ILO study reveals bankruptcy of pensions privatisation

The privatisation of pensions has been a core element of neoliberal restructuring promoted by the World Bank, the IMF, the OECD, the Inter-American, African and Asian Development Banks, USAID and the financial services companies who derive the ultimate benefit.  And, as with much of the privatisation story, Chile was the first country to privatise pensions systems under the direction of US-backed military dictator Augusto Pinochet in 1981.

Rosa Pavanelli, PSI General Secretary, notes:

“I want to congratulate Isabel Ortiz, Fabio Durán and their team at the ILO for this book.  It starkly reveals the hypocrisy of pension privatisation, which has basically institutionalised the theft of workers’ wages.  It shows the moral bankruptcy of the neoliberals, who knew exactly what they were doing.  One can only feel outrage when reading the conclusions.  But one also feels hope that good sense will prevail, and that the remaining countries with privatised pensions will take them back under public management – as is increasingly the case in water, energy, transport, health and other key public services.”

“Another aspect of this work that must be acknowledged is the evidence that when workers are not involved in decisions, we can be sure that their welfare will not be protected. Worker and trade union involvement is essential, and our job is to ensure that governments and the international agencies respect our legitimacy, especially around issues as crucial as social protection and retirement.”

The lessons that PSI draws from this experience are consistent with the experiences of privatisation in other sectors: 

• The primary beneficiaries of privatisation are elites within societies
• Privatisation frequently facilitates and increases corruption
• Government and corporate promises of universal benefit of privatisation are inflated and under-delivered

The lessons for trade unions in public services are equally important:

• When governments announce privatisation, unions must prepare to fight
• Accumulated evidence shows that most privatisations can and should be defeated
• Privatisations can be reversed[i]

See the full publication: Reversing Pension Privatizations: Rebuilding public pension systems in Eastern Europe and Latin America

Executive Summary

From 1981 to 2014, thirty countries privatized fully or partially their public mandatory pensions. Fourteen countries were in Latin America (by chronological order, Chile, Peru, Argentina, Colombia, Uruguay, Bolivia, Mexico, Venezuela, El Salvador, Nicaragua, Costa Rica, Ecuador, Dominican Republic and Panama), another fourteen countries in Eastern Europe and the former Soviet Union (Hungary, Kazakhstan, Croatia, Poland, Latvia, Bulgaria, Estonia, the Russian Federation, Lithuania, Romania, Slovakia, Macedonia, Czech Republic and Armenia), and two in Africa (Nigeria and Ghana). Most of the privatizations were supported by the World Bank, the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), USAID and the Asian or Inter-American Development Banks, against the advice of the ILO.

As of 2018, eighteen countries have re-reformed and reversed pension privatization fully or partially: the Bolivarian Republic of Venezuela (2000), Ecuador (2002), Nicaragua (2005), Bulgaria (2007), Argentina (2008), Slovakia (2008), Estonia, Latvia and Lithuania (2009), the Plurinational State of Bolivia (2009), Hungary (2010), Croatia and Macedonia (2011), Poland (2011), the Russian Federation (2012), Kazakhstan (2013), the Czech Republic (2016) and Romania (2017). The large majority of countries turned away from privatization after the 2007-2008 global financial crisis, when the drawbacks of the private system became evident and had to be redressed.

With sixty per cent of countries that had privatized public mandatory pensions having reversed the privatization, and with the accumulated evidence of negative social and economic impacts, it can be affirmed that the privatization experiment has failed. Pension privatization did not deliver the expected results. Coverage rates stagnated or decreased, pension benefits deteriorated, and gender and income inequality compounded, making privatization very unpopular. The risk of financial market fluctuations was shifted to individuals. Administrative costs increased reducing pension benefits. The high costs of transition – often underestimated – created large fiscal pressures. While private sector administration was supposed to improve governance, it weakened it instead. Workers’ participation in management was eliminated. In many cases, the regulatory and supervisory functions were captured by the same economic groups responsible for managing the pension funds, creating a serious conflict of interest; furthermore, the private insurance industry, which ultimately benefits from people’s savings, moved towards concentration. Last, but not least, pension reforms had limited effects on capital markets and growth in most developing countries.

