An Assessment Of Reform Options For The Public Service Pension Fund In Uganda is projected to obtain from the first pillar around 13-15% of the unconstrained<sup>28</sup> average wage regardless of his/her income. Notice that, by international standards, this is a low replacement rate for a first pillar DB pension. However, due to the design of the ceiling indexation the first pillar is being gradually phased out in a minimum pension affine to a sort of a flat benefit. 13-15% of the average wage may be a reasonable level for a guaranteed minimum pension.

If the new defined benefit component is not in deficit, the government expenditure in Reform II.1 will be exactly the same as in Reform I.1. This is due to the fact that the switching pattern is the same (everybody switches to the new scheme), accrued rights are calculated and paid out in the same way, and the contributions paid to the new scheme are the same (same number of active members with the same wages). In both variants II.1A (5% real interest rate) and II.1B (3% real interest rate) the defined benefit pillar is projected to be in surplus accumulating reserves throughout the simulation period comparable with the second pillar reserves. Even in the case of zero nominal rate of return on first pillar reserves investments, the current balance will remain positive almost until 2075. The main factor contributing to that is the accelerated coverage expansion assumed between 2015 and 2050.

In summary, from the costs-to-the-government point of view Reform II may be equivalent to the pure DC reform scenario. However, for beneficiaries the outcomes may be different, especially for lower income groups. Table 12 compares average replacement rates projected for the last few years of the simulation period (when the new scheme matures) for the stock of old age pensioners under Reform I.1 and Reform II.1 with 5% and 3% assumed as the real interest rate earned on individual accounts.

**Table 12: Projected average replacement rates* for the stock of retirees (average** **<u>over 2070 – 2075)</u>**

||**5% inter**|**est rate**|**3% inter**|**est rate**|
|---|---|---|---|---|
||**government**|**teachers**|**government**|**teachers**|
|**Reform I.1**|42%|33%|27%|21%|
|**Reform II.1****|42%|40%|34%|35%|

**Notes** : * Average pension as percentage of average group wage, **Combined replacement rate from two pillars **Source** : WB calculations based on PROST

Under a more favorable investment return assumption (5% real), teachers – earning on average less than civil servants – would be better off in a two-pillar scheme rather than in a pure defined contribution, whereas for higher income groups the outcomes are likely to be similar. However, if invested funds can only earn 3% real, all groups would fair better under the two-pillar scheme, with lower income groups gaining more than higher income groups. Thus, the first pillar will perform redistributive function providing some sort of a minimum pension guarantee which is not stipulated in Reform I. In addition, it provides some insurance against investment risk for system participants.

# **V.B.2 Reform II.2**

Similar to Reform I, a gradual transition path is modeled for the two-pillar reform scenario assuming that the new two-pillar scheme is introduced only for employees

> 28 Unconstrained wage=wage before the ceiling/floor is applied

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