Options for Increasing Coverage

1
Options for Increasing Coverage

• Mukul G. Asher
• Professor, LKY School of Public Policy
• National University of Singapore
• Email sppasher_at_nus.edu.sg

Presented at the Expert group Meeting on Setting
the Agenda Of the High-level Meeting on the
Regional Review of the Implementation of the
Shanghai Implementation Strategy for the Macao
and Madrid Plans of Action on Ageing, 30 June-1
July 2006, Shanghai, China.
2
Introduction/1

• Three aspects of coverage of social protection
  systems
• Proportion of the labor force (or population
  cohort) covered
• The number of risks covered (for example during
  retirement, longevity and retirement risks)
• The extent of the benefits (this is closely
  linked to the overall adequacy)

3
Introduction/2

• Main characteristics of developing ESCAP
  countries
• Dualism with respect to philosophy all three
  aspects of the coverage between civil servants
  (public sector) on the one hand, and private
  sector workers on the other.
• Limited development of multi-tier systems (for
  example, the five-tier system suggested by the
  World Bank) (Table 1).
• Relative lack of innovation and limited
  professionalism in this sector.

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Table 1 Multi-Pillar Pension Taxonomy of the
World Bank
5
Table 1 Multi-Pillar Pension Taxonomy of the
World Bank

• Note The size of x or X characterizes the
  importance of each pillar for each target group.
• Source Holzmann R. et al. Old age income
  support in the 21st century the World Banks
  perspective on pension systems and reform,
  Washington DC The World Bank, May 2004 Draft
  (Processed).

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Introduction/3

• This presentation focuses on the first aspect of
  the coverage, i.e. how to increase the proportion
  of the labor force (population cohort) which is
  covered under social safety nets.
• This issue is complicated by the fact that social
  security schemes tend to be earnings-related and
  assume some type of employer-employee
  association.
• The labor force in most ESCAP countries has a
  large so-called unorganized or informal sector
  where formal labor laws and social security
  schemes do not or cannot apply due to
  administrative and other constraints.

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Table 2 Population Aging in Selected Countries
Demographic and Labor Force Challenge
8
Demographic and Labor Force Challenge
Source Ahya, C., A. Xie et al. (2006), India
and China New Tigers of Asia Part II, JM
Morgan Stanley, Exhibit 8, p.15.
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Coverage in ESCAP/1

• The coverage in ESCAP countries relatively low.
• The demographic and labor force challenges will
  simply increase the complexity of providing
  social security coverage.
• Table 3 provides the coverage in selected
  Southeast Asian countries.

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Table 3 Key Provident and Pension Fund
Organizations and Indicators in Southeast Asia
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Table 3 Key Provident and Pension Fund
Organizations and Indicators in Southeast Asia

• a Figures in brackets refer to year to which
  data refers.
• b Includes 4017 foreign workers.
• c Membership in the SSS is 23 million but the
  active contributors are 6-8 million.
• d Foreign workers are around 25 of the labor
  force and are excluded.
• e The SSO coverage is overstated as the figure
  refers to members rather than active
  contributors. If the provident funds of SOEs
  are included, the coverage rate may be as high as
  25.
• f This rate applies to those below 55 years of
  age. Lower rates apply to those above 55 years.
• Sources Information obtained for official
  sources in each country.

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Coverage in ESCAP/2

• In other ESCAP countries such as India and
  Indonesia, the coverage ranges from between 10
  and 20 percent of the labor force.
• This however does not imply that all those that
  are covered will satisfy the second and third
  aspects of coverage mentioned earlier.
• Given this huge challenge, what are the options?

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Coverage in ESCAP/3

• OPTION 1
• Element 1
• Increase the capacity of formal provident and
  pension fund organizations to cover larger
  proportion of those in the formal sector. For
  example, in India, the provident fund
  organization can improve its capacity to
  effectively cover firms with less than 20
  employees.
• This element can provide non-trivial increase in
  coverage though would still leave out large
  proportion of those in the informal sector.

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Coverage in ESCAP/4

• Element 2
• Provide decentralized voluntary schemes with
  effective regulation for all individuals to
  participate.
• The role of group-schemes, including by
  Self-Help Groups (SHGs) becomes critical.

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Coverage in ESCAP/5

• Element 3
• Undertake fiscal reforms to increase the
  coverage of social assistance programmes,
  financed directly through the budget (Zero pillar
  of Table 1).

