Factors Affecting Intention to Adopt MMT: An Empirical Study Among M-Pesa Customers
Mobile money transfer has transformed communication and economy in Kenya. This study explores factors influencing adoption of M-Pesa among customers, focusing on performance and social factors.
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International Labour Office Providing income security in old age ? A quick review of pension reforms Michael Cichon Social Security Department 1 November 2011
International Labour Office Structure of presentation Point One: The background noise: were paradigmatic reforms really necessary? Point Two: Point Three: The theoretical pros and cons of paradigmatic pension reform Pension reforms in the crisis stress test Point Four: Point Five: What went wrong with pension reform in principle Elements of generic repair strategies 2 2
International Labour Office One . Was paradigmatic reform necessary? 3
International Labour Office The history of pension reform: the return to and old risk coping mechanism: savings . PARADIGMATIC reforms introducing individual savings components into national pension systems attracted most attention : 1980/81 the Pinochet reform in Chile During the 1990s and early 2000s 11 countries in Latin America introduced fully funded elements into their pension schemes Between 1997 and 2008 10 Eastern European plus some Central Asian Countries followed countries followed SWEDEN Notional defined benefits 1994 2008 Reversal in Argentina 2008 Renewed reform in Chile... 2009 2010 Reversals in Eastern Europe But PARAMETRIC reforms were equally prominent : Since the 1990s and many European and OECD countries largely focussing on pension age increases 4 4
International Labour Office Point One: paradigmatic reforms really necessary ? Projected system dependency rates -source EU beyond the ageing hype: were 5 5
International Labour Office Point One: paradigmatic reforms really necessary ? Projected system dependency rates beyond the ageing hype: were 6 6
Point One: The need for paradigmatic reforms remains in doubt projected cost in % of GDP International Labour Office 7 7
Point One: The need for paradigmatic reforms remains in doubt projected cost in % of GDP International Labour Office 8 8
The challenge beyond the ageing hype Projected total social expenditure in the EU International Labour Office Age related Government expenditure in % of GDP EU 27 2007 10.2 6.7 1.2 0.8 4.3 23.2 2060 Change 12.6 8.2 2.3 0.6 4.1 27.8 Pensions Health Long-term care Unemployment Education Total 2.4 1.5 1.1 -0.2 -0.2 4.6 Source: EU EPC 9
International Labour Office Labour Point One: The challenge beyond the ageing hype Projected total social expenditure in the EU International Office Age related social expenditure, EU, 2007-2060 12 10 8 6 Pensions Total 4 2 0 -2 Belgium UK Poland France Sweden Germany Netherlands Czech Republic -4 10 10
Point One: The challenge beyond the ageing hype The 50:50 rule International Labour Office 11
Point One: The challenge beyond the ageing hype International Labour Office 12
Point One: The challenge beyond the ageing hype The 50:50 rule International Labour Office 13
International Labour Office Two. A quick review of the theoretical pros and cons of paradigmatic pension reform 14
Financing Social Protection: The PAYG vs. Funding debate International Labour Office Pro funding Funding would avoid ageing triggered CR increases Create domestic resources for investment Increase national savings rate and hence growth DC schemes are in automatic financial equilibrium 15
Contra funding Future benefit levels vulnerable to inflation and capital market performance Low compliance = low protection No social redistribution and risk sharing Double burden during transition or implicit debt (through borrowing) on the level of GDP all schemes are PAYG anyway Funded system equally vulnerable to ageing Concentration of investment power in too few hands ageing can be counteracted by activity rates and pension ages Ageing will not lead to exploding social expenditure International Labour Office 16
Financing Social Protection: The PAYG vs. Funding debate International Labour Office On (tentative) balance: Funded and unfunded schemes both subject to demographic and economic risks; on GDP level both are PAYG Both vulnerable to bad governance and bad management Contribution rate stabilisation easier under funded schemes Social redistribution easier under PAYG schemes Financing of transition cost can be difficult Funding might support economic development Defined benefit schemes with intelligent collective funding ?? 17
International Labour Office Three. Pensions in the crisis stress test 18
