The Future of Private and Public Pension Provision in the Next Five Years in Mauritius - Essay Example

The future of Private and Public pension provision in the next five years in Mauritius. Table of contents 2) Pension Provision in Mauritius. 3) The nature of existing pension crisis 4) Poverty-reduction government decisions 5) Conclusion: suggestions for further enhancement 6) Reference list Abstract: The essay discusses current pension crisis in Mauritius, based upon the flaws in the pension system, and also outlines the major governmental measures, taken for the enhancement of both public and private pension provision for the next five years. The paper also includes the author’s suggestion concerning the five-year future of pension system in Mauritius. Pension Provision in Mauritius. Mauritius is a subtropical island country, situated in the Indian Ocean, not far from Madagascar. The country had been under British rule up to the end of the 1950s and became a full sovereign state in 1968 (Willmore, 2003; Pigott, 2000, Vittas, 1998). Pension system is Mauritius was established in the early 1950s, non-contributory pensions are now received by the majority of the residents aged over 60 (Willmore, 2003, Vittas, 2003). Since 1974 pension coverage in the country has been universal, i.e. there is a fixed division into four age groups (60-74 years old; 75-85; 86-99 and 100+, due to overall longevity in the state). The average basic universal pension is about 57 USD (Bailey, 2004, Gopee, 2006). In Mauritius, non-occupational pension consists of several components, such as Basic Retirement Pension, the National Pensions Fund and the Civil Service Pension Scheme and is regulated by strong legal basis (Philip, 1995). Non-occupational pension schemes include basic retirement pension, financed from general taxes, and its current ratio constitutes 3 per cent of annual GDP, but an estimated ratio for 2020 is 6 per cent (GAD, 2001a), due to the ageing trends in population structure. National Pensions Fund is also a part of non-occupational pension provision, as the NPF is an obligatory model which takes into account all private sector organizations employees, excepting those who gain very low wages and some workers involved into sugar industry. Compulsory contributions constituting about 3-9 per cent of overall earnings result in the accumulation of points on the basis of the declared cost of a point for the certain period (Willmore, 2003). National Savings Fund is a third component of non-occupational pension provision and requires of participants certain contributions (2-3 per cent of income) on the mandatory basis (Mauritius Modernizing and Advanced Pension System, 2004). The NSF funds are normally invested into government security, thus the resources themselves are not accumulated, but spent immediately after the employee’s contribution. The other universal social aids and assistances under the NPS’s responsibility include: 1) widow’s pensions; 2) social aid for disabled and invalids (several types); 3) orphan’s pensions and 4) inmate’s allowance (World Bank, 2001; Quessier and Vittas, 2000; Vittas, 2003) . Occupational pensions play the most important role in pension provision, as in this case the senior’s income depends on their salary and related income taxes. Occupational pensions can be divided into three groups: pension schemes for various statutory bodies, the civil service pension model and pension provision funded by private sector entities (Vittas, 2003). Pensions designed for statutory bodies count more than 100 types and are operated but not insured by the State Insurance Corporation (ibid). The main self-regulated pension schemes include those for the Mauritius Commercial Bank, Mauritius Hotels Group and other domestic corporations. In addition, the pensions for statutory bodies are non-contributory, i.e. some companies introduce them as a bonus in order to lure new top managers (Willmore, 2003). The CSPS depends greatly on the pensioner’s occupation and covers mainly civil servants, or those employed in executive authorities (except military sphere). The state economy is exceptionally vulnerable to the growth of CS pensions, as they constitute huge GDP segment (Subraminian and Devesh, 2001). Private sector pension provision (Demarco, 2000; Bailey, 2004) is now realized through several banks which offer such service, but due to the overall unreliability of the developing country’s private sector, the mentioned service is used by less then 10 per cent of retirees. Nevertheless, private sector pensions do not depend on points, but have cumulative nature, i.e. save the customer’s finances (Bailey, 2004) and introduce