World Bank Pension Reform Primer

Pension reform primerIssues, challenges, options and arguments in pension reform

he World Bank Pension Reform Primer aimsto provide a comprehensive toolkit for policy

makers on designing and implementing pensionreform. It is based on continuously updatedinformation from countries that have introducedreforms emphasizing the role of privately-managedindividual retirement accounts. Their experienceoffers a number of useful lessons for policymakers elsewhere.

The World Bank set out a conceptual frameworkfor fundamental pension reform in Averting the OldAge Crisis: Policies to Protect the Old and PromoteGrowth. This study, published in 1994, helpedshape the global debate about the impact ofpopulation ageing on pension systems. ThePension Reform Primer builds on this pioneeringwork and on the experience of the World Bankand other international institutions. It focuses onpractical questions.

Country and regional studiesRecent pension reforms in Eastern Europe—Hungary (introduced in 1997), and Poland (1999)Latvia and Croatia — and in Latin America—Argentina (1994), Bolivia (1997), Colombia (1994),El Salvador (1998), Mexico (1997) and Uruguay(1996)—provide a body of experience on whichwe can draw. The first part of the Primer is aseries of 13 country and three regional studies andothers in preparation.

Issues in pension reformThe second part of the Primer consists of notesand background papers assessing the options andthe arguments in different areas of pension policy.

The first set of issues are about fostering a climatefor change: public information and the public’sfinancial acumen, the political economy of reformand necessary initial conditions for reform, such asthe state of capital markets. They also coveranalysis of the macroeconomics of the transitionto a funded pension system, and the drafting ofpension reform legislation.

Pension system design is the topic of the secondset of papers. This includes the coverage of thereform and whether it should be voluntary ormandatory. Other papers look at the structure anddesign of disability benefits, taxation of fundedpensions and the role of notional defined-contribution plans. Finally, we look at guaranteesof the value of funded pensions, and differentoptions for withdrawing pension benefits and thestructure of the annuities market.

The third set of papers looks at administrative,regulatory and supervisory issues. These includeoptions for the collection of contributions andtheir transfer to individuals’ accounts, how toavoid evasion of pension contributions andpromote compliance and structures of supervisionto protect people’s contributions. We also look atthe arguments for and against restricting theportfolio options of pension funds and options inmanaging public-sector funds.

Finally, an assortment of miscellaneous issues,which arise in the reform context but relate to abroader category of study, such as the question ofretirement behavior and household savings orspecial issues such as sub-national public schemes

T

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and ways to provide incentives for lower-incomeworkers to participate are considered.

The Pension Reform Primer teamContributors to the primer are drawn from theWorld Bank, other international organisations,governments and regulators, academe andconsulting firms. The project was supervised by aSteering Committee, chaired by Robert Holzmann,Director of Social Protection at the World Bank.Robert Palacios of the Social Protection divisionand Edward Whitehouse of Axia Economics actedas editors.

Getting hold of the PrimerPrimer papers and notes can be obtained from:Social Protection Advisory ServiceWorld Bank, 1818 H Street NWWashington DC 20433Telephone +1 202 458 5267Fax +1 202 614 0471E-mail: socialprotection@worldbank.orgWeb: www.worldbank.org\pensions

Country studiesArgentina Rafael Rofman

Bolivia Herman Von Gersdorff

Georgia Robert Palacios

Hungary The Hungarian pension system in transitionRobert Palacios and Roberto RochaSocial Protection Discussion Paper no.9805

Italy Patrizia Tumbarello

Kazakhstan Emily Andrews

Latvia Louise Fox

Mexico The 1997 Mexican pension reformGloria Grandolini and Luis CerdaPolicy Research Working Paper no. 1933

Poland The quest for pension reform:Poland’s Security through DiversityMarek Góra and Michal RutkowskiSocial Protection Discussion Paper no. 9816

Sweden The Swedish Pension ReformAnnika SundenSocial Protection Discussion Paper, forthcoming

United Kingdom Pension reform in BritainEdward WhitehouseSocial Protection Discussion Paper no. 9810

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Regional studiesEastern Europe/Central Asia Pension Systems in Transition

Robert Palacios and Michal RutkowskiLatin America Second-Generation Pension Reforms in Latin America

Monika QueisserSocial Protection Discussion Paper, forthcoming

Middle East/North Africa Formal pension systems in low and lower-middle-incomecountries in the Middle East and North AfricaAxel Börsch-Supan and Patrizia Tumbarello

Issues notes1. Implementing reform 3. Administration and regulation

1.1 Overview of reform 3.1 Collection1.2 Transition 3.2 Administrative costs1.3 Political economy 3.3 Supervision: building public confidence in

mandatory public pensions1.4 Legislation 3.4 Public funds1.5 Initial conditions 3.5 Portfolio limits: pension investment

restrictions compromise fund performance1.6 Public information 3.6 Compliance1.7 Consumer financial acumen 3.7 Administration

2. Pension system design 4. Other issues2.1 Notional accounts: the role of notional

defined-contribution plans in pensionreform

4.1 Retirement

2.2 Switching: the role of choice in thetransition to a funded pension system

4.2 Household savings

2.3 Taxation: the tax treatment of fundedpensions

4.3 Reforming pay-as-you-go pensions

2.4 Disability benefits 4.4 Covering low-income workers2.5 Guarantees: costs and consequences of

guaranteeing funded pension benefits2.6 Annuities

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Issues papersImplementing reform

