the system to deliver on its promises. Second, because vesting periods are reduced or eliminated and thus individuals have fewer concerns in terms o f contributing and not being able to benefit from a pension. Finally, because reforms will strengthen links betweencontributionsand benefits: more contributions bringhigher pensions benefits. 77. Improvingand strengtheningthe enforcementcapacity of thefunds. Coverage can be expanded through better enforcement capacity. At this stage, it is unclear, what is the level o f resource that the CNSS invests in enforcing collection. Most likely, there is room to improve, andprobably expand, the current system. Three interventions are usually considered to strengthen enforcement capacities: (i)higher penalties for non-compliance; (ii)more efficient mechanisms to detect fraudevasion; and (iii) more administrative capacity to deal with fraud and enforce penalties. Collection costs, however, tend to increase as coverage expands (i.e., getting the marginal employer to contribute becomes more costly). Hence, there i s a limit to how many more employers/employees can be enrolled through better administrative systems. Ingeneral, the effects o f these policies are likely to be modest. Even ifthecoverage ratesdoubles, itwillremainbelow 6percent ofthe labor force. 78. Facilitatingenrollmentofindividuals workingin theinformalsector. The idea here i s to allow individuals in the informal sector who have some savings capacity to enroll and contribute on a voluntary basis. To accommodate lower and more irregular earnings patterns, the CNSS would need to allow for low flat contributions (say the equivalent o f 5 percent o f the minimum wage or perhaps less) and intermittent contributions. Indeed, taxing a given percentage o f earnings (which are difficult to determine) and/or requiring regular payments will most likely discourage enrollment. The CNSS would also need to be able to carefully track contributions. As.important, the CNSS would need to be able to pay fair pensions for the contributions received. The pension inthis case, would be equal to the accrual rate times the total contributions deposited (the sum o f the flat payments) revalorized with the growth rate o f the average covered wage. Clearly, the demands interms o f institutional capacity are considerable. This type o f system therefore can only be realistically envisioned over the mediumterm. 79. An issue to consider is also that individuals with short contribution densities and low earnings might not be able tofinance a pension that is at least equal to the minimum. Allowing these individuals to automatically benefit from the minimum pension guarantee could be expensive. With proper restrictions in terms o f the minimum amount of total contributions necessary to be eligible for the minimum pension, however, costs could be reduced and financed explicitly with part o f the total contribution rate to the CNSS. Some countries are also considering matching contributions through government subsidies to provide stronger incentives to ~ontribute.~'This policy, however, can be expensive and most likely not affordable inthe case o fNiger. 4 1 See, Also Robalinoet ai. (forthcoming) for a discussionof the issues. Countries like Dominican Republic(Law Passed), India (implementedin West Bengal), Mexico (implemented), and Vietnam (Law under consideration)have consideredthis type of system. 37 80. Even with these arrangements, a largepart of the labor force, mainly individuals withno savings capaciq, willnot enrollin the CNSS; thisraises the question of whether non-contributory arrangementsshould be considered in Niger. Several middle and high income countries have implemented so called social pensions to ensure that all individuals have access to a minimum level o f income during old-age. These social pensions differ in terms o f benefit levels and eligibility conditions (see Appendix 5). In countries like New Zealand the benefit i s flat, provided to everybody old and resident o f the country, In other countries like Australia, the benefit i s means-tested. In Niger the decision to adopt a non- contributory system will depend inpart o f the socioeconomic situation o f the elderly. Ifthe elderly are not poorer than the rest o f the population, there i s little rationale for considering specific programs that target them, instead o f investing ina general safety net that targets poor households (with or without the elderly). At this stage there are no data to conduct this type o f analysis and therefore it would be premature to advance policies. Ingeneral, however, it i s important to note that the opportunity cost o f developing non-contributory programs i s likely to be higher in Niger -- as in other low income countries facing important challenges to improve human development indicators through investments in education, health, and infra~tructure.~~ 6 LOOKINGFORWARD A SUSTAINABLEPENSIONSYSTEM FOR 81. The review o f the pension schemes in Niger confirms that there i s an urgent need for addressing financial sustainability, efficiency and equity o f the system (both CNSS and FNR). Based on the best practices, as discussed in this chapter, the government needs to focus all efforts in an integrated reform program; it i s advisable to maintain the pay-as-you-go financing and defined benefit formulas and aim to harmonize the system and avoid creation o f a new institution (CARENI). Moreover, the actions o f groups such as the Validation Commissions set up for launching reforms in the CNSS and FNR require professional/technical support in order to ensure the technical soundness o f the policy recommendations. Thus, the reform agenda for both CNSS and FNRneeds to focus on: (i) Developing adequate and reliable information system and records keeping (IT development) on contributors, beneficiaries and financial flows; (ii) Evaluating alternative scenarios to assess cost o f various scenarios and address theproblems o ffinancial sustainability, equitability andaffordability; (iii) Reaching agreement to chose the institutional configuration that reduces fragmentation and evaluate alternatives to consolidate the pension schemes o f FNRand CNSS; (iv) Addressing regulation and governance issues inboth systems. 