Brunei: Pension Reform Options

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Brunei Pension Reform Options

• Towards a More Sustainable Post-Retirement
  Income Policy Options for Brunei Darussalam
  
• Mark C. Dorfman, World Bank
• January 19, 2008

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Roadmap

• Objectives and evaluation criteria
• Bruneis current pension provisions
• Aging and Coverage in Brunei
• Proposed Supplementary Contributory Pension
  (SCP)
  
• Proposed survivorship benefit
• Additional issues
• Summary recommendations

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I. Objectives and Evaluation Criteria (1)

• Pension systems have at least two objectives
• Provide a minimum standard of living for elderly
• Smooth consumption from worklife into retirement
  (often with annuities or phased withdrawals)
  
• Both objectives are translated into subjective,
  country-specific target levels that vary widely
  
• First step to define these objectives and second
  step to define parameters that meet these
  objectives

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I. Objectives and Evaluation Criteria (2)

• Evaluation criteria applied by the World Bank
• Adequacy ability of public and private pension
  provisions to satisfy country-specific
  requirements for consumption smoothing and a
  minimum standard of living for most of the
  working population.
• Affordability ability of employers, employees,
  other taxpayers and the Government to afford the
  required savings and benefit provision over
  time.
• Sustainability ability of pension provisions to
  be provided across generations.
  
• Robustness ability of pension provisions to
  withstand economic and political shocks.

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I. Objectives and Evaluation Criteria (3)

• Adequacy Indicators (see Whitehouse, OECD)
• Individual Income Replacement Rate
• Benefit at retirement as a of lifetime income
  for a full career worker.
  
• Indicator of income smoothing.
• Pension Level
• Benefit at retirement as a of average wages.
• Indicator of absolute benefit relative to average
  wages.
  
• Pension Wealth
• Net Present Value of projected benefit stream for
  full career workers.
  
• Pension wealth/average wages indicator of
  projected lifetime retirement benefit as a
  proportion of economy-wide average wage wages.

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I. Objectives and Evaluation Criteria (4)

• Benchmarks
• We utilize country-determined benchmarks
  established based on public policy choices,
  economic characteristics and historical
  circumstances.
• Cross-country comparisons using the same
  indicators can inform country-determined
  benchmarks.
  

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II. Bruneis Current Pension Provisions (1)

• Minimum standard of living in old age
• Provided by current Old Age Pension (OAP)
• Only provided by TAP to the degree that
  individual accumulations support such a minimum
  through retirement.
  
• Inflation and longevity risks affect achieving
  such a minimum
  
• Consumption-smoothing objective
• Partially achieved by TAP accumulation
• Achieved by individual, non-retirement savings

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II. Bruneis Current Pension Provisions (2)
Adequacy of Income Replacement
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II. Bruneis Current Pension Provisions (3)
Adequacy of Pension Levels compared to Average
Wages
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II. Bruneis Current Pension Provisions (4)
International Comparisons
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II. Bruneis Current Pension Provisions (5)
Regional Comparisons
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II. Bruneis Current Pension Provisions (6)

• Some weaknesses in current schemes
• TAP benefit not annuitized - beneficiary bears
  investment and longevity risks.
  
• TAP withdrawals make retirement benefit
  uncertain.
  
• TAP survivorship benefit does not pool risks.
• Weak long-term savings incentives (tax
  incentives, long-term instruments).

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III. Aging and Coverage in Brunei (1)

• Brunei has a less aged population than most in
  the region now but is aging very rapidly.
  
• Percent of Population over age 65

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III. Aging and Coverage in Brunei (2)

• Coverage (84,400 GPS or TAP members) is about 82
  of the citizen labor force which could be higher
  when compared to countries of similar per capita
  income.

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IV. Proposed Supplementary Contributory Pension
(1)

• The SCP aims to remedy some of the weaknesses
  identified
  
• Key objectives
• Encourage savings mobilization - efforts by
  employees and employers to save towards
  retirement.
  
• Improve incentives for participation by
  low-income workers through Government matching
  contributions.
  
• Increase retirement benefit levels from
  B250/month (from OAP) to a long-term target to
  ensure a minimal standard of living in retirement
  adjusted periodically for inflation.
• Provide basic support to survivors through a
  support mechanism prior to reaching retirement
  age.

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IV. Proposed Supplementary Contributory Pension
(2)

• Additional key principles
• Scheme aims to be contributory and
  self-financing.
  
• Benefit should be annuitized to shield workers
  from post-retirement inflation, longevity and
  performance risk.
  
• Benefit design should align with current TAP and
  OAP benefits.
  
• Utilize existing account and payment
  infrastructure to limit costs.

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V. Proposed Survivorship Benefit (1)

• Suggested Parameters
• Survivors provided with annuitized benefit from
  members SCP account accumulation at time of
  death
  
• Minimum annuitized top-up provided on a pooled
  basis from contributory premium.
  
• One benefit paid per wage earner, divided amongst
  survivors.
  
• Benefits indexed to reflect price adjustments.

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V. Proposed Survivorship Benefit (2)

• Policy considerations
• Which survivors would be entitled to benefits and
  what would be the formula for division of the
  benefit?
  
• Should survivors that are no longer dependents
  (young adults over age 18 or out of university,
  remarried widows and widowers) continue to be
  entitled to benefits?

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VI. Additional Issues (1)

• SCP and survivorship benefit remedy many
  weaknesses but further reforms to TAP will still
  be needed
  
• Benefits not annuitized increasing retiree
  risks.
  
• Withdrawals for housing and pre-retirement
  deplete retirement benefits.
  
• Retirement age of 55 life expectancy results in
  low effective annual benefits.
  
• Retirement age of 55 not aligned with OAP and
  proposed SCP.

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VI. Additional Issues (2)

• The TAP (and GPS) retirement age is low relative
  to the retirement age of several countries in the
  region

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VII. Summary Recommendations

• Supplementary Contributory Pension suggested as a
  means to
  
• Strengthen efforts by employees and employers to
  save towards their retirement.
  
• Increase the coverage of retirement savings
  schemes
  
• Increase target pension levels
• Survivorship benefit and contributory premium
  suggested to top-up annuitized benefit provided
  by SCP individual account accumulation.
  
• Further reforms are still needed to the TAP in
  order to improve old-age income protection and
  savings mobilization.