The report then reviews the main experiences of re-reforming pensions and how countries reversed pension privatization, the laws enacted, basic characteristics of the new public model, new rights and entitlements, re-establishment of a public pension administrator, transfer of members and funds and recognition of past entitlements, financing and new contribution rates, contribution collection and fund management, supervisory and regulatory changes, governance and representation of employers and workers, social dialogue. While the reversals of pension privatization need more years to mature, clear and measurable improvements and positive impacts can already be observed in terms of reduced fiscal pressures, lower administrative costs, higher coverage and pension benefit levels, and reduced gender and income inequalities.

Pension privatization can be reversed quickly, in as a little as a few months. For those countries considering rebuilding their public pension systems, there are eleven main policy steps: (i) start social dialogue to generate consensus and launch communication campaigns; (ii) constitute a technical tripartite reform committee, in-charge of designing and implementing the re-nationalization of the pension system; (iii) enact law(s) with the main characteristics of the pay-as-you-go defined benefits scheme, in compliance with ILO social security standards; (iv) create a public pension institution/ administrator ensuring tripartite governance; (v) transfer members from the private to the public system; (vi) transfer the accumulated resources of the individual accounts; (vii) set new contribution rates and start collecting contributions for the new public pension system; (viii) close the contribution collection mechanism of the private system; (ix) implement inspection services and contribution enforcement mechanisms; (x) create the unit or entity in charge of investment management of the public pension scheme; (xi) close the private sector pension supervisory and regulatory body.

This paper and associated country case studies document the underperformance of private mandatory pensions, and abstract lessons for governments intending to improve their national pension systems. Strengthening public social insurance, coupled with non-contributory solidarity pensions, as recommended by ILO standards, have improved the financial sustainability of pension systems, made pension entitlements better and more predictable, allowing people to enjoy a better retirement in their older years. The responsibility of States to guarantee income security in old-age is best achieved by strengthening public pension systems.

This book documents the underperformance of private mandatory pensions in fifteen countries, and abstracts lessons for governments intending to improve their national pension systems. Specifically, this volume:

(i)  analyses the failure of mandatory private pensions to improve old-age income security and their underperformance in terms of coverage, benefits, administrative costs, transition costs, social and fiscal impacts, and others;

(ii) documents the reversals of pension privatization, the laws, governance, new entitlements, coverage, financing and contribution rates of the new public pension systems;

(iii) provides guidance on the key policy steps to reverse pension privatization -in accordance with ILO standards- for those countries considering returning back to a public pension system.

The different chapters are also available as working papers:

• Synthesis report: Reversing Pension Privatization: Rebuilding public pension systems in Eastern European and Latin American countries (2000-18), by Isabel Ortiz, Fabio Durán-Valverde, Stefan Urban, Veronika Wodsak and Zhiming Yu
• Argentina: Pension Privatization and Reversal  of Pension Reforms in Argentina, by Fabio Bertranou, Oscar Cetrángolo, Carlos Grushka and Luis Casanova
• Bolivia: Reversing Pension Privatization in Bolivia, by Carmelo Mesa-Lago
• Hungary: Reversing Privatization and Re-Nationalizing Pensions in Hungary by Dorottya Szikra
• Kazakhstan: Reversing Pension Privatization in Kazakhstan, by Elena Maltseva and Saltanat Janenova
• Poland: Reversing Pension Privatization: The Case of Polish Pension Reform and Re-Reforms, by Michał Polakowski and Krzysztof Hagemejer
• Ecuador: The Reversal of Pension Privatization in Ecuador, by Francisco Peña-Jarrín
• Nicaragua: Repeal of the Privatization of the Pension System in Nicaragua, by Karlos Navarro Medal
• Venezuela: The Reversal of Pension Privatization in Venezuela, by Luis Eduardo Díaz
• Bulgaria, Croatia, Estonia, Latvia, Macedonia, Romania, and Slovakia: Second-pillar Pension Re-reforms in Bulgaria, Croatia, Estonia, Latvia, Macedonia, Romania, and Slovakia: Benefit Payouts amidst Continuing Retrenchment, by Elaine Fultz and Kenichi Hirose