The 2007-2009 financial crisis has heavily affected financial markets worldwide. The particular design of pension systems in certain developing countries has contributed to the spreading of the negative effects of the credit crunch over both the current and future retirees. Indeed, funded defined contribution pension plans1, very common in emerging markets, are particularly exposed to the dramatic consequences of a collapse in value of the assets they are built upon. Retirement-incomes threatened by assets’ values fluctuations are those of Chile, El Salvador, Mexico and Peru, where defined-benefit pension systems were eliminated and the majority of retirement incomes comes from private or public pension funds: in such countries losses from financial crisis have ranged between 8% and 50%. On the other hand, there are some nations that maintained a defined-benefit system as well: in Lithuania and Hungary, for example, less than 30% of the retirement benefit package for retirees today comes from financial assets in individual accounts.
Within a context of financial uncertainty, a deep reform plan for weak pension systems is needed. This is the reason behind the new international discussion about the future of pension schemes in developing countries affected by the credit crunch that World Bank has started at the beginning of 2010.
“The Financial Crisis and Mandatory Pension Systems in Developing Countries”, an article by the WorldBank published in 2009, aims at discovering the short- and medium-term effects that the financial crisis had on defined contribution and defined benefit pension systems in developing countries. It identifies optimal policy responses in order to shield the poorest from the credit crunch and high volatility of assets’ values composing funded pension systems. Particularly interesting is the attention that is paid to the potential positive effects that long term institutional investors (like micro pension institutions) may have on the financial system enterprise financing, and ultimately employment and growth. Moreover, the financial crisis strengthens the case for a multi-pillar pension system: it would incorporate elements of a social pension or minimum guaranteed benefit (a zero pillar) to ensure broad protection against poverty, first pillar based on sustainable earnings and funded second and third pillars. The three operating together would provide core benefits to the broad population even during the low points of the economic cycle.
The World Bank discussion also produced in January 2010 a complete book which compares and evaluates the financial performance of several funded pension arrangements that have emerged over the last several decades. The main goal is to assess the quality of investment management and to recognize any factors that may have been responsible for differences in the performance of different pension systems.
Several meetings and international conferences, in order to create awareness amongst policy-makers for the need of pension system reforms as a consequence of the financial crisis, are organized by the WorldBank. Aimed at intervening and further supporting the development of voluntary based pension schemes (the third pillar), these meetings prove useful to make governments and international organizations aware about the pivotal role micro pensions can have in poverty alleviation within developing countries.
1 A defined contribution system is a type of retirement plan in which the amount of employers’ annual contributions is defined. Benefits, instead, are not certain since the retirement income relies on any investment earnings on workers’ contributions. Future benefits thus fluctuate on the basis of investment earnings.