82. Developing a reliable information system. Currently the CNSS has the institutional capacity to collect reliable information on plan members and assess the revenues and expenditures. Nevertheless further improvement in record keeping i s required. For FNR, given poor existing member records, accurate assessment o f liabilities and a pre-funding exercise may require something like a civil service census. Experiences with such an exercise 42 See Palaciosand Sluchynskyy, 2006 and Robalino et al. 2008 for a discussionon the criteria lo allocatepublic resourcesto finance social pensions 38 internationally are mixed - partially, due to resistance to disclose ghost workers on the payroll. Thus strong political will and leadership is required to improve the information system of the FNR. Government has already initiated some work to improve the information system of the FNR. This effort could be complemented by payroll automation or a human resource management information system (HRMIS)in order to develop a transparent record- management system for the civil servants. 83. Analyzing cost of transition to new benefitformulas and eligibility conditions. Both the CNSS and FNR need to develop technical capacity to evaluate alternative scenarios for reform. The recommendations o f technical studies, such as the actuarial study conducted by ILO in2003 and the FNR study are inthe right direction, but the reforms are incomplete. The situation o f FNRneeds closer attention from the government. Inthe absence o f a contributory scheme, the financial situation o f the system i s more difficult to state and the causes of disequilibria are less evident, but they still exist. The staff o f CNSS and FNR would benefit from training in the use o f tools o f financial projections, such as the World Bank's PROST model. 84. Choosing adequate institutional configuration. This report strongly recommends aiming for a unique mandatory pension scheme over the medium term in order to facilitate labor mobility, create economies o f scale inmanagement, and eliminate variations inpension benefits across sectors (private and public). This can be achieved gradually by having all new entrants join the "integrating" scheme (integrating CNSS and FNR). If for political reasons this is not a viable option, it is advisable to consider gradually consolidation of various functions. For instance, at least the benefit design could be harmonized. 85. Improving governance and administration. The investment process deserves particular attention both from the administrative and from the governance perspectives. The government needs to improve the governance o f pension fund management, shielding management as much as possible from political influence, while improving accountability and transparency. The mandate o f the governing body should be to manage the reserves for the sole benefit o f plan members. For better accountability, transparency i s key. The operations o f the finds, including the results o f investment policies, should be fully disclosed with publications o f annual reports, including the complete reports from external auditors. The governing body would report regularly to the parliament. Investment strategies would need to be designed and executed by investment committees constituted by qualified professionals. In addition more analytical work is required to address the administrative costs of both systems. A technical study could be conducted in order to identify critical areas where costs could be reduced and re-engineering o fprocesses to achieve the same goal. 86. I n the medium term, consider extending social protection coverage to the informal sector. While the contributory system has to evaluate actions to reduce evasion, the broad problem o f income protection for the elderly in a country with the socioeconomic and demographic structure o fNiger requires the concurrence o f different instruments and involves other social partners. In any foreseeable scenario, the con tributary pension system o f Niger will benefit a small segment o f the population. At minimum, consistency o f social policy objectives requires that the contributory schemes are financially self-sustainable so that they 39 do not compete for fiscal resources with programs with a higher redistributive impact. However, over the mediumterm, taking into account its financial constraints, the Government could begin reviewing various options for extending social protection to the informal sector. 87. The government of Niger may seek international cooperation for technical assistance and development, Some priority areas in which the World Bank as well as other development partners could support the reform process for both the CNSS and FNR are the following: > Technical assistance to further explore the fiscal and welfare impacts o f alternative changes to benefits and eligibility conditions, which would include training o f PROST (Pension Reform Options Simulation Toolkit) targeted to the members o f technical > units o f CNSS and FNR, and the Steering Committees. Technical assistance on administration, management, and governance o f pension funds: Various training activities could be provided related to the design and operations o f mandatory pension schemes, as well as technical assistance on policy > analysis. Capacity building programs targeted to technical staff in various areas related to pensions: Various training activities could be provided related to data registration, > auditing, and business processes ininsurance systems. Financial assistance for the implementation o f administrative reforms, once the needs have been assessed, and the authorities have adopted the decision to move towards a more efficient and sustainable pension system for Niger. Upgrading core administrative and IT systems in both FNR, and CNSS i s extremely important. The main goal is to optimize the various business processes. These would include registration, collection o f contributions, reconciliation o f information and cash-flows, record keeping, and payment o f benefits. The scope o f the activity could be defined in detail depending on the costs o f developinghmplementing the various components o f the administrative system. At the minimum, this activity could cover the registration processes, paying also attention to the interactions between FNR and CNSS. The activities should involve the development of new IT systems, including a new platform (both interms o f the operating system, databases, and hardware). Ideally, the new IT system should be centralized. In parallel to the development o f new administrative processes and IT systems (hardware and software), current databases need to be updated. This does not only involve entering in the system missing information but, as important, auditing this information. In this context the implementation o f a census o f plan members and the upgrading o f electronic records could be considered. This merging the new and the old databases, entering and correcting data, and implementing controls on information quality and accuracy. 