MENA: World Bank & Arab Monetary Fund urge reforms in pension systems
Source: Middle East Insurance Review | Oct 2017
The World Bank and the Arab Monetary Fund have warned that many countries in the Arab world are in a situation in which flaws have been allowed to persist in a pension system, with consequent negative effects not only on public finances but also the economy as a whole. Other countries are very likely to be in the same position soon unless appropriate reforms are implemented in time.
Outcomes and design principles to drive pension system reforms include: affordability, sustainability, adequacy, coverage, efficiency, and security, said the two institutions in a report released in August titled “Arab Pension Systems Trends, Challenges and Options for Reforms”.
The design principles are not necessarily always in harmony with one another, said the report. On the contrary, they are often in tension. Steps to raise benefit adequacy, for example, may reduce affordability (encouraging migration from the formal to informal economic sector) and undermine a scheme’s sustainability over the long term. Resolution of these sorts of tradeoffs is the central – and inherently difficult – challenge facing policymakers in each country.
The main and general challenges of the social insurance and pensions programmes in the Arab region, outlined in the report, are summarised as:
- Data gaps: A severe lack of data with which to develop policy and undertake the day-to-day and strategic operations of pension funds, as well as lack of rigorous benchmarking to best practice on costs.
- Sustainability and affordability: A range of trends, including design of pension schemes and population ageing mean that social insurance programmes, particularly pensions (old age, disability, and survivor benefits), have sustainability and affordability problems and are a large and growing financial burden on national finances, crowding out support for other deserving policy programmes and creating inequalities.
- Low coverage of the private sector: Most Arab countries need to develop solutions that reach workers in the informal sector and for countries with higher degrees of formality such as the GCC. There is a need to develop solutions for the high percentage of the labour market made up of resident foreign workers.
- Inefficiency of labour market, high costs, inequities, and bad incentives: Significant cost, investment, and labour market inefficiencies due to social insurance programmes that are fragmented and cover different schemes (old age, invalidity, survivors, work injury, family allowances, sickness and maternity, unemployment) create considerable administrative and economic inefficiencies and inequalities, particularly between public and private sector employees. Badly designed schemes in most countries in the region are leading to adverse behaviour and increasing inequities. The economic and behavioural impact of many current pension scheme features have been overlooked and not well assessed, which affects all programmes, including disability and survivorship pensions.
- Social security challenges: In many countries in the region, social security institutional capacity is facing considerable challenges as scale, expertise, and governance lag best practices.
- Security, regulation, and supervision: Many countries, particularly those with fragmented pension systems, have underdeveloped or lack regulatory and supervisory structures to ensure proper oversight of pension funds and retirement promises. M