Hyde M. and Dixon J. 2008 The Public Int
PENSIONS WORLDWIDE
Working Papers on the Reform of Pensions, No. 2, 2008.
The Public Interest and Retirement-Income-Protection: The
Design of Mandated Private Pension Arrangements
Mark Hyde and John Dixon
1
The Public Interest and Retirement-Income-Protection: The
Design of Mandated Private Pension Arrangements
Mark Hyde* and John Dixon**
* Mark Hyde is a Reader in Public Policy and Management at the University of
Plymouth, Drake Circus, Plymouth PL4 8AA, United Kingdom. Telephone: +44
01752 233230; email: mhyde@plymouth.ac.uk; web:
http://www.zyworld.com/PensionsWorldwide/Cover.htm
** John Dixon is a Professor in Public Policy and Management at the University
of Plymouth, Drake Circus, Plymouth PL4 8AA, United Kingdom. Telephone:
+44 01752 233274; email: J.Dixon@plymouth.ac.uk; web:
http://www.plymouth.ac.uk/researchcover/rcp.asp?pagetype=G&page=55
2
Preface
The shift from public to non-state administration, inherent in recent pension
privatisation reforms, has suggested to several observers that pension policy has,
globally, converged around the precepts of the “neoliberal” welfare reform model,
marginalising the public interest. We reject this one-dimensional characterisation
of privatisation. In particular, we identify the diverse ways in which the architects
of a distinctive approach to pensions privatisation have sought to promote and
protect the public interest, by imposing statutory obligations, with compliance
enforced through appropriate regulatory instruments. This has encompassed
several public interest objectives, including the promotion of social solidarity,
individual and family responsibility in the context of interrupted earnings,
security, transparency and accountability. Where mandated private pension
arrangements have been introduced, policy makers have been tightly prescriptive
with regard to: coverage (who should be protected?); eligibility (under what
circumstances may accumulated assets be withdrawn as benefits?); benefits (what
form should the retirement benefits derived from pension schemes take?); finance
(how should retirement benefits be paid for?); and governance (how should the
activities of those with responsibility for administering pension schemes be
regulated?). Building on this discussion, we develop a quantitative assessment of
the degree to which the design of mandated private pension arrangements is
market orientated. Overall, our analysis of the design of mandated private pension
arrangements suggests that the diminution of the public interest that seems to be
endorsed by “neoliberalism” is not a universal or unambiguous feature of pension
privatisation.
Professor John Dixon
Dr. Mark Hyde
University of Plymouth
United Kingdom
3
Table of Contents
Preface
1.
What is the public interest?........................................................................11
2.
Why is the public interest important?.........................................................12
3.
Protecting the public interest: governance approaches..............................14
3.1
Hierarchical governance mode.............................................................14
3.2
Co-governing mode..............................................................................15
3.3
Self-governing mode............................................................................16
4.
Protecting the public interest: policy instruments......................................17
5.
Overview of mandated private pension arrangements...............................19
6.
Coverage.....................................................................................................21
6.1
Coverage exemption.............................................................................24
6.2
Voluntary coverage..............................................................................26
6.3
The self-employed................................................................................27
7.
Eligibility....................................................................................................27
7.1
Retirement............................................................................................28
7.2
Early retirement....................................................................................29
7.3
Deferred retirement..............................................................................31
7.4
Pre-retirement benefit eligibility..........................................................31
8.
Benefits.......................................................................................................35
8.1
Earnings-related benefits......................................................................37
8.2
Accumulated savings............................................................................39
8.3
Survivors’ benefits...............................................................................43
8.4
Disability
benefits.................................................................................45
8.5
Mandatory supplementary benefits......................................................46
8.6
Government subsidies and taxes..........................................................46
9.
Financing....................................................................................................48
9.1
Contributions........................................................................................49
9.2
Employee-only contributions...............................................................52
4
10.
11.
9.3
Employer-only contributions................................................................53
9.4
Diverted public pension contributions.................................................53
9.5
Multiple contribution liabilities............................................................53
9.6
Additional voluntary contributions......................................................53
9.7
Income for contribution purposes.........................................................54
9.8
Tax deductability..................................................................................55
9.9
Government subsidies..........................................................................56
Governance.................................................................................................56
10.1
Contribution collection.........................................................................57
10.2
Asset management................................................................................60
10.3
Benefit provision..................................................................................61
10.4
Regulatory regimes...............................................................................61
Must privatisation be market orientated?...................................................83
11.1
The market orientation of extant mandated
private pension schemes.......................................................................85
12.
Conclusion..................................................................................................95
Appendix..............................................................................................................100
Acknowledgements..............................................................................................104
References............................................................................................................105
5
The Public Interest and Retirement: The Design of Mandated
Private Pension Arrangements
Mark Hyde and John Dixon
“It is not markets that decide on individual well-being but actors that are
collective in their nature” (Trampusch, 2005, p. 3).
The shift from public to non-state administration, inherent in recent pension
privatisation reforms, has suggested to several observers that pension policy has
converged around the precepts of the neoliberal welfare reform model,
marginalising the public interest (Martin, 1993; Klein and Millar, 1995; Ploug,
1995; Bonoli et al., 2000). For Mishra (1990, p. 14), this approach advocates “the
return to a pure form of capitalism — the rigour and discipline of the marketplace
— including…a lean even if not mean social welfare system, and a reliance on
non-government sectors for meeting social needs”. In a similar vein, Martin
(1993, p. 6) maintains that the privatisation of welfare, including pensions, has
been guided by a global neoliberal alliance of:
economists, accountants and lawyers…the big banks and management
consultancies; the World Bank and the IMF; regional financial institutions,
such as the Inter-American Development Bank and the European Bank for
Reconstruction and Development; and bilateral agencies, notably the
United States Agency for International Development. Others again are
attached to universities or policy pressure groups sometimes referred to as
think tanks. Their broadly shared outlook is that the free market knows
best and the private sector does best, that the state’s main task in economic
and social development is to minimise impediments and maximise
inducements to private capital accumulation.
6
However, the belief that pension privatisation has been informed by neoliberalism
is not confined to those at the collectivist end of the ideological spectrum. Jose
Piñera, the principal architect of Chile’s fully funded defined-contribution pension
arrangement, describes how the precepts and principles of neoliberalism
“provided our guiding vision”: indeed, the reform “was introduced as part of a
coherent set of radical free market reforms”, creating “a political and cultural
atmosphere more consistent with free markets and a free society” (Piñera, 2001,
pp. 3–4). Indeed, Piñera maintains that Chile‘s so-called “neoliberal” model was
subsequently adopted throughout Latin America and by several Central and
Eastern European countries. But what about those countries where pension
provision has been privatised by governments of the centre-left? This does not, we
are told, contradict the contention that privatisation has been informed by
neoliberal political economy. The problem with the rhetoric of neoliberalism in its
unadulterated form is its apparent endorsement of intensified social inequalities,
which creates political barriers to the implementation of market reforms. The
solution has been to “seal the victory of the market” by preserving “the placebo of
a compassionate public authority”, emphasising “the compatibility of competition
with solidarity”. Pensions privatisation is now “carefully surrounded with
subsidiary concessions and softer rhetoric” in order to “kill off opposition to
neoliberal hegemony completely” (Anderson, 2000, p. 11). In this view, centre-left
values are merely an “ideological shell” for neoliberalism, which is now
“dominant in the assumptive worlds of policy-makers” (Bonoli et al., 2000, p. 2).
Neoliberalism generally endorses an approach to retirement-incomeprotection where private interest is predominant. In this conception, private
interest has three core dimensions.
Individualism. Private interest is regarded as individual self-interest, as
reflected in an individual’s utility function. Defined in this way, private
interest is the cornerstone of human motivation, and the driving force of all
individual action. This understanding contrasts with collectivist approaches to
the notion of “interest”, which subsume individual self-interest under group
7
interests (people act in their “class interests”), or which discount individual
self-interest entirely (people act according to social norms).
Voluntary action. Private interest presumes a voluntary approach to
individual decision making, because “every person is the final judge of his
own welfare and interests. No economic actor is allowed to have power
(economic or otherwise) over other actors” (Swedberg, 2005, p. 30).
Freedom. Individual decision making is legitimate only to the extent that it
is consistent with the freedom of others, because “individuals have the right to
run their lives as they see fit, provided they do not interfere with the right of
others to do the same” (Shapiro, 1998, p. 2). Of particular importance is
negative rights (regarding freedom of expression and association, life and
property), which impose a duty on the individual to refrain from particular
courses of action.
As we suggest below, the public interest is conceptualised as the aggregation of
individual interests, and its legitimate scope encompasses the rule of law, to
enforce negative rights. Where private interest is predominant, the design and
administration of pension arrangements are the object of voluntary action, and,
consequently, may be expected to manifest in a variety of ways, reflecting the
diverse resource endowments and preferences of consumers and suppliers,
constrained only by rules defined by laws of property, tort and contract. Rejected
is the notion, admirably expressed by Hutton, that to construct a society “around
the nostrum that the public realm is morally, economically and socially inferior to
the private realm is to submit to an alien barbarism in which what we hold in
common is permanently placed as second best” (Hutton, cited in Marquand, 2004,
p. 172). This marginalisation of the public interest has, it is suggested, had serious
consequences for society, including diminished trust and social cohesion (Ginn,
2003, 2004).