40 APPENDIX 1:REFERENCES Bureau Internationaldu Travail (2005) : Evaluation actuarielle de la Caisse Nationale de (( SCcuritC Sociale au 31 decembre 2002 D. Geneve. Caisse Nationale de SCcuritC Sociale (2005) : Rapport annuel d'activitk. (( Exercice 2005 )).Niamey. Demarco, G. and R. Rofman (1999): (( Collecting contributions in multipillar pension systems)). World Bank PensionPrimer. Washington, DC. Direction de la Statistique et des Comptes Nationaux (2003) : L'emploi, le chamage et (( les conditions d'activitd dans la communautd urbaine de Niamey. Enquete 1.2.3. 2002 : PremiersRCsultats )).Niamey. HimR., and M.Pallares-Miralles (forthcoming 2008): "International patternsof pension .provision11". World Bank PensionPrimer. Washington, DC. Holzmann, R. and R. Him (2005): "Old Age income support in the 21" Century". The World Bank. Washington, DC. Kakwani, N., and K. Subbarao (2005): "Ageing and poverty in Africa and the role of social pensions". World Bank PensionPrimer. Washington D.C. Minist6re de 1'Economie et des Finances (2006a) : Les caractiristiques demographiques (( et socio-Cconomiques des mdnages a partir des donnCes du RGP/H 2001 )). Rapport DCfinitif. Niamey. Ministkre de 1'Economie et des Finances (2006b) : Rapport de la mission d'etude sur (( l'experience Malienne en matiere ded reforme de la Securite Sociale v. Niamey Ministhe de la Fonction Publique et du Travail (2006) : Rapport de la Commission de (( validation de 1'Ctude actuarielle de la Caisse Nationale de SecuritC Sociale)). Niamey. Musalem, A. and R. Palacios (2004): ((Public pension fund management. Governance, accountability and investmentpolicies)). The World Bank. Washington, DC. Palacios, Robert, andEdward Whitehouse (2006): "Civil Service Pensions", Social ProtectionDiscussionPaper, The World Bank. Washington, D.C. Palacios, Robert, and Oleksiy Sluchynsky (2006): "Social pensionspart I:their role inthe overall pensionsystem" Social ProtectionDiscussion Paper, The World Bank, Washington D.C. 41 World Bank (2004): ((Project appraisal document on a proposed credit in the amount o f SDR 10.9 Million (US$ 14.8 Million equivalent) to the Republic of Niger for a financial sector technical assistanceproject D. Mimeo. World Bank (2005): ((Pensions in Morocco: towards an integrated reform strategy". MNSHD. Middle East and North Africa Human Development. The World Bank, Washington D.C. 42 APPENDIX 2: PENSIONS GLOSSARY Accrual rate. The rate at which pension entitlement is builtup relative to earningsper year o f service inearnings-related schemes-for example, one-sixtieth o f final salary. Accruedpension. The value o fthe pension to a member at any point prior to retirement, which can be calculated on the basis o fcurrent earnings or also include projections o f future increasesinearnings. Actuarial fairness. A method o f setting insurance premiumsaccording to the true risks involved. Annuity. A stream o fpayments at a specified rate, which may have some provision for inflation proofing, payable untilsome contingency occurs, usually the death o f the beneficiary or a survivingdependent. Annuityfuctor. The net present value o f a stream o f pensionor annuity benefits. Annuity rate. The value o fthe annuity payment relative to its lump-sumcost. Average effective retirement age. The actual average retirement age, taking into account early retirement and special regimes. Benefit rate. The ratio o fthe average pension to the average wage, which could be expressed as relative to the economy wide average wage or to the individual's specific average or final wage. Ceiling. A limit onthe amount of earnings subject to contributions Commutation. Exchange o fpart of the annuity component o f a pensionfor an immediate lump S u m . Comprehensiveincome tax. A tax on all incomes, whether from earnings or investments and whether used for savings or consumption. A pure comprehensive income tax allows the component o f investmentreturns compensating for inflation and so only taxes real returns. Contracting out. The right o f employers or employees to use private pension fund managers instead ofparticipating inthe publicly managed scheme. Contracting-out rebate. The amount by which employers' and employees' national insurance contributions are reduced for contracting out o f the state earnings-related pensionscheme andthe minimumcontributionto a personal pensionplan. Deferred unnuity. A stream o f benefits commencing at some future date. Defined benejt. A pensionplanwith a guarantee by the insurer or pension agency that a benefit basedon a prescribed formula will be paid. Can be fully funded or unfundedand notional. Defined contribution. A pensionplaninwhich the periodic contribution is prescribed and the benefitdependson the contributionplusthe investment return.Can be fully funded or notional andnonfinancial. Demogrant. Same as a universal flat benefit, where individuals receive an amount o f money based solely on age and residency. Demographic transition. The historicalprocess o f changing demographic structure that takes place as fertility and mortality rates decline, resulting inan increasing ratio o f older to younger persons. 43 Disclosure. Statutory regulations requiringthe communication o f informationregarding pension schemes, funds, and benefits to pensioners and employees. Discretionary increase. An increase ina pensionpayment not specified by the pension scheme rules. Early leaver. A person who leaves an occupational pension scheme without receiving an immediate benefit. Early retirement. Retirement before reaching an occupational scheme's normal retirement age or, inthe state scheme, before reachingthe state's pensionable age. Earnings cap (ceiling). A limit on the amount o f earnings subject to contributions. Fullfunding. The accumulationo f pensionreserves that total 100percent of the present value o f all pension liabilities owed to current members. Funding. Accumulation o f assets inadvance to meet future pension liabilities. Implicitpension debt (net). The value o f outstanding pension claims on the public sector minusaccumulated pensionreserves. Indexation (uprating). Increases inbenefits by reference to an index, usually o fprices, although insome cases o f average earnings. Intergenerational distribution. Incometransfers betweendifferent age cohorts o fpersons. Intragenerational