REFORMING CIVIL SERVICE PENSIONS IN SELECTED ASIAN COUNTRIES
By
MUKUL G. ASHER Associate Professor of Economics and Public Policy National University of Singapore 10 Kent Ridge Crescent Singapore 119260
Fax: (65) 775-2646 E-mail:
[email protected]
February 2000
A paper prepared for the Social Security Workshop, The World Bank, D.C; March 2000. (file name: Civil Service-est00)
Washington,
Thanks are due to Tom Snyder for useful comments and to Sadhana Sen for research assistance. The usual caveat applies.
I INTRODUCTION
Recent years have witnessed an intensification of the fundamental reforms in pension systems around the world. Three main characteristics of the reforms have been pre-funding of the benefits; substantial involvement of the private sector institutions in managing investments in both accumulation and decumulation phases, and to a lesser extent in administration of the pension systems; and emphasis given to prudential regulation to ensure credibility of reforms. The nature and the scope of government’s guarantees relating to pensions have varied greatly among countries, but the intentions of the reformers have been to keep any such guarantees modest. There are several reasons why reform of civil service pensions has acquired much greater urgency in recent years. First, the globalization forces, aided by the technological revolutions in communications and information processing have made the task of attaining fiscal sustainability both more urgent and more complex (Asher, 1999). Without adequate progress towards fiscal sustainability, other macro and microeconomic reforms necessary to be competitive in a globalized economy cannot be vigorously pursued. Reforming civil service pensions, particularly introducing a degree of pre-funding represents a possible avenue for addressing the fiscal pressures faced by many countries. Second, the end of the cold war, and economic costs of government failures begin to be better understood, there has once again been a shift in the public-private mix and state-market mix. As a result, the role of the public sector and of the state has been undergoing searching scrutiny. One of the consequences of this scrutiny has been the
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realization that the marked dualism in the pension systems between the public and the private sector existing in many countries may not be consistent with labour market efficiency. Civil service pension reform is thus considered an essential measure to allocate human resources more efficiently between the public and private sectors, to provide appropriate incentives for acquisition of human capital, and to lessen the fiscal burden on future generations. Third, the East Asian economic crisis has underlined the importance of financial sector and capital market reforms, and of reducing the gap between domestic savings and investment, to lessen dependence on volatile short-term external capital inflows. In many countries, civil servants account for significant proportion of employment in the formal sector, and as a group belong to the upper-half of the income group. Civil Service pension reform, is thus regarded as a potential avenue for increasing national savings, or at least of changing the composition of savings towards long-term contractual savings. Such long-term saving can then be potentially utilized to finance infrastructure development and to enhance the efficiency of saving investment process. The civil service pension reforms thus have been designed to reduce the fiscal burden of the state; improve labour market efficiency; assist in the development of capital markets and improve their efficiency; and generate higher savings, or at least to better utilize the change in the composition of savings towards long-run contractual savings made possible by the pre-funding arrangements, while simultaneously addressing the social adequacy and equity concerns. It should be stressed that these objectives of civil service pension reforms are broadly similar to those of the pensions reforms in general, though the details may necessarily vary.
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It is in the above context that this paper examines reforms in pension arrangements for civil servants (more broadly government employees) in selected Asian countries, namely, India, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Pension systems in these countries (with the exception of the Philippines) have traditionally exhibited a marked dualism. Thus, for the public sector employees, the pension benefits have been financed largely from the current budgetary revenues, and the benefits have covered longevity and inflation risks to varying degrees. The coverage ratio for the public sector employees has been quite high and the replacement rates have been typically between 50 to 70 percent. Survivor’s benefits have also been usually provided. In contrast, pension benefits for the private sector employees (with the exception of the Philippines) have been financed primarily through defined contribution type mandatory (or voluntary) schemes, often in the form of provident funds. The accumulated balances have usually been paid in lump sum, and thus have not covered for inflation and longevity risks. The coverage ratios as well as the replacement rates for the private sector employees have been rather low. Nevertheless, as detailed in the country summaries (Section 2), there are significant variations in the pension arrangements for government employees, and in the type, extent, and urgency of pension reforms in these countries. The final section provides the concluding observations. II Country Summaries
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India The right to pension in India is provided in the Article 366/17 of the Indian Constitutions; and this right has been upheld by the Supreme Court of India (Agarwala and Sharma, 1999, p-4.) In March 1997, there were 34.29 million individuals in India (10.92 percent of the 1991 labour force of 314 million) who were covered under any formal social security system. The combined government employees of the Central, State and Union territories covered numbered 11.14 million (32.5 percent of the total), while the remaining were salaried employees in the private sector. The government employees in India are provided with three types of retirement benefits. The first is the gratuity, governed by the Payment of Gratuity Act 1972. This Act applies to both the public and private sectors. The gratuity is based on the length of service, and is paid as a lump sum, subject to a ceiling. The second is the Defined Contribution (DC) scheme. Each government employee contributes at a rate of 6.0 percent of wages to the Government Provident Fund (GPF), with no matching contributions from the government. There are liberal pre-retirement withdrawal provisions. The accumulated balances are provided in lump sum at retirement. As at end 1996, Central government’s provident fund had accumulated balances of Rs. 178.1 billion (US $ 4.1 billion), while the state governments had provident fund accumulations of Rs. 307.9 billion (US 4 7.1 billion)
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(Patel, 1997, Table 4). These funds are invested primarily in government securities and non-market considerations play a role in the determination of the interest rate provided on the balances. Thus, no separate income earning assets are created. Thus, in essence, it is not a DC scheme, but a Pay-As-YouGo (PAYG) scheme, as future generations will need to pay the accumulated balances. The third, and the most significant retirement benefit is the Defined Benefit (DB) non-contributory (for the employees), unfunded, indexed pension scheme. There are also disability and survivor benefits. The maximum replacement rate is 50 percent of the average wages for the last ten months of service. There is also a maximum ceiling on the absolute amount of pension of 50 percent of the highest pay in the government. The pension benefits are simply paid out of the general budgetary revenues. Pensions are automatically adjusted with the salary revisions for the current government employees. Substantial pay increases (without corresponding reductions in either the number of employees or improvements in productivity per employee) have increased the fiscal burden of pensions substantially at all levels of government. This has hit the fiscal position of the poorer states especially hard. The Indian experience thus suggests caution in advocating upward salary revision alone as an instrument for improving efficiency and reducing the wage burden of the government. Political power of the civil servants usually does not easily permit reductions in the size of the government