We reject the argument that the privatisation of pensions has, universally
and unambiguously, been informed by this particular endorsement of private
interest. While it may reflect the underlying intent and impact of reforms that have
8
sought to promote a greater reliance on voluntary third-pillar pension provision, it
is largely irrelevant to an understanding of mandated private pension
arrangements.
Privatisation generally may be defined as the shifting of a government
function, either in whole or in part, from the public to the private sector (Rose,
1989). We are concerned, however, with a specific form of privatisation, where
statutory measures have been adopted to give a role to the private (non-state)
sector in the administration of mandatory pension arrangements. This form of
privatisation has been embraced in Latin America, Central and Eastern Europe,
Western Europe and Australasia. What distinguishes this approach, described
elsewhere as “forced saving” (Bateman et al., 2001), is its emphasis on statutory
compulsion. Specified individuals are required by law to join a private pension
plan, operating within the framework of a state-mandated private pension scheme,
instead of, or in addition to, participating in a public pension scheme. As we shall
see, such privatisation may encompass first- and second-pillar provision. This
approach may be distinguished from three alternative approaches to pension
privatisation. The first is where the enabling legislation that established public
pension schemes exempts from coverage those who are members of an equivalent
private pension plan. This is characteristic of countries operating National
Provident Funds (Dixon, 1999). The second is where the membership of
occupational pension plans is made, by employment law, a condition of
employment. The third approach is “privatisation-by-stealth”, where the
retrenchment of public provision (for example, by reducing benefits, or by
tightening eligibility and coverage criteria) creates a “social protection gap”
(Bonoli et al., 2000), which encourages individuals to voluntarily affiliate to a
private scheme.
Our focus extends beyond the third-pillar of retirement pensions, where
the emphasis is on voluntary provision that is administered by the financial
services industry. Under mandated private pension arrangements, scheme
administration may be undertaken by a range of agencies, including, for example,
corporate entities, mutual associations, voluntary organisations, stakeholder
9
organisations, such as labour unions and community-based associations, and
social partner organisations. Thus we are not concerned exclusively with
commercial-for-profit provision in a competitive market setting. In sum, the
pension privatisation initiatives that comprise the focus of this paper have two
broad defining characteristics: mandated compulsory scheme membership and the
possibility of a wide compass of non-state scheme administration.
This paper has two central aims. First, we identify the common and
distinctive ways that the architects of extant mandated private arrangements have
sought to promote and protect the public interest, by imposing statutory
obligations, with compliance enforced through appropriate regulatory instruments.
This has encompassed, inter alia: social solidarity, or the promotion of social
cohesion through inclusiveness and income redistribution; security, by
accentuating the sustainability of pension arrangements, both organisationally and
financially; individual responsibility, to ensure that retirement income is
distributed in accordance with (employment focussed) desert, and to prevent
unnecessary welfare dependence; and transparency and accountability, which
increase the likelihood that pension institutions will be seen to act in accordance
with the requirements of the public interest. We illustrate these and other
mandated private pension arrangement attributes with regard to five areas of
social security design.
Coverage requirements (who is required to be protected — the covered
person — by the scheme?).
Benefit eligibility requirements (under what conditions may accumulated
assets be drawn down as benefits?).
Approved benefit provision requirements (what form do benefits take?).
Finance (who is required to contribute to the financing of retirement
benefits, and in what specific ways are their contributions utilised?).
10
Governance, which is concerned with the nature and degree of
intrusiveness of regulatory arrangements to ensure compliance with statutory
obligations.
Second, and building on this discussion, we develop a quantitative assessment of
the degree to which the design of extant mandated private pension arrangements is
market orientated.1 Our discussion demonstrates that public interest concerns have
been integral to this distinctive form of pension privatisation. The diminution of
the public interest that seems to be endorsed by neoliberalism is not a universal or
unambiguous feature of pensions privatisation.
1.
What is the public interest?
Determining how the public interest with regard to pension arrangements
differs from the private interests of those who are charged with the responsibility
for their administration, and those who are affiliated as active contributors and
retirees, is problematic, as, indeed, is deciding what collective actions are justified
in the public interest. Public choice theorists argue that the public interest is only
knowable as the aggregation of private interests, as revealed in the marketplace
(Arrow, 1963). Others, such as communitarians (Sandel, 1982) and idealists
(Wolff, 1973), maintain that the public interest is grounded in a notion of the
collectivity, or the “common good”, which is different from, and greater than, the
sum of any private interests. In this sense, the public interest is constitutive of the
individual, partly because the common good reflects shared values and creates
social cohesion and identity (Plant, 1991). Involved is a delicate balancing act by
government: on one side is private interest (the self-interested autonomy of
contributors, retirees, and the range of agents responsible for the administration of
pension arrangements), giving rise to the case for the promotion of negative
freedom; on the other is the public interest (involving societal control), giving rise
to the case for constraining negative freedom so as to promote positive freedom
1
A high degree of market orientation would suggest that the public interest has been marginal to
the design of a mandated private pension arrangement.
11
(Berlin, 1969). Rouseau (1974), who predicted more than two centuries ago that
individual self-interest will routinely prevail over the public interest, articulated
the long-standing dilemmatic governance challenge: “[How] to devise a form of
association which will defend and protect the person and possessions of each
associate with all the collective strength, and in which each is united with all, yet
obeys only himself and remains as free as before” (1974, p. 17).
2.
Why is the public interest important?
Any statutory shift in responsibility for administering pension provision
away from the state creates a new governance environment in which the need to
protect the public interest, grounded on the premise that the private sphere can do
harm to others, justifies state intervention to correct the adverse consequences of
private actions (Mill, 1968). Such diswelfares flow from one or more of the risks
inherent in the private (non-state) provision of pensions.
Investment risks. The risk that agencies responsible for administering
pension schemes will be unable to supply promised or expected retirement
benefits, because rates of return are lower than anticipated, due perhaps to
exogenous downturn in capital markets, to less-than-optimal portfolio
management performance, or even to corporate or management malfeasance.
The financial cost of this is carried by retirees under defined-contribution
programmes, and by scheme sponsors under defined-benefit programmes.
Corporate risks. The risk that agencies responsible for administering
pension schemes will be unable to supply promised or expected retirement
benefits, because of organisational termination. This may result from a
number of contingencies, including: corporate bankruptcy, due perhaps to
exogenous downturn in capital markets, to management inefficiency or even
to corporate or management malfeasance; and deliberate boardroom business
strategy decisions, such as business rationalisation because of the emergence
of new, more profitable, investment opportunities. The financial cost of this is
12
carried by retirees, if scheme sponsors can legally abdicate from meeting their
full contractual obligations.
Longevity risks. The risk that retirees will live longer than can be sustained
by accumulated retirement savings. The cost of this is carried by the retirees, if
they take their benefits as lump-sums or programmed withdrawals, insurance
companies, if retirement benefits are annuitised, or by scheme sponsors under
defined-benefit schemes.
Inflation risks. The risk that future price rises with diminish the purchasing
power of pension income. The cost of this is carried by retirees if they take
their benefits as lump-sums, programmed withdrawals, or non-indexed
annuities, or by insurance companies if annuities are indexed.
Consumer choice risks. The risk that those affiliated to pension schemes
will make choices that, with the passage of time, become inappropriate to their
retirement needs. This may reflect: imperfect information regarding the likely
value of retirement benefits, which may be exacerbated by poor advice or
advice given in bad faith; and public policy risk, particularly the possibility of
changes to state retirement pension provision, state tax regimes and state
regulatory policies. The cost is carried by retirees, whose retirement income
does not meet their retirement needs.
This all brings into focus the fact that private pension arrangements are designed
and administered in an environment in which there are incongruent, even
incompatible, public and private motivations. This requires the state to identify the
public interest, and how it should protected. Several salient questions are likely to
emerge.
What is the best way of creating an enabling environment that will allow
alternative private (non-state) modes of pension provision to replace, compete
with, or augment public provision?
13
What multi-level political and administrative structures and processes are
needed to protect the public interest in a market environment?
What are the regulatory structures, processes, and requirements needed to
achieve articulated public policy goals in a market environment?
How should sub-optimal provision (for desired public policy outcomes) be
dealt with in a market environment?
What public accountability structures, instruments and processes are
needed to ensure that agencies responsible for administering pension schemes
are publicly accountable for the degree to which they achieve the public policy
goals expected of them?
3.
Protecting the public interest: governance approaches
In addressing these challenges, the state may choose to adopt one or a
combination of three governance modes: hierarchical, co-governing and selfgoverning. Each entails a separate conceptualisation of the public good and logic
of collective action.
3.1
Hierarchical governance mode
This involves the state imposing rights and obligations on those with the
responsibility for administering, and those who are affiliated to pension schemes.
It is premised on two principles: that only the state can determine, protect and
promote the public interest; and the state’s seal-of-approval on the provision of
private pension schemes creates a heightened need to ensure that all those involved
in contractual transactions conduct, and are seen to conduct, their affairs in the
public interest. The only legitimate individual autonomy/social control balance is
one that emerges as a product of political institutions engaging in aggregative and
integrative processes to derive the “will” of the people. An aggregative process
derives this through political campaigns and political bargaining. An integrative
process involves deliberation between those who seek to govern and those they
seek to govern. Once this individual autonomy/social control balance has been
14
decided upon, the state uses force, coercion, manipulation, persuasion or its
legitimate authority to achieve its desired policy outcomes.