distribution. Income transfers within a certain age cohort o fpersons. Legal retirement age. The normal retirement age written into pension statutes. Marginalpension. The change inthe accrued pensionbetween two periods. Means-testedbenefit. A benefit that i s paid only ifthe recipient's income falls below a certain level. Minimumpension guarantee. A guarantee provided by the government to bringpensions to some minimum level, possibly by "topping up" the capital accumulation needed to fund the pensions. Moral hazard. A situation inwhich insured people do not protect themselves fiom risk as much as they would have ifthey were not insured. For example, inthe case o f old-age risk, people mightnot save sufficiently for themselves ifthey expect the public system to come to their aid. Nonfinancial (or notional) defined-benefit @an). A defined-benefit pensionplanthat is unfunded (except for a potential reserve fund). Nonfinancial (or notional) defined-contribution blan). A defined-benefit pensionplanthat mimics the structure o f (funded) defined-contribution plansbut remains unfunded (except for a potential reserve fund). Normal retirement age. The usual age at which employees become eligible for occupational pension benefits, excluding early-retirement provisions. Notional (or nonfinancial) accounts. Individual accounts where the notional contributions plusinterest rates accrued are credited and determine the notional capital (that is, the liability to society). Notional (or nonfinancial) capital. The value o f an individual account at a given moment that determines the value o f annuity at retirement or the transfer value incase o f mobility to another scheme or country. Notional or nonfinancial interest rate. The rate at which the notional accounts o f notional defined-contribution plans are annually credited. It should be consistent with the financial sustainability o fthe unfunded scheme (potentially the growth rate o f the contribution base). 44 Occupationalpension scheme. An arrangement by which an employer provides retirement benefits to employees. Old-age dependency ratio. The ratio o f older persons to working-age individuals. The old-age dependency ratio may refer to the number o f persons over 60 divided by, ,for example, the number of persons ages 15-59, the number o f persons over 60 dividedby the number o f persons ages 20-59, and so forth. Overannuitization. A situation inwhich a compulsory pension forces an individual to save more inpension than he or she would inthe absence o f the compulsory provision. Pay-as-you-go. Inits strictest sense, a method of financing whereby current outlays on pension benefits are paid out o f current revenues from an earmarked tax, often a payroll tax. Pension coverage rate. The numbero fworkers actively contributingto a publicly mandated contributory or retirement scheme, divided by the estimated labor force or by the working- age population. Pension lump sum. A cash withdrawal from a pensionplan, which inthe case o f some occupational pension schemes is provided inaddition to an annuity.Also available from personal pension plans. Pensionspending. Usually defined as old-age retirement, survivor, death, and invalidity- disability payments based on past contribution records plus noncontributory, flat universal, or means-tested programs specifically targetingthe old. Pensionableearnings. The portion o f remunerationon which pensionbenefits and contributions are calculated. Portability. The ability to transfer accrued pensionrightsbetweenplans. Providentfund. A fully funded, defined-contribution scheme inwhich funds are managed by the public sector. Replacement rate. The value o f a pensionas a proportion o f a worker's wage during a base period, such as the last year or two before retirement or more, or the entire lifetime average wage. Also denotes the average pensiono f a group o f pensioners as a proportion o fthe average wage o f the group. Supplementarypensions. Pension provision beyondthe basic state pension on a voluntary basis. Support ratio. The opposite o f the system dependency ratio: the numbero f workers required to support each pensioner. System dependency ratio. The ratio o f persons receiving pensions from a certain pension scheme dividedby the numbero f workers contributing to the same scheme inthe same period. System maturation. The process by which a pension system moves from beingimmature, with young workers contributing to the system, but with few benefits being paid out since the initial elderly have not contributed and thus are not eligible for benefits, to being mature, withthe proportiono felderly receivingpensions relatively equivalent to their proportion o f the population. Universalflat benejt. Pensions paid solely on the basis o f age and citizenship, without regard to work or contributionrecords. Valorization of earnings. A method o f revaluingearningsby predetermined factors such as total or average wage growth to adjust for changes inprices, wage levels, or economic growth. Inpay-as-you-go systems, pensions are usually based on some percentage o f 45 average.wage. This average wage is calculated over some period oftime, ranging from full-career average to last salary. Ifthe period for which earningshistory enters into the benefit formula i s longer thanthe last salary, the actual wages earned are usually revalued to adjust for these types o f changes. Vestingperiod. The minimumamount o ftime requiredto qualify for full and irrevocable ownership of pension benefits. 46 APPENDIX 3: PROJECTIONMETHODOLOGY AND KEY ASSUMPTIONS We utilizedthe computer-basedactuarial model, the World Bank Pension ReformOptions Simulation Toolkit (PROST) model, version 2006 to project both baseline and reform scenarios for the Public Service Pension. The model is designed to simulate the financial flows associated with public and private pension systems and assess their financial sustainability under different economic and demographic assumptions over a long time frame. The model has been adapted to a wide range of countrycircumstances throughout the world. The base year for the simulationis 2006 (for both CNSS, and FNR) and the projectionperiodextends to 2075. The reform scenarios assume that a reform is enacted in 2008 and implemented by the beginningof 2009. Three maingroups of assumptionsare important in PROSTmodeling:(1) macroeconomic; (2) demographic; and (3) pensionsystemrelated variables. Any simulationmodel, the outcome from PROST depends largely on the nature and quality of data as well as on the set of assumptionsbeingused