African formal public pension arrangements create a lot of confusion and inequities

There are provident funds which operate as compulsory individual savings accounts, with beneficiaries entitled to a lump sum at retirement and they focus exclusively on retirement and do not include other benefits. Although annuities are possible, often people prefer to take the lump sum. Several provident funds have been transformed into social security arrangements with pensions organized around a defined benefit principle. This has already happened in countries like Ghana and Nigeria. In Tanzania, in 1997, Parliament approved a law transforming the National Provident Fund (NPF) into a broad social security arrangement covering pensions and other benefits (including possibly health insurance) National Social Security Fund (NSSF). This transformation has yet to be fully implem

African formal public pension arrangements create a lot of confusion and inequities Written by Christian Gaya Friday, 15 July 2011 05:24 There are provident funds which operate as compulsory individual savings accounts, with beneficiaries entitled to a lump sum at retirement and they focus exclusively on retirement and do not include other benefits. Although annuities are possible, often people prefer to take the lump sum. Several provident funds have been transformed into social security arrangements with pensions organized around a defined benefit principle. This has already happened in countries like Ghana and Nigeria. In Tanzania, in 1997, Parliament approved a law transforming the National Provident Fund (NPF) into a broad social security arrangement covering pensions and other benefits (including possibly health insurance) National Social Security Fund (NSSF). This transformation has yet to be fully implemented. Kenya and Uganda are underway way to be transformed their provident funds into a comprehensive social insurance funds. Contribution rates among provident funds vary considerably and are very high for the NPF in Tanzania, twenty percent of gross salaries. Contributions to the Uganda provident fund stand at fifteen percent, ten for employers and five for employees. Kenyas contribution stands at ten percent, but with an effective ceiling for most workers, around three dollars, half for the employees and half for the employers. This extremely low level is the result of contribution rates fixed in nominal terms during the years. Retirement ages range between 55 and 60, but most systems allow early retirement at about 50 and 55 years. The minimum number of years to qualify for a pension can be quite high, reaching 20 years in some countries. Failure to reach this benchmark means that the contributors can get back only his/her nominal contributions. In some countries pensions for widows and survivors can be quite generous. Replacement rates vary with contribution rates. It can reach 80 percent for public servants in some countries (Cte dIvoire, etc.). In most countries the difference between basic and total wages (basic plus allowances) is a source of ambiguity that creates opportunities for evasion. Mauritius has a different history. The National Pension Fund (NPF), created in 1978, is a contributory arrangement, partially funded, where the members purchase pension points

with their contributions, to be redeemed later for pension benefits. The basic ratios are roughly indexed to inflation and have remained relatively constant over time. In Mauritius, the standard contribution to the NPF is nine percent, six for employers and three for employees. However, there is a cap at a relatively low level of income and the effective contribution for medium and high salaries is much lower. Civil servants often have one or more social security arrangements. In a good number of cases pensions are paid out of the budget and there is no pension fund per se. Often the pension rules covering civil servants or public employees vary considerably. In Cameroon around seven different regimes for public servants can be found. In countries like Kenya, Uganda, and Tanzania, local governments have their independent pension arrangements for instance in Tanzanian we have The Local Authority Pension Fund (LAPF) a social security institution established under The LAPF Act No 9 of 2006. In French speaking countries, not all public employees are covered by the civil service rules; some of them belong to the funds covering private employees. All of this creates a lot of confusion and inequities. Mauritius pays a pension out of the budget to anyone over 60 years old. Initially Mauritius experimented with a means-tested pension scheme out of the general budget. Application complications led to the introduction of a universal pension, which has become pretty much ingrained in the population. This pension is adjusted regularly, although no precise formula exists. The universal pension covers roughly one third of the average wage. Total expenditure on the universal pension stands at 1.3 percent of GDP, and surveys show that it is an important instrument to sustain income of the less fortunate. South Africa has a means-tested universal pension. Gabon also has a universal pension. There is a wide variety of private pension arrangements in Africa. Some are set up by individuals and some by companies, with contributions both by employers and employees. Three factors seem to favor the emergence of private pension arrangements: low contribution rates to the public funds, adequate tax treatment, and a working financial sector with some tradition in the management of pension accounts. These pension accounts can be of different types: defined-contribution, defined-benefit, and provident fund. Private non-compulsory private arrangements are strong in Kenya, where more than a thousand can be found. Reportedly, the preferred private option in Kenya is defined-contribution. Defined benefit arrangements have decreased in popularity, because they require the employer to balance the funds, if needed after periodic actuarial examinations. The assets under management by private pension funds stand at 10 percent of GDP, roughly the same percentage as the public provident fund (NSSF). In Kenya there is a well-developed infrastructure of brokers, fund managers, and insurance companies and significant competition in the sector. As already mentioned, the contribution levels are low and tax law allows a deduction for investments in pension funds both for employer and employees. This industry could play a very important role in the region. These remarkable developments not withstanding, some concerns remain regarding (1) the

