metadata: authors: 0: author: Vittas,Dimitri
count: Mauritius
docna: 0: docna: The role of occupational pension funds in Mauritius
docty: Policy Research Working Paper
subtopic: Urban Housing and Land Settlements,Pensions & Retirement Systems,Social Funds and Pensions,Urban Governance and Management,Urban Housing,Capital Markets and Capital Flows,Non Bank Financial Institutions,Capital Flows,Inflation,Municipal Management and Reform,Financial Sector Policy
teratopic: Finance and Financial Sector Development
abstracts: cdata!: Mauritius belongs to a select group of
            developing countries where contractual savings-savings with
            insurance companies and pension funds-exceed 40 percent of
            GDP and represent a major potential force in the local
            financial system. Pension funds account for 75 percent of
            contractual savings. Contractual savings institutions invest
            in government securities, housing loans, corporate
            securities, real estate and bank deposits. They currently
            hold 35 percent of government securities and also account
            for 36 percent of total outstanding housing loans.Given
            their strong demand for long-duration assets, they can
            stimulate the issue of long-term government bonds (both
            inflation-linked and zero-coupon) and the development of
            corporate debentures, mortgage bonds, and mortgage-backed
            securities.Mauritius has a balanced and well-managed
            multipillar pension system. In addition to several public
            components, such as the Basic Retirement Pension, the
            National Pensions Fund (NPF), the National Savings Fund, and
            the Civil Service Pension Scheme, there are over 1,000
            funded occupational pension schemes that play an
            increasingly important part in the whole system. The funded
            schemes are divided into two main groups-those insured
            and/or administered by insurance companies, and those that
            are self-administered and are registered with the Registrar
            of Associations. Coverage of the funded schemes is estimated
            at about 10 percent of the labor force. Together with the
            unfunded civil service scheme, occupational pension schemes
            cover about 100,000 employees or 20 percent of the labor
            force. All types of pension funds, including the public
            ones, report low operating costs. This reflects the absence
            of marketing and selling costs and, in the case of large
            private pension funds, the assumption of some costs by
            sponsoring employers. The investment performance of the
            self-administered funds was less than fully satisfactory in
            the late 1990s, reflecting poor returns on the local and
            foreign equity markets. Funds insured or administered by
            insurance companies as well the NPF performed better during
            this period because of their heavier allocations in
            government securities and housing loans. However, over a
            longer period, the private pension funds probably
            outperformed the NPF. The regulatory framework, though
            fragmented, is not unreasonable. It has many important
            provisions, such as observance of internationally acceptable
            accounting and actuarial standards and minimum vesting and
            portability rules, and it does not impose prescribed limits
            on investments. However, consolidation and modernization of
            the regulatory framework is required, while supervision,
            which is currently nonexistent, needs to be developed and to
            be proactive.
geo_reg_key: 517191
repnme: repnme: The role of occupational pension funds in Mauritius
display_title: The role of occupational pension
            funds in Mauritius
listing_relative_url: /research/2003/04/2329626/role-occupational-pension-funds-mauritius
topicv3: Pension Funds m1326066 611,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Land and Housing m1327648 817,Financial Sector Development m1327681 1920,Retirement m1504007 2896
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: FSD
no_of_pages: 44
author_keys: 0: author_key: 92949
model_extractions: POLICY RESEARCH WORKING PAPER 3033

# Abstract

Mauritius belongs to a select group of developing countries where contractual savings-savings with insurance companies and pension funds-exceed 40 percent of GDP and represent a major potential force in the local financial system. Pension funlds account for 75 percent of contractual savings.

Contractual savings institutions invest in government securities, housing loans, corporate securities, real estate and bank deposits. They currently hold 35 percent of government securities and also account for 36 percent of total outstanding housing loans.

Given their strong demand for long-duration assets, they can stimulate the issue of long-term government bonds (both inflation-linked and zero-coupon) anic the development of corporate debentures, mortgage bonds, and mortgage-backed securities.

Mauritius has a balanced and well-managed multipillar pension system. In addition to several public components, such as the Basic Retirement Pension, the National Pensions Fund (NPF), the National Savings Fund, and the **Civil** Service Pension Scheme, there are over 1,000 funded occupational pension schemes that play an increasingly important part in the whole system.

The funded schemes are divided into two main groups-those insured and/or administered by insurance companies, and those that are self-administered and are registered with the Registrar of Associations.

unfunded civil service scheme, occupational pension schemes cover about 100,000 employees or 20 percent of the labor force.

All types of pension funds, including the public ones, report low operating costs. This reflects the absence of marketing and selling costs and, in the case of large private pension funds, the assumption of some costs by sponsoring employers.

The investment performance of the self-administered funds was less than fully satisfactory in the late 1990s, reflecting poor returns on the local and foreign equity markets. Funds insured or administered by insurance companies as well the NPF performed better during this period because of their heavier allocations in government securities and housing loans. However, over a longer period, the private pension funds probably outperformed the NPF.

The regulatory framework, though fragmented, is not unreasonable. It has many important provisions, such as observance of internationally acceptable accounting and actuarial standards and minimum vesting and portability rules, and it does not impose prescribed limits on investments.

However, consolidation and modernization of the regulatory framework is required, while supervision, which is currently nonexistent, needs to be developed and to be proactive.