for the simulations. Since PROST has beenused in some 80 countries to provide quantitative input for pension policy discussions, its methodologyhas proven to be sufficiently robust and its flexibility has permitted easy adaptation to specific country circumstances for sensitivity testing and comparisons under a wide range of economic and policy scenarios. However,projections of this nature shouldnot be quotedin absoluteterms withoutproper reference to the underlying assumptions. The purpose of the sustainability benchmarks presented here is to provide a comparison of the relative magnitude of the efsects of difserent pension policy measures under various scenarios, Horizon of the simulationspresented: The start of the simulation horizon for both CNSS and FNR is 2006 (baseyear), the year for which the most complete documentationwas found for all the variables needed for PROST. The endingyear for the simulationhorizon is 2075 (end year) -a periodviewed to be of adequate duration to demonstrate the emerging trends of the pension expenditure in most pensionschemes. Table below illustratesthe availability ofthe requesteddata for such analysis. 47 Table 1appendix3: Data availability for pensionschemes analysis (base year 2006) RequestedAnnualData CNSS FNR OldAge PensionExpenditures Yes Yes (for menandwomen) Survivors and Orphans Pension Yes Yes Expenditures InvalidityPensionExpenditures Yes Numberof Contributors Individualrecordsprovided Individualrecordsprovided by age / sex (99% haveage / sex information) (only 40% haveage/ sex information) Number of Old-AgePensioners Providedby age groups and sex No, data obtained from recent by age / sex actuarialstudy Numberof Survivors and Providedby age groups and sex No, data obtained from recent Orphansby age/sex actuarialstudy Numberof Invalidity Providedby age groups andsex Pensionersby age/sex Lengthof Service at Retirement Individualrecords of new No for NewPensioners . retireesin 2006 by age/ sex Average wage Obtainedfromindividualrecords Obtained from recentactuarial studies Benefit formula for pensions Yes Yes calculations EarningsProfde Individualrecordsprovided Individualrecordsprovided (averagewage by age and sex) ( 99% haveage / sex information) (only 40% haveage/ sex information) PensionsBenefitProfde Providedby age groups andsex No (averagepensionbenefit for old-ageby age and sex) The following paragraphs present the general country demographic assumptions. All data and assumptions required by PROST for population projections were provided by the World Bank's Population Unit: initial population by age and gender; projections of age-specific fertility rates, mortality rates andmigrationflows. Mortality Rates: Age-specific mortality rates (in five-year age groups) including projected improvements in mortality (in five year intervals) for the years 2006-2075 were providedby'theWorld 48 Bank's Population Unit. These mortality rates were used to calculate the probability o f dying by age cohort (age 0 to age 85) for both men and women every year during the simulation horizon. Average life expectancies at various ages as a result o fthe mortality assumptions are shown in Table below.@ Table 2 appendix 3: Projection of life expectancy changes in Niger 2006 2007 2010 2020 2030 2040 2050 2075 Male Life expectancy at birth 55.7 55.9 56.9 59.5 61.6 63.8 65.8 71.5 At age 20 44.0 44.1 44.3 45.4 46.8 48.3 49.7 53.8 At age 60 14.3 14.3 14.4 14.8 15.4 16.1 16.9 18.9 At age 65 11.5 11.5 11.6 11.8 12.4 13.0 13.6 15.3 Female Life expectancy at birth 56.9 57.3 58.6 61.5 64.4 67.2 69.7 77.3 At age 20 44.6 44.8 45.3 47.0 49.0 51.1 53.2 59.4 At age 60 15.3 15.4 15.5 16.2 17.2 18.4 19.5 23.1 At aee 65 12.2 .12.3 12.4 12.9 13.8 14.9 15.8 18.9 Note: (Average RemainingYears of LifeExpectedat Specific Ages) Source: World Bank staff calculationsbasedon PROST 43 Mortality tables used are available uponrequest. 49 Figure1appendix3: Current and projected age structureofthe population Figure2 appendix 3: Percentageof population over 65 in the World and Niger (2000-2090) % of 66 + in the world % of 66+ in Niger 50 Figure3 appendix3: Lifeexpectancies in the World and Niger ( mid-2000) Lit. Expectancy (mid-2000) 0 10 20 30 40 50 60 70 BO At birth for men At birth for women 69 At 60 for men At 60 for women At 65 for men At 65 for women 7Average in the World Macroeconomic assumptions: Economic indicators (GDP growth and inflation rate) used for years 2006-2010 were based on the informationprovidedby the World Bank team working on Niger. The longer term trend was based on the assumption that Niger's economy will converge to a steady real growth rate of 5 percent per year by 2015, and then gradually decreaseto 4 percent from 2027 to the end of the simulation period. Average wage growth was adjusted to increase slightly from 2 to 3 percent. Inflation rate was assumedto be 0 in2006and 2007, butthen increasedto 2 percent in 2008 until 2009. From 2010 to the end of simulation period, inflation is assumed to be 3 percent. These economic parameters were used in conjunction with the assumptions concerningthe population.and the system demographics, to project the future financial conditions of the pension systems. Three percent real discount rate is used for present value calculations. Table below summarizes the key macroeconomicassumptionsused. Table 3 appendix3: Key macroeconomic assumptions ( percent per annum) Coverage assumptions: system demographics assumptions are presented by scheme and in more detailed in the next paragraphs. Coverage rate in Niger is very low when comparing with most countries in the world, including countries in the same region. This figure illustrates some comparative indicators o f a sample of countries on active contributors to mandatorypensionschemes. The distribution by,ageand gender of both schemes are very different (as shown in figure below), the ages of active members in FNR are mainly concentrated between 30 and 50. These distributions will 51 also reflect very different in the finances of both systems. System demographics of FNR represent a higher burdenin its finances. Figure 4 appendix 3: Number of current contributors, by age and sex, CNSS, and FNR 3500 1 1 3000 ,- Men in FNR F ' Women in FNR Women in CNSS 5001 52 APPENDIX4: OVERVIEW OF PROST The model consists of an inputworkbook and five output modules. On the input side, the user provides country specific data on demographic, economic and pension system related parameters and assumptions about their behavior in the future. This informationis entered in the input file with six