The state’s adoption of this governance mode would reflect a policy
decision to the effect that the statutory transference of responsibility for
administering pension schemes away from the public sector does not diminish, let
alone displace, its public interest responsibilities. This would be achieved by the
state imposing rights and obligations, with compliance supervised and enforced by
one or more public regulatory agencies. Regulatory compliance, then, would
depend on the ease of regulatory violation detection, the probability of regulatory
sanctions being imposed on violators, and the magnitude of those sanctions (see
Young, 1992, p. 176). As we shall see, this governance mode predominates in the
design and administration of extant mandated private pension arrangements.
3.2
Co-governing governance mode
This requires those with the responsibility for administering private
pension schemes to cede some autonomy to the state-endorsed voluntary
regulatory network to which they belong, in return for agreed common rights and
compliance with common obligations. It is premised on the principle that they
should, with government (and perhaps representatives of both contributors and
retirees), co-determine, co-protect and co-promote the public interest. In this
context, a network is defined as:
a relatively stable set of mainly public and private corporate actors. The
linkages between the actors serve as channels for communication and for
the exchange of information, expertise, trust and other policy resources.
The boundary of a network would not, in the first place, be determined by
formal institutions but rather would be the result of a process of mutual
recognition,
dependent
on
functional
relevance
embeddedness” (Kenis and Schneider, 1991, pp. 41–42).
15
and
structural
By so belonging, all members of the voluntary regulatory network would come to
share a commitment to a common set of regulatory values, which presumes that
there is a synergy between the categorical interests of all network participants, and
which constrains the public interest to an exclusive set of categorical interests (or
aggregative common private interests). This has, of course, implications for the
state’s role in the articulation of what constitutes the public interest.
The state’s endorsement of this governance mode would reflect a policy
decision to the effect that the statutory transference of responsibility for
administering pension schemes away from the public sector allows the
displacement of its public interest responsibilities to a voluntary regulatory
network focused on an exclusive set of categorical interests. Regulation is
achieved by state-endorsed voluntary regulation, where regulations are codesigned, co-authorised and co-implemented by an exclusive set of stakeholders.
Regulatory compliance would be contingent upon the regulated having a
commitment to a common set of regulatory values grounded in a set of categorical
interests. This governance mode is a salient feature of a small number of mandated
private pension arrangements, particularly those that have been instituted in
continental Europe, where there is a strong tradition of stakeholder engagement in
the conduct of industrial relations.
3.3
Self-governing governance mode
This requires those with the responsibility for administering private
pension schemes to self-regulate their conduct in accordance with the rights and
obligations articulated in enforceable contracts, negotiated in context of the
statutory market environment. It rests on two premises: the public interest is
knowable only as an expression of the “will” of the market — the aggregation of
individual preferences as revealed in the marketplace (Arrow, 1963, 1967;
Friedman, 1962); and the state is inherently inefficient, ineffective, and, in itself,
unable to protect the public interest.
The state’s adoption of this governance mode would reflect a policy decision
to the effect that the statutory transference of responsibility for administering
16
pension schemes away from the public sector relieves it of any public interest
responsibilities, beyond determining a set of enforceable market transaction rules
embedded in the laws of property, tort and contract. Contractual compliance would
be instrumental, based on economic calculations of net compliance costs.
Regulation is achieved by the state enforcing contracts embodying a zero tolerance
of non-compliance and full restitution as the ultimate sanction. Although elements
of self-regulation are evident in extant mandated private pension arrangements,
this is not the preferred dominant governance mode.
4.
Protecting the public interest: policy instruments
However the state chooses to protect the public interest, it must be
cognisant of the implications of its regulatory attitudes and behaviour on the
balance of power between itself and those it seeks to regulate, and on the rights of
the regulated in a statutory market environment, where there may be incongruent,
even incompatible, public- and private-interest goals. In such circumstances, the
state must at the very least be willing and able to articulate a set of statutory design
features, embracing:
the desired characteristics of the statutory market environment created: viz.
who should be obliged to purchase and pay for what type of retirement savings
vehicles, for consumption by whom under what future circumstances;
the characteristics of acceptable sellers of retirement savings vehicles: viz.
ownership, corporate governance, financial and domicile (the content of
structural regulations); and
the acceptable forms of behaviour by sellers of retirement savings vehicles:
viz. institutional management practices; investment portfolio management
practices; record keeping; information confidentiality; reporting and
disclosure; access by contributors and beneficiaries to stored information;
financial auditing practices; corporate, director or management malfeasance;
and winding-up provisions in the event of being unable (or unwilling) to meet
financial obligations.
17
The enforcement of these statutory design features necessarily entails a mix of
regulatory instruments (Gunningham and Grabosky, 1998):
Command and control instruments, which can include: programme design
standards (such as required programme coverage, eligibility, finance and
benefit provision features); criminal liability (in the event of malfeasance by
any contractual party); process standards (such as acceptable forms of
corporate behaviour like institutional management practices, investment
portfolio management practices, and information management and disclosure
practices); and performance standards (such as a benchmark standard for rates
of return on contributors’ assets).
Economic instruments, which can include: broad-based economic
instruments (such as licensing and registration fees and security bond
requirements); government subsidies (to offset any differential cost associated
with the coverage of particular target population groups); tax disincentives
(such as punitive corporate tax rates being applied if an acceptable rate of
return on contributors’ assets is not achieved); and tax incentives (such as
preferential corporate tax rates being applied if an acceptable rate of return on
contributors’ assets is not achieved); and civil legal liability (such as a right to
full restitution in the event of culpable contractual non-performance).
Information instruments, which can include: public education programmes
(such as performance league tables); corporate performance reporting (such as
mandatory performance indicator disclosure); right-to-know requirements
(such as mandatory financial disclosures); and product certification (such as
state-approval of particular types of retirement benefit products).
Whether private interests are able to subvert the public interest depends on the
statutory design features of private pension schemes and the chosen mode of
enforcement, which determine the degree of risk of governance failure (Bernstein,
1996). Two sets of contingencies need to be addressed.
18
Asymmetrical information flows, where those with the responsibility for
administering private pension schemes distort or withhold from regulators the
information that is necessary to regulate effectively (say, information
regarding financial product commission rates; management incentive and
bonus payments; actual administrative costs; actual profit margins; proposed
or likely business rationalisation measures; and corporate mergers or
takeovers to achieve private-interest ends).
Agency capture, where those with the responsibility for administering
private pension schemes manipulate the regulators (by, perhaps, strategic
agenda setting or compromise bargaining at the political or administrative
levels, to achieve private-interest ends).
Building and maintaining popular trust in mandated private pension arrangements,
and, indeed, in government as the trustee of the public interest, suggests that any
regulatory mechanism put in place must have the following objectives.
To ensure that both the regulated and the external regulators act cooperatively, working together towards the achievement of mutually beneficial
and equitable retirement income outcomes.
To be flexible enough to allow the regulated to respond to the challenges
of complexity, diversity and the dynamics of modern society.
To encourage compliance by not imposing excessive obligations on the
regulated, whilst discouraging non-compliance by effectively enforcing those
obligations that are imposed.
To be transparent, so as to foster co-ordination and co-operation between
the community-at-large, the regulated and external regulators.
To ensure participation, by involving all stakeholders, directly or indirectly,
in strategically important decision-making.
19
To ensure that the desired degree of market competition is attained and
maintained.
We turn now to the common, as well as the diverse and distinctive, ways that these
aims, objectives and policy instruments have been reflected in the design of extant
mandated private pension arrangements.
5.
Overview of mandated private pension arrangements
Mandated private pension arrangements have been embraced by countries
in four regions — Latin America (11 countries or 34 percent), Central and Eastern
Europe (9 countries or 28 percent), Western Europe (7 countries or 22 percent)
and Australasia (5 countries or 16 percent). Most were introduced in the 1990s
and 2000s (75 percent). Such schemes compliment public provision in a majority
of instances (19 countries or 59 percent), although some have replaced public
provision (8 countries or 25 percent), while several provide an alternative to
public provision (5 countries or 16 percent), whether as an alternative to a public
first-pillar pension programme — as in Colombia, Ecuador and Peru (10 percent)
— or a public second-pillar pension programme — as in Argentina and the United
Kingdom (6 percent).
Defined-contribution schemes are the most prevalent (28 countries or 88
percent), with defined-benefit schemes being mandated in only seven countries
(22 percent). Three countries have mandated both strategies (Australia,
Switzerland and the United Kingdom). Occupational pension schemes (21
countries or 66 percent) are almost twice as prevalent as personal accounts (12
countries or 38 percent), although the United Kingdom has adopted both
approaches. Thus, occupational defined-contribution schemes are the most
common (17 countries or 53 percent), followed by personal defined-contribution
schemes (12 countries or 38 percent), and occupational defined-benefit schemes
(7 countries or 22 percent). The pension scheme modality endorsed by
neoliberalism — the personal defined-contribution plan — has thus been adopted
in only a minority of countries.
20
Mandated private pension schemes coexist with public retirement-benefit
provision in all but one country, Papua New Guinea. They most commonly coexist with public social insurance programmes (25 countries or 78 percent),
although such provision is being phased out in five countries (Chile, Dominican
Republic, El Salvador, Mexico and Uruguay). Interestingly, only in Slovenia,
which uses mandated private schemes to finance the early retirement of
employees in designated jobs, are retirees required to pay contributions towards
their first-pillar social insurance retirement pensions (Slovenia, 1999 Pension and
Invalidity Insurance Act, Part XII, Articles 283 [5] and 284 [1]). Mandated private
schemes also commonly co-exist with tax-financed social assistance programmes
(24 countries or 75 percent).
