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Friday, November 9, 2012

Urgency need of improving governance of public pension institutions


The main tasks of improving good governance should involve increasing transparency, curtailing opportunities for corruption, and most importantly protecting beneficiary rights. On one hand it should be well known that our government and even existing public pension administrations have contributed to the mismanagement of public pension institutions in our country, therefore, an important component of improving governance should then to create protective barriers that would foster good governance and penalize poor governance on the other hand.
 
The creation or strengthening of existing social security regulatory institution like SSRA is an important step in this direction. Regulation is important whether management of these public pension institutions remains in public hands or is transferred to private hands. Social security regulatory authority (SSRA) should always be within the context of a strong regulatory framework, so as to grant public pension institutions administrative and legal autonomy within clearly defined objectives. Further it should be able in unbundling public pension institutions in the country according to the different services or activities they provide that would help fine-tune the relationship between objectives, responsibilities, and incentives and thus improve governance.  

                                                               
Over the long term, formal public pension institutions need increased membership to thrive. This buoyancy will not be possible if an adequate set of incentives would not be in place. In many cases, rules today were developed in a context where government and its enterprises were the main providers of formal employment.

As a consequence, contributions are high and benefits, at least as known by contributors, are generous. As the environment changes and the private sector takes the leadership in economic development, economic agents become very sensitive to the rules of the game. Public pension schemes designed for the stronger economic agents, who can contribute more, end up penalizing those at the margin-small and medium economic concerns and leading to increased informality. It thus seems appropriate that compulsory pension contributions go to finance minimum benefit standards and that additional benefits are the result of voluntary agreements between the parts. 

In pensions there are no boiler plate solutions. Much will depend on the initial conditions (benefit defined, provident fund, the level of pension contributions, the stock of reserves etc), the strength of the supporting institutions (finance), and the fiscal situation.  There is a need for pension systems to be fully funded because of reduced fiscal risk and improved savings. But investing pension reserves is a difficult issue and there are no easy solutions. Investing abroad, which probably would be the best financially for the beneficiaries, is often politically unpalatable.

Only countries with thriving economies and strong financial sectors can provide profitable investment opportunities. When this is so, pension fund reserves can profit from the opportunity. When financial sectors are weak, concentrating fund reserves in public hands to protect them often leads pension institutions to try and become financial intermediaries with dismal results, including the further weakening of the financial institutions.

The challenge for social policy is how to introduce designs that improve on the voluntary agreements that develop naturally. The danger is that policy intervention will worsen outcomes. These developments can happen when public policy alters incentives in such a way that they reduce the social protection efforts now being undertaken. For instance, children may stop providing for their parents because of availability of public support.

A consensus seems to be emerging that the government must operate through the development of regulatory frameworks that facilitate the operation of community organizations that provide social protection. These organizations tend to have credibility and capacity to enforce agreements at the local level. The question is how to aggregate these efforts in such a way that credibility and ability to enforce are maintained in the larger organizations. The larger organizations will be able to benefit from economies of scale and scope and be in a better position to work with formal sector organizations.  

It is likely that problems with the elderly in the traditional and informal societies could not be solved through voluntary agreements and that at some point our state would have to provide some support through budgetary resources. Given the limited availability of budgetary resources and the multiple claims on them, it is likely that only very selective interventions are possible.

The urgency of improving governance of formal public pension institutions and doing so within the broad framework of a social protection strategy has to be emphasized. This is well known that a broad social protection strategy will take time to develop, because in the meantime the priority is mostly with the formal arrangements. The social security regulatory body should take into account that by improving the public pension or social security governance would truly be a test of a government's commitment to institutional reform in the country. 

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