embeddedworksheets: General Economic variables (GDP and wage growth, inflation, interest rate), non age-specific pension system parameters (pension fund balance and benefit expenditure in the base year, retirement age, contribution rate, pension indexationrules, etc.) and some demographic variables; Population Base year population by age and gender along with age-specific fertility and mortality rates and immigration information. Labor Age and gender specific labor force participation and unemployment rates as well as distribution o f wages and old age pensions across age and gender cohorts. Pension Age and gender specific information about pension system contributors, beneficiaries, coverage and retirement rates, average years o f service at retirement and replacement rates for new beneficiaries. ProJiles Information on representative individuals, such as gender, career path, individual wages, life expectancy, etc. Reform Parameters relevant to systemic reforms to be simulated (any combination o f conventional PAYG, fully funded D C and notional D C pillars), including switching pattern, how the acquired rights will be paid, contribution rates, rules for annuitization and pension payout under DC schemes and replacement ratesbenefit formula in a PAYG pillar, indexation, etc. Inthe most simplified way the general calculation scheme canbe summarized as follows: 53 GeneralCalculationScheme Population Individual accounts PROST follows single age/gender cohorts over time and generates population projections, which, combined with labor market assumptions, are used to forecast future numbers o f contributors and beneficiaries. These in turn generate flows o f revenues and expenditure. The model then projects fiscal balances and calculates the implicit pension debt. The required contribution rates and affordable replacement rates for zero pension fund balance in each year of the simulation period are also calculated. Finally, PROST produces outputs related to individuals - what an individual would contribute to the system and what he/she obtain under PAYG DB and multipillar schemes. This allows both intra- and intergenerational analysis. Depending on the characteristics of the pension system and data availability, the user can choose the method for calculation o f some o f the variables. Inparticular, the number o f contributors and beneficiaries can be computed ineither "Stock" or "Flow" method. With the "Stock" method, for each year the stocks o f contributorsheneficiaries are calculated first and then inflows (new contributorsheneficiaries) are derived as the changes o f the stocks: InJow(a,t,g;) = stock(a,t,g;)-stock(a-l,t-l,g;) + outjlow(a,t,g;) With the "Flow" method, inflows are calculated first and then stocks are derived as previous year's stocks ineach agelgender cohort adjusted for the net inflow (inflow-outflow): Stock(a,t,g;)= stock(a-1,t-1,g;)- outjlow(a,t,a) + inJow(a,t,@ where a =age, t =year, g =gender As PROST keeps track o f contribution years o f service accrued by each cohort, the calculated number o f new retirees - whatever method is used - is then adjusted so that the total length o f service accrued by the cohort i s equal to the total length o f service claimed by the cohort at the time o f retirement. After the number o f new retirees is adjusted, the stock is recalculated usingthe "Flow" method. 54 The user can also choose how the benefito fnewbeneficiaries is specified - via benefit formula or via age and gender specific replacement rates. As mentioned above, output produced by PROST is organized in five output modules. Each of the modules contains a number of Excel worksheets and a graphical summary onkey output indicators: Population Projection Populationprojections and pyramids, life tables, life expectancy changes, populationdependency rates, etc. Demographic Structure Labor force and employment projections, projections o f contributors and beneficiaries, demographic structure o f the pension system, and system dependency rates. Finances of Monopillar Macroeconomic trends, wage projections, pension benefit PAYG projections for the existing and new pensioners, revenue and expenditure o f the pension system, required adjustments to contribution rates and replacement rates for zero current balance, andthe implicit pension debt. Finances of Multipillar Pension benefit projections for new and existingpensioners System under each o fthe three pillars (conventional PAYG, notional PAYG, and funded DC), revenues and expenditure o f both PAYG and funded pillars, implicit pension debt o f the PAYG system after the reform, and results o f the reform (compares benefit projections and financial standing under the monopillar PAYG and multipillar scenarios). Individual accounts Lifetime contributions and benefits and individual related summary statistics for up to six different individuals specified in the "Profiles" input sheet under PAYG system (statutory, with adjusted contribution rates and with adjusted benefits) and multipillar system (for those who switched to the multipillar system and those who remainedinthe PAYG system). 55 APPENDIX 5: PENSION SYSTEMS AROUND THE WORLD Systems providing financial security for the old are under increasing strain throughout the world. Most pension systems inthe world do not deliver on their social objectives, they create significant distortions in the operation o f market economies, and they are not financially sustainable particularly when faced with an aging population. Most formal systems o f old-age security are publicly managed schemes44,financed by payroll taxes on a largely PAYG basis. Table 1 shows payroll taxes among different countries inthe world. Pension systems can be classified by three criteria: i)how benefits are calculated, and the party that cover shortfalls, ii)how benefits are financed, and iii)who manages the system. The rate o f reform i s highest in countries which face the worst demographic pressures, however more and more countries have also been implementing various types o f reforms. However, the type o f reforms adopted by countries indifferent regions varies significantly. Sub-Saharan Africa has undertaken quite a significant number o f reforms. Various countries shifted from provident funds to PAYG systems or set up completely new PAYG systems. Duringthe last few years most ofthe reform initiatives under way inthe regionhave retained the existing structure of the pension system. We are aware o f only two countries-Nigerie, and Ghana- where a system reform has been seriously proposed. However, parametric