Pension scheme designed to increase contribution rates

contribution rates are increased on a step-by-step basis throughout the scheme’s lifecycle.
According to this plan, contribution rates would gradually increase and so too would the proportion of a pensioner’s income on retirement that was paid as a retirement pension.
The first increase in contribution rates came in January 2009, when the joint employee/employer contribution was raised, on actuarial advice, from six percent to eight percent.
However, the rate was adjusted back to 6 percent in May last year. This was not based on actuarial advice.
This affected negatively plans to increase pensions. The insurable earnings ceiling of US$200 per month also limited the size of pensions, as the formula for determining pensions is the product of an accrual rate (equal to 1,333%), the contribution period and insurable earnings at retirement.
So, the lower the insurable earnings ceiling, the lower is the pension to be paid.
The International Labour Organisation’s ideal contribution rate for old age schemes is a minimum of 10 percent of an employee’s salary.
By way of comparison the contribution rates in 2005 for old age, invalidity and survivors social security schemes was 10 percent in Zambia, Swaziland, Kenya and Ethiopia.
It was 20 percent in Tanzania, 15 percent in Uganda and Nigeria, 17,5 percent in Ghana and 30 percent in Egypt.
In Ireland it was 12,5 percent, in the United Kingdom 23,8 percent, in France 16,65 percent, in Germany 19,5 percent, in Sweden 18,91 percent, in the Netherlands 25,35 percent and in Italy 32,7 percent.
The average contribution rate for private occupational pension schemes in Zimbabwe is currently 21,5 percent.
With Zimbabwe’s national pension scheme the 6 percent contribution is divided equally between employee and employer, with each paying 3 percent of the employee’s salary.
Not all countries follow this practice. In some countries the employer pays a higher percentage than the employee.
In Zambia, Swaziland, Kenya, Tanzania and Nigeria contributions are shared equally between employee and employer.
In Uganda, according to statistics for 2005, the employee paid 5 percent while the employer paid 10 percent. In Mauritius the employee paid 3 percent and the employer 6 percent.
In Ethiopia it was 4 percent for the employee and 6 percent for the employer.
In Egypt the employee paid 13 percent and the employer 17 percent, while in Ghana employees paid 5 percent and the employer 12,5 percent.
The contribution rates were in Ireland 4 percent for the insured person and 8,5 percent for the employer, in France 6,75 for the insured and 9,9 for the employer.
In Italy 8,89 percent for the insured and 23,81 for the employer, and in the United Kingdom 11 percent for the insured and 12,8 percent for the employer.
There is pressure on old age schemes worldwide caused by ageing populations, rising life expectancies and declining fertility rates.
In some countries the retirement age is being gradually increased so that pensions are paid at a later age.
The challenge that all social security schemes face is to ensure that contributions are sufficient to cover payments to beneficiaries when they retire or become eligible for benefits.
A further challenge is to ensure that those pensions will be meaningful when the individual retires.
One way of doing that is to relate the pension to a proportion of a person’s income at retirement.
Where there is an insurable earnings ceiling, as is the case currently in Zimbabwe with the national pension scheme, the pension is based not on a proportion of the full income at retirement but a proportion of the maximum insurable earnings on which contributions have been based at retirement.
If the ceiling remains static, the only variable will be the number of months that contributions have been made for.
For pensions to be meaningful, the contribution level and the insurable earnings level have to be meaningful.
Since pension schemes provide pensions that are only a proportion of a person’s income on retirement, an insurable earnings level of US$200, which is the maximum insurable earnings level for national pension scheme purposes, is never going to result in a meaningful pension.

l The Talking Social Security Column is published each week by the National Social Security Authority as a public service.
Readers who have any questions they would like dealt with in this column are welcome to e-mail their questions to [email protected] or text them to 0772 469 801.
Those who have specific enquiries about their own position that require an individual response should telephone NSSA on (04)706517-8 or 706523-5.