Monitoring pension benefit adequacy

Box 4 Monitoring pension benefit adequacy

Trends move in different directions; in some cases pension systems improve the benefit level and in other cases pension benefits are reduced. It is worth noting that recent fiscal consolidation trends are having a negative impact on the adequacy of pension payments in many countries, compromising the social contract.

The United Kingdom has recently introduced changes to its public pension scheme designed to improve the adequacy of pension for low-income earners. The reforms will see the two-tier benefit structure (a flat-rate basic pension and an earnings-related additional pension) being merged into a flat-rate basic pension. The new flat-rate benefit will deliver an enhanced minimum pension benefit. Participants will be able to gain additional earnings-related pension credits through external voluntary pension arrangements.

The retirement benefits of the public pension in Slovakia introduce a new indexation formula entering into force in 2018 which removes linkages to the national average earnings growth constituted solely by the consumer price index. Similar adjustments to the indexation formula have also been introduced in Azerbaijan, Czech Republic, Honduras and Spain as part of broader reforms to their national pension systems.

Several national pension schemes have recently announced upward adjustments to pension benefits, namely Belarus, China, Georgia, Ireland, Mauritius, Namibia, Nicaragua, Panama, Philippines, Portugal, Russian Federation, Seychelles, Turkey and Zimbabwe.

In 2014 the Republic of Korea introduced a new formula for determining minimum pensions, which resulted in the minimum pension being revised to nearly twice the previous amount. Armenia’s national social pension system has also delivered pension benefit increases of 15 per cent in both 2014 and 2015.

Spain will, effective 2019, introduce sustainability adjustment factors to automatically adjust new pension benefits to counter the increased life expectancy of new pensioners. A similar adjustment was previously introduced to the public pension scheme in Finland, where it is expected to have reduced pension benefits by

21 per cent by 2060 (OECD, 2015). In Hungary a bonus 13th payment in the public pension system is to be replaced by conditional indexation.

Source: ILO Social Protection Monitor.

The extent to which retirement pensions are considered sufficient varies from one society to another, in particular in prevailing attitudes on matters such as the distribution of The extent to which retirement pensions are considered sufficient varies from one society to another, in particular in prevailing attitudes on matters such as the distribution of

It is important to take into consideration that the adequacy of retirement benefits depends not only on the quantum of the cash benefits provided, but also on the costs of essential services such as health care, food, accommodation, and so on. Furthermore, the assessment of the adequacy of retirement benefits is dynamic and will therefore evolve over time as social, cultural, demographic and economic conditions change.

Despite global progress in social protection, adequacy of benefits remains a major challenge. As shown in figure 11, in countries such as Armenia, Belize, Bolivia (Plurinational State), Colombia, India and Turkey the amount of the non-contributory pension represents less than 40 per cent of the value of the national poverty line. Older persons receiving a social pension in these countries are still poor.

Figure 11. Non-contributory pensions as a percentage of the national poverty line, single person, latest available year

Although pension systems in many high-income countries include a universal social pension or a minimum pension, benefit levels often fall below the poverty threshold and thus fail to prevent poverty in old age (European Commission, 2015b). Actually, according to OECD data, old-age poverty is increasing in some OECD countries.

If the level of benefits provided by social protection systems is insufficient in terms of minimum living standards, this will jeopardize the achievements of the poverty reduction goals of the 2030 Agenda. The adequacy of benefits thus plays a crucial role in strategies for achieving the SDGs on social protection.

8.1. Preventing erosion of the value of pensions over time: Ensuring regular adjustments

An important consideration on the adequacy of pensions is their ability to retain their purchasing power and real value. A good practice in the design of pension systems is the establishment of an initial income replacement at retirement, and then ensuring the preservation of such income level for the life of the retiree. Unless the quantum of pensions is adjusted or indexed, the standard of living of pensioners will be jeopardized.

Conventions Nos 102 and 128 both call for levels of benefits in payment to be reviewed following substantial changes in level of earnings or of cost of living, while Recommendation No. 131 explicitly stipulates that benefit levels should be periodically adjusted to take into account changes in the general level of earnings or cost of living. Recommendation No. 202, on the other hand, requires social protection floor guaranteed levels to be reviewed regularly through a transparent procedure established by national laws, regulations or practice. The practice of indexation varies across countries and schemes, as shown in table 1.

Table 1. Indexation methods

Indexation method

Number of schemes

Price indexation

Wage indexation

Mixed price/wage

Regular, not specified

Ad hoc

No information No information

be based solely on the consumer price index (IMF, 2017). Many newly established schemes provide ad hoc pension increases. Particularly in

inflationary environments, this results in a majority of pensioners eventually receiving nominal pensions with limited poverty reduction impact. Figure 11 shows the average replacement rates at retirement in public pension schemes across selected European countries, indicating a clear reduction towards 2060 in projected data. Unless pensions are adjusted in line with increases in real wages or other measures related to the overall cost of living, the standard of living of older persons will deteriorate and they may be subsequently pushed into poverty.

Figure 12. Average replacement rates at retirement in public pension schemes, selected European countries, 2013 and projected for 2060 (percentage)

Note: A 40 per cent replacement rate after 30 years of contributions is prescribed by Convention No. 102 for periodic old-age benefits.

Source: European Commission, 2015a, p. 13, table 2. Link: http://www.social-protection.org/gimi/gess/RessourceDownload.action?ressource.ressourceId=54663

8.2. Reforming pension systems in the context

of fiscal consolidation and austerity policies 6