Mauritius - Modernizing an advanced pension system

The report examines the pension system in Mauritius, a country which over the past two decades, has made enormous progress in economic development, and poverty reduction, and which today, is facing a much earlier demographic transition in its development cycle, than other upper income, and high income countries have experienced. The questions being addressed are whether the current pensions arrangements will be financially sustainable, given the projected ageing of the population, and whether they will be equitable and efficient, at a time when the system will be relied on by a growing number of people. Mauritius has a three-tiered pension system that helps the poor, and provides moderate (although declining, in the case of the private sector) replacement income for working people, and no regulatory protection for voluntary retirement schemes. The un-funded nature of the universal scheme, together with the income maintenance scheme of the civil service, are endangering the country's economic stability. At the same time, declining benefits to the working class, are jeopardizing living standards at retirement, while the lack of a regulatory environment for private savings, discourages maintaining private savings through the formal financial system. Concurrently, public sector management of the private contributory schemes, deprives contributors of maximum returns, and concentrates risk only on the local economy, enhances government consumption, and deprives the domestic private sector of financing sources. The poor performance of the contributory tiers, exercises upward pressure on the un-funded tier, increasing the system's fiscal risks. The report adopts an approach that seeks to diversify the economic, and political risks inherent in pension systems, for while economic risk can come from fiscal concerns, particularly of un-funded schemes, and from re-distributive concerns, political risks otherwise, arise from outside the country's financing capacity. The approach suggests maintaining a small, and efficient un-funded re-distributive component (first pillar) to meet the needs of the poor, and, a dual, funded, and privately managed component for income maintenance, and life-time consumption appease. The dual character of the funded component aims to assure moderate replacement income, via a mandatory privately managed scheme (second pillar), and to provide as well, opportunities for private provision to meet individual preferences, or labor market response for supplementary pensions (third pillar).