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employment or significant improvements in their productivity, while salary increases are eagerly implemented. In addition to the above retirement benefits, government employees are also provided health care benefits, both during the working life and during retirement. These benefits are also largely unfounded, and thus paid from current budgetary revenues. The fiscal burden of the mandated health-care benefits, already likely to be substantial (no data are however available on expenditure level, pattern of health care resources, etc.), will grow rapidly in the future. Not only is the average Indian expected to live longer (life expectancy at 60 years of age is expected to be 80 years by year 2020), but the pattern of diseases, especially for the non-poor to which category civil servants belong, is shifting from communicable to chronic, non-communicable diseases such as cancer, and cardio-vascular problems which are more expensive to treat. Technological developments will drive up the costs as they have elsewhere; and India is in the early stages of introducing modern technology on a mass scale for noncommunicable diseases. The importance of controlling health care costs has not been recognized in India, even in the recent governmental report on pension reform (Government of India, Ministry of Social Justice and Empowerment, 2000). There is however a strong case in India (and elsewhere) for reforming pension and health care financing arrangements concurrently, and considering them together as a part of a package.
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A detailed analysis of the fiscal sustainability of the above system of retirement benefits is hampered by extremely limited record keeping of the various programs at the Centre, in the States, and by the government commercial enterprises for which annual budget authority must be obtained from the Parliament such as the railways, and the postal department (Costain, 1999; Agarwala and Sharma, 1999). Indeed, reducing administrative costs while improving efficiency should be an essential element of any pension reform in India. Nevertheless, there are several indicators, which strongly suggest that the current retirement schemes are fiscally unsustainable. First, the current ratio of pensioners to employees is extremely high, including for the Central government employees (Government of India, Ministry of Social Justice and Empowerment, 2000). Thus, in March 1998, there were 5.17 million Central government employees, while the number of pensioners was 3.59 million, resulting in one employee supporting 0.69 pensioners. Among the Central government employees, the ratio for the Armed Forces at1.16 (employment of 1.58 million, pensioners, 1.84 million), already exceeds one. This is clearly not sustainable. The Indian Railways employed nearly 1.6 million persons in 1998, but the number of pensioners was 1.1million, giving the employee to pensioners ratio of 0.67, up sharply from 0.17 in 1981 (AITD, 1998). Railways thus constitute the second largest number of pensioners among the Central government pensioners. The share of pensions in the working expenses of the
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railways has risen from 4.65 percent in 1981 to 13.3 percent in 1998 (AITD, 1998). The ratio of employees to pensioners is set to increase substantially in the future. The Railways had set up a Pension Fund in 1964 to meet pension liabilities in an orderly manner. But adequate contributions to the fund were never undertaken, and thus pension expenditure has been met from current revenue (AITD, 1998; Agarwala and Sharma, 1999). The rising pension burden has the potential to severely strain operational efficiency and modernization of the railways. The Ministry of Finance has constituted a working group to examine pension reform options for the government civil servants. While the details are not available, a gradual shift to pre-funding is being considered, perhaps over the next ten years (Government of India, Ministry of Social Justice and Empowerment, 2000). There however appears to be a need for much greater sense of urgency in beginning the process of pension reform. This lack of urgency is indicated by the fact that neither the Railway Budget nor the Union Budget for the fiscal year 2000 presented in February 2000 contains any proposals for civil service pension reform. Indeed, neither budget mentions this issue as requiring urgent attention. Second, the states in India, already severely hampered by a mismatch between their responsibilities and resources available to them, are finding it increasingly difficult to maintain fiscal sustainability. Indeed, there are concerns that unless the State finances are reformed, overall fiscal
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sustainability of the country as a whole would be difficult to achieve, even if the Central government is able to reduce its fiscal deficit to a manageable level. The difficulties in the States have been exacerbated by poor record keeping and governance, and populist political tendencies. The general practice towards uniformity in civil service emoluments across the country without regard to the ability to pay of the different States has also contributed to the difficult fiscal situation. Pension reforms thus needs to be carried out at the state level as well. The third indicator is the potential contingent liability that the Central government may incur as a result of the Employees Pension Scheme (EPS) introduced in 1995 as part of the Employees Provident Fund Scheme (EPFS) for the private sector employees. The EPS has a maximum replacement rate of 50 percent. The benefits however are not inflation or wage indexed. The EPFS had 23.18 million members (7.38 percent of 1991 labour force) in March 1997. EPFS is a Defined Contribution (DC) scheme (total contributions range from 20 to 24 percent of wages upto Rs. 5000 per month depending on the industry, with employees paying between 10 and 12 percent), and it was introduced in 1952. The 1995 modification has however made it a mixed Defined Contribution (DC)- Defined Benefits (DB) Scheme. While there is a strong case for reforming the whole EPFS scheme, mainly in areas of investment policies and performance, and its administration (Government of India, Ministry of Social Justice and Empowerment, 2000;
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Agarwala and Sharma, 1999 and Patel, 1997), the main concern here is with the Defined Benefit (DB) component of the scheme. The recent government report on pensions (The Government of India, Ministry of Social Justice and Empowerment, 2000) has expressed the strong concern that the DB component is underfunded and non-transparent. As the report states : “ Actuarial calculations (relating to the DB component of the EPFS) that compare the adequacy of contributions and returns on investments of the pension fund to meet the defined pension obligations of the Government are not readily available. There is a risk that this provision may be underfunded, and promises an unsustainable benefit which will become a liability of the Government in the long run”.
