Review of some strategies used to extend pension coverage to informal sector and self employed in the world

17 mars 2013
Review of some strategies used to extend pension coverage to informal sector and self employed in the world dans Savings culture jean-damour-150x150

Author: Jean d’Amour NTIBITURA

What are the strategies used to extend the pension coverage to informal sector and self employed in the world? This review will provide the summary of our findings from the available research reports done by some authors after doing my research on internet to respond the above question. However, any contribution from you to make this review more complete and update is welcome as it may not be exhaustive due probably to limited access of data.

Each strategy identified and presented in this review has a common element with others, to be as a solution to one cause of the low coverage in pension system in related country. These strategies were applied to deal with not only the coverage problem but also to achieve other objectives; like addressing the problem of sustainability of the system, the adequacy of the pension benefit, the robustness of the pension system etc.

For better understanding and dissemination of these strategies, the latter were grouped in three categories, namely strategies based on selection of contributors in pension scheme, strategies based on relaxing traditional
pension schemes for specific groups and strategies based on non-pension facilities and contributions collection mechanisms.


 1. Strategies based on selection of contributors in pension scheme


Moving towards universal coverage from the regulation

Providing social security to all population has motivated some countries to enact the laws and adopt the national social security policies respecting the principles of social solidarity, universality, equity and sustainability. This legal framework contributed in pension reforms for some countries of Latina America, Asia and Africa, to extend the pension coverage to informal and rural economies.

For example, in China due to the very limited scope of the rural pension system the coverage rate among the total population was still low at 13.4% in 2005. However, in 2010, China has endorsed a social insurance law to accelerate the coverage extension in social security, with the national objective is to realize “social security for all” by 2020. Under this law which came into effect in 2011, the government was expecting to extend the old-age pension coverage to whole population by the end of 2020.

Similar positive developments can be observed in many other countries of Asia and Pacific, such as Indonesia, Jordan and Thailand. According to ISSA, Putting in place universal coverage for all workers avoids discrimination between workers and facilitates continuing coverage for those who move in and out of the formal


Compulsory coverage to self-employed workers

Mandatory or compulsory adhesion of self employed to Defined Benefits pension system has been challenging in most of the countries, as it was really not possible to determine the reliable base of contribution of this category of workers. However, with the introduction of mandatory    ‘‘second pillar’’ in most of countries which reformed their pension systems in 1990s and after mandatory participation of self employed has been provided.

 As an example, in pension reforms carried out from 1998, the Republic of South Korea has made the participation of self-employed workers in defined contributory pension scheme an obligation. Pension coverage for self-employed workers in rural areas was realized at first, and the self-employed workers in urban areas were progressively covered after on the same basis.


Selective coverage by employer size

The rationale for starting with the largest firms is that their records, stability of employees and compliance will be such that administrative cost will be minimal, whereas the reverse is true of the smaller firms. The cases of India, Indonesia, Iraq and the Republic of Korea can serve as some examples among many countries which extended selectively the coverage step-by-step.

For example, Indonesia introduced its scheme in 1977 and applied it progressively from a minimum of 100 employees in 1977 to 25 in 1983 and 10 in 1990.

 Whilst the in Korean National Pension Scheme was introduced in 1988 to be applicable to all population aged 18-60. It started with effective coverage to workers employed in enterprise whose employees are not less to ten. Thereafter the coverage was extended to enterprises employing less than 10 workers (i.e., 5-9 workers in 1992). In 1995, the coverage was further extended to include farmers and fishermen as well as the self-employed in rural areas. In 1999, the self-employed in urban areas as well as workers at small (less than five employees) workplaces are included to the system, thereby establishing a nominally ‘universal’ coverage.

 As of the end of the year 2000, a total of 16,278,000 persons, including 5,680,000 employed workers and 10,889,000 self-employed participants, are covered by the National Pension Scheme. Out of the 10,889,000 self-employed, only about 55% declared and reported their income and made required contributions and the remaining 45% were exempt from contributions. As a result, the number of persons effectively
made contributions was only 11,643,000 (less than 70%).

 The social insurance scheme in Malaysia started in 1971 and achieved the level of employee coverage
of 1 in 1992 when the policies for wider expansion to rural workers were adopted.


 Semi compulsion of pension participation for the informal sector

Some people prefer to make their own choice in planning of the retirement income, instead of being forced to participate in a given scheme. However, when faced with a number of difficult choices people tend to make no rationale choice.