reforms are under way in a handful of countries (such as Kenya, Senegal, Uganda, and Cape Verde). These involve changes to the benefit formula o f schemes covering civil' servants, private sector workers, or both. Another area o f reform within the existing structure i s the management o f pension reserves. Here again, a few efforts are under way to increase transparency and professionalism, but little progress has been made to date. Meanwhile, proposals to integrate civil servants and private sector workers into the same scheme are rare and face political difficulty. In Zambia, for example, new civil servants have been contributing to the scheme covering private sector workers since 2000. In Cape Verde, since 2006. Ghana unified its schemes decades ago, but civil servants have recently lobbied to reverse the integration and reintroduce a separate scheme. The challenges o f systemic reform, where there is a shift from unfunded to funded schemes and possibly the introduction o f private management of assets, are particularly great in Sub- Saharan Africa. Reformers face three major obstacles: first and foremost, any diversion o f contributions to a new funded scheme will force governments to find resources to covers the resulting gap. Since most o f the countries depend heavily on foreign aid to supplement their budgets, there is little scope for financing the transition, at least not a rapid transition. Second, existing public pension institutions are generally not equipped to meet the record-keeping requirements o f a funded individual accounts scheme. Finally, few o fthe conditions that make 44The number of formal pensionsystemsthat are privatelymanagedare increasing.In 1981there was only one country, and currentlymorethan 20 countrieshave some type of mandatorypensionsystemsthat are privatelymanaged. 56 a privately managed, funded system viable -investment opportunities, solid regulatory institutions, and potential participants inthe private pension sector -are present inmost o f the region. In short, countries around the world are indeed reforming their pension systems. Most are reforming to reduce the fiscal costs o f their existing pension systems. A few young countries are establishing new systems or are increasing the generosity o f their current systems, although perhaps not always taking into account the future fiscal costs entailed in the increased generosity. The past decade o f experience has reinforced the need in nearly every circumstance to move away from a single-pillar design. Experience has demonstrated that the multipillar design is better able to deal with the multiple objectives o f pension systems -the most important being poverty reduction and income smoothing- and to address more effectively the kinds o f economic, political, and demographic risks facing any pension system. A multipillar design is much more flexible and better addressesthe main target groups inthe population. The suggested multipillar pension system by the World Bank is composed o f some combination o f five basic elements: a) a noncontributory or "zero pillar" ( in the form o f a demogrant or social pension) that provides a minimal level o f protection, b) a "first-pillar" contributory system that i s linked to varying decrees to earnings and seeks to replace some portion o f income, c) a mandatory "second pillar" that i s essentially an individual savings account but can be constructed in a variety o f ways, d) voluntary "third-pillar" arrangement that can take many forms (individual, employer sponsored, defined benefit, defined contribution) but are essentially flexible and discretionary in nature, and e) informal intra- family or intergenerational sources o f both financial an nonfinancial support to the elderly, including accessto health care and housing. For a variety o f reasons, a system that incorporates as many o f these elements as possible, depending on the'preferences o f individual countries as well as the level and incidence o f transaction costs, can, through diversification, deliver retirementincome more effectively and efficiently. Table 1 below shows the contribution rates for social security programs in a sample o f countries worldwide. `Niger's main pension system (CNSS) has one o f the lowest contribution rate in the world, however when looking at the total contribution rates (including family allowances and work injury) i s quite high, particularly when comparing with other countries in the region, and also considering that the total does not include contribution for a health branch. Table 2 presents accrual rates and indexation practices in national and civil servants schemes ina few countries from the region. Table 3 presents some cross-country comparison data on retirement ages in civil servants schemes. Niger's FNR retirement age i s low when comparing with similar schemes inthe region. 57 Table 1appendix 5: ContributionRatesfor Social Security Programsin a Sample of Countries aroundthe World Old gr,dsbllty, wvivon: Allscdd rcurlty propnu: WofW E N TFIRSIAUAR NEW RRSl AUAR SECOND RLLAR lnund Imund IIBd w n Enpbyu Told pmon bnpbyr TDIJ TDIJ pmon Empbyu Tow I I - Abmta 8 19.1 27.1 9.5 33.2 39.7 7 10 17 9 25 34 3 5 6 3 5 8 11 16 27 16 16 7 13 22.7 35.7 1221 10 11.71 21.71 0 0 0 0 0 0 7.65 20 27.65 7.65 20 n.65 5 5 10 5 5 10 6.05 14.85 23 6.5 1235 19 4 12425 23.475 35.9 5.5 5.5 10 5.5 16 21.5 3.5 3.5 7 3.5 9 12.5 2 5 4.7 7.5 25 4.7 7.5 4.25 9 20.5 26.5 3.2 4.8 6 3.2 1255 15.75 20 0 20 20 17.2 37.2 0 14 14 0 14 14 6.3 6.3 126 6.3 6.3 12.6 6.5 21.5 26 125 37 47.5 3 6.75 9.75 3 6.75 9.75 258 6.42 9 9 4.96 1202 17 9.15 9.15 18.3 11.15 10.15 21.3 13 17 30 14 26 40 7 7 14 13 6.25 14.25 20.5 4.5 21.5 26 4.5 21.5 28 6 8 16 14.05 13.66 27.71 0 0 0 0 0 0 11.5 125 24 11.5 13.75 25.25 10 10 20 10 10 20 31 2 1 15 16 6 39 3 6 9 1.125 5.15 6.275 0.63 1.75 2.5 6.5 1.375 6.85 6.225 3 28 29 3 28 a.39 m 3.96 7.93 11.69 4.29 16.1 0 0 0 1.5 25 4 10 10 20 10 10 20 19.15 6.38 25.53 37.45 16.33 53.76 0 0 0 0 0 0 4 6 10 gs 1025 24 34 25 77.65 7 5 15 7 5 15 14.1 21.9 77 56 14.1 21.9 5 6 13 5 9 14 5 5 12 12 6.75 2.75 9.5 7.25 10.75 18 5 7 12 7 12 9 14 23 59 14 23 13 1274 8 9 17 3.33 6.07 9.4 4.56 8.32 12.9 16.2 16.2 3252 6.98 16.28 25.22 7.3 27.21 19.88 46.88 11 23.75 34.75 11 23.75 34.75 9.5 20.5 30 17.5 33.25 50.75 03 20 20 0 28.2 28.2 3 6 3 5 6 5 5 10 5 6 11 5 5 10 5 5 10 2 5 3.5 6 2 5 4 6.5 5 10 15 5 10 15 3 323 35.3 3.75 36.7 40.15 11 128 23.8 11 12.8 23.8 6.2 8.2 124 7.65 11.45 16.1 2155 125 27.5 27.5 15 17.5 35.5 33 35.5 2165 38 38.5 4 6 10 4 6 10 1.93 4.62 6.75 4.22 