Indonesia Indonesia has two separate groups of social security programs, one for the public sector , and another for the private sector. In general, the public sector programmes are far more comprehensive in their coverage of the target group and in coverage of various types of risks, and their replacement rate is also higher than for the private sector schemes. The public sector programmes are further divided into those for civil servants, administered by PT TASPEN (Tabungan dan Asuransi Pegawai Negeri or The Government Civilian Employees’ Saving and Insurance Scheme), and military personnel, administered by PT ASABRI (Asuransi
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Social ABRI or The Armed Forces Social Insurance Plan). Both are state owned enterprises. Participation in the respective plans is compulsory. Currently, the plan covers about 4 million active civil servants and 1 million members of the armed forces. It has been paying pension benefits to some 2 million beneficiaries. TASPEN was originally an endowment insurance scheme established in 1963 to provide lump-sum cash benefits to civil servants at retirement age (which was and still is 56 years), or in the event of death during employment. Its key objective at that time was to supplement the meager benefits of the civil servants’ pension scheme dating from 1949. TASPEN began to provide life insurance in 1981- The scheme is called Jaminan Hari Tua (JHT) – to civil servants, their spouses, and children. Members contribute 3.25 percent of their monthly salary to the scheme, and in return, receive a lump-sum amount roughly equivalent to 19 times the final monthly salary in the event of retirement or death (TASPEN, 1995). The account balance is returned to the member in case of termination of, or resignation from employment before retirement. In 1995, the scheme paid out lump sum benefits totaling Rp.393 billion to 100,837 members under the JHT scheme , compared to payouts of Rp. 80.5 billion to 70,800 members in 1989. The average size of the payment was Rp. 3.9 million in 1995, which was three times larger than the amount six years earlier (TASPEN, 1995). The share of total benefits as a portion of total revenues increased from 78.9 percent in 1991 to 92.5 percent in 1995. The increase in size of benefits payment
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partially reflects a rise in members’ wages. While the JHT schemes are deemed to be self-funding, the contributions are insufficient to meet the commitments because of low contribution rate, low returns on investment and high administrative costs. Rise in civil service salaries in the Fiscal year 2000 budget will put further strains on the financial viability of this scheme. The pension scheme for civil servants under TASPEN was established in 1969. Originally the government provided sole funding from general revenues, but civil servants have been required to contribute 4.75 percent of their monthly earnings since 1994. To be eligible for pension, an employee needs to be at least fifty years of age and have been in government service for twenty years. The plan is not portable and no vesting takes place until the worker reaches the age of fifty – in other words, the worker will lose all entitlements in the event of leaving government service. The monthly pension amount is set at 1.875 percent of the final annual salary times the number of years of service. For someone who has participated in the scheme for twenty years, the monthly pension amount is normally equivalent to 75 percent of the final monthly salary. In the event of death or permanent disability, a monthly pension is paid to the dependent spouse or children at a rate roughly equivalent to 40 percent of final salary. In case of termination of service on the grounds of permanent sickness or disability, the benefit is 75 percent of the pension base. The survivor’s benefit is equal to 72 percent of the pension base in case of death before retirement and 36 percent after retirement.
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The pension and lump sum benefits under TASPEN provide benefits equivalent in value to about 100 percent of the worker’s final salary after 35 years of service. The number of pensioners increased from 1.14 million in 1989 to 1.54 million in 1995, but the total amount of pension paid out increased even more, from Rp. 1.99 trillion to Rp. 3.37 trillion. The average pension value increased from Rp. 106,116 per month in 1991 to Rp. 183,036 per month in 1995 (TASPEN, 1995). The benefits paid by the pension scheme are extraordinarily generous, especially compared to the modest contributions received from members. The scheme’s contributions and other income cover only 22.5 percent of the costs of benefits, elevating the government to cover the remaining 77.5 percent from its general revenues. In 1994 the pension plan has assets worth Rp. 6.3 trillion and accrued liabilities amounting to Rp. 21.4 trillion, leaving the government with huge unfunded liabilities (World Bank, 1996). The government’s payment towards civil servants’ pensions amounted to 22 percent of its total wage bill in 1995 ; this is projected to increase to 66 percent by the year 2020. This is unsustainable from the fiscal as well as social and economic perspective. Resolving the problem of the contingent liabilities has become even more urgent in view of the reduced revenue base and increased expenditure obligations of the government arising from the economic crisis (Asher and Heij, 1999). In addition to pensions, civil servants and their families in Indonesia are also eligible to receive health care benefits during their working life as
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well as during retirement. The details of the health financing expenditures and usage are not available, but are likely to be substantial. Since the benefits are in terms of medical services, sharp depreciation of the Indonesian Rupiah (from Rp. 2300 to US $ just before the crisis to about Rp. 7400 in early 2000) must have increased their costs in domestic currency quite significantly as much of the medicines and equipment is imported. ASABRI was established in 1971 and covers military personnel, civilian employees of the Ministry of Defence, and the police force. In early 1996 its membership stood at 0.5 million. While the scheme’s rate of contribution is similar to that for civil servants, the eligibility and benefit conditions are somewhat different : retirement age for military personnel is lower (50 years) and depends on rank. Generally , the monthly pension is set at 2.5 percent of the last basic monthly salary multiplied by years of service. The average size of the benefit per member was Rp. 2.1 million in 1994, which saw a substantial increase from Rp. 1.34 million five years earlier. There is unusually high degree of secrecy surrounding ASABRI, and as a result, there is little data available on the scheme.