The semi-compulsion comes to deal with the behavior of no decision or irrational choice by automatically enrolling the people and giving them the option to opt out, thereby using people‘s natural inactivity to deliver higher membership levels. This strategy was observed to be applied in some developed

In 2004 the Parliament of Italy approved a new pensions law, and according to the latter, from July 2007 employee contributions to the severance pay (i.e. trattamento difine rapporto or TFR) were automatically transferred to a public pension fund run by the INPS (i.e the National Social Security Institute), unless they choose to stay with the old TFR or divert their funds to a pension fund. New employees are given six months to make their decision.

In 2007 the government of New Zealand introduced a voluntary, long-term savings initiative known as KiwiSaver . Those in formal employment are automatically enrolled into an eligible saving scheme on starting work, with employees and employers both contributing, but can opt out within a certain period. The self-employed and unemployed can choose how much they want to contribute in respecting the minimum contribution amounts.

 Incentives, for formal sector workers and other participants include a NZD 1000 contribution from the government on setting up the scheme, a NZD 40 payment from the government each year to cover scheme costs, tax incentives and the possibility of linking KiwiSaver savings to mortgage payments. As of May 2008, take-up of
the scheme was estimated to have reached 673,000 (40% of the working population).


Differentiated schemes and gradual extension of coverage

The workers in informal sector and self employed have specific problems due to the conditions of working, historic of their income, the nature and structures of their jobs. These factors explain the reason why some countries designed the specific schemes for some categories of workers.

Uruguay is a good example here. The identification of three categories of workers has been done, as categories encountering particular problems caused by the precarious and informal nature of their employment. The construction workers have been covered by one scheme for old-age pensions, sickness, and family and employment injury benefits. The self-employed were covered by the country’s main social security institution (the Social Insurance Bank) for old age pensions, survivors and invalidity and sickness benefits.

Another good example of gradual extension of coverage is Tunisia (Chaabane, 2002). The level of coverage reached 84 per cent of the active population in 1999, compared with 60 per cent in 1989. The main categories which were not covered until 2009 were seasonal and casual agricultural workers, unemployed workers employed on labour-intensive public works schemes, domestic servants and the unemployed.


2. Strategies based on relaxing traditional pension schemes for specific groups


Extending coverage by relaxing the eligibility criteria of existing schemes

 Relaxing the entitlement conditions has contributed in extending coverage to those working in rural, informal and self employed for some existing contributory social security schemes.  These changes may be related to level or frequency of contributions payment or nature of benefit provision.

In China, for instance, the contribution rate that applies for self-employed workers and people engaged in flexible work in urban areas is lower than that of formal sector employees. In addition, the basis on which employee contributions can be paid is flexible, ranging from 40 to 100 (or even 300) per cent of the base contribution depending on the province, and workers can choose to contribute every month, quarter, half year or annually. As a result, China saw the total number of participants increase from 178 million in 2005 to 284 million in 2011, with the expectation that it will rise to 357 million by the end of 2015.

Under the new Chinese Social Insurance Law implemented in July 2011, foreign employees many in the informal sector can now access retirement, medical, work injury, unemployment and maternity benefits, similar to those for Chinese citizens.


Extending coverage through new voluntary or mandatory contributory programmes

In a number of countries, new voluntary or mandatory contributory programmes have greatly enhanced social security coverage for vulnerable groups, including for people working in informal and rural economies. In Sri Lanka, a new Voluntary Pension Fund for all Sri Lankans was introduced in May 2011. The programme is operated through a simple and low-cost electronic infrastructure, which uses mobile phone technology for registration, member contributions and the payment of monthly pensions. The new programme is expected to benefit millions of small business and self-employed workers as well as expatriate workers.

In Senegal the Social Security Fund has since 1998 been working with the Federation of Chambers of Trade to encourage handicraft workers to join on an individual basis in order to cover work injury.

 Sri Lanka has also introduced a pension scheme for agricultural workers, fishers and elf-employed workers, based on voluntary membership and with a state subsidy.


Developing income scales for various groups of self employed to calculate contribution liability

Using a variety of initiatives, in 2004, Tunisia succeeded in raising social security coverage for old age pensions from 60 to 84 per cent of its workers and their families in just 10 years. Nearly all Tunisians who work in the public and private non-agricultural sectors are covered; and coverage rates were still below 50 per cent in the agricultural sector and among the self employed.

How is this being done so rapidly? Firstly, Tunisia took measures to limit the under declaration of income from the self-employed by developing income scales for various occupational groups to calculate contribution liability. This was followed by an extensive publicity campaign in collaboration with employers and workers’ organizations that brought a large number of employers and workers into the scheme. Secondly, as the government took these vigorous steps to improve compliance, confidence grew in the scheme as an effective source of protection against rising health care costs as well as providing security in old age.