Where mandated private schemes have replaced public provision (8
countries or 25 percent), two transitional arrangements have been instituted. The
first involves government transferring past contributions to social insurance
programmes — paid as Recognition Bonds — when coverage transfers from the
public to the private sector, as happens in Bolivia, Chile (where they are indexed),
the Dominican Republic, and El Salvador (50 percent of cases). The second
involves the freezing of accumulated public retirement-pension entitlements at the
time of transfer, which are subsequently paid upon the attaining of eligibility, as
happens in Kazakhstan, Mexico, Papua New Guinea and Uruguay (50 percent of
cases). To finance these future public pension entitlements, Kazakhstan continues
to collect payroll taxes from employers, albeit at a reduced rate (15 percent, as
compared with 25.5 percent imposed prior to the pension reform), which is being
phased out over time as the public retirement pension obligations diminish
(Andrews, 2000, 1,
pp. 7–9, 11). Where mandated private schemes are an
alternative to public retirement provision (5 countries or 16 percent),
arrangements exist to protect the accumulated rights of transferees. In Columbia
and Peru, Recognition Bonds are paid, while in the United Kingdom, an
actuarially determined, age-related rebate of their past public contributions is
provided.
21
Argentina and Ecuador have chosen to freeze accumulated entitlements, which
can be drawn upon once the qualifying conditions for a public retirement pension
have been met.
6.
Coverage
This is concerned with the degree of population coverage that is required
of retirement savings schemes. Where the design and administration of pension
arrangements are framed primarily in terms of private interest, coverage is an
irrelevant issue, because the decision to affiliate to a retirement scheme is
voluntary, reflecting the willingness and capacity to pay the prices that are
22
Table 1. An overview of mandated private pension arrangements
Country
Year
introduced
Argentina
1994
Alternative
PDC
Australia
Bolivia
Bulgaria
Chile
Columbia
Costa Rica
Croatia
Dominican Republic
Ecuador
El Salvador
Estonia
Finland
France
Hong Kong
Hungary
Iceland
Kazakhstan
Latvia
Liechtenstein
Macedonia
Mexico
Papua New Guinea
Peru
Poland
Slovenia
South Korea
Sweden
Switzerland
Ukraine
1992
1997
2001
1981
1994
2000
2002
2003
2002
1998
2002
1962
1972
2000
1998
1974
1998
2002
1989
2003
1992, 1997
2000
1991
1999
2001
1962
1999
1985
2004
Complementary
Replacement
Complementary
Replacement
Alternative
Complementary
Complementary
Replacement
Alternative
Replacement
Complementary
Complementary
Complementary
Complementary
Complementary
Complementary
Replacement
Complementary
Complementary
Complementary
Replacement
Replacement
Alternative
Complementary
Complementary
Complementary
Complementary
Complementary
Complementary
ODC, ODB
PDC
ODC
PDC
ODC
ODC
PDC
ODC
ODC
ODC
ODC
ODB
ODC
ODC
PDC
ODB
PDC
PDC
ODB
PDC
ODC
ODC
PDC
ODC
ODC
ODB
ODC
ODC, ODB
ODC
United Kingdom
1961, 1988
Alternative
Uruguay
1996
ODC,
PDC
PDC
Notation:
Objective
Replacement
PDC: Personal Defined-Contribution scheme
ODC: Occupational Defined-Contribution scheme
ODB: Occupational Defined-Benefit scheme
23
Scheme
type
ODB
charged by sellers (as reflected in voluntary third-pillar pension arrangements,
which have embraced the self-governing governance mode) (Simpson, 1996;
Murray, 1997), although affiliation may be made mandatory under specific
employment contracts, which embeds purchase decisions in choice-ofemployment decisions. Under mandated private pension arrangements, however,
the degree of coverage is determined by statute, reflecting one or more of a range
of public interest concerns, including, inter alia, the appropriate balance between
inclusiveness and desert, defined in terms of work participation, the need to
expedite privatisation, by ensuring a smooth transition between public and private
provision, and the requirement that both the term of affiliation during which
contributions are paid, and employee earnings, are sufficient to generate a
satisfactory retirement income (Gillion et al., 2000).
Employees in the formal employment sector are the target population for
mandated private schemes, to achieve an appropriate balance between
inclusiveness, which underpins social solidarity, and desert, where economic
rewards are attached to labour force participation (Esping-Andersen, 1990). The
Ukraine is the only country to extend coverage beyond those in paid employment
to non-employed family members of entrepreneurs who receive special tax
treatment, full-time students in higher and occupational education, people engaged
in off-the-job occupational training for which they receive a stipend, former
employees in receipt of redundancy benefits, and recipients of occupational
disability benefits, child allowances (for children up to three years of age) ,
temporary disability allowances, and allowances for the care of invalided minors
(Ukraine, 2003 Law of Ukraine on Mandatory State Pension Insurance, Article 4).
Moreover, only Finland and Iceland have instituted universal employment
coverage. Finland, distinctively, has done so by enacting a principal statute
establishing a master mandatory privately administered scheme for private-sector
employees then, effectively, extending its coverage by the enactment of subsidiary
statutes targeting particular population groups (notably, temporary employees,
performing artists, the self employed, farmers, state employees, local government
employees and church employees). Iceland achieved universal employment
24
coverage by mandating a network of voluntary occupational pension schemes,
developed initially under collective bargaining agreements between employer
federations and labour unions, which means that membership is usually based on
union affiliation. Coverage exclusions are common (29 countries or 91 percent),
which has important implications for women. The most restricted coverage may
be found in Slovenia, where it is limited to employees “performing particularly
hard work and work harmful to health as well as [those] performing professional
activities which cannot be successfully performed after attaining a certain age”
(Slovenia, 1999 Pension and Invalidity Insurance Act, Part XII, Article 280 [1]).
The particular jobs that fall into this category have been designated by the
Minister for Labour, with the “consent of the relevant labour union and
employer’s association” (Slovenia, 1999 Pension and Invalidity Insurance Act,
Part XII, Article 280 [3]).
6.1
Coverage exemption
Coverage exemptions, which are of course also characteristic of publicly
administered pension schemes, may be instituted for several reasons (Gillion et
al., 2000). In some countries, coverage exclusions are part of a strategy designed
to phase in mandated private retirement-benefit schemes. Others have made a
strategic decision to exclude particular employee categories. Most commonly, this
takes the form of exempting employees in particular sectors and industries (21
countries or 66 percent), particularly public-sector employees (19 countries or 90
percent of cases), all of whom are covered by special schemes, although in six of
those countries (32 percent of cases) such arrangements are being phased out
(Bolivia, Chile, Dominican Republic, El Salvador, Peru and Uruguay). There are,
however, five other significant excluded categories of employees.
The most common exemption category (8 countries or 25 percent) includes
employees who are below retirement age but above a designated age at
commencement date, which means they were born before a specific year
(typically 1962). This acknowledges that a satisfactory retirement income requires
a sufficient contribution period. Such employees continue to be covered by public
25
retirement-pension
programmes
(Bulgaria,
Croatia,
Dominican
Republic,
Ecuador, El Salvador, Latvia, Poland and Uruguay). They are permitted voluntary
affiliation in only four of those countries (Dominican Republic, Ecuador, El
Salvador and Latvia). This makes mandatory coverage applicable only for those
below this designated age.
The second most common exemption category (6 countries or 19 percent)
includes low-income employees (Australia, Bolivia, Liechtenstein, Switzerland,
the United Kingdom and Uruguay), whose earnings are arguably insufficient to
generate a satisfactory retirement income from a long-term savings arrangement.
In all but Bolivia, the earnings threshold below which employees are exempted
from coverage is set by law, whereas Bolivia ties its earning threshold to the
national minimum wage. This makes mandatory coverage applicable only for
those whose earnings are above this designated threshold.
Three exemption categories, which are less common, are constituted by
specific employee groups (each applicable in 5 countries or 16 percent). One is
employees who were in covered employment at commencement date but who
explicitly remained covered by extant public pension programmes, with the
possibility of voluntary affiliation to the private arrangement (Chile, Estonia,
Hungary, Macedonia and Mexico). This makes mandatory coverage applicable
only to those first entering the workforce after commencement date. The second
group is employees below a minimum age, typically 20 years, but between a range
of 18 years (Australia, Estonia and the United Kingdom) to 23 or 24 years
(Liechtenstein and Sweden respectively). This makes mandatory coverage
applicable only to those above that designated age. The third group is employees
deemed to be in a pre-retirement age group at commencement date, who remain
covered by the extant public retirement-pension programmes (El Salvador,
Hungary, Latvia, Poland and Sweden), which makes mandatory coverage
applicable only to those born after a specific year, typically 1945 for men and
1947 for women, but ranging from 1937 for both men and women in Sweden to
1953 and 1956 for men and women, respectively, in Hungary. In Sweden, there is
also an intermediate age cohort (people born between 1938 and 1953) who, whilst
26
covered under its mandated private retirement provision, also remain eligible for a
national supplementary pension.
There are other relatively minor coverage exemption categories: casual
employees (Liechtenstein, Papua New Guinea and Switzerland); temporary
employees (Liechtenstein and Switzerland); employees who are members of
exempted equivalent voluntary occupational-pension schemes (Hong Kong and
Liechtenstein); contract workers (Hong Kong and Liechtenstein); domestic
servants (Hong Kong and Australia); those abov
Working Papers on the Reform of Pensions, No. 2, 2008.