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Table 1 Indonesia: Pension Indicators for Government Civil Servants, 1994-97 1994 1995 1996
1997
Members (million)
3.15
4.06
4.04
3.97
Retirees (million)
1.52
1.55
1.62
1.78
Retirees/Members
0.48
0.38
0.40
0.45
Benefit Payment*
231
252
302
302
Net Assets*
5875
6261
6929
7013
Invested Assets*
5914
6235
6719
6849
Non Investment Assets*
129
183
63
538
Operational Expense*
26.98
27.46
36.41
N.A
Operational Expenses/Benefit 11.68 10.90 12.06 N.A Payment *(Billion Rupiahs) The benefit payments are likely to have been understated. N.A: Not Available Note: No details of Contributions, investment patterns, and returns were provided by PT TASPEN. Source: Calculated from Data made available by PT TASPEN The above analysis of Indonesia’s civil service pension system suggests a strong need for better record keeping, greater transparency in investment management, and government expenditure on pensions and health care benefits. It is also essential that the civil service pension systems be subjected to actuarial analysis at regular intervals, and the results be made publicly available.
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Malaysia1 In Malaysia, officers in the public service, employees of Statutory Bodies and Local Authorities, Judges, Members of Parliament and the Administration, Political Secretaries, and the Armed Forces are eligible to receive pensions under various legislative Acts. Article 74, Ninth schedule, List 1, para 6d of the Federal List of Malaysia’s constitution stipulates pension to be a Federal matter. Protection of the pension rights is enshrined in the constitution under Article 147. Section 3(1) of the Pensions Act 1980 however stipulates that the grant of pension is a matter of eligibility only and not an absolute right. Nevertheless, the above Constitutional Provisions would need to be taken into account in any radical reform of the civil service pensions. A public sector employee must complete at least three years of service to be eligible for pensions. During this period, the employee is required to contribute to the Employees Provident Fund (EPF), Malaysia’s mandatory national Provident Fund, which has a contribution rate of 11.0 percent of wages (with no ceiling) for the employees and 12 percent for the employers. Since 1991, the government employees have had the choice of joining the EPF or the Pensions Scheme. The pensionable civil servants will be allowed to withdraw their own contributions to the EPF before reaching the age of 55. The contributions of the government as an employer to the EPF for pensionable civil servants is to be transferred to the Pensions Trust Fund (PTF). The retirement age is 55 years if the proposal made in the year 2000 is implemented. This is rather low as compared to life expectancy at birth of 69.6 years for males and 74.5 years for females in 1997. The government employees are eligible for the following types of retirement benefits: 1
Unless otherwise noted, the basic information is from Malaysia, Pensions Division, 1999.
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(i)
Service Pensions: This applies to the pensionable officer who retires according to the standard rules. The monthly pension is estimated on the basis of the following formula.
1/600 * total completed months of reckonable service * Last drawn Salary The monthly pension is subject to a ceiling of 50 percent of the last drawn salary. The monthly pension is not automatically indexed, but is adjusted from time to time. The Pensions adjustment act 1980 provides the framework. Thus, in the year 2000 budget, pensions for the civil servants were increased by 10 percent, identical to the rise in the salary of the civil servants. (ii)
Service Gratuity: This is a lump sum payment (in addition to monthly pension) given to the pensionable officer upon retirement. The amount is calculated as follows: 7.5 % * total completed months of reckonable service * Last drawn Salary There are also provisions for the Derivative Pensions (i.e. survivor’s benefits), Derivative Gratuity; Disability Pension; Dependent’s Pension (when an officer dies in course of performing official duties); and Alimentary Allowance. In addition to the above pension related benefits, pensioners and members of their family are also eligible for extensive medical benefits, while all employees are eligible for subsidized housing loans. Table – provides data concerning the number of persons receiving retirement benefits under the above schemes. The data in Table 2 suggests the following:
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(i)
The number of pension recipients has been rising quite rapidly, at an average annual compound growth rate (AACGR) of 9.4 percent during the 1981-98 period. In 1998, total number of pension recipients were equivalent to 44.2 percent of government sector employees, or 4.3 percent of the total labour force. Even if only those receiving Service Pensions are included, the corresponding ratios will be 32.1 percent and 3.1 percent respectively.
