PensionReforms' summary and comments
There are 30 countries in the area covered by this World Bank's briefing note on pensions.  They stretch from the former Eastern Europe and on through Russia.  They offer different mixes of PAYG pensions with those based on 'points', 'notional accounts' across the different 'pillars'.

"The financial crisis has significantly impacted pension systems in the Europe and Central Asia region (ECA) tempting governments to make policy changes in response to the increased pension deficits they are facing. The crisis exacerbates the existing financial imbalance in the public pension systems by reducing contribution revenues sharply while leaving expenditures constant or even higher. The crisis also resulted in a sharp drop in financial asset values which affects pensions provided by funded pillars. Consequently, no pension system, however structured, has been immune to the crisis."

PAYG schemes are affected by falling tax revenues and tagged contributions.  Pre-funded, Defined Contribution schemes have suffered falling asset values - also contributions but, as benefits are tied to contributions, declining contributions do not immediately threaten the scheme's 'solvency' but they will eventually produce smaller than expected benefits.  That could place pressure on other parts of the government's welfare system.

But all this is as nothing compared with the upcoming pressures created by ageing populations:
"Despite the severity of the financial crisis, it pales in comparison to the demographic crisis which the region will face.  Therefore, countries are urged not to make long-term policy changes to address short-run fiscal concerns.  Any short-run responses should be consistent with strategies to address the long-run challenges to the pension system."

The report urges countries to instead focus on strategies that "...include:
(i) protecting the purchasing power of pensioners and fiscal sustainability of the system, both during the crisis and beyond, by shifting to inflation indexation of pensions,
(ii) encouraging individuals to work more and longer by raising retirement ages, equalizing retirement ages between men and women, and curbing early retirement, and
(iii) enhancing public awareness of the increasingly limited capacity of publicly provided pensions as populations age."

Where there is a pre-funded component to the public system, those countries should also "...focus on:
(i) providing better insurance for second pillar pensions through life cycle portfolios or guarantees,
(ii) accelerating regulatory reforms to enhance the rates of return, and
(iii) building a market for inflation-indexed bonds which will allow insurance companies to offer inflation-indexed annuities."

The World Bank has a model that demonstrates what might happen.  It's called the Pension Reform Options Simulation Toolkit (PROST).  It constructed a 'typical' country for the territory and ran some scenarios through PROST.  Pension expenditures, held constant, would see costs rising by 0.5% to 0.8% of GDP as economic output falls in the short run.  There is a lesser impact on Pillar 2 and 3 schemes because they are relatively new (a maximum of ten years old) and will not be so affected by falling asset values.  However, the report warns that members' confidence in the schemes will be affected by poor, even negative returns.

Some of the changes already made by countries (reducing contributions, compensating losses, delaying increases, changing indexation) may help in the short-run but are, the report suggests, short-sighted sticking plasters and could worsen the impact of the demographically driven changes yet to come.

The size and scale of the global economic crisis with the "...rapid deterioration in output, employment, asset values, fiscal balance, and access to domestic and foreign financing has led to a rapidly worsening situation for the entire pension systems in the region and to early policy reactions by authorities in response to the crisis."

But, according to the report, that should not tempt countries to pull back from the reasons pension systems were recently changed - to limit the imposition on future generations of "...bigger financial burdens when they will be even more constrained than they are today."

PensionReforms suggests that the report highlights one of the key deficiencies of the complex web of pension arrangements many of the countries now have.  There are too many levers for the governments to pull.  In large part, these are legacies of the countries' pasts.  The really significant issue is that, from a country's overall perspective, it does not much matter how pension systems are arranged - they are all different ways of allowing the retired to make claims on tomorrow's economic output.  From an individual's perspective, however, it matters greatly who bears the ultimate economic risks as that will affect the distribution of economic gains and losses.

What really matters now and into the future from a macro perspective is economic growth.  That will give countries choices about how to deal with the growing proportion of older people.  PAYG and pre-funded schemes are not materially different in the way they allow pensioners as a group to make those claims.

The World Bank probably did not anticipate such early stress tests for the pension reforms it has been encouraging.  PensionReforms suggests it is as well they have happened earlier, when there is less at stake, rather than later.  The very poorest countries in the world that are now looking at the pension issue (Lesotho, Zanzibar, Sri Lanka) may provide better examples of building more robust income support systems for their oldest citizens.  The principles need be no different for the ECA countries covered in this report. (File size 276 KB; 25 pp)  377