The Public Interest and Retirement-Income-Protection: The
Design of Mandated Private Pension Arrangements
Mark Hyde and John Dixon
1
The Public Interest and Retirement-Income-Protection: The
Design of Mandated Private Pension Arrangements
Mark Hyde* and John Dixon**
* Mark Hyde is a Reader in Public Policy and Management at the University of
Plymouth, Drake Circus, Plymouth PL4 8AA, United Kingdom. Telephone: +44
01752 233230; email: mhyde@plymouth.ac.uk; web:
http://www.zyworld.com/PensionsWorldwide/Cover.htm
** John Dixon is a Professor in Public Policy and Management at the University
of Plymouth, Drake Circus, Plymouth PL4 8AA, United Kingdom. Telephone:
+44 01752 233274; email: J.Dixon@plymouth.ac.uk; web:
http://www.plymouth.ac.uk/researchcover/rcp.asp?pagetype=G&page=55
2
Preface
The shift from public to non-state administration, inherent in recent pension
privatisation reforms, has suggested to several observers that pension policy has,
globally, converged around the precepts of the “neoliberal” welfare reform model,
marginalising the public interest. We reject this one-dimensional characterisation
of privatisation. In particular, we identify the diverse ways in which the architects
of a distinctive approach to pensions privatisation have sought to promote and
protect the public interest, by imposing statutory obligations, with compliance
enforced through appropriate regulatory instruments. This has encompassed
several public interest objectives, including the promotion of social solidarity,
individual and family responsibility in the context of interrupted earnings,
security, transparency and accountability. Where mandated private pension
arrangements have been introduced, policy makers have been tightly prescriptive
with regard to: coverage (who should be protected?); eligibility (under what
circumstances may accumulated assets be withdrawn as benefits?); benefits (what
form should the retirement benefits derived from pension schemes take?); finance
(how should retirement benefits be paid for?); and governance (how should the
activities of those with responsibility for administering pension schemes be
regulated?). Building on this discussion, we develop a quantitative assessment of
the degree to which the design of mandated private pension arrangements is
market orientated. Overall, our analysis of the design of mandated private pension
arrangements suggests that the diminution of the public interest that seems to be
endorsed by “neoliberalism” is not a universal or unambiguous feature of pension
privatisation.
Professor John Dixon
Dr. Mark Hyde
University of Plymouth
United Kingdom
3
Table of Contents
Preface
1.
What is the public interest?........................................................................11
2.
Why is the public interest important?.........................................................12
3.
Protecting the public interest: governance approaches..............................14
3.1
Hierarchical governance mode.............................................................14
3.2
Co-governing mode..............................................................................15
3.3
Self-governing mode............................................................................16
4.
Protecting the public interest: policy instruments......................................17
5.
Overview of mandated private pension arrangements...............................19
6.
Coverage.....................................................................................................21
6.1
Coverage exemption.............................................................................24
6.2
Voluntary coverage..............................................................................26
6.3
The self-employed................................................................................27
7.
Eligibility....................................................................................................27
7.1
Retirement............................................................................................28
7.2
Early retirement....................................................................................29
7.3
Deferred retirement..............................................................................31
7.4
Pre-retirement benefit eligibility..........................................................31
8.
Benefits.......................................................................................................35
8.1
Earnings-related benefits......................................................................37
8.2
Accumulated savings............................................................................39
8.3
Survivors’ benefits...............................................................................43
8.4
Disability
benefits.................................................................................45
8.5
Mandatory supplementary benefits......................................................46
8.6
Government subsidies and taxes..........................................................46
9.
Financing....................................................................................................48
9.1
Contributions........................................................................................49
9.2
Employee-only contributions...............................................................52
4
10.
11.
9.3
Employer-only contributions................................................................53
9.4
Diverted public pension contributions.................................................53
9.5
Multiple contribution liabilities............................................................53
9.6
Additional voluntary contributions......................................................53
9.7
Income for contribution purposes.........................................................54
9.8
Tax deductability..................................................................................55
9.9
Government subsidies..........................................................................56
Governance.................................................................................................56
10.1
Contribution collection.........................................................................57
10.2
Asset management................................................................................60
10.3
Benefit provision..................................................................................61
10.4
Regulatory regimes...............................................................................61
Must privatisation be market orientated?...................................................83
11.1
The market orientation of extant mandated
private pension schemes.......................................................................85
12.
Conclusion..................................................................................................95
Appendix..............................................................................................................100
Acknowledgements..............................................................................................104
References............................................................................................................105
5
The Public Interest and Retirement: The Design of Mandated
Private Pension Arrangements
Mark Hyde and John Dixon
“It is not markets that decide on individual well-being but actors that are
collective in their nature” (Trampusch, 2005, p. 3).
The shift from public to non-state administration, inherent in recent pension
privatisation reforms, has suggested to several observers that pension policy has
converged around the precepts of the neoliberal welfare reform model,
marginalising the public interest (Martin, 1993; Klein and Millar, 1995; Ploug,
1995; Bonoli et al., 2000). For Mishra (1990, p. 14), this approach advocates “the
return to a pure form of capitalism — the rigour and discipline of the marketplace
— including…a lean even if not mean social welfare system, and a reliance on
non-government sectors for meeting social needs”. In a similar vein, Martin
(1993, p. 6) maintains that the privatisation of welfare, including pensions, has
been guided by a global neoliberal alliance of:
economists, accountants and lawyers…the big banks and management
consultancies; the World Bank and the IMF; regional financial institutions,
such as the Inter-American Development Bank and the European Bank for
Reconstruction and Development; and bilateral agencies, notably the
United States Agency for International Development. Others again are
attached to universities or policy pressure groups sometimes referred to as
think tanks. Their broadly shared outlook is that the free market knows
best and the private sector does best, that the state’s main task in economic
and social development is to minimise impediments and maximise
inducements to private capital accumulation.
6
However, the belief that pension privatisation has been informed by neoliberalism
is not confined to those at the collectivist end of the ideological spectrum. Jose
Piñera, the principal architect of Chile’s fully funded defined-contribution pension
arrangement, describes how the precepts and principles of neoliberalism
“provided our guiding vision”: indeed, the reform “was introduced as part of a
coherent set of radical free market reforms”, creating “a political and cultural
atmosphere more consistent with free markets and a free society” (Piñera, 2001,
pp. 3–4). Indeed, Piñera maintains that Chile‘s so-called “neoliberal” model was
subsequently adopted throughout Latin America and by several Central and
Eastern European countries. But what about those countries where pension
provision has been privatised by governments of the centre-left? This does not, we
are told, contradict the contention that privatisation has been informed by
neoliberal political economy. The problem with the rhetoric of neoliberalism in its
unadulterated form is its apparent endorsement of intensified social inequalities,
which creates political barriers to the implementation of market reforms. The
solution has been to “seal the victory of the market” by preserving “the placebo of
a compassionate public authority”, emphasising “the compatibility of competition
with solidarity”. Pensions privatisation is now “carefully surrounded with
subsidiary concessions and softer rhetoric” in order to “kill off opposition to
neoliberal hegemony completely” (Anderson, 2000, p. 11). In this view, centre-left
values are merely an “ideological shell” for neoliberalism, which is now
“dominant in the assumptive worlds of policy-makers” (Bonoli et al., 2000, p. 2).
Neoliberalism generally endorses an approach to retirement-incomeprotection where private interest is predominant. In this conception, private
interest has three core dimensions.
Individualism. Private interest is regarded as individual self-interest, as
reflected in an individual’s utility function. Defined in this way, private
interest is the cornerstone of human motivation, and the driving force of all
individual action. This understanding contrasts with collectivist approaches to
the notion of “interest”, which subsume individual self-interest under group
7
interests (people act in their “class interests”), or which discount individual
self-interest entirely (people act according to social norms).
Voluntary action. Private interest presumes a voluntary approach to
individual decision making, because “every person is the final judge of his
own welfare and interests. No economic actor is allowed to have power
(economic or otherwise) over other actors” (Swedberg, 2005, p. 30).
Freedom. Individual decision making is legitimate only to the extent that it
is consistent with the freedom of others, because “individuals have the right to
run their lives as they see fit, provided they do not interfere with the right of
others to do the same” (Shapiro, 1998, p. 2). Of particular importance is
negative rights (regarding freedom of expression and association, life and
property), which impose a duty on the individual to refrain from particular
courses of action.
As we suggest below, the public interest is conceptualised as the aggregation of
individual interests, and its legitimate scope encompasses the rule of law, to
enforce negative rights. Where private interest is predominant, the design and
administration of pension arrangements are the object of voluntary action, and,
consequently, may be expected to manifest in a variety of ways, reflecting the
diverse resource endowments and preferences of consumers and suppliers,
constrained only by rules defined by laws of property, tort and contract. Rejected
is the notion, admirably expressed by Hutton, that to construct a society “around
the nostrum that the public realm is morally, economically and socially inferior to
the private realm is to submit to an alien barbarism in which what we hold in
common is permanently placed as second best” (Hutton, cited in Marquand, 2004,
p. 172). This marginalisation of the public interest has, it is suggested, had serious
consequences for society, including diminished trust and social cohesion (Ginn,
2003, 2004).
