The need for micropensions

17-May-2011    The world's demographic transitions demands of emerging and established economies alike to undertake action. Micropensions are an underused policy instrument for achieving just and more equitable societies for all ages. Their vital role as part of anti poverty policy needs to be recognized.

Worldwide populations are ageing: today the number of people over 60 years old has surpassed 700 million worldwide, of which 64% live in less developed countries[1]. By 2050 the older population is expected to have more than doubled to 1.6 billion and will exceed the young for the first time in history[2]. Estimates predict that in 2050, 80% of this group of people over 60 years will be living in low-income countries[3]. These countries usually do not offer old-age provisions for their oldest generation. Even at present times, one out of five extremely poor people (living on less than $1 a day) is aged over 60[4].


 
 
The worldwide ageing population will prove to be a tremendous burden on the economic development of the poor. On a global scale, the group of people over 80 years old has the fastest growing rate. The greater part of this growth takes place in low-income countries; countries that usually do not offer old-age provisions for their elderly. Most extreme poverty is found amongst the young and the elderly. While the young still posses labour power, the elderly do not. Since the aging workforce in developing countries for the most part consists out of self-employed and laborers in the informal sector, to who pensions and other old age security provisions are unavailable, a regular income for the elderly will be a luxury.
 
Given the expected exponential increase in the elderly population and the poor’s willingness and ability to save for old age, it becomes clear that there is a strong need to provide lifelong financial security for the self-employed poor individuals living in low-income countries. It is time for the microfinance sector to build efficient and effective vehicles to help the informal sector save for old age. This is where micropensions are needed!
 
What are micropensions?
Broadly, there are four types of microfinance provisions. The first three are microcredit, microsavings and microinsurance. Microcredit offers clients the opportunity to assume debt in expectation of greater return. For example, low income individuals use enterprise loans to grow their income and housing loans to grow their base of physical assets, which in turn often become an income source. Microsavings allow clients to accumulate capital; microinsurance mitigates risk by protecting clients’ capital. The fourth category is micropensions.
 
 
Box 1. ‘Pension System’: The term micro pensions refers to second and third pillar old age income security, especially for poor people working in the informal sector. The Pension & Development Network offers concrete support in desinging, developing and implementing pension and saving schemes according to this model.
 
Each of these four financial asset categories streams is important for the poor to be able to safely accumulate, grow, and protect wealth. While the first three financial assets are now increasingly available to poor people, pension products which allow clients to successfully grow their net wealth to provide for their old age are not. 
 
Why micropensions as old-age provision?
Micropensions are the next step in micro-finance provisions. Micro ensions are intended to generate capital growth by enabling poor people to invest in diverse assets. A micropension scheme can be described as a fixed system of contributions where participants save voluntarily over a long period. The built up savings are invested by a professional asset manager, and at a pre determined age, often around 58 – 60 years, the built-up assets can be collected as a lump sum, in phases or on a yearly basis. Often, a combination of these methods is used[5].

Old-age provisions in the form of micro-ensions are important for the poor to be able to safely accumulate, grow, and protect wealth. However, pension products which allow clients to successfully grow their net wealth to provide for their old age are rarely available to poor people. Pension-based old-age provisions are an underused policy instrument for achieving just and more equitable societies for all ages. Their vital role as part of anti poverty policy needs to be recognized.

Impact on poverty

A study by HelpAge International on the impact of non-contributory pension programmes on poverty shows that the programmes significantly reduce the probability that individual households with a pension recipient will be in poverty. Also, the evidence of this study suggests that extending non-contributory pensions programmes to other developing countries could have a significant impact on reducing poverty and vulnerability among households with older people[6].

Old-age provisions in the form of pensions are an effective way of reducing income poverty and other forms of poverty among older people. Regular cash transfers also increase poor older people’s access to services, particularly health care. As most older people live and share resources with younger family members, pensions have a substantial impact on child wellbeing, and contribute to increased school attendance and better nutrition among children. Old-age provisions based on pensions can play an important role in breaking intergenerational poverty cycles. Rather than creating dependency, pensions can actually reduce it.

 


[1] World Population Ageing 2009, Department of Economic and Social Affairs, Population Division, United Nations, New York, 2010.

[2] http://www.helpage.org/resources/ageing-data/, visited February 22nd, 2011.

[3] World Population Ageing 1950 – 2050,  Department of Economic and Social Affairs, Population Division, United Nations, New York, 2001

[4] World Economic en Social Survey 2007 - Development in an Ageing World, Department of Economic and Social Affairs, United Nations, New York, 2007.

[5] Institute for Financial Management and Research, Centre for Insurance and Riskmanagement, http://www.ifmr.ac.in/cirm/socsec-intro.htm, visited September 21st, 2009.

[6] Non-contributory pensions and poverty prevention: A comparative study of Brazil and South Africa, Final Report, DFID Project R7897, Pensions and Poverty Prevention, HelpAge International, September 2003.

 

 

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