Pension coverage and informal sector workers: international experiences

Pension coverage and informal sector workers: international experiences

Designing flexible pensions systems to encompass more workers

Pension reform around the world in recent decades has focused mainly on the formal sector. Consequently, many of those working in the informal sector have been left out of structured pension arrangements, particularly in developing countries.

However, more recently both the international community and national governments have realised the importance of extending pension systems to the informal sector. This paper provides a comparative overview of the different policy initiatives that have been undertaken and aims to provide practical international experiences to other governments considering such pension reform initiatives. In particular, the paper provides case studies of systems in Bangladesh, Chile, China, India, Kenya, South Africa and the United Kingdom.

Main policy recommendations:

  • fully funded pension arrangements may not be the best solution. Asking such individuals to save extra money for the distant future, either via a mandatory regime or through various means of incentives, may not be practically feasible
  • allow more flexible contribution and withdrawal terms for informal sector workers in order to encourage their participation in mandatory or voluntary pension systems
  • target and incentivise those who are capable of extra saving - tax incentives should be carefully designed, with mechanisms such as tax credits and matching contributions considered to ensure that incentives successfully reach the informal sector
  • utilise existing infrastructure from a broad range of sectors and broad financial sector players - using everyday contact points, such as post offices, credit unions, money transfer agents or rural banks) or alternative finance providers, such as retirement related mircofinance programmes
  • centralise administration agencies - governments may therefore wish to consider establishing a centralised agency, which serves as a national clearing house and can provide several functions,  such as transaction settlement, account administration and record keeping, etc.
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