pensions for each individual after the retirement. The main feature of this scheme underlies in the fact that savings are not spent immediately for organizational needs, but are stored and added by certain interest rates. The nature of existing pension crisis The main cause of the present-day pension crisis in Mauritius is caused by several natural and economic problems. First of all, there is a considerable evidence of ageing in the country, and over the last thirty years longevity has increased, whereas the number of productive population (aged 20-55) is gradually decreasing (Piggott and Whitehouse, 200; Philip, 1995) . The estimated ratio of pension-age population for 2011 is about 12 per cent, whereas the old age dependency ratio will grow to 14,5 per cent (comparing to 13 per cent in 2005). This means, in 2011, about 15 pensioners will be dependent on 100 employment-age Mauritian. Furthermore, excessive taxation is expected (Mauritius Modernizing and Advanced Pension System, 2004), as the current pension system is based on current contributions (as it has already been mentioned, the funds contributed by employment-age population are distributed right away for the current needs of retirement-age population). Thirdly, paternalism in Titmus’s understanding (Vittas, 2003; Philip, 1995; Sin, 2000 ) is the provision of appropriate life standards for retirees, but the interests of productive-age population are being gradually neglected – for instance, the 2004 pension scandal was associated with related research, suggesting hat pension system had covered 108 per cent of retirees, i.e. employees were forced to pay unjustifiably high taxes. In addition, the National Pensions Fund has incomplete accountability and the distribution of payments made by employees is poorly-planned and controlled. Another aspect of pension crisis is the fact that those who receive (Vittas, 2003; Bailey, 2004) social aids from government are disproportionably poorer than employment-age citizens, i.e. in spite of the variety of pension schemes, there exists a problem rooted in tremendous social and financial inequality (Philip, 1995). Individual voluntary plans have gained, as it has already been mentioned, insignificant popularity, as they are still registered as free associations and have limited responsibility. Poverty-reduction government decisions The course of poverty-reduction also shows low proportion among several types of pensions: in fact, some retirees from large industries (such as prosperous sugar industry) gain considerable pensions from the respective corporation, whereas the others remain socially vulnerable. Non-statutory pension schemes constitute the main part (Gopee, 2006) of pension provision and have recently proved their incapability of protecting their receivers from social problems and poverty-related stigma (Vittas, 1998; Quessier and Vittas, 2000). The introduction of the 13th pension (Sin, 2000) hasn’t brought desired results, as the pension system is not yet adjusted to economical changes in the country, as Mauritius is gradually transiting to service economy (Piggott and Whitehouse, 2000). To manage the crisis more effectively, the government in cooperation with the World Bank published in 2005 the pension reform plan, which will rely upon the four-pillar model (Gopee, 2006): 1) a non-contributory zero-level, consisting of basic poverty alleviation payments (universal pensions); 2) first-level-payments constitute contributory system (such as contemporary NPF) 3) National Savings Fund will in future constitute mandatory third level 4) Third pillar, planned as particularly important component, will include voluntary contributions into several areas, such as health care (should be carried out by insurance companies and private pension-based banks). The zero-level ratio will be reduced in the nearest future, as the universal pensions are demanding increasingly greater parts of GDP (ibid). On the contrary, contributory system users will gain additional benefits, such as higher security and guaranteed adequacy between contributions and retirement pensions. Furthermore, private organizations providing pension-related services will be promoted at both public and economic levels (more ‘benign’ taxation and more appropriate law enforcement). Conclusion: suggestions for further enhancement Pension provision in Mauritius requires deeper changes, and before modernizing the whole system, it is necessary to take into consideration two crucial factors. Firstly, wage-indexation mechanism must be institutionalized, as the discretion in indexation is obvious nowadays (especially for those who were occupied in top-management 