International Labour Office Point Two: The crisis stress test: effects on the individual pension saver in DC schemes under different crisis scenarios Total savings at 3% real rate if return without crisis Rate of return 3% with crisis at age 40 and further rate of 3% Rate of return 3% with crisis at age 40 and further rate of 5% Rate of return 3% with crisis at age 50 and further rate of 5% Rate of return 3% with crisis at age 55 and further rate of 5% Rate of return 3% with crisis at age 60 and further rate of 5% 12000 10000 8000 6000 4000 2000 0 23 27 31 35 39 43 47 51 55 59 63 age 19 19
Point Two: what we see in funded pension schemes fund losses in 2008 . and lost years of pension savings International Labour Office loss in % of value of reserves at the end of 2007 40 35 35 30 26 30 25 22 22 25 19 loss of pension savings in years (assumed 9% annual increase) (8) 20 15 8.4 7.0 10 5.9 5.6 4.8 4.8 4.6 4.1 3.8 3.1 3.2 2.6 2.6 2.2 5 loss of pension savings in years (assumed 5% annual increase) 0 Government plans (1) Funds (2) Funds (5) Funds (4) Fund AP1 Municipal AFPs (3) Quebec pension US State Chilean Pension Pension Swedish pension Pension Fund (6) Dutch Norway Pension and Irish (7) 20 20
International Labour Office Point Two: what we see in funded pension schemes Development of funding levels in Dutch second tier pensions funds, 2007 - 2009 160 140 120 Estimated funding ratio ( % ) 100 percent 80 Share of pension schemes under funding ratio of 105% 60 40 20 0 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 21 21
International Labour Office Point Two: Effect of the crisis: what we see in funded pension schemes 22 22
International Labour Office Point Two: Effect of the crisis: what we see in funded pension schemes Table: Years of contributions lost for standard savers since July 2007 by category of portfolio (adjusted losses net of fees) December 2009 April 2010 Source: R. Bluhm, 2010 Fund A -199% -270% Fund B -142% -249% Fund C -5% -108% Fund D none none Fund E none none Fund F None? None? 23 23
Point Three: what the crisis has shown so far International Labour Office Temporary and permanent losses of pension funds which were at peak times as big be as big as the fiscal stimulus package of 5-6 trillion US $ , Even if pension funds levels may have recovered individual losses of contribution years remained crisis and pension reforms have increased the insecurity about future pension levels dominantly in DC schemes Crisis amplified the systemic fiscal stress that the pardigmatic reform created In the long run if crisis related unemployment persists for half a decade - then DB schemes may also have to be adjusted but the burden can be shared between contributors and pensioners 24
Generic problems : Response International Labour Office Table 2: Recent changes in second-tier systems in Central European Countries5 Change in state mandate to invest contributions in privately managed individual accounts Change in contribution rate diverted to second tier Previous rate Adjustment of rate Reduced to zero (December 2010) Reduced to 2.3% of earnings (2011), rising to 3.5% in 2017 Suspended (June 2009- December 2010); restored to 3% (2011) Planned increase to 6% (2012) and 9% (voluntary) depending on GDP growth (2014-2017) Reduced to 2% (2009) Planned to increase to 6% by 2013, if financial conditions permit Hungary 8% of earnings Mandate repealed Poland 7.3% of earnings --- Estonia 6% of earnings --- 8% of earningsa Latvia --- Government proposed worker option to withdraw from second tier; currently before Parliament Reduced to 2% of earnings (2009)b Lithuania 5.5% of earnings Frozen at 2% (May 2008-March 2010); raised to 2.5% (March 2010) Romania 2% of earnings --- Existing account holders could opt out of second tier (November 2008-June 2009); second tier made voluntary for new hires (since 2008) Slovak Republic 9% of earnings N/A Sources: SSA 2006 & 2010; SSA 2007-2011; World Bank (2009); Zaman (2010); IPE "Baltic Round-up," December 2, 2010; Leppik (2011) a. The rate had been scheduled to rise to 10% in 2010. b. Since their inception, individual accounts have been voluntary; but those who join have contributions diverted from the public pension systems, creating transition costs. Once enrolled, workers may not opt out. 25
International Labour Office Three. What went wrong with pension reform in principle? 26
Generic problems International Labour Office Privatised schemes helped to stabilise pension contribution rates but In LA failed to increase coverage Charged too high fees In Eastern Europe: Covering of transition cost left completely unclear (Hungary 0,8 1,4% of GDP for 43 years, Poland 1.5 2.2. % of GDP over 50 years ) Same concern in Chile No provisions for the payout modalities of the second tier in Hungary and Poland Reform was interest driven by private insurance companies (e.g. Poland and Slovakia ) Asset and contribution based fees reduced the savings of workers considerbaly 27