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Coverage in ESCAP/6

• OPTION 2
• Centralized mandatory social insurance-based
  schemes to cover health, pension, and other
  aspects.
• This is the approach taken by Indonesia in its
  recently passed legislation. Similar legislation
  is pending in Vietnam. In India, some groups have
  also recommended such a scheme covering more than
  300 million people.

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Coverage in ESCAP/7

• Limitations of Social Insurance
• Social insurance is a complex concept. In many
  countries, the critical constraints are
  administrative, particularly related to
  record-keeping, paying the benefits in a correct
  way with low transactions costs, sound actuarial
  analysis, and managing political risk.

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An SHG-based Micro Pension Initiative/1

• Recently UTI Mutual Fund has started an
  initiative which can be credited as Indias first
  Micro-Pension Scheme for the unorganized sector.
• UTI Mutual Fund has entered into a customized
  arrangement with Shree Mahila Sewa Sahakari Bank
  Ltd. for providing its members an investment
  opportunity through a micro-pension initiative
  under its UTI-Retirement Benefit Pension Fund.
• This initiative will enable the workers in the
  unorganized sectors with very small income to
  share the benefits of the capital market. 

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An SHG-based Micro Pension Initiative/2

• Shree Mahila Sewa Sahakari Bank Ltd. (SEWA Bank)
  is a unique institution which is primarily owned,
  led and established by self employed women in
  low-income groups.
• These self employed women are primarily engaged
  as vendors or laborers or small service providers
  or home-based workers. The average monthly income
  of a member of SEWA Bank is Rs.800.   

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An SHG-based Micro Pension Initiative/3

• SEWA was established in 1972, and is the largest
  trade union in the country.
• It has membership of over 7 Lakh Women.
• SEWA objective is to make the poor self employed
  women, economically strong, safe, sound and self
  reliant.
• SEWA also endeavors to provide financial
  literacy.

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An SHG-based Micro Pension Initiative/4

• The UTI MF Micro Pension Scheme is a customized
  version of an existing Government/ SEBI / CBDT
  approved scheme for low income workers.
• UTI MF will provide members of SEWA Bank with
  Pension fund option through UTI Retirement
  Benefit Pension Fund.
• The scheme focuses on self-provision through its
  micro-pension scheme.
• The scheme targets low-income earners across all
  States

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An SHG-based Micro Pension Initiative/5

• Minimum Investment per applicant is Rs. 50 per
  month.
• Members will contribute up to 55 years so as to
  receive periodic pension after they reach 58
  years.
• Estimates suggest that initially 50,000 members
  will join the scheme, with the number likely to
  increase to 0.35 million over the next few years.

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An SHG-based Micro Pension Initiative/6

• The savings will be pooled and transferred to UTI
  for funds management.
• Each worker will receive a unique account number
  and will receive a passbook which will record
  contributions history and savings values.
• The scheme will ensure periodic cash flow through
  its Systematic Withdrawal Plan.

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An SHG-based Micro Pension Initiative/7

• UTI is actively working with SEWA, SA-DHAN, FWWB
  and Grameen Koota for building institutional and
  human capacity for lower transactions costs
• This will help to scale the scheme to a national
  level
• Representatives of over 1 million workers have
  already sought participation for their members in
  this scheme

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An SHG-based Micro Pension Initiative/8

• Opportunities
• Ease of replication
• Capable of internalizing Employer / Govt.
  Contribution
• Low Transaction cost through technology
• Challenges
• Awareness
• Institutional capability in workers / MFIs

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An SHG-based Micro Pension Initiative/9

• Scheme Objective
• To provide Pension to Investors on retirement
  after they attain the Age of 58
• Ideal for Self employed people
• Periodic Cash flow through Systematic Withdrawal
  Plan

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An SHG-based Micro Pension Initiative/10

• An Open ended Balanced fund with a maximum equity
  allocation of 40 and a minimum allocation of 60
  in Fixed income instruments.

Fund Performance as on 31st March 2006
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An SHG-based Micro Pension Initiative/11

• The critical challenge will be in the payout
  phase.
• Currently, a lumpsum payment is planned. So,
  longevity, inflation risk, survivors benefits,
  and long-term health care issues are not
  addressed.
• Such schemes require national level base of
  strong regulation and large scale and scope
  economies to be viable on their own.

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An SHG-based Micro Pension Initiative/12

• The replicability and scalability of this
  initiative within India and elsewhere needs to be
  examined.
• This would be an interesting area of further
  work.