(ii) For the 1981-98 period, total expenditure on pensions and gratuities increased at an annual rate of 10.4 percent, slightly lower than the 11.0 percent for the nominal GDP. The pensions expenditures to GDP ratio has remained at about 1.0 percent of GDP during this period. However, expenditure on pensions and gratuities was 5.3 percent of total operating expenditures of all levels of government, up from 4.5 percent in 1993.The fiscal burden would be even higher if health benefits for the pensioners were included. The full impact of rapid expansion in government employment during the 1970s as a result of the New Economic Policy (NEP) designed to increase the share of the Bumiputra (Sons of the Soil) community in the economy, on pensions expenditure is also yet to be fully felt. A study assessing the future contingent pension liabilities of the government, and its incorporation in the fiscal policy may be an essential first step towards an assessment of the sustainability of the current arrangements.
Financing of Civil Service Pensions The pension benefits outlined above do not require any contribution from the employees. The pensions expenditure is wholly borne by the Federal Government, through an annual budgetary appropriation charged on the Federal Consolidated Fund.
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The Statutory Bodies and Local Authorities are required to make monthly contributions to the pensions Trust Fund at the rate of 17.5 percent of the monthly salary of pensionable employees. A Pensions Trust Fund (PTF) was established under the PTF Act of 1991.The initial contribution to the PTF from the accumulated past budgetary surpluses. The rational for the PTF is to make pension obligations of the government transparent, and to separate the investment management of the pension balances from the general government accounts. The assets of the PTF as at end 1997 (latest period for which data are available) was RM 9.9 billion (3.6 percent of GDP). Unfortunately, the PTF does not publish any data on its operations. It is therefore not possible to assess its investment policies and performance. This is an area where greater transparency is required. The above arrangement however does not alter the Defined Benefit (DB), and non- contributory nature of the pension arrangements for the civil servants. The pertinent question is whether such an arrangement is fiscally sustainable, particularly when the potential increase in health care benefits for the pensioners are also considered.
Pensions for the Armed Forces The armed forces personnel are divided into two groups. Officers in the armed forces belong to the non-contributory Regular Armed Forces pension scheme, which is of the Defined Benefit (DB) type. Its financing is from the government budget. Servicemen who enlisted after August 1972 and who are not eligible for pensions
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form the second group. Their retirement benefits scheme is of a Defined Contribution (DC) type, with the payment at the time of retirement provided as a lump sum. The contributions, at a rate of 10 percent for the employees and 15 percent for the employers (for a total of 25 percent), are channeled into the Armed Forces Fund (AFF). As at end June 1997, the AFF had 105,040 registered persons. While data are not available, active contributors are likely to be considerably lower. As at end 1997, total assets of the AFF were RM 4.5 billion (1.6 percent of GDP). The AFF, however also does not publish any details of its operations. It is therefore not feasible to undertake analysis of its investment policies and performance. Philippines Unlike the other countries in the sample, in Philippines, both the private sector and the government employees share the same social security philosophy that is based on the principles of social insurance. The private sector employees are covered by the Social Security System (SSS), established in 1957, which is broadly comparable to the system in the US. It provides old age, disability, survivor, maternity, and sick leave benefits. The Government Service Insurance System (GSIS), established in 1936, is the counterpart scheme for the public sector. The GSIS provides retirement, disability and survivor coverage to all workers employed by any level of government or by government owned corporations. Both the SSS and the GSIS are Defined Benefit (DB), partially funded, publicly managed, and mandatory social insurance programs providing social security.
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In 1997, the GSIS had a membership of 1.32 million, and the average age of the member was 42.9 years. GSIS members are offered benefits covering essentially the same contingencies as SSS members are offered. In addition, they are provided a program that combines aspects of forced savings with aspects of life insurance. Under the life insurance program, each worker receives life insurance coverage scaled to his age and salary level. Since the contribution is much higher than required simply to purchase term life insurance, the policies accumulate a substantial cash value. At age 45, and again at age 65 or the date of retirement, if earlier, the policies mature and the cash value is paid to the worker. GSIS also operates the employees compensation program for government workers that is financed by employer contributions of 1 percent of the first P 1,000 of earnings each month. The Philippines also has a Home Development Mutual Fund (Pag-IBIG Fund). It is a mandatory savings program covering all individuals in the GSS and GSIS programs. GSIS members pay a contribution of 9 percent of their earnings upto P 10,000 a month and 2 percent of their earnings above that ceiling; employers of these workers pay 12 percent of all earnings. GSIS contributions therefore total 21 percent of earnings below the ceiling and 14 percent of earnings above the ceiling. The coverage of the GSIS is quite high since it covers government and state enterprise employees. The GSIS program faces a different compliance challenge that stems form the inability to enforce collections from delinquent government agencies. Changes introduced in the Government Service Insurance Act of 1997 are designed to
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deal with this problem prospectively by making certain officials personally liable if the employer’s contribution is not budgeted for or if either the employer’s or the employee’s contributions are not remitted properly. It remains to be seen how effective this will be. The system continues to have major arrearages from the Department of Budget and Management, however, with respect to contributions owed in prior years. The GSIS permits extensive pre-retirement withdrawals including salary loans. These loans are provided at subsidized rates. Such withdrawals impact negatively on savings and on the ability of the GSIS to provide retirement benefits in fiscally sustainable manner. Retirement benefits under the GSIS are based on the average monthly salary of the last 36 months prior to separation. The retirement age is 60 years. The pension benefits are not automatically adjusted i.e. indexed for either wage growth or inflation. Even then, an average worker retiring under the GSIS program with thirty years of service is likely to be entitled to a lifetime pension amounting to roughly 75 percent of the average earnings subject to contributions over the previous three years. The value of the lump-sum payments under the forced savings/life insurance program is in addition to this pension.