Flexible terms for informal sector workers to participate voluntarily

One of the main reasons why informal sector workers do not want to participate in voluntary pension systems (and in some cases even comply with mandatory schemes) is that they find the strict criteria involved too onerous, e.g. in terms of contribution requirements, vesting policies and requirements on governance structure of pension fund itself etc..

In order to encourage participation of this particular group of population, it may therefore be necessary to relax some requirements to a level which is consistent with the situation relating to informal sector workers. For example, in China informal sector employees are required to join the mandatory public pension scheme.

However, due to lack of incentives and relatively high contribution rates, as well as lax enforcement powers of the labour ministry, very few comply with this requirement. In view of this problem, in many local regions across the country, restrictions have been modified to encourage participation.
Specifically, the contribution rates for the system have been reduced from the standard 28% of earnings (20% from employer and 8% from employee) to 20% (of which 8% will be directed to an individual account).

In Chile and in other developing countries where there is a large agricultural sector, in order to encourage participation of the temporary and/or seasonal workers (most from the agricultural sector), flexible contributions are allowed. In other words, when there is a good harvest, due to good weather conditions and/or advances in fertilization technology, farmers can make larger pension contributions than normal. However, if bad weather conditions prevail (e.g. flooding or pest problems) farmers may not have sufficient funds to meet their basic needs, let alone to put aside extra money for pension contributions. Hence it can make sense to allow for irregular contributions which correspond to the income pattern of such seasonal industries and workers.

In addition to flexibility in terms of contributions, flexibility in terms of withdrawals may be necessary to encourage informal sector workers to participate in pension arrangements. Given in many countries these workers are from vulnerable groups of society, having access to long-term pension savings may be required to cover periods of unemployment, for emergency spending (such as on health care) or for other life essentials, such as housing.

However, this flexibility needs to be balanced with the risk of ‘leakage’ from the system, with large withdrawals leading to insufficient balances upon retirement (as has been a problem with the provident fund in Singapore and pension funds in South Africa, for example).


3. Strategies based on non-pension facilities and contributions collection mechanisms


Providing monetary incentives to participate

Tax relief on pension contributions may be one way to encourage pension participation, particularly for the voluntary schemes. It has been argued that one of the reasons why 401(k) plans in the US are so popular largely arises from government tax rebates and matching contributions. Consequently, when introducing new pension arrangements to increase (voluntary) contributions, tax policy has been frequently used as a tool in many countries; particularly an ‘EET’ policy (where by pension contributions and investment income are tax exempt whilst pension benefits are taxed as ordinary income). Such a ‘deferred’ tax policy is designed to encourage pension contributions, given that even a small deduction from accumulated pension assets (e.g. via tax charges) at the early accumulation stage can make a big difference to eventual pension wealth
when compounded over 40 years.

When Chile, for example, introduced its pension reform in the early 1980s, it was specified that employees contribute 10% of salary to their individual account, with all contributions and investment income treated as tax free, while benefits were considered as income. Yet it has been debated as to whether tax incentives really provoke new savings rather than shifting existing savings to more efficient arrangements (Antolin and Ponton 2007). Moreover, tax benefits are not always a powerful tool, particularly for those in the informal sector who do not pay tax or are too poor to put aside extra money for long-term savings. Other mechanisms, such as tax credits or matching contributions, may be more appropriate mechanisms for assisting these groups.


Facilitate the payment of contributions for persons with low paying capacity

Problems of covering numerous isolated persons with low paying capacity have deterred most developing countries from including domestic workers, but some have taken action in recent years. There are several examples in Central and South America (including Belize, Brazil and Venezuela) whilst Fiji and Philippines recently devised methods to facilitate the payment of contributions for domestic workers (stamp cards in Fiji and in Philippines employers payments by direct debit arrangements for remittance of contributions). The main issues for social insurance pension schemes are whether minimum contribution requirement should be imposed to avoid or reduce subsidies from other employees, and the administrative difficulties of registering, collecting contributions, and enforcing the law.


Promoting social security culture via educational programmes

One reason why people may not join a pension scheme (even where available and advantageous for them to do so) is because of a lack of knowledge on pensions in general and the cheme in particular. For example, around 80% the informal sector employees in India surveyed by the Asian Development Bank (ADB 2006) did not know what a pension was. Likewise, even though they meet the criteria, very few informal sector workers join the Public Provident Fund in India. In developed countries, this same problem also exists. For example, in the United Kingdom up to over GBP 6 billion pension credit benefits are not claimed, largely due to lack of knowledge among this group of people (Stewart 2006).