coverage of the combined public/ private arrangements, and (2) the transparency of the existing private schemes, costs, for instance. Still, quotes obtained from different sources would suggest that the total costs of administering pension funds in the private sector stand at around 1.5 percent of assets, which seems reasonable given the size of the market. Mauritius has also developed a significant sector of complementary private pensions. The office of the Income Tax Commissioner reports over 900 independent arrangements, additional to around 70 covered by the Parastatal Pension Act. The information on the private arrangements is limited and it is difficult to estimate its size from available information. It is likely that jointly, the private and the parastatal arrangements have assets equal to half of the assets under NPF management. The private arrangements are complementary to the public schemes and reportedly cover mostly medium and high level employees, even though the law orders full employee coverage to be eligible for tax benefits. Zimbabwe also has significant private sector pension arrangements. They are not customary in Tanzania and Uganda, probably as a result of the high contribution rates to the public pension systems, (which are 20 percent for Tanzania and 15 percent for Uganda), and credibility problems of the financial sector. In French-speaking Africa and where contribution to the public pension system is low, private pension funds can also be found. Countries in these regions tend to have favorable tax treatment for private pension funds. Overall, there is limited information of the extent to which private arrangements are used to provide for pensions. In United Republic of Tanzania, we have five public pension funds one provident fund: These are the National Social Security Fund (NSSF) offering social security coverage to employees of private sector and non-pensionable parastatal and government employees, the Public Service Pension Fund (PSPF) providing social security protection to employees of central Government under pensionable terms, Parastatal Pension Fund (PPF) offering social security coverage to employees of the both private and parastatal organizations, the Local Authorities Provident Fund (LAPF) offering social security coverage to employees of the Local Government and the National Health Insurance Fund (NHIF) offering health insurance coverage to pensionable employees of central government including Government Employees Provident Fund (GEPF)covering government employees not covered by PSPF and focuses exclusively on retirement and does not include other benefits. It operates as compulsory individual saving accounts, with beneficiaries entitled to a lump sum at retirement. And Zanzibar Social Security Fund (ZSSF) which is offering social security coverage to employees of private sector and government employees. Christian Gaya is the founder of the HakiPensheni Company Limited. Questions from readers will be answered in future columns. Please send me to gayagmc@yahoo.com , www.HakiPensheni.blogspot.com

nted. Kenya and Uganda are underway way to be transformed their provident funds into a comprehensive social insurance funds. Contribution rates among provident funds vary considerably and are very high for the NPF in Tanzania, twenty percent of gross salaries. Contributions to the Uganda provident fund stand at fifteen percent, ten for employers and five for employees. Kenyas contribution stands at ten percent, but with an effective ceiling for most workers, around three dollars, half for the employees and half for the employers. This extremely low level is the result of contribution rates fixed in nominal terms during the years.

Retirement ages range between 55 and 60, but most systems allow early retirement at about 50 and 55 years. The minimum number of years to qualify for a pension can be quite high, reaching 20 years in some countries. Failure to reach this benchmark means that the contributors can get back only his/her nominal contributions. In some countries pensions for widows and survivors can be quite generous. Replacement rates vary with contribution rates. It can reach 80 percent for public servants in some countries (Cte dIvoire, etc.). In most countries the difference between basic and total wages (basic plus allowances) is a source of ambiguity that creates opportunities for evasion.

Mauritius has a different history. The National Pension Fund (NPF), created in 1978, is a contributory arrangement, partially funded, where the members purchase pension points with their contributions, to be redeemed later for pension benefits. The basic ratios are roughly indexed to inflation and have remained relatively constant over time. In Mauritius, the standard contribution to the NPF is nine percent, six for employers and three for employees. However, there is a cap at a relatively low level of income and the effective contribution for medium and high salaries is much lower.

