Lessons from micro pensions Part 1

Door Robert Timmer - 15 februari 2016


What we can learn from micro pension in developing countries

For some years now I have been involved in the development of micro pensions. From a perspective of  social involvement I like to use my knowledge of the pension sector to support organizations and governments in Africa, Asia and Latin America who want to offer the benefits of pensions to their population. Meanwhile, I also experience the opposite effect: how to offer the development of micro pension in developing countries innovations for the Dutch pension sector.


In this first blog I like to explain what micro pension is and why it is important. In a second blog I 'm going to explore what the Dutch pension sector might learn from the developing countries.


What is micro pension?

Micro pension is the term used to refer to pension products that have been developed to enable the world’s poorest to save for their retirement. Micro pension can be described as ‘any kind of money set aside for the purpose of having a source of income in old age’. The word ‘micro’ indicates the small amount relative to Dutch standards that a working person can save. In some cases, the equivalent of only a few euros a month is saved. 


The informal economy

The micro pension target group consists largely of people who live in what is referred to as the informal economy. They do not have ID cards or other registration details and/or have only limited or no access to financial products because of the high costs. People in the informal economy sell products at the market, for example, or work as freelance labourers on the land or in the mining industry. Still others work as taxi drivers. Basically, they take up any kind of work that provides an income for themselves and their families.
The informal sector is massive. In Africa and Asia, between 60% and 85% of the people live or seek to survive in the informal economy. The matter therefore concerns billions of people. The estimate is that, 30 years from now, almost two billion people will be above the age of 60.


Uncertain, no access and therefore vulnerable

People in the informal economy have a flexible and often uncertain income. They do not have access to social services and if they become unable to work due to age, illness or injury, an already meagre income dries up altogether. People in the informal sector are therefore very vulnerable and, when old, often sink deeper into poverty if family members are unable to care for them.


Financial services out of reach

Even though many in the informal economy live on just a few euros a day, they are keenly aware of the need to budget and save for later. A key problem in this regard, however, is that the very poorest do not have access to, or do not have sufficient assets for, the established financial services providers. In addition, financial services providers do not even offer the kind of financial products that are tailored to the needs of people in the informal economy in terms of flexible incomes and financial means. 


Left to fend for themselves

As a result, people in the informal economy must resort to their own methods of saving. Sometimes they save as a group. They rely in this respect on a degree of solidarity in the event of a death, for example (using part of what the group has saved to pay for the funeral). Gold or other valuable commodities are also set aside. In practice, the risk of fraud, theft and embezzlement is relatively high. In addition, these forms of saving do not provide any guarantee whatsoever against the often high rates of inflation. 


The need for micro pension

To make safe saving and micro pension possible for the informal economy, Enviu set up People’s Pension Holding and People's Pension Trust Ghana, a pension provider. Please see the box below for more information.

Micro pension makes it possible for people in the informal economy to save what little money remains after they have paid for the basic necessities of life. The amount saved becomes their income once they are too old to work or if they become unfit for work, or is used to support their families after they have died. These people therefore become less dependent on donations and development assistance from the West. We are therefore starting an upward spiral, since Western countries will ultimately have to invest less in emergency aid. 


Pension paradox: how do you make ‘something’ from ‘nothing’?

People in the informal economy generally earn between EUR 1 and EUR 10 a day. The question is therefore whether they are even in a position to save. And, even if they are able to save, won’t their money just be taken by corrupt institutions? Would they trust an organisation that offers micro pension? From day one, the challenge was therefore about making it financially feasible for someone in the informal economy to save for a pension and establish an organisation that could independently meet this need.


Dutch pension system unsuitable

The traditional Dutch pension system is unsuitable in the context of the informal economy in terms of both structure (employer-employee relationship governed by strict legal rules) and the way in which customers are served (through large institutions like pension funds and insurers and an active government role). Such a system would also not be financially feasible. New developments are required, perhaps even radical innovation.


No bank accounts or database

In addition to the fact that a Dutch pension system would not be feasible in Ghana because of the system’s structure, there is no municipal personal records database in Ghana and only a limited number of people have bank accounts. There are also no mortality tables on the basis of which monthly, lifetime payments can be made. From the viewpoint of traditional Western providers, it therefore seems impossible to offer pensions in countries like Ghana.


The possibilities of the mobile phone

Almost everyone in Africa and Asia has a mobile phone or smartphone, however. Indeed, as a method, the use of mobile telephony to make payments is considerably more accepted than it is in the Netherlands. In other words, the mobile phone is not only used for calling and messaging, it is frequently used for payment transactions. Mobile phone technology can therefore also be used for identification in the context of making payments.


Micro pension through (mobile) biometric identification

In spite of the limitations referred to above, the mobile phone means that People’s Pension Trust Ghana will in the future have a completely new and innovative pension product and service concept. People in Ghana’s informal sector will be able to use their mobile phones to save flexibly and accrue pension, register, pay contributions and receive payments. Where it is not possible to identify individuals by means of a personal records database, the mobile phone will be used to identify fingerprints, faces and voices. We believe that, eventually, special software installed on a mobile phone will even make it possible for us to determine the participant’s age.


Low costs and no profiteering policy

The costs that People’s Pension Trust Ghana may charge as a pension provider are subject to a maximum of 2.5% and other deductions like insurance premiums are prohibited by law. For example, an average participant in Ghana saves EUR 100 a year. Of this total, a maximum of EUR 2.50 is available to People’s Pension Trust Ghana. The trust must use this amount to cover administrative expenses, make investments and pay other parties like fund managers and Ghana’s National Pensions Regulatory Authority. A profiteering policy is not possible in Ghana because the maximum costs for such products are laid down in Ghana’s National Pensions Act.


Innovations in micro pension: lessons that the Netherlands can learn

The Netherlands can also learn from the innovations in micro pension that are being developed for Ghana’s informal economy, not least in terms of reducing costs while raising quality, something that must be achieved as a result of numerous developments in society and in law. In addition, in what way can we reach and inform current and former participants, and how can we combine saving and pension accrual?


Following blogs

In the next blogs I will share more innovations and learnings with you. I will include a closer look at:

  • Municipal Administration vs. biometrics
  • Innovation of the pension product
  • Cheaper version of pension
  • Awareness of the participant
  • Data security and privacy

About People's Pension Holding and People's Pension Trust Ghana
The Dutch organization Enviu wants to make it possible for people in developing countries to save safely for their micro pension. Backed by the Dutch pensions and insurance companies this project starts in Ghana. Enviu "People's Pension Holding" is created to attract capital to start on-site social enterprises. Next step is to establish People's Pension Trust Ghana as a local pension provider. BluePrint Pension Services, consultants in the field of pension solutions and feasibility studies in developing and developed countries, supports Enviu and People's Pension Holding in the operations of People's Pension Trust Ghana. And it's not just Ghana! Meanwhile we are working hard to get in other African countries - and beyond - to provide a pension for the informal sector.