While dubbed the new economy, it really is the only economy in the emerging world. The limits of large-scale formal employment, particularly in sub-Saharan Africa, have left a dynamic informal labour market of contract or part-time workers (such as biscatos in Mozambique), entrepreneurs (largely informal and often out of necessity) and smallholder farmers.
We were asked to provide our insights on the potential of micropensions for this market in a roundtable discussion hosted by pinBox in collaboration with the World Bank. Micropensions are being explored as part of a broader social security framework to support the individual welfare and vulnerability of adults in old age for the emerging world where incomes are low and irregular, and employer-based pension schemes are limited.
To make micropensions work for this market, we need to consider their potential within the realities and financial needs of the emerging world where most adults don’t prioritise old-age or long-term savings. For those that do plan for old age, they use a combination of non-financial and financial services: investing in a house or livestock, or education for a child, while also participating in a burial society or having a funeral insurance product.
In the hierarchy of financial needs, long-term goals (like saving for old age and building assets over time) are found far from the top. Evidence from our Making Access Possible (MAP) research with UNCDF and FinMark Trust on the financial sector in developing countries supports this:
- In Madagascar, ~12% of adults invest in a home or save for old age, compared to 53% who use financial services to manage risk and 35% for consumption smoothing.
- In the DRC, ~6% of adults save for old age and 30% invest in their home, compared to 69% who use financial services for managing non-health risk and 92% for health risks.
- Even in more advanced countries like Zambia, less than 10% of adults save for old age, whereas 72% use financial services to meet daily liquidity needs.
For most adults in the emerging world, disposable income, regularity of income and the means to collect contributions are limited. For example, formal employment – often a key driver of the market for pensions in developed countries – is less than 20% and is declining. This limits the extent to which compulsion can address the problem, and it shifts the focus to voluntary contributions – a challenge other financial inclusion initiatives, such as savings and microinsurance, are still grappling with.
Voluntary contributions require investment in distribution networks. This often raises costs and lower returns, which raises questions about the value offered to consumers with low and irregular incomes. We’ve already seen the challenges of moving beyond compulsion to voluntary contributions at scale in microinsurance, and providers are now rethinking their approaches. We can learn a lot from this experience that can be incorporated into our micropensions thinking.
In addition, other measures (such as tax incentives, often used to make up for lower returns) will have limited (if any) impact on this target market, as they are largely informal and not taxed.
Given the above, micropensions may not be appropriate for all adults initially. As a starting point, it may be better to target gaps in the middle- and higher-income market that are not currently served. For example, in Zambia, 16% of adults are formally employed, but only 10% report savings for old age or in assets.
Technology was another key focus of the roundtable discussion on micropensions. It is expected to reduce the cost of delivery through its potential to identify, aggregate, communicate and facilitate low-value payments.
However, this potential may still be far off. Our experience in microinsurance, mainly with the mobile phone, has showed that technology typically solves the challenges of providers and intermediaries first. Our recent Insurtech study with FSDA showed that this is not changing. Very few are incentivised to address the problems for consumers.
As with developed markets, micropensions are a potential tool to broaden our social welfare toolkit in developing markets. But we need to be deliberate if we want them to be effective. For example, for the foreseeable future, social grants to lower-income markets may remain the most valuable and cost-effective way to support adults in old age. Targeting the easiest to reach first (such as excluded, formally employed, higher-income adults) may therefore be the right starting point for micropensions.
Technology holds great promise, but we can’t be fixated on it alone. It has yet to find and address the challenges for consumers by itself. Incentives need to be carefully considered to optimise the benefits of technology for the low-income market, as there are other, more lucrative, opportunities in the high-income market.
Addressing the challenge of pensions in the emerging world will not be easy; but, if we can figure it out here, it will be incredibly valuable for the more developed world as it moves into the new economy.