We reject the argument that the privatisation of pensions has, universally
and unambiguously, been informed by this particular endorsement of private
interest. While it may reflect the underlying intent and impact of reforms that have
8
sought to promote a greater reliance on voluntary third-pillar pension provision, it
is largely irrelevant to an understanding of mandated private pension
arrangements.
Privatisation generally may be defined as the shifting of a government
function, either in whole or in part, from the public to the private sector (Rose,
1989). We are concerned, however, with a specific form of privatisation, where
statutory measures have been adopted to give a role to the private (non-state)
sector in the administration of mandatory pension arrangements. This form of
privatisation has been embraced in Latin America, Central and Eastern Europe,
Western Europe and Australasia. What distinguishes this approach, described
elsewhere as “forced saving” (Bateman et al., 2001), is its emphasis on statutory
compulsion. Specified individuals are required by law to join a private pension
plan, operating within the framework of a state-mandated private pension scheme,
instead of, or in addition to, participating in a public pension scheme. As we shall
see, such privatisation may encompass first- and second-pillar provision. This
approach may be distinguished from three alternative approaches to pension
privatisation. The first is where the enabling legislation that established public
pension schemes exempts from coverage those who are members of an equivalent
private pension plan. This is characteristic of countries operating National
Provident Funds (Dixon, 1999). The second is where the membership of
occupational pension plans is made, by employment law, a condition of
employment. The third approach is “privatisation-by-stealth”, where the
retrenchment of public provision (for example, by reducing benefits, or by
tightening eligibility and coverage criteria) creates a “social protection gap”
(Bonoli et al., 2000), which encourages individuals to voluntarily affiliate to a
private scheme.
Our focus extends beyond the third-pillar of retirement pensions, where
the emphasis is on voluntary provision that is administered by the financial
services industry. Under mandated private pension arrangements, scheme
administration may be undertaken by a range of agencies, including, for example,
corporate entities, mutual associations, voluntary organisations, stakeholder
9
organisations, such as labour unions and community-based associations, and
social partner organisations. Thus we are not concerned exclusively with
commercial-for-profit provision in a competitive market setting. In sum, the
pension privatisation initiatives that comprise the focus of this paper have two
broad defining characteristics: mandated compulsory scheme membership and the
possibility of a wide compass of non-state scheme administration.
This paper has two central aims. First, we identify the common and
distinctive ways that the architects of extant mandated private arrangements have
sought to promote and protect the public interest, by imposing statutory
obligations, with compliance enforced through appropriate regulatory instruments.
This has encompassed, inter alia: social solidarity, or the promotion of social
cohesion through inclusiveness and income redistribution; security, by
accentuating the sustainability of pension arrangements, both organisationally and
financially; individual responsibility, to ensure that retirement income is
distributed in accordance with (employment focussed) desert, and to prevent
unnecessary welfare dependence; and transparency and accountability, which
increase the likelihood that pension institutions will be seen to act in accordance
with the requirements of the public interest. We illustrate these and other
mandated private pension arrangement attributes with regard to five areas of
social security design.
Coverage requirements (who is required to be protected — the covered
person — by the scheme?).
Benefit eligibility requirements (under what conditions may accumulated
assets be drawn down as benefits?).
Approved benefit provision requirements (what form do benefits take?).
Finance (who is required to contribute to the financing of retirement
benefits, and in what specific ways are their contributions utilised?).
10
Governance, which is concerned with the nature and degree of
intrusiveness of regulatory arrangements to ensure compliance with statutory
obligations.
Second, and building on this discussion, we develop a quantitative assessment of
the degree to which the design of extant mandated private pension arrangements is
market orientated.1 Our discussion demonstrates that public interest concerns have
been integral to this distinctive form of pension privatisation. The diminution of
the public interest that seems to be endorsed by neoliberalism is not a universal or
unambiguous feature of pensions privatisation.
1.
What is the public interest?
Determining how the public interest with regard to pension arrangements
differs from the private interests of those who are charged with the responsibility
for their administration, and those who are affiliated as active contributors and
retirees, is problematic, as, indeed, is deciding what collective actions are justified
in the public interest. Public choice theorists argue that the public interest is only
knowable as the aggregation of private interests, as revealed in the marketplace
(Arrow, 1963). Others, such as communitarians (Sandel, 1982) and idealists
(Wolff, 1973), maintain that the public interest is grounded in a notion of the
collectivity, or the “common good”, which is different from, and greater than, the
sum of any private interests. In this sense, the public interest is constitutive of the
individual, partly because the common good reflects shared values and creates
social cohesion and identity (Plant, 1991). Involved is a delicate balancing act by
government: on one side is private interest (the self-interested autonomy of
contributors, retirees, and the range of agents responsible for the administration of
pension arrangements), giving rise to the case for the promotion of negative
freedom; on the other is the public interest (involving societal control), giving rise
to the case for constraining negative freedom so as to promote positive freedom
1
A high degree of market orientation would suggest that the public interest has been marginal to
the design of a mandated private pension arrangement.
11
(Berlin, 1969). Rouseau (1974), who predicted more than two centuries ago that
individual self-interest will routinely prevail over the public interest, articulated
the long-standing dilemmatic governance challenge: “[How] to devise a form of
association which will defend and protect the person and possessions of each
associate with all the collective strength, and in which each is united with all, yet
obeys only himself and remains as free as before” (1974, p. 17).
2.
Why is the public interest important?
Any statutory shift in responsibility for administering pension provision
away from the state creates a new governance environment in which the need to
protect the public interest, grounded on the premise that the private sphere can do
harm to others, justifies state intervention to correct the adverse consequences of
private actions (Mill, 1968). Such diswelfares flow from one or more of the risks
inherent in the private (non-state) provision of pensions.
Investment risks. The risk that agencies responsible for administering
pension schemes will be unable to supply promised or expected retirement
benefits, because rates of return are lower than anticipated, due perhaps to
exogenous downturn in capital markets, to less-than-optimal portfolio
management performance, or even to corporate or management malfeasance.
The financial cost of this is carried by retirees under defined-contribution
programmes, and by scheme sponsors under defined-benefit programmes.
Corporate risks. The risk that agencies responsible for administering
pension schemes will be unable to supply promised or expected retirement
benefits, because of organisational termination. This may result from a
number of contingencies, including: corporate bankruptcy, due perhaps to
exogenous downturn in capital markets, to management inefficiency or even
to corporate or management malfeasance; and deliberate boardroom business
strategy decisions, such as business rationalisation because of the emergence
of new, more profitable, investment opportunities. The financial cost of this is
12
carried by retirees, if scheme sponsors can legally abdicate from meeting their
full contractual obligations.
Longevity risks. The risk that retirees will live longer than can be sustained
by accumulated retirement savings. The cost of this is carried by the retirees, if
they take their benefits as lump-sums or programmed withdrawals, insurance
companies, if retirement benefits are annuitised, or by scheme sponsors under
defined-benefit schemes.
Inflation risks. The risk that future price rises with diminish the purchasing
power of pension income. The cost of this is carried by retirees if they take
their benefits as lump-sums, programmed withdrawals, or non-indexed
annuities, or by insurance companies if annuities are indexed.
Consumer choice risks. The risk that those affiliated to pension schemes
will make choices that, with the passage of time, become inappropriate to their
retirement needs. This may reflect: imperfect information regarding the likely
value of retirement benefits, which may be exacerbated by poor advice or
advice given in bad faith; and public policy risk, particularly the possibility of
changes to state retirement pension provision, state tax regimes and state
regulatory policies. The cost is carried by retirees, whose retirement income
does not meet their retirement needs.
This all brings into focus the fact that private pension arrangements are designed
and administered in an environment in which there are incongruent, even
incompatible, public and private motivations. This requires the state to identify the
public interest, and how it should protected. Several salient questions are likely to
emerge.
What is the best way of creating an enabling environment that will allow
alternative private (non-state) modes of pension provision to replace, compete
with, or augment public provision?
13
What multi-level political and administrative structures and processes are
needed to protect the public interest in a market environment?
What are the regulatory structures, processes, and requirements needed to
achieve articulated public policy goals in a market environment?
How should sub-optimal provision (for desired public policy outcomes) be
dealt with in a market environment?
What public accountability structures, instruments and processes are
needed to ensure that agencies responsible for administering pension schemes
are publicly accountable for the degree to which they achieve the public policy
goals expected of them?
3.
Protecting the public interest: governance approaches
In addressing these challenges, the state may choose to adopt one or a
combination of three governance modes: hierarchical, co-governing and selfgoverning. Each entails a separate conceptualisation of the public good and logic
of collective action.
3.1
Hierarchical governance mode
This involves the state imposing rights and obligations on those with the
responsibility for administering, and those who are affiliated to pension schemes.
It is premised on two principles: that only the state can determine, protect and
promote the public interest; and the state’s seal-of-approval on the provision of
private pension schemes creates a heightened need to ensure that all those involved
in contractual transactions conduct, and are seen to conduct, their affairs in the
public interest. The only legitimate individual autonomy/social control balance is
one that emerges as a product of political institutions engaging in aggregative and
integrative processes to derive the “will” of the people. An aggregative process
derives this through political campaigns and political bargaining. An integrative
process involves deliberation between those who seek to govern and those they
seek to govern. Once this individual autonomy/social control balance has been
14
decided upon, the state uses force, coercion, manipulation, persuasion or its
legitimate authority to achieve its desired policy outcomes.
