(First of two parts)
If we evolve our thinking about social security, pension, retirement and voluntary savings, could we deliver better socio-economic outcomes for the Philippines and better financial well-being for millions of Filipinos?
SUSTAINABLE ECONOMIC PROSPERITY REQUIRES A MATURE CAPITAL MARKET FUELED BY SAVINGS
The Philippines has been experiencing a long period of unprecedented growth and prosperity. At the same time, its young population offers a temporary demographic dividend. However, the capital needed for infrastructure to further spur the country’s economic growth is lacking and has exposed an area demanding additional evolution: the depth and breadth of the country’s capital market constrained by limited sources of long-term savings to enable sustainable domestic funding.
More evolved social security, pension and retirement systems, and long-term savings are the most effective and sustainable answer. We should note that there are many relevant regional and global success stories. Both Singapore and Malaysia used substantial savings generated by mandatory social security, pension and retirement systems to support their creation of deep and broad capital markets, which in turn enabled economic prosperity and infrastructure evolution. Even in the United States, a significant share of the fuel for the country’s capital market originates from public and private pension, retirement and voluntary savings. This article focuses on government-driven solutions. Future articles will cover private retirement and savings.
EVOLVING EXISTING SOCIAL SECURITY AND PUBLIC PENSION
The Philippines has three well-established mechanisms, two of which already rank among the country’s largest institutional asset owners. But various challenges currently limit maximizing savings, which in turn limit positive capital market and funding effects.
1. Social Security System (SSS): Mandatory contributions from participating Filipinos provide pension, retirement and related benefits to more than 36 million Filipinos globally. Long-term sustainability and funding gaps are exacerbated by significant challenges to nudge more Filipinos, mostly from the informal sector, to participate and contribute. Benefit adequacy and administrative efficiency challenges are also heavily impacted by common manual processing limits, available savings and increased cost to service. Additionally, regulatory investment restrictions result in lower than expected average investment returns. Improvements could both increase savings and returns while reducing cost to service. However, change requires all stakeholders (including members and employers) to collaborate. (Note: Republic Act No. 11199 or the Social Security Act of 2018 was signed by the President on Feb. 7).
2. Government Service Insurance System (GSIS): Mandatory contributions from most public sector and government employees provide benefits to more than 1.5 million members, but benefits adequacy remains insufficient. Long-term funding gaps and administrative efficiency challenges impacted by common manual processing and lack of standardization across various government agencies offer improvement opportunities. Similar to the SSS, regulatory investment restrictions result in less than expected average investment returns. Progressive changes could significantly expand available savings and member outcomes. But that change requires the collaboration of all stakeholders including members and government agencies as sponsoring employers.
3. Military retirement and separation benefits: Annual budget appropriations fund this mechanism. However, the rising longevity of military personnel drives benefits costs, which makes this pay-as-you-go solution a growing burden for Government’s annual budget. Benefits are accumulated over 40 years without any dedicated system assets. Therefore, enabling long-term financial sustainability will require a systemic solution.
These three existing saving mechanisms provide a sound starting point to evolve into a necessary comprehensive and modern social security, pension, retirement and voluntary savings solution that aligns with the Philippines’ current and future socio-economic strengths. Such a solution acts as a savings engine that will fuel the capital market, attract more foreign investors and increase employment and prosperity.
A GLOBAL FRAMEWORK FOR SOCIAL SECURITY, PENSION, RETIREMENT AND VOLUNTARY SAVINGS
While economies vary in terms of population and stages of economic development, EY has developed a global framework for social security, pension, retirement and voluntary savings. There are nine key dimensions supported by various sub-dimensions that serve to guide a holistic assessment, design and evolution of such systems in emerging, evolving and mature countries and systems. The framework focuses on the relevant ecosystem with key direct and indirect drivers across relevant stakeholders.
Country and policy context — This entails gaining deeper insights into various areas such as socio-economic context and outlook; the social contract, vision and social culture of the stakeholders; the pension program’s long-term strategy and objectives; existing regulations and incentives to save; measurable outcomes; and the depth and breadth of the capital market.
Customer and member context — This sub-dimension looks at the needs of customers and members; a balance between the savings culture of the country and the risk appetite of members; consumer protection and advice programs; customer relevance and choices; empowerment for informed decision-making; and alignment to financial well-being.
Benefits, products, and services context — This considers the existence of subsistence welfare programs; basic retirement; sound retirement; death, disability and other protections; healthcare and related essentials; and additional retirement and voluntary savings practices.
Delivery context — Effective programs will require a sound operating model and appropriate delivery agility; relevant focus on best interest fiduciary duties, effective governance and oversight on possible conflicts of interest; effective risk management; and programs to strengthen public confidence.
Solution context — The system should have adequate benefits, financially sustainable operations and investment rules; and efficient management that addresses customer relevance and empowerment.
Reform context — This sub-dimension considers elements such as political, stakeholder and reform governance; flexibility in implementing reforms; and continuous evolution for the system.
Solution culture, leadership and accountability — Building the right system necessitates establishing the right culture and expected conduct, with the right incentives, all supported by accountable and outcome-driven leadership, including appropriate supervision and relevant penalties.
Stakeholder behavior — Members and stakeholders need to be willing to collaborate to come up with new ideas and innovations, work under a culture of transparency and disclosure, share a long-term perspective, all while taking responsibility and accountability for their behavior.
Delivery principles — At the last step, a good system should be customer-centric, providing relevant choices while maintaining simplicity, which can be supported by automation, digital platforms and straight-through-processing protocols that leverage exchange-to-exchange value chains.
There is hope that this framework adds value to an informed debate in the Philippines to evolve the existing government-driven long-term savings system. Such evolution is perceived to deliver better retirement and financial well-being outcomes for all Filipinos, and, in turn, deepen the capital market and assist in delivering further economic prosperity.
In the second part of this article, we will discuss how greater collaboration between the public and private sectors can deliver improved results.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Josef Pilger is EY’s Global Pension and Retirement Leader. Christian Lauron is an Advisory of Partner from SGV’s Financial Services and Government and Public Sectors.