Dubai: Countries considering pension reforms need to have clarity on general principles and objectives for the pension system and mechanisms for implementation, before they embark on the reform process, according to World Bank and the Arab Monetary Fund.

Pension systems around the world concentrate on guaranteeing a basic level of income at retirement and/or ensuring a minimum level of replacement of pre-retirement income (insurance function).

Middle East and North African countries will need to make explicit choices about the objectives of the pension system. Thus societies will need to determine the level of pension entitlements that the system will guarantee at various levels of income.

In general, there is little rationale for the pension system to be the only source of retirement income, particularly among middle- and high-income workers.

Regarding implementation, countries have a large pool of pension systems from which to choose. These systems can be classified along three dimensions: how they are financed (pay-as-you-go, fully funded, government budget, or some combination), how pensions are calculated and risks distributed (earnings-related schemes, defined-contribution schemes, or some combination), and how the system is managed (for example, private or public management, centralised or decentralised management). There is no unique model that should be implemented. Choices need to respond to local economic, political, and social conditions. These choices, however, need to be based on sound economic analysis.

While the new pension reforms should ensure that the pension rights accrued by new contributions will be sustainable thus guaranteeing that pension promises can be kept the focus should be on realistic promises and management of finances.

The reform, in itself will not eliminate the current implicit pension debt—that is, the flow of pension promises to current retirees and current contributors. It is important to make this implicit debt explicit (that is, in the form of formal government debt) and to design transparent financing mechanisms. In addition, to improve the credibility of the fiscal framework, it is desirable that new implicit pension liabilities be backed by explicit government debt.

Reforms include improving the mechanisms to select the governing body, accountability, and investment policies to ensure that pension schemes are run in the best interests of members. In addition, work is needed on improving institutional capacity and administration, which will include investments in information technology systems.

While government-led pension schemes are prevalent across the region, the report recommend a review the institutional organisation of the pension systems and potential inclusion of private schemes.

Countries with a core of sound banks and insurance companies and a clear agenda to support financial sector development should consider higher levels of funding in the mandatory scheme. It is also desirable to promote the development of voluntary private pensions, which implies having in place the appropriate regulatory and supervisory framework.