Civil servants often have one or more social security arrangements. In a good number of cases pensions are paid out of the budget and there is no pension fund per se. Often the pension rules covering civil servants or public employees vary considerably. In Cameroon around seven different regimes for public servants can be found. In countries like Kenya, Uganda, and Tanzania, local governments have their independent pension arrangements for instance in Tanzanian we have The Local Authority Pension Fund (LAPF) a social security institution established under The LAPF Act No 9 of 2006. In French speaking countries, not all public employees are covered by the civil service rules; some of them belong to the funds covering private employees. All of this creates a lot of confusion and inequities.

Mauritius pays a pension out of the budget to anyone over 60 years old. Initially Mauritius experimented with a means-tested pension scheme out of the general budget. Application complications led to the introduction of a universal pension, which has become pretty much ingrained in the population. This pension is adjusted regularly, although no precise formula exists. The universal pension covers roughly one third of the average wage. Total expenditure on the universal pension stands at 1.3 percent of GDP, and surveys show that it is an important instrument to sustain income of the less fortunate. South Africa has a means-tested universal pension. Gabon also has a universal pension.

There is a wide variety of private pension arrangements in Africa. Some are set up by individuals and some by companies, with contributions both by employers and employees. Three factors seem to favor the emergence of private pension arrangements: low contribution rates to the public funds, adequate tax treatment, and a working financial sector with some tradition in the management of pension accounts. These pension accounts can be of different types: defined-contribution, defined-benefit, and provident fund. Private non-compulsory private arrangements are strong in Kenya, where more than a thousand can be found. Reportedly, the preferred private option in Kenya is defined-contribution. Defined benefit arrangements have decreased in popularity, because they require the employer to balance the funds, if needed after periodic actuarial examinations.

The assets under management by private pension funds stand at 10 percent of GDP, roughly the same percentage as the public provident fund (NSSF). In Kenya there is a well-developed infrastructure of brokers, fund managers, and insurance companies and significant competition in the sector. As already mentioned, the contribution levels are low and tax law allows a deduction for investments in pension funds both for employer and employees. This industry could play a very important role in the region. These remarkable developments not withstanding, some concerns remain regarding (1) the coverage of the combined public/ private arrangements, and (2) the transparency of the existing private schemes, costs, for instance. Still, quotes obtained from different sources would suggest that the total costs of administering pension funds in the private sector stand at around 1.5 percent of assets, which seems reasonable given the size of the market.

Mauritius has also developed a significant sector of complementary private pensions. The office of the Income Tax Commissioner reports over 900 independent arrangements, additional to around 70 covered by the Parastatal Pension Act. The information on the private arrangements is limited and it is difficult to estimate its size from available information. It is likely that jointly, the private and the parastatal arrangements have assets equal to half of the assets under NPF management. The private arrangements are complementary to the public schemes and reportedly cover mostly medium and high level employees, even though the law orders full employee coverage to be eligible for tax benefits.

Zimbabwe also has significant private sector pension arrangements. They are not customary in Tanzania and Uganda, probably as a result of the high contribution rates to the public pension systems, (which are 20 percent for Tanzania and 15 percent for Uganda), and credibility problems of the financial sector. In Frenchspeaking Africa and where contribution to the public pension system is low, private pension funds can also be found. Countries in these regions tend to have favorable tax treatment for private pension funds. Overall, there is limited information of the extent to which private arrangements are used to provide for pensions.

In United Republic of Tanzania, we have five public pension funds one provident fund: These are the National Social Security Fund (NSSF) offering social security coverage to employees of private sector and non-pensionable parastatal and government employees, the Public Service Pension Fund (PSPF) providing social security protection to employees of central Government under pensionable terms, Parastatal Pension Fund (PPF) offering social security coverage to employees of the both private and parastatal organizations,

the Local Authorities Provident Fund (LAPF) offering social security coverage to employees of the Local Government and the National Health Insurance Fund (NHIF) offering health insurance coverage to pensionable employees of central government including Government Employees Provident Fund (GEPF)covering government employees not covered by PSPF and focuses exclusively on retirement and does not include other benefits. It operates as compulsory individual saving accounts, with beneficiaries entitled to a lump sum at retirement. And Zanzibar Social Security Fund (ZSSF) which is offering social security coverage to employees of private sector and government employees.

Christian Gaya is the founder of the HakiPensheni Company Limited. Questions from readers will be answered in future columns. Please send me to gayagmc@yahoo.com , www.HakiPensheni.blogspot.com