The state’s adoption of this governance mode would reflect a policy
decision to the effect that the statutory transference of responsibility for
administering pension schemes away from the public sector does not diminish, let
alone displace, its public interest responsibilities. This would be achieved by the
state imposing rights and obligations, with compliance supervised and enforced by
one or more public regulatory agencies. Regulatory compliance, then, would
depend on the ease of regulatory violation detection, the probability of regulatory
sanctions being imposed on violators, and the magnitude of those sanctions (see
Young, 1992, p. 176). As we shall see, this governance mode predominates in the
design and administration of extant mandated private pension arrangements.
3.2
Co-governing governance mode
This requires those with the responsibility for administering private
pension schemes to cede some autonomy to the state-endorsed voluntary
regulatory network to which they belong, in return for agreed common rights and
compliance with common obligations. It is premised on the principle that they
should, with government (and perhaps representatives of both contributors and
retirees), co-determine, co-protect and co-promote the public interest. In this
context, a network is defined as:
a relatively stable set of mainly public and private corporate actors. The
linkages between the actors serve as channels for communication and for
the exchange of information, expertise, trust and other policy resources.
The boundary of a network would not, in the first place, be determined by
formal institutions but rather would be the result of a process of mutual
recognition,
dependent
on
functional
relevance
embeddedness” (Kenis and Schneider, 1991, pp. 41–42).
15
and
structural
By so belonging, all members of the voluntary regulatory network would come to
share a commitment to a common set of regulatory values, which presumes that
there is a synergy between the categorical interests of all network participants, and
which constrains the public interest to an exclusive set of categorical interests (or
aggregative common private interests). This has, of course, implications for the
state’s role in the articulation of what constitutes the public interest.
The state’s endorsement of this governance mode would reflect a policy
decision to the effect that the statutory transference of responsibility for
administering pension schemes away from the public sector allows the
displacement of its public interest responsibilities to a voluntary regulatory
network focused on an exclusive set of categorical interests. Regulation is
achieved by state-endorsed voluntary regulation, where regulations are codesigned, co-authorised and co-implemented by an exclusive set of stakeholders.
Regulatory compliance would be contingent upon the regulated having a
commitment to a common set of regulatory values grounded in a set of categorical
interests. This governance mode is a salient feature of a small number of mandated
private pension arrangements, particularly those that have been instituted in
continental Europe, where there is a strong tradition of stakeholder engagement in
the conduct of industrial relations.
3.3
Self-governing governance mode
This requires those with the responsibility for administering private
pension schemes to self-regulate their conduct in accordance with the rights and
obligations articulated in enforceable contracts, negotiated in context of the
statutory market environment. It rests on two premises: the public interest is
knowable only as an expression of the “will” of the market — the aggregation of
individual preferences as revealed in the marketplace (Arrow, 1963, 1967;
Friedman, 1962); and the state is inherently inefficient, ineffective, and, in itself,
unable to protect the public interest.
The state’s adoption of this governance mode would reflect a policy decision
to the effect that the statutory transference of responsibility for administering
16
pension schemes away from the public sector relieves it of any public interest
responsibilities, beyond determining a set of enforceable market transaction rules
embedded in the laws of property, tort and contract. Contractual compliance would
be instrumental, based on economic calculations of net compliance costs.
Regulation is achieved by the state enforcing contracts embodying a zero tolerance
of non-compliance and full restitution as the ultimate sanction. Although elements
of self-regulation are evident in extant mandated private pension arrangements,
this is not the preferred dominant governance mode.
4.
Protecting the public interest: policy instruments
However the state chooses to protect the public interest, it must be
cognisant of the implications of its regulatory attitudes and behaviour on the
balance of power between itself and those it seeks to regulate, and on the rights of
the regulated in a statutory market environment, where there may be incongruent,
even incompatible, public- and private-interest goals. In such circumstances, the
state must at the very least be willing and able to articulate a set of statutory design
features, embracing:
the desired characteristics of the statutory market environment created: viz.
who should be obliged to purchase and pay for what type of retirement savings
vehicles, for consumption by whom under what future circumstances;
the characteristics of acceptable sellers of retirement savings vehicles: viz.
ownership, corporate governance, financial and domicile (the content of
structural regulations); and
the acceptable forms of behaviour by sellers of retirement savings vehicles:
viz. institutional management practices; investment portfolio management
practices; record keeping; information confidentiality; reporting and
disclosure; access by contributors and beneficiaries to stored information;
financial auditing practices; corporate, director or management malfeasance;
and winding-up provisions in the event of being unable (or unwilling) to meet
financial obligations.
17
The enforcement of these statutory design features necessarily entails a mix of
regulatory instruments (Gunningham and Grabosky, 1998):
Command and control instruments, which can include: programme design
standards (such as required programme coverage, eligibility, finance and
benefit provision features); criminal liability (in the event of malfeasance by
any contractual party); process standards (such as acceptable forms of
corporate behaviour like institutional management practices, investment
portfolio management practices, and information management and disclosure
practices); and performance standards (such as a benchmark standard for rates
of return on contributors’ assets).
Economic instruments, which can include: broad-based economic
instruments (such as licensing and registration fees and security bond
requirements); government subsidies (to offset any differential cost associated
with the coverage of particular target population groups); tax disincentives
(such as punitive corporate tax rates being applied if an acceptable rate of
return on contributors’ assets is not achieved); and tax incentives (such as
preferential corporate tax rates being applied if an acceptable rate of return on
contributors’ assets is not achieved); and civil legal liability (such as a right to
full restitution in the event of culpable contractual non-performance).
Information instruments, which can include: public education programmes
(such as performance league tables); corporate performance reporting (such as
mandatory performance indicator disclosure); right-to-know requirements
(such as mandatory financial disclosures); and product certification (such as
state-approval of particular types of retirement benefit products).
Whether private interests are able to subvert the public interest depends on the
statutory design features of private pension schemes and the chosen mode of
enforcement, which determine the degree of risk of governance failure (Bernstein,
1996). Two sets of contingencies need to be addressed.
18
Asymmetrical information flows, where those with the responsibility for
administering private pension schemes distort or withhold from regulators the
information that is necessary to regulate effectively (say, information
regarding financial product commission rates; management incentive and
bonus payments; actual administrative costs; actual profit margins; proposed
or likely business rationalisation measures; and corporate mergers or
takeovers to achieve private-interest ends).
Agency capture, where those with the responsibility for administering
private pension schemes manipulate the regulators (by, perhaps, strategic
agenda setting or compromise bargaining at the political or administrative
levels, to achieve private-interest ends).
Building and maintaining popular trust in mandated private pension arrangements,
and, indeed, in government as the trustee of the public interest, suggests that any
regulatory mechanism put in place must have the following objectives.
To ensure that both the regulated and the external regulators act cooperatively, working together towards the achievement of mutually beneficial
and equitable retirement income outcomes.
To be flexible enough to allow the regulated to respond to the challenges
of complexity, diversity and the dynamics of modern society.
To encourage compliance by not imposing excessive obligations on the
regulated, whilst discouraging non-compliance by effectively enforcing those
obligations that are imposed.
To be transparent, so as to foster co-ordination and co-operation between
the community-at-large, the regulated and external regulators.
To ensure participation, by involving all stakeholders, directly or indirectly,
in strategically important decision-making.
19
To ensure that the desired degree of market competition is attained and
maintained.
We turn now to the common, as well as the diverse and distinctive, ways that these
aims, objectives and policy instruments have been reflected in the design of extant
mandated private pension arrangements.
5.
Overview of mandated private pension arrangements
Mandated private pension arrangements have been embraced by countries
in four regions — Latin America (11 countries or 34 percent), Central and Eastern
Europe (9 countries or 28 percent), Western Europe (7 countries or 22 percent)
and Australasia (5 countries or 16 percent). Most were introduced in the 1990s
and 2000s (75 percent). Such schemes compliment public provision in a majority
of instances (19 countries or 59 percent), although some have replaced public
provision (8 countries or 25 percent), while several provide an alternative to
public provision (5 countries or 16 percent), whether as an alternative to a public
first-pillar pension programme — as in Colombia, Ecuador and Peru (10 percent)
— or a public second-pillar pension programme — as in Argentina and the United
Kingdom (6 percent).
Defined-contribution schemes are the most prevalent (28 countries or 88
percent), with defined-benefit schemes being mandated in only seven countries
(22 percent). Three countries have mandated both strategies (Australia,
Switzerland and the United Kingdom). Occupational pension schemes (21
countries or 66 percent) are almost twice as prevalent as personal accounts (12
countries or 38 percent), although the United Kingdom has adopted both
approaches. Thus, occupational defined-contribution schemes are the most
common (17 countries or 53 percent), followed by personal defined-contribution
schemes (12 countries or 38 percent), and occupational defined-benefit schemes
(7 countries or 22 percent). The pension scheme modality endorsed by
neoliberalism — the personal defined-contribution plan — has thus been adopted
in only a minority of countries.
20
Mandated private pension schemes coexist with public retirement-benefit
provision in all but one country, Papua New Guinea. They most commonly coexist with public social insurance programmes (25 countries or 78 percent),
although such provision is being phased out in five countries (Chile, Dominican
Republic, El Salvador, Mexico and Uruguay). Interestingly, only in Slovenia,
which uses mandated private schemes to finance the early retirement of
employees in designated jobs, are retirees required to pay contributions towards
their first-pillar social insurance retirement pensions (Slovenia, 1999 Pension and
Invalidity Insurance Act, Part XII, Articles 283 [5] and 284 [1]). Mandated private
schemes also commonly co-exist with tax-financed social assistance programmes
(24 countries or 75 percent).