9.96 14.2 5 10 15 6 17 23 6 13 19 6 17 23 Source: Hinzand Pallares-Miralles (2008) 58 Table 2 appendix 5: Accrual rates and indexation for select nationalpension schemes4' Civil Service ~~ National scheme Accrual rate (YO) Indexation Accrual rate (YO) Indexation Niger 2.0 , Discretionary 1.33 N o indexation Benin 2.0 Discretionary 1.71 Discretionary Botswana Defined No contributory contribution Burkina Faso 2.0 Prices 1.33 Prices Burundi 1.67 Discretionary 2.0 Discretionary Cape Verde 2.9 Wages 2.0 Discretionary Cote D'Ivoire 2.0 Discretionary 1.7 Wages Gabon 2.0 Discretionary 1.57 Discretionary Ghana a/ 2.5 (up to 20 yrs, Discretionary 2.5 (up to 20 Discretionary 1.5 after) yrs, 1.5 after) Kenya 2.5 Discretionary Provident Fund Madagascar 2.0 Discretionary 2.0 Discretionary Mali 2.0 Discretionary 1.67 Prices Mauritius 2.0 Wages Discretionary Senegal 2.0 Discretionary 1.o Discretionary Sierra Leone a/ 2.0 Discretionary 2.0 Discretionary Tanzania 2.22 Discretionary 2.0 (up to 15 Discretionary yrs, 1.5 after) Togo 2.0 Wages 1.33 Prices Uganda 2.4 Discretionary Provident Fund Zambia a/ 1.8 Discretionary 1.8, Discretionary a/ Civil service and national schemes were merged for workers entering after a given date. Source: Palacios and Whitehouse, Civil-service Pension Schemes around the World, 2006; and Staff estimates. 45 As of 2004 except for Uganda, Tanzania, Sierra Leone, Ghana which are 2006. 59 Table 3 appendix5: Age and service requirementsfor select African civil service pension schemes Minimum Normal Minimum Age of Retirement Years of Retirement Age Service Niger 55 BurkinaFaso 53 60 Cape Verde 60 Cote d'Ivoire 55/60 Ethiopia 55 10 The Gambia 45 60 10 Ghana a/ 55 60 20 Kenya 50 55 10 Malawi 45 (w/20 yrs service) 55 10 Mauritius 60 15 Senegal 60 30 (for fillbenefit) Sierra Leonea/ 55 60 15 SouthAfrica 50 65 Tanzania 60 . 15 Togo 55 15 45 (w/20 yrs Uganda service 60 10 Zambia a/ 50 55 10 a/ Civil serviceand nationalschemes were merged for workers enteringafter agiven date. Source: Palacios and Whitehouse,Civil-service PensionSchemes around the World and staff estimates. Cash transfers for the elderly with little or no link to previous contribution or work history are employed in many countries to provide income support for the elderly. It i s useful to have a measure that compares the relative size o f social pensions across countries. Spending on social pensions as a share o f GDP would be a useful indicator if countries were at a similar stage in their demographic transition. However, given the difference of the proportion o f elderly in each country, a better indicator is to take both coverage and benefit levels into account inform o f an index ( as shown inmap appendix 7 above): (SPB/ POP65+) * (SPLEV /YCAP), where the first term is social pension beneficiaries, divided by population over 65 in the country, and the second is the level of benefit as a share of income per capita. The index i s the product o f the two terms and would be equal to 1 if all elderly were covered and received a benefit equivalent at the income per capita o f the country in question. The Map below illustrates the social pensions inthe world, following this index. Table 4 presents some detailed information for a few countries with the highest impact o f social pensions. 60 Map appendix5: Social Pensionsin the World * - Impact Index: recipients as % of 65+ pop, multiplied by benefit as % of income per capita ("All others" indicates countries with non-axistent social pensions, or no information) 0.001 to 0.021 0 AllOthers 0.021 to 0.300 Source: Palacios andSluchynsb, 2006 A relatively recent study on ageingandpoverty inAfrica (Kakwani, and Subbarao, 2005), finds that, when defined by householdstructure, the elderly only, elderly with children, and the elderly-headedhouseholdsare poorerthan others inmost ofthe sample countriesofthe study. The findings suggest that eveninthose countries where certain categoriesofthe elderly happento be at ahigher risk ofpoverty, the case for anuniversal social pension for all ofthe elderly is weak both on welfare grounds, and on considerations of fiscal affordability. A universal social pensionfor all of the elderly above 65 years of age for a quiterepresentative country inthe region would cost about 2 percent of GDP, a level comparableto, or higher than, the current levels of spendingon healthcare. Increasingthe age cut-off to 70+ or 75+ might lower costs, but few would be eligible for the pension, and it would have little impact on poverty reduction at the national level. The same study finds, however, that ther is a case for anon-contributory social pensionto some ofthe elderly inall countries (restricting the eligibility to the poor amongthe elderly). Thetraditional safetynet ofthe extendedfamily is increasingly becoming ineffective and unreliable for the elderly, Infact, some ofthe elderly have becomeprimeearning members for families andor caregivers for grandchildren, either becauseprime age adults have died (or sick or dying) or migrated. However, the economic and welfare consequences of the growing burdenon the elderly inSub Saharancountries have not beensystematically analyzed from 61 the perspective of the role of appropriate social protection instruments. This i s very m u c h needed. 62 0 Vl 0 N I h 5 .-c En E .3 -T c v al .e - c u 10°E 15°E NIGER L I B Y A To Djanet Djanet To Tajarhi ajarhi SELECTED CITIES AND TOWNS A L G E R I A DEPARTMENT CAPITALS NATIONAL CAPITAL NIGER RIVERS Madama MAIN ROADS DEPARTMENT BOUNDARIES INTERNATIONAL BOUNDARIES T é To Tamanrasset amanrasset This map was produced by the Map Design Unit of The World Bank. n 20°N The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Mont Greboun é A G A D E Z Group, any judgment on the legal status of any territory, or any (1,944 m ) endorsement or acceptance of such boundaries. r é 0 50 100 150 200 Kilometers A i r M t s . D Arlit e Bilma 0 50 100 150 Miles se M A L I rt Agadez T A H O U A Ingal D I F F A To To Tchin- Gao Gao Tabaradene 15°N C H A D 15 Z I N D E R Tahoua Tanout 15°N Keïta Keïta T I L L A B É R I To To Tillabéri Tillabéri Illéla Illéla Dakoro Ouahigouya Ouahigouya Bouza Téra Téra Filingué Filingué Niger M A R A D I S a h e l Nguigmi Birnin Gouré Gouré Mts. NIAMEY Konni Zinder NIAMEY Aguié Aguié Manga Kollo Maradi Maïné- Diffa Maïné- Soroa Dosso 1963 Level Lake To To Magaria 1973 Level SEPTEMBER B U R K I N A D O S S O Kontagora Kontagora 2001 Level Chad IBRD F A S O To To N I G E R I A Ouagadougou Ouagadougou 33457 2004 To To 0° BENIN BENIN Kaduna Kaduna 5°E 10°E 10 15°E 15