Diversifying Pensions in Emerging Markets

Celine Zins
Dec 12, 2019 · 3 min read

Update: We recently released the pensions calculator — check it out here!

Ageing presents a significant risk of becoming or remaining poor, especially in developing countries.

Two thirds of the global elderly population (60 years of age and above) live in emerging and developing countries, where the informal economy employs a large share of the population. Lack of reliable social protection regimes puts a strain on future generations as the elderly depend on their working family members to fund their retirement. As old-age income insecurity is increasingly recognised as an impediment to economic development, there is a need to bring to light essential products to ensure that older persons receive a stable and lasting income throughout their retirement.

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Share of elderly population (60 and over) in 7 Sub-Saharan African countries, 2010–2050 (Source: UN Department of Economic and Social Affairs)

Although several countries have achieved universal non-contributory pension coverage, high coverage rates obscure the fact that benefit levels are still too low to push the elderly population out of poverty. Contributory retirement systems in developing countries remain in their infancy, restricted to a small, privileged population. There are a number of options that can be implemented to diversify sources of retirement income, including workplace pensions, government saving schemes, or even drawdown pension schemes.

One option we have been looking closely at is annuities. Annuities convert a lump sum of wealth into a lifelong flow of income: they insure people against the risk of longevity (i.e., living longer than they expect and running out of money) by paying a guaranteed income for life. The wide range of options in annuity contracts mean that you can make choices to increase your regular payments (in line with inflation, for example), or to sustain payments even after death (by adding your spouse to the contract).

Despite these incentives, annuity contracts are not as common as they should be — as economist Franco Modigliani stated in his 1985 Nobel Prize acceptance speech. This is partly because of adverse selection; the complexity of annuity payment structures, the many accompanying options, and insurance companies’ hidden fees often deter pensioners from buying annuity contracts.

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Simplified annuity payments model

Still, annuities are fairly straightforward products that enable retirees to plan for their retirement and invest capital productively rather than hoarding money, and eliminate the risk of running out of money in old age.

The cost of providing for people in old age reflects various factors: retirement age, life expectancy, income levels, and pension rates. Understanding that this may have different implications in different contexts is a good starting point for a debate about who should fund this cost. While it is generally accepted that a mix of public and private pension provision is an effective option to reap the best combination of benefits, a number of creative solutions can be leveraged in emerging markets (remittance-based, employer contributions, digital savings, CSR…) to fill the existing gap.

AlliedCrowds aims to open up the pensions market to individuals around the world. We think there’s great potential to ensure that individuals are able to support themselves in old age. To start, we have created a simple and easy to use calculator to estimate how much it costs to fund a person’s retirement and how much income one might receive in a number of emerging markets.

View the full proposal for the concept here!


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