Where mandated private schemes have replaced public provision (8
countries or 25 percent), two transitional arrangements have been instituted. The
first involves government transferring past contributions to social insurance
programmes — paid as Recognition Bonds — when coverage transfers from the
public to the private sector, as happens in Bolivia, Chile (where they are indexed),
the Dominican Republic, and El Salvador (50 percent of cases). The second
involves the freezing of accumulated public retirement-pension entitlements at the
time of transfer, which are subsequently paid upon the attaining of eligibility, as
happens in Kazakhstan, Mexico, Papua New Guinea and Uruguay (50 percent of
cases). To finance these future public pension entitlements, Kazakhstan continues
to collect payroll taxes from employers, albeit at a reduced rate (15 percent, as
compared with 25.5 percent imposed prior to the pension reform), which is being
phased out over time as the public retirement pension obligations diminish
(Andrews, 2000, 1,
pp. 7–9, 11). Where mandated private schemes are an
alternative to public retirement provision (5 countries or 16 percent),
arrangements exist to protect the accumulated rights of transferees. In Columbia
and Peru, Recognition Bonds are paid, while in the United Kingdom, an
actuarially determined, age-related rebate of their past public contributions is
provided.
21
Argentina and Ecuador have chosen to freeze accumulated entitlements, which
can be drawn upon once the qualifying conditions for a public retirement pension
have been met.
6.
Coverage
This is concerned with the degree of population coverage that is required
of retirement savings schemes. Where the design and administration of pension
arrangements are framed primarily in terms of private interest, coverage is an
irrelevant issue, because the decision to affiliate to a retirement scheme is
voluntary, reflecting the willingness and capacity to pay the prices that are
22
Table 1. An overview of mandated private pension arrangements
Country
Year
introduced
Argentina
1994
Alternative
PDC
Australia
Bolivia
Bulgaria
Chile
Columbia
Costa Rica
Croatia
Dominican Republic
Ecuador
El Salvador
Estonia
Finland
France
Hong Kong
Hungary
Iceland
Kazakhstan
Latvia
Liechtenstein
Macedonia
Mexico
Papua New Guinea
Peru
Poland
Slovenia
South Korea
Sweden
Switzerland
Ukraine
1992
1997
2001
1981
1994
2000
2002
2003
2002
1998
2002
1962
1972
2000
1998
1974
1998
2002
1989
2003
1992, 1997
2000
1991
1999
2001
1962
1999
1985
2004
Complementary
Replacement
Complementary
Replacement
Alternative
Complementary
Complementary
Replacement
Alternative
Replacement
Complementary
Complementary
Complementary
Complementary
Complementary
Complementary
Replacement
Complementary
Complementary
Complementary
Replacement
Replacement
Alternative
Complementary
Complementary
Complementary
Complementary
Complementary
Complementary
ODC, ODB
PDC
ODC
PDC
ODC
ODC
PDC
ODC
ODC
ODC
ODC
ODB
ODC
ODC
PDC
ODB
PDC
PDC
ODB
PDC
ODC
ODC
PDC
ODC
ODC
ODB
ODC
ODC, ODB
ODC
United Kingdom
1961, 1988
Alternative
Uruguay
1996
ODC,
PDC
PDC
Notation:
Objective
Replacement
PDC: Personal Defined-Contribution scheme
ODC: Occupational Defined-Contribution scheme
ODB: Occupational Defined-Benefit scheme
23
Scheme
type
ODB
charged by sellers (as reflected in voluntary third-pillar pension arrangements,
which have embraced the self-governing governance mode) (Simpson, 1996;
Murray, 1997), although affiliation may be made mandatory under specific
employment contracts, which embeds purchase decisions in choice-ofemployment decisions. Under mandated private pension arrangements, however,
the degree of coverage is determined by statute, reflecting one or more of a range
of public interest concerns, including, inter alia, the appropriate balance between
inclusiveness and desert, defined in terms of work participation, the need to
expedite privatisation, by ensuring a smooth transition between public and private
provision, and the requirement that both the term of affiliation during which
contributions are paid, and employee earnings, are sufficient to generate a
satisfactory retirement income (Gillion et al., 2000).
Employees in the formal employment sector are the target population for
mandated private schemes, to achieve an appropriate balance between
inclusiveness, which underpins social solidarity, and desert, where economic
rewards are attached to labour force participation (Esping-Andersen, 1990). The
Ukraine is the only country to extend coverage beyond those in paid employment
to non-employed family members of entrepreneurs who receive special tax
treatment, full-time students in higher and occupational education, people engaged
in off-the-job occupational training for which they receive a stipend, former
employees in receipt of redundancy benefits, and recipients of occupational
disability benefits, child allowances (for children up to three years of age) ,
temporary disability allowances, and allowances for the care of invalided minors
(Ukraine, 2003 Law of Ukraine on Mandatory State Pension Insurance, Article 4).
Moreover, only Finland and Iceland have instituted universal employment
coverage. Finland, distinctively, has done so by enacting a principal statute
establishing a master mandatory privately administered scheme for private-sector
employees then, effectively, extending its coverage by the enactment of subsidiary
statutes targeting particular population groups (notably, temporary employees,
performing artists, the self employed, farmers, state employees, local government
employees and church employees). Iceland achieved universal employment
24
coverage by mandating a network of voluntary occupational pension schemes,
developed initially under collective bargaining agreements between employer
federations and labour unions, which means that membership is usually based on
union affiliation. Coverage exclusions are common (29 countries or 91 percent),
which has important implications for women. The most restricted coverage may
be found in Slovenia, where it is limited to employees “performing particularly
hard work and work harmful to health as well as [those] performing professional
activities which cannot be successfully performed after attaining a certain age”
(Slovenia, 1999 Pension and Invalidity Insurance Act, Part XII, Article 280 [1]).
The particular jobs that fall into this category have been designated by the
Minister for Labour, with the “consent of the relevant labour union and
employer’s association” (Slovenia, 1999 Pension and Invalidity Insurance Act,
Part XII, Article 280 [3]).
6.1
Coverage exemption
Coverage exemptions, which are of course also characteristic of publicly
administered pension schemes, may be instituted for several reasons (Gillion et
al., 2000). In some countries, coverage exclusions are part of a strategy designed
to phase in mandated private retirement-benefit schemes. Others have made a
strategic decision to exclude particular employee categories. Most commonly, this
takes the form of exempting employees in particular sectors and industries (21
countries or 66 percent), particularly public-sector employees (19 countries or 90
percent of cases), all of whom are covered by special schemes, although in six of
those countries (32 percent of cases) such arrangements are being phased out
(Bolivia, Chile, Dominican Republic, El Salvador, Peru and Uruguay). There are,
however, five other significant excluded categories of employees.
The most common exemption category (8 countries or 25 percent) includes
employees who are below retirement age but above a designated age at
commencement date, which means they were born before a specific year
(typically 1962). This acknowledges that a satisfactory retirement income requires
a sufficient contribution period. Such employees continue to be covered by public
25
retirement-pension
programmes
(Bulgaria,
Croatia,
Dominican
Republic,
Ecuador, El Salvador, Latvia, Poland and Uruguay). They are permitted voluntary
affiliation in only four of those countries (Dominican Republic, Ecuador, El
Salvador and Latvia). This makes mandatory coverage applicable only for those
below this designated age.
The second most common exemption category (6 countries or 19 percent)
includes low-income employees (Australia, Bolivia, Liechtenstein, Switzerland,
the United Kingdom and Uruguay), whose earnings are arguably insufficient to
generate a satisfactory retirement income from a long-term savings arrangement.
In all but Bolivia, the earnings threshold below which employees are exempted
from coverage is set by law, whereas Bolivia ties its earning threshold to the
national minimum wage. This makes mandatory coverage applicable only for
those whose earnings are above this designated threshold.
Three exemption categories, which are less common, are constituted by
specific employee groups (each applicable in 5 countries or 16 percent). One is
employees who were in covered employment at commencement date but who
explicitly remained covered by extant public pension programmes, with the
possibility of voluntary affiliation to the private arrangement (Chile, Estonia,
Hungary, Macedonia and Mexico). This makes mandatory coverage applicable
only to those first entering the workforce after commencement date. The second
group is employees below a minimum age, typically 20 years, but between a range
of 18 years (Australia, Estonia and the United Kingdom) to 23 or 24 years
(Liechtenstein and Sweden respectively). This makes mandatory coverage
applicable only to those above that designated age. The third group is employees
deemed to be in a pre-retirement age group at commencement date, who remain
covered by the extant public retirement-pension programmes (El Salvador,
Hungary, Latvia, Poland and Sweden), which makes mandatory coverage
applicable only to those born after a specific year, typically 1945 for men and
1947 for women, but ranging from 1937 for both men and women in Sweden to
1953 and 1956 for men and women, respectively, in Hungary. In Sweden, there is
also an intermediate age cohort (people born between 1938 and 1953) who, whilst
26
covered under its mandated private retirement provision, also remain eligible for a
national supplementary pension.
There are other relatively minor coverage exemption categories: casual
employees (Liechtenstein, Papua New Guinea and Switzerland); temporary
employees (Liechtenstein and Switzerland); employees who are members of
exempted equivalent voluntary occupational-pension schemes (Hong Kong and
Liechtenstein); contract workers (Hong Kong and Liechtenstein); domestic
servants (Hong Kong and Australia); those abov