While recent data are not available, an indication of investment policies and performance of the GSIS may be obtained by examining the data for 1996. As at end-1996, the GSIS had total investments of P 96.6 billion. Their contribution was as follows: Current assets: P 33.0 billion (34.2 percent), loans to
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members and to non-members: 34.9 billion (36.1 percent), and other investments: P 28.7 billion (29.7 percent). The Annual Reports of the GSIS do not provide a breakdown of the above broad aggregates. The non-insurance income of the GSIS was P 9.3 billion. This implies a nominal rate of return of 9.6 percent, much lower than the corresponding rate on treasury bills (12.3 percent), but somewhat higher than the inflation rate (8.4 percent). Loans and investments had much lower rate of return (9.2 percent) than return on current assets (10.5 percent). For the GSIS, claims and benefits plus operating expenses amounted to P 10.7 billion in 1996, while net insurance income was P 17.6 billion. This partly reflects the fact that there is no salary ceiling on government’s contribution to the GSIS as an employer. Until mid 1997, the GSIS (and the SSS) was not permitted to use external fund managers (local or foreign) to manage their accumulated balances. The GSIS has been performing in-house management of their investment funds. It is however, reported to be seeking the services of four external fund managers to manage a small proportion (less than 1 percent) of its assets since this amounts to about P 1 billion (US $ 25 million). This amount appears to be too small to be of interest to major fund managers. The Armed forces of the Philippines are covered in a separate retirement plan The Armed Forces of the Philippines – Retirement and Separation Benefits System (AFPRSBS). Little information however, is available on this scheme.
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Singapore Among the sample countries, Singapore is the only high-income country with a rapidly aging population. In 1997, the per capita income of its resident population was US $ 32,940 (US $ 29,000 in PPP terms), the fourth highest in the world. The first formal scheme to provide for pensions to civil servants in Singapore was formulated under the Pensions Ordinance, 1871 (Law, 1972). The replacement rate for Judges of Supreme Court who had served for at least 25 years was two-thirds of the salary; while other eligible officers had to serve at least 35 years to receive the equivalent pension. The retirement age was 60 years. There were several changes to the above ordinance in 1887, 1928, and in 1956. The first and main objective of the Pensions Ordinance, 1956 was to consolidate and update the pension law since the enactment of the Pensions Ordinance , 1928 which had been amended and revised. The second objective was to provide one uniform scheme of pensions and gratuities for all members of the public service of Singapore and to do away with the invidious distinction which previously existed between those officers on the Singapore Establishment whose pension rights were governed by the Singapore Pensions Ordinance, and the others who were on what was known as the Malayan Establishment and governed by the Malayan Establishment Pension Minutes. The Ordinance followed closely the legislation enacted in the Federation in 1951. The replacement rate remained at two-thirds of the last drawn salary, with no indexing provisions or for survivor’s benefits. The employee was not required to make any contributions towards the pension benefits.
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In 1972, the pension scheme covered 28,000 civil servants and about 6,750 individuals were receiving pensions (Law, 1972, p.14). However, even in 1972, there were estimated to be about 25,000 civil servants who were under the Central Provident Fund (CPF) scheme. Law indicates that the most important advantage of the CPF Scheme for a civil servant was that the contribution of his/her employer is not forfeited if the civil servant resigns before reaching the retirement age, while in that event the civil servant will not be paid any pension and so will lose all the accrued benefits (Law, 1972, p.14). In 1972, the total CPF contribution rate was 24 percent (14 percent for employer and 10 percent for the employee, with a maximum monthly contribution of S $ 360). It was the thus the stringency of the civil service pension system which induced some of the civil servants to participate in the CPF scheme. Over the years, Singapore has progressively further reduced the proportion of civil servants who receive pensions, shifting others to a Defined Contribution (DC) CPF scheme. However, even the pensionable civil servants must now contribute to the CPF, though at a reduced rate of 22.5 percent as compared to the 30 percent (As on January 1, 1999) for others. Until 1973, all government employees were eligible to be on the pension scheme, though as noted above, there were significant number of civil servants who were already contributing to the CPF scheme on a voluntary basis. However, in 1973 and 1987 conversion exercises, then existing pensionable employees were given a choice to shift to the CPF scheme. The response was mixed, with some employees electing to stay with the pension scheme, while some shifted to the CPF scheme. At present, only new officers in the designated pensionable services (Administrative service, Police (Senior) and
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intelligence service), and the political appointees are on the pension scheme. Even the members of Parliament who are in Parliament after January 1, 1995 are not eligible to be on the pension scheme, but must belong to the CPF scheme. The political office holders are on pensions for their period of office. The criterion is that they must hold office for at least 8 years. As at January 31, 1999, there were 19,000 pensioners. Their number is expected to decline over time as restrictions on who is eligible for a pension become fully effective. In 1997-98, the government expenditure on gratuities and pensions was $ 569.5 million, equivalent to 3.7 percent of operating expenditure or 17.9 percent of the expenditure on manpower. Since April 1, 1994, the pensionable employees may choose monthly pension until death , a lump sum payment, or a combination of the two. Since 1995, the government has set up a separate Pension Fund. The original contribution to the fund was made from the accumulated budgetary surpluses. In addition, there is an annual contribution from the budget to the fund. As of 31 March 1999, the Pension Fund had balances of $ 10,540 million, slightly less than the $ 10, 681.8 million in the previous year. The details regarding its investments policies and performance are however, not made publicly available. This is an area where greater transparency is needed. It should be stressed that in spite of the setting up of the Pension Fund, the Government Pension scheme is essentially non-contributory, unfunded scheme, with the pension benefits being paid on Pay As you Go (PAYG) basis. This philosophy is indeed in sharp contrast to the philosophy of the CPF scheme. Since the top policy makers and