Given such challenges, financial education may be able to play a role in raising public knowledge and awareness, and therefore potentially leading to increased pension coverage, including for the informal sector (Stewart 2006). For example the ADB (2006) have estimated that 20 million of 360 million workers in the Indian informal sector are financially able and willing to join the New Pension System. One of their proposals for successfully bringing these workers into the system is through financial education –i.e. via public awareness campaigns.

Similarly in China, projects have been undertaken to provide training for local social security bureau officials to ensure that they know how to effectively explain benefits available to eligible people (such as rural workers, only 11% of whom claim available pension insurance benefits). Financial education projects have also been conducted in the pension context in several OECD countries with some success. In the UK, a specific campaign was launched in 2006 to help self-employees understand current pension system and arrangements available to them, with the aim of including them into the formal private pension system.

The Uruguayan educational project “Getting to know your social security rights and responsibilities on social security matters” is recognized as a pioneer in promoting a culture of social security and, indeed, has become a global point of reference. The development of the project has been linked intrinsically to the country’s long process of coverage extension involving the coordinated endeavours of various institutions, and among which the Social Insurance Bank of Uruguay (Banco de Previsión Social, BPS) has played a leading role. The success of this
initiative has been built on the realization that children and young people are important purveyors of information in their households. To exploit this potential, the project incorporates a series of modules that are taught as part of the national school curriculum. The well-developed learning materials that accompany the modules include manuals for pupils and teachers and interactive online games.


Utilization of existing (non-pension) infrastructure

Though it may be necessary to establish institutions and infrastructure when setting up a new pension system, it can be more efficiently if existing infrastructure is utilized where possible. This can be particularly useful when attempting to reach informal sector workers who cannot join a pension scheme via existing employment related mechanisms. For example, when the Indian government was considering introducing the new National Pension Scheme (NPS) (which is mandatory for government officials, but voluntary for informal sector workers), much debate focused on the structure of points of presence (PoP) – i.e. the first point of contact between members (or potential members) and the NPS system. Making such contacts and facilities as convenient as possible is considered of great importance to ensuring the success of the new system. In India, the financial sector infrastructure related to the NPS (including arrangements not previously related to pensions) has been made as wide ranging as possible, and utilizes existing institutions.

For example,banks, post offices, depository agencies, and pay and accounts offices are all permitted to conduct the NPS related business. This should greatly assist individuals’ participation, particularly those living in remote rural area where many financial institutions are absent and the establishment of new branches is not financially practical.


Utilizing existing (non-pension) financial sector institutions – Micro-finance

In addition to utilizing a wide range of financial sector infrastructure to access the informal sector, drawing upon financial sector players and institutions which already have a relationship with such groups outside the pensions realm may also be useful; for example, microfinance companies. Microfinance is a generic term which refers to the mechanism by which financial services are provided to poor and low income earners. The first microfinance project was initiated by Prof. Muhammad Yunus in 1976 in a small Bangladeshi village, and later extended to over 73,000 villages across the country. His Grameen Bank provides microcredit services to poor people who otherwise cannot receive standard loans from commercial banks. One condition of granting loans from the Grameen Bank is trust or reputation between the Bank and its borrowers rather than collateral or credit history. In this context, an individual must join a group of borrowers in order to apply for a loan, with a small amount of money initially being lent. Depending on the punctuality of repayments, the amount of subsequent loans may be increased.


In 2000, the Grameen Bank started to offer a product specifically designed for the purposes of old-age protection. Under this scheme, all borrowers in the Grameen Bank are required to deposit a minimum of 50 taka each month in a personal pension savings account (Barua 2006). The guaranteed interest rate is 8% if the deposit period is one to three year, 10% if three to five years, and 12% if longer than five years. Since the introduction of microfinance in Bangladesh, such programmes have been adopted in many other countries, particularly developing economies (Hu 2008). For example, in the Philippines a variant of such micro-pension
schemes operates, i.e. the retirement saving fund, which features greater flexibility in terms of contributions and vesting rights. For example, members are allowed to make contributions at a level as low as USD 0.12 per week, which is intended to make the programme as low burden as possible.


In conclusion, it is necessary to underline that those strategies have played a big role in extending pension coverage in countries where they have been applied, according to the evidences from international experiences. But until today there is a certain gap to be closed between the covered population and the economically active population. This means that more innovations in this regard could be the only key factors to the achievement of pension for all, from poor to the rich, from rural population to those living in towns, from to small vendor to wholesaler and from the farmer to the CEO. The next publication will talk about possible innovations in extending pension coverage.



Jean d’Amour NTIBITURA

The author is a student in master programme

for Social Protection Financing

University of Mauritius




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