15-20 years ago and whose wages might be at risk of various indexation biases). Furthermore, indexation system should be universalized in terms of basic variables (Piggott and Whitehouse, 2000), but narrowed in terms of industry (for instance, the indexes for sugar and automobile industries can differ). Moreover, wage indexation should respectively respond to current economic development so that the retirees will not feel much marginalized (Bailey, 2004; Gopee, 2006). In addition, in order to ensure sustainability, it is vital to upgrade social assistance model, as the aforementioned pension reform design contains universal pension supply reduction. On the other hand, the decrease of basic pensions is likely to touch some other vulnerable groups (widows, handicapped persons and so on), so the government should ensure they have addressed the latter issue properly . Taking into account these guidelines, I would like to make several suggestions for pension reform in Mauritius. First of all, technological and health care advancements allow rising retirement age by seven years, as evidence suggests that 65-70-year olds continue their successful job performance in spite of their age. The alternative decision can also include the flexible pensions for employed seniors– for instance, for those retired at the age of 70, pensions will rise by 15 per cent. This proposition is applicable for such short term as five years, and the reform is likely to bring benefit constituting 1 per cent of GDP (Gopee, 2006). The second proposition is limiting eligibility of basic pensions so that their provision is determined by the degree of social need. This means, only the most vulnerable population categories (single retirees, widows, disabled elderly) will be paid basic pensions. Control measures should necessarily include affluence-testing and precise targeting (i.e. specific household classification for basic pensions must be introduced in following five years). As for public and private voluntary schemes, there should be established an independent supervisory agency which would be accountable at institutional level(licensing of funds and organizations, audits and on-site inspections) and responsible for financial control, public information and membership issues. To sum up, existing pension crisis in Mauritius is likely to cause the shortage of employment-age population and the consequent decrease of social security, so the corresponding reform should be carried out in the nearest five years. In general, more attention should be paid to each industry so that pensions are paid depending on the nature of employment and specific job benefits, provided by each industrial area. Reference list 1) Bailey, C. 2004. Extending Social Security in Africa. Social Security Policy (Geneva: SOL/POL) 2) Demarco, G. 2000. Private Pensions: regulation and Supervision in Mauritius. (Washington, DC: World Bank). 3) GAD (Government Actuary’s Department). 2001a. Mauritius National pensions Fund: Actuarial Review as at June 2000. (London: GAD). 4) Gopee, R. 2006. The Adequacy of Current Social Security Benefits. (Mahe, Seychelles) 5) Mauritius Modernizing and Advanced Pension System. 2004. World Bank Report No. 29588-MU. (Washington, DC: World Bank). 6) Philip, D. 1995. Pension Funds: Retirement-Income Security and Capital markets: An international perspective. (Oxford: Clarendon Press). 7) Piggott, J. and Whitehouse, E. 2000. Pensions in Paradise: Modernizing the Mauritius Retirement Income Schemes. (Washington, DC: World Bank). 8) Quessier, M. and Vittas, D. 2000. The Swiss Multi-Pillar Pesnion System: triumph of Common Sense? Policy research Working Paper 2416. (Washington, DC: World Bank). 9) Rofman, R. 2000. Private Superannuation Plans in Mauritius. (Washington, DC: World Bank). 10) Sin, Y. 2000. Modeling the Mauritius Pesnion System. (Washington, DC: World Bank). 11) Subraminian, A. and Devesh, R. 2001. Who Can Explain the Mauritian Miracle: Meade, Romer, Sachs or Rodrik? IMF Working Paper 01-116. (Washington, DC: International Monetary Fund). 12) Vittas, D. 1998. Regulatory Controversies in Private Pension Funds. Policy research Working Paper 1893. (Washington, DC: World Bank). 13) Vittas, D. 2003. The Role of Occupational Pension Funds in Mauritius. World Bank Policy Research Paper, 3033 (Washington, DC: World Bank). 14) Vittas, D. 2003. The Insurance Industry in Mauritius. (Mimeo, Washington DC: World Bank). 15) Willmore, L. 2003 Universal Pensions in Mauritius: Lessons for the Rest of Us. DESA Discussion Paper #32 (United Nations Press). 16) World Bank. 2001. Mauritius – Modernizing an Advanced Pension System. (Washington, DC: World Bank). Read More