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politicians are on the pension scheme, their pension benefits are determined on the basis of a different philosophy than that of the rest of the population. The second pension scheme deserving a brief mention is the provident fund scheme for the certain categories of Armed forces personnel called the Savings and Employees Scheme (the “SAVER Scheme”). This scheme came into existence as a result of an amendment to Singapore’s Armed Forces Act passed on March 20, 1998. Those servicemen, immediately prior to January 1, 1998 who are eligible for any pension, gratuity or other allowances may opt for the SAVER Plan. Moreover, those who opt to join the SAVER Plan are guaranteed pension, gratuity and other benefits at least equivalent to his/her entitlement at the time of joining. This Fund is managed by a Board of Trustees appointed by the Armed Forces Council, with inputs from professional fund managers and the Monetary Authority of Singapore, the country’s de-facto Central Bank. Unlike pensions, the balances in the Fund will not be taxed; there will be no salary ceiling on contributions; and those belonging to the Fund will continue to enjoy post-retirement medical benefits as before. This scheme is more generous than the CPF scheme as it is designed to encourage military officers to stay in service for 20-25 years and retire at age 40-45, with benefits similar to those outside the services retiring at age 55. Essentially, the scheme provides for benefits equivalent to 10-12 percent (20 percent for super scale officers) of an officer’s gross monthly income to be deposited into an officer’s account that can be withdrawn after serving a specified period of time. This is in addition to the normal CPF contribution by employers.
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If the SAVER fund has insufficient balances to meet the obligations, the deficit is to be statutorily made up from the Consolidated Fund. As at March 31, 1999, the balance in SAVER Fund was S $ 1238.0 million. However, as with the pensions fund, investment policies and performance of the SAVER Fund are not made publicly available. There is therefore a need for greater transparency concerning this fund. Singapore thus, has succeeded in shifting a pre-dominant proportion of its civil servants into a fully funded mandatory DC scheme. It has also ensured that even those who receive pensions do make some contributions to the DC scheme. The pension benefits have been kept unindexed, with no survivor’s benefits. These, along with setting up of Pension Fund and the SAVER Fund potentially permits it to use investment income to finance at least a portion of the pension benefits. Fiscal sustainability of civil service pensions system in Singapore is therefore not a concern. Thailand The current pension arrangements for the government employees in Thailand are as follows: (i)
The government officials, including university and school teachers and the members of the armed forces receive their pensions in two components. The first Defined Benefit is the (DB) component. It provides a maximum of 60 percent replacement rate after 30 years of service. It is non-contributory for the employee, and is therefore financed entirely out of the annual budgetary allocations.
(ii)
The second is the Defined Contribution (DC) component which is funded by employee and employer each contributing at a rate of 3 percent of wages (with
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no wage ceiling) for a combined contribution of 6 percent. This component is mandatory for officials joining after March 27, 1997, but voluntary for those who joined earlier. As an incentive for the government’s official to join, the government has promised t make additional contributions, though their level and duration remain unclear. The accumulated balances are to be returned at retirement in a lump sum rather than in periodic payments. This was introduced under the Civil Servant Pension Fund Act introduced in 2539 BE or in 1996. Under the Act, the Government Pension Fund (GPF) was set up as an independent entity. It has is own Board with 22 members, comprised of 10 ex-officio members, 9 members from 9 different government offices, and 3 outside experts. The main objective of the GPF is to assist in increasing national savings rate, and to provide greater certainty of pensions to the government officials. The GPF has two functions to perform, fund administration and fund management. It can perform the functions in-house or can outsource all or some of the components of the two functions. As of late 1999, the GPF managed a major portion of its balances of US $ 2.9 billion as of May 1999 (2.6 percent of the 1998 GDP) in-house, but it also has 5 external fund mangers. As the fund had approximately 1.3 million members on May 31, 1999, the balance per member was US $ 2231. The GPF has also outsourced the membership registration and record keeping, but has retained the responsibility of the handlings of the receipt of money, payment, claim, and account settlement.
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As at 31 December 1998, the GPF had total assets of 95.5 billion baht, of which 90.8 billion baht were invested. The Thai government had provided 70.4 billion baht as initial contribution when the GPF was set up in 1997. The contributions in 1998 were 18.4 billion baht from the employer and the government as an employee. In addition, the government made an additional contribution of 6.1 million baht to compensate for the reduction in pensions as a result of the rationalization of the pension system. Net Income of the GPF in 1998 was 11.5 billion baht, and after certain adjustments interest distributed to its members was 12.5 million baht. Under the Ministerial Regulation No.4 (B.E 2540, 1997) issued under Civil Servant Pension Fund Act (B.E 2539, 1996) the GPF can allocate funds for investment in the following manner:
(i)
At least 60 percent of the total investments must be in one or more of the following classes of assets: cash and bank deposit, government debt paper, including those of state enterprises, and those guaranteed by the government, debt paper issued or endorsed by a bank, and issued buy an approved company.