Generic problems : fees International Labour Office Table 3. Fees and contributions in individual accounts in Latin American countries as of June 2007 (percent) Country Admin fee a Mandatory contribution a Argentina 1.00 Bolivia c 0.50 Chile 1.71 Colombia d 1.58 Costa Rica 0.29 Dom Rep0. 0.60 El Salvador 1.40 M xico 1.02 Peru 1.81 Uruguay e 1.79 SOURCE: AIOS 2007. NOTE: AIOS = Asociaci n Internacional de Organismos de Supervisi n de Administradoras de Fondos de Pensiones Fees as a percentage of contributions 17.8 4.8 14.6 12.6 6.7 7.5 12.3 12.0 15.3 12.8 4.61 10.00 10.00 11.00 3.96 7.40 10.00 7.48 10.00 12.22 a. As a percentage of the worker's salary. b. The employee's contribution as a percentage of salary, except in Colombia, Dominican Republic, El Salvador and Mexico where the figure also includes the employer's contribution as a percentage of covered payroll. c. A fee for administering the investment portfolio is also charged. d. Fees are also charged for transferring, exiting, and making voluntary contributions. e. A custody fee on the account balance is also charged. 28
Generic outcome of paradigmatic reforms International Labour Office Financial stabilisation of individual funded pension tiers Increased social uncertainty for individuals Financial destabilisation of PAYG tiers Increased fiscal de-stabilisation 29
International Labour Office Four. Generic repair strategies 30
Point Four: Generic repair strategies a few reminders first Transfer schemes /pension schemes can only define entitlements to a share of present/future consumption (not absolute amounts) no society can promise more Markets cannot be asked to secure the income of people who cannot or can no longer operate in markets The statement that pension schemes can only be stabilised by paradigmatic reforms is a myth The statement that countries can only afford a basic social safety net type welfare state in the globalised economy and an ageing society is likewise a myth International Labour Office 31
Key principles of ILC Policy recommendations for the extension of coverage : focus on outcomes not on institutional set-ups International Labour Office Universal coverage of basic income security and essential health care not necessarily uniform coverage. Progressive realization of universal coverage and higher levels of security Benefit levels and poverty protection as predictable rights (i.a. through Ratification of ILO conventions) , Social and economic adequacy of benefit levels Financial and fiscal sustainability Good governance with the state as the ultimate guarantor of social security rights and benefit levels and the participatiosn of sociaL partners 32 32
Point Four: Options for solutions combining financial and social stabilisation...are not abundant International Labour Office Process: Solutions have to be found in a process of national dialogue System wide: Adopt social floor guarantee and adhere to convention C. 102 DC pillars: Find innovative pension level guarantees if second pillars have to survive... ; reduce the size if fiscal space does not allow the financing of the transition DB pillars: long-term planned increases of contribution rates and definition of government subsidies Phased increase of retirement age + reasonable relationships between time in work and time in pensions Or adopt NDC schemes with social redistribution... Changing indexing method but protecting purchasing power of pensions 33
International Labour Office What is needed A DB Guarantee for a DC or NDC scheme In a given country the General average premium (GAP) for a pension scheme with an accrual rate of 1.33 % be calculated at a defined point in time If a DC scheme charges a contribution that is equal to a fraction or a multiple of the GAP it has to provide for the same fraction or multiple of the accrual rate of 1.33 percent. At the age of retirement in year n her scheme has to provide a present value (or the above fraction thereof) for the total number of insurance years t (starting from 0) of contributions that is equal to n i W CR = ) 1 ( * * 0 n + = + n t n t 0133 . 0 * * 1 ( * ) e W w , t t x n t = t t o If I=w then CR = 0133 . 0 * xe ,n for funded schemes and at least that for NDC schemes Side comment: This means that the NDC tier in Russia may be underfunded 34 34
A side-kick: NDC benefit formula and the classical DB pension formula The identity of the International Labour Office An NDC is equivalent to a DB scheme with a linear pension formula, constant contribution rate and with actuarial reductions or increments for early or late retirement and an: accrual rate in the equivalent DB scheme that is equal to = constant contribution rate/life expectancy (annuity factor) at normal retirement age
What is needed to avoid a waste of the crisis International Labour Office National and interntional reviews of three decades of pension reforms based on Observed experience on systemic effects of pension reforms New academic knowledge An analysis of the reasons for reform A return to basics (i.e. redefining the primary function of pension systems securing old age income security ) A contextual view (i.e. pensions in the context of overall social budgets and their role in economic devlopments) 36 36