Overview A World Bank perspective on pension reformRobert HolzmannSocial Protection Discussion Paper no. 9807

Transition Financing the transition to multi-pillarRobert HolzmannSocial Protection Discussion Paper no. 9809

Financial issues Reporting the implicit pension debtC. Kane and Robert Palacios

Initial conditions Building and environment for pension reform in developingcountriesOlivia MitchellSocial Protection Discussion Paper no. 9803

Public information

Pension system designNotional accounts Notional accounts: microeconomic and macroeconomic

aspectsRichard Disney and Anita Schwarz

Switching The role of choice in the transition to a funded pension systemRobert Palacios and Edward WhitehouseSocial Protection Discussion Paper no. 9812

Taxation The tax treatment of funded pensionsEdward Whitehouse

DisabilityEmily Andrews

Disability pensions and social security reform: a comparativeanalysis based on the Argentine experienceCarlos Gruska and Gustavo DemarcoSocial Protection Discussion Paper, forthcoming

Annuity markets Annuitising mandated retirement accumulationsJohn Piggott and Suzanne Doyle

Guarantees Government guarantees on funded pension returnsGeorge PennachiSocial Protection Discussion Paper no. 9806

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Administration and regulationCollection Collecting and transferring contributions in multi-pillar pension

schemesRafael Rofman and Gustavo Demarco

Supervision Supervising mandatory pension funds: issues and challengesGustavo Demarco and Rafael Rofman with contributions fromEdward WhitehouseSocial Protection Discussion Paper no. 9815

Institutional arrangements for mandatory funded pensionschemesDonald Duval

Managing public fundsAugusto Iglesias and Robert Palacios

Portfolio limits Does ‘Draconian’ pension regulation compromise fundsperformance?P.S. Srinivas, Edward Whitehouse and Juan Yermo

Evasion and complianceMichelle Riboud

Other issuesRetirement

Richard Disney and Edward Whitehouse

Pay-as-you-go reform Reforming pay-as-you-go pension systemsSheetal Chand and Albert Jaeger

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Pension Reform Primer teamPrimer Editors

Robert Palacios Economist, Social Protection DivisionEdward Whitehouse Consultant Economist, Social Protection Division

Director, Axia Economics, London

Steering Group Chair

Robert Holzmann Director, Social Protection Division

Steering Group

Christine Allison Lead Specialist, Human Development, Economic DevelopmentInstitute

Luca Barbone Sector Manager, Macroeconomics, Africa OfficeJoseph Delfico Consultant, Human Development, Economic Development InstituteLouise Fox Lead Specialist, Social Protection DivisionEstelle James Lead Economist, Development Research GroupGuillermo Perry Director, Poverty Reduction and Economic Management, Latin

America and Caribbean OfficeMichal Rutkowski Sector Leader, Human Development, Eastern Europe and Central

Asia OfficeAnita Schwarz Lead Economist, Social Protection Division

Primer contributors — World Bank

Emily Andrews Senior Economist, Human Development, Eastern Europe andCentral Asia Office

Herman von Gersdorff Senior Economist, Finance, Private Sector and InfrastructureSector Management Unit, Latin America and Caribbean Office

David Lindeman Advisor, Social Protection DivisionMitchell Orenstein Consultant, Development Research GroupMontserrat Pallares-Mirales Social Protection DivisionMichelle Riboud Principal Economist, Poverty Reduction and Economic

Management Unit, Eastern Europe and Central Asia OfficeRoberto Rocha Principal Financial Economist, Budapest OfficeP.S. Srinivas Financial Economist, Finance, Private Sector and Infrastructure

Sector Management Unit, Latin America and Caribbean OfficePatrizia Tumbarello Harvard University and Consultant, Social Protection DivisionJuan Yermo Finance, Private Sector and Infrastructure Sector Management

Unit, Latin America and Caribbean Office

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Primer contributors

Axel Börch-Supan Professor of Economics, University of MannheimLuis CerdaSheetal K. Chand International Monetary FundGustavo Demarco Head of Control Operations, Superintendencia de Administrados de

Fondos de Jubilaciones y Pensiones, Buenos AiresRichard Disney Professor of Economics, University of Nottingham, Research

Fellow, Institute for Fiscal Studies and Director, Axia Economics,London

Suzanne Doyle University of New South WalesAlan Duncan Reader in Economics, University of York and Research Associate,

Institute for Fiscal Studies, LondonDonald Duval Aon Consulting, LondonMarek Góra Director, Office for Pension Reform, WarsawGloria GrandoliniCarlos Grushka Economic Studies and Statistics Unit, Superintendencia de

Administrados de Fondos de Jubilaciones y Pensiones, BuenosAires

Augusto IglesiasAlbert Jaeger International Monetary FundDavid Miles Professor of Economics, Imperial College, LondonGeorge Pennachi Department of Finance, University of IllinoisJohn Piggott University of New South WalesAnnika Sundén Federal Reserve BoardRafael Rofman Head of Economic Studies and Statistics Unit, Superintendencia de

Administrados de Fondos de Jubilaciones y Pensiones, BuenosAires

Salvador Valdés-Prieto