(ii)
A maximum of 40 percent of total investments in domestic equity, certain types of debt instruments, mutual funds (or Unit Trust) and others. The regulations currently do not permit the GPF assets to be invested
abroad. According to the GPF annual report in 1998, 48.6 percent of the total
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investment of 90.8 billion baht was in bank deposits; and another 45.5 percent was in various debt instruments with government and public enterprise bonds predominating; and 2.5 percent in equities. Market value of equities was 2.1 billion baht while the acquisition cost was 2.3 billion baht. The above pattern of investments appears to reflect the state of capital markets in Thailand. Nevertheless, it does not permit much investment diversification; and the control of the government over allocation of GPF savings remains high. Large initial contribution of 70.4 billion baht which the government made to the GPF, and the additional contribution which the government is making so far suggest that the fiscal savings from partially moving to a DC scheme may not be as large as initially hoped. There is also a voluntary Defined Contribution (DC) scheme for the permanent government employees who do not fall under the category of officials. This is called the Government Permanent Employees Fund (GPEF) and it is modeled after the GPF. The details of the GPEF are however not available. Under the Provident Fund Act of 1987, mandates state enterprises (and some categories of private sector firms) to set up provident funds. The rate of contribution must be between 3 percent and 15 percent of the wages for employer and employee each, for a combined total of between 6 percent and 30 percent. While the employer must make the provident fund available, it is not mandatory for the employees to join.
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The pension system for the local government employees is a partially funded Defined Benefit (DB) scheme administered by the Department of Interior. The details however are not available. It thus appears that even for the government employees, there is a lack of integration of the pension system. III. Concluding Remarks The discussion in the previous sections may be summarized as follows: 1.
Except for the Philippines, there is dualism in the philosophy concerning retirement benefits for government employees on the one hand and the private sector employees on the other. The coverage is also much higher for the government employees, and so are the risks covered and the replacement rate.
2.
Nevertheless, the details of the pension design and implementation aspects, as well as the extent to which the existing pension systems are fiscally sustainable vary greatly among the sample countries. In particular, non-contributory (on the part of the employees) civil service pension systems of India and Malaysia are fiscally unsustainable. The partially funded system of Indonesia and to a lesser extent, of Thailand and the Philippines, will also put considerable
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stress on the fiscal systems. Only in the case of Singapore is fiscal sustainability not a concern. 3.
The investment policies and performance in those countries where the systems are partially or fully funded remain in need of substantial reform. In particular, there appears to be a mismatch between assets and liabilities, and insufficient diversification among asset classes. In none of the sample countries (with the exception of Singapore) are the funds invested abroad, thus not benefiting from international risk diversification.
4.
In most of the sample countries, the record keeping is poor; and there is substantial scope for improving administration of and compliance with the civil service pensions schemes.
5.
The transparency concerning civil service pension schemes is low and requires urgent attention. There is also a need to statutorily require periodic actuarial review of the schemes and their wide dissemination.
6.
There appears to be very little capacity, interest, or official encouragement of research on civil service pension reform by the academic and research institutions in the sample countries. The issues raised by civil service pension reform are important areas of public policy, and require much wider but informed debate and discussion than has been the case so
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far. While the data constraints are severe, efforts must be made to overcome them. In conclusion, the issues raised by civil service pension reform are very similar to the pension reform in general. An important difference, however is that financing of health care benefits must be considered an integral part of civil service pension reform, as these benefits are often provided to civil servants and their families during their retirement in the sample countries with only nominal contributions from the beneficiaries.
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References Agarwala R. and Sharma R.K., 1999. “India’s Pension System Reform: Challenges and Opportunities”, a paper presented at the International Conference on Social Security Policy: Challenges before India and South Asia, New Delhi, 1-3 November 1999. Asher, M.G. 1999. “Fiscal Policy Issues and Challenges facing Southeast Asia in the 21’st Century”, paper presented at the public policy programme conference on “Perspectives on Public Policy in the 21’st Century”, Orchard Hotel, Singapore, 6-8 September. Asher, M.G. and Heij, G., 1999. “South-East Asia’s Economic Crisis: Implications for Tax Systems and Reform”, Bulletin for International Fiscal Documentation, 53, 1, pp.2534. Asian Institute of Transport Development (AITD), 1998. Greying of the Railways, New Delhi, AITD. Costain, J., 1999. “Indian Pension systems: Some Issues”, paper presented at the International Conference on Social Security Policy: Challenges before India and South Asia, New Delhi, 1-3 November, 1999. Government of India, Ministry of Social Justice and Empowerment, 2000. “The Project OASIS Report”, New Delhi, January. Holzmann, R. et.al. 1999. “Pension Systems in East Asia and the Pacific : Challenges and Opportunities”, Social Protection Unit, The World Bank, Washington D.C., September 24. Law, S.K 1972. “A Historical Background of Civil Service Superannuation in Singapore”, Singapore: Ministry of Finance, Economic Development Division. Malaysia, Pensions Division, 1999. “The Public sector Pensions Scheme in Malaysia”, mimeo. Patel, U.R., 1997. “Aspects of Pension Fund Reform: Lessons for India”, Economic and Political Weekly, September 20, pp. 2395-2402. Ramesh M. with M.G Asher, 2000. “Welfare Capitalism in Southeast Asia: Social Security, Health, and Education Policies”, London: Macmillan Press. TASPEN, 1995. “Company Profile PT TASPEN (PERSERO)”, Jakarta.
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The World Bank, 1996. “The Indonesian Pension System”, Unpublished report, Washington D.C., Country operations Division.
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