Egypt is to supplement its €42bn of social security reserves with a new defined contribution system that has been developed in partnership with the World Bank. The Egyptian deputy minister for finance, Dr Mohammed Maait, told Pirkko Juntunen about the planned new system
Egypt is in the starting blocks of one of the first and most comprehensive pension reforms in the Middle East and southern Mediterranean countries. New social security legislation is expected to go through parliament imminently, which will see a modernisation of the entire system from 2012, including pension provision.
Through the reform, Egypt will move to a defined contribution system with individual accounts and will increase the pension age gradually to 65 in 2027. The reform aims to create a simple system that is clear, transparent and not overly complex for members and those managing it. It also aims to reduce costs and increase its attractiveness to a broader part of the population, thus minimising contribution evasion.
As part of the reform and new pension law, a pension and social insurance investment board will be established according to a decree issued by the board of directors of the National Organsiation of Social Insurance. This board will be responsible for administrating and investing the assets and the money belonging to the various social insurance systems mentioned in this law and according to the specified rules and regulations, says the Egyptian deputy finance minister, Mohamed Maait.
"The pension and social insurance investment board will set conservative investment policies for investing the assets of the system," Maait told IPE in an interview. "These policies will specify the goals of investment in terms of the long term and short term returns, the extent for mismatching and accepting risks, and the way for managing such risks. The main aim is to increase investment efficiency by exploring new channels of investments than those used under the current law, where most of the surplus of the two pension funds was deposited with the National Investment Bank (NIB). At the same time, there had been set restrictions as to where the funds can be invested so as not to jeopardise the pension rights of the policyholders."
The investment board is expected to include specialised advisers and portfolio managers to assist in the management of the system's portfolio. "We are currently working on the calculation of the expected income for the new system and shall provide these figures in due course," says Maait.
As in many countries, the current unreformed system has many challenges. Issues hampering the current system are: the lack of investment capabilities or options available within the system and the lack professional training or development policy for human resources staff. The need for reform has been excacerbated by increasing life expectancy and the change in the demographic profile. Maait says the reforms aim to address these issues.
The reform process in Egypt started in mid-2006, and after a period spent studying possible options, choosing a suitable solution, testing, simulation and validation of the chosen option and its application. The first legislative draft was then discussed with political parties and then discussed publicly after being approved by the cabinet. The draft is currently being reviewed by Egypt's upper house, the Shura Council and will then be presented to the lower house, the People's Assembly.
It is expected new law will come into force on 1 January 2012 but may be delayed to 1 June 2012, according to Maait.
"We studied the systems run by many countries and learned what can be implemented taking our special social, economic, and demographic nature into consideration," the minister continues. "The system has some unique benefits that need special consideration as to the cost and presentation to the public. The defined contribution system is a worldwide, well-known system that has been applied in many countries such as Sweden. We tailored the DC system to fit the Egyptian community as it has its own traditions and cultures."
Egypt sought the advice of institutions like the International Monetary Fund (IMF), and International Labour Organisation (ILO), but the main adviser for the process was the World Bank, keeping in mind Egypt's special social, economic and demographic nature, Maait says.
The current Egyptian system covers around 25 million people and is administered by the National Organisation for Social Insurance (NOSI) through two separate pension funds - one relating to government workers such as civil servants, army and the police (GSIF) and the other relating to workers in the public and private enterprises, the self-employed, casual workers and Egyptians working abroad (PSIF).
Benefits are primarily funded by contributions collected from employers and employees, but there has been a substantial financial support from the Treasury. Both the GSIF and PSIF were established mainly on a fully-funded basis but have been receiving more Treasury subsidies and has become a partially funded system nearly operating as a pay-as-you-go system.
Most of the surplus of the two pension funds was, in accordance with the legislation, deposited with the National Investment Bank (NIB). The system has built assets to be invested to pay for future liabilities but the government has used these as cheap loans. The current accumulated assets are of around EGP300bn (€42bn) with two thirds invested in treasury bills and around 20% in national development projects.
The new legislation aims to create a unified social and pension system applied to all categories of the population characterised by transparency, fairness and simplicity of the administration procedures.
The contribution rate will be reduced to 26.5% of total salary (employers contributes 10%, workers contributes 16.5%) from the current level of 41%, which is considered too expensive, leading to contribution evasion.
The minister noted that the transition from a defined benefit system to defined contribution will create a direct and strong relationship between the accumulated contributions, and this will encourage individuals to save.
The establishment of an old-age pension and end-of-service indemnity system based on individual accounts for members will further encourage contribution and discourage evasion, Maait believes.
In addition, under the new legislation, each member will be allowed to add sums to his, or her, individual account in order to increase the value of pension and benefits due. Furthermore, a basic pension will be provided for all Egyptian citizens who reach the normal pension age (age 65) even if they have not contributed to the system.
There will also be a mechanism to improve and increase pensions on a regular basis prescribed by law, which will allow for annual increases to provide for inflation.