Coverage of the funded schemes is estimated at about 10 percent of the labor force. Together with the This paper-a product of the Financial Sector Operations and Policy Departrrient-is part of a larger effort in the department to study pension funds and contractual savings. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Priscilla Infante, room MC9-904, telephone 202-473-7642, fax 202-522-7105, email address pinfante@worldbank.org. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at dvittas@worldbank.org. April 2003. (34 pages) _The Policy Research Working Paper Series disseminates the findings of work tn progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent_ Produced by the Research Advisory Staff
### Financial Sector Development World Bank

# The Role of Occupational Pension Funds in Mauritius

## Dimitri Vittas
# **Table of Contents***

|**I.**|**Introduction**|**1**|
|---|---|---|
|**II.**|TheContractualSavingsMarket|**1**|
|III.|InstitutionalStructureofPensionSystem|**4**|
||A.<br>Non-OccupationalPensionSchemes|**4**|
||B.<br>OccupationalPensionSchemes|**6**|
|IV.|InvestmentandOperating Performance|10|
|V.|Regulation andSupervision|13|
|VI.|FutureProspectsandPolicyIssues|17|
|**Annex**|**PublicProvisionofPensions**|**21**|
||References|33|

* The paper has benefited from comments and insights provided by officials of the Ministries of Finance, Financial Services, and Social Security, the Financial Services Commission of Mauritius, representatives of Mauritian pension fund managers, administrators, actuaries and advisers as well as colleagues at the World Bank. Special thanks are due to Rehana Kasenally of the Financial Services Commission for her help in obtaining the relevant data.
# GRossary

|BOM|BankofMauritius|
|---|---|
|BRP|BasicRetirementPension|
|CEB|CentralElectricityBoard|
|CSPS|CivilServicePension Scheme|
|FSC|FinancialServicesCommission|
|GAD|GovernmentActuary'sDepartment|
|IAS|InternationalAccounting Standards|
|LEL|Lower EarningsLimit|
|MAS|Mauritius AccountingStandards|
|MCB|MauritiusCommercialBank|
|MHC|MauritiusHousingCorporation|
|NPB|National PensionsBoard|
|NPF|NationalPensionsFund|
|NSF|NationalSavingsFund|
|SBM|StateBankofMauritius|
|SICOM|StateInsuranceCorporationofMauritius|
|SIPF|SugarIndustryPensionFunds|
|UEL|UpperEarnings Limit|
## I. **Introduction**

Mauritius, a small island economy in the Indian Ocean off the coast of Africa, has been remarkably successful in achieving rapid economic growth in the context of financial and political stability. It has been able to overcome unfavorable initial conditions and exposure to economic sectors that suffered from cyclical and structural weaknesses. This success has been attributed to the pursuit of stable macroeconomic policies and the promotion of sound and efficient institutions. The importance of the latter in explaining the strong growth performance of Mauritius has been highlighted in Subramanian and Roy (2001).

These policies have benefited many sectors of the economy, including the financial sector. They have stimulated the growth of banks as well as insurance companies and pension funds. In the pensions area, they are underscored by the creation of a well-designed multi-pillar pension system that comprises several public components, such as the Basic Retirement Pension, the National Pensions Fund, the National Savings Fund, and the Civil Service Pension Scheme, alongside a large number of occupational pension schemes.

This paper provides an overview of the development and role of occupational pension schemes in Mauritius. The main focus is on the funded schemes that have been set up by private companies and statutory bodies. However, to provide a broader context of their role and relative importance, the paper also offers a brief overview of the contractual savings market and the public provision of pensions. The various components of public provision are discussed at greater length in the Annex. The paper draws extensively on, and also complements, the recently completed World Bank study (World Bank 2001) and its background papers (Demarco 2000, Piggott and Whitehouse 2000, Rofman 2000, and Sin 2000).

The structure of the paper is as follows. Following this introductory section, section II provides a brief summary of the contractual savings market. This is followed by section Im that covers the institutional structure of the pension system, subdivided into non-occupational and occupational pension schemes. Section IV analyzes the investment and operating performance of different types of funds, while section V reviews the regulation and supervision of pension funds with particular emphasis on existing gaps and areas requiring strengthening. Section VI offers a brief evaluation of the-performance of company pension funds against a set of economic criteria and then reviews their future prospects and main policy issues. The Annex offers a more detailed discussion of the various components of public provision of pensions.

# **II. The Contractual Savings Market**

Mauntius belongs to a select group of developing countries where contractual savings (i.e., savings with insurance companies and pension funds) exceed 40'percent of GDP and represent a major potential force in the local financial system. Occupational 1
pension funds, including those insured and/or administered by insurance<sup>companies,</sup> represent 75 percent of contractual savings.

Other developing countries with large contractual savings<sup>sectors includeSouth</sup> Africa, Malaysia and Chile alongside most high income countries and<sup>some island</sup> economies like Cyprus and Malta. The vast majority of developing countries in Africa, Asia and Latin America as well as most transition countries<sup>of EasternEuropeare well</sup> below this level.

Table 1: Assets of Contractual Savings ]Institutions, 1997-2001

||1997|1998<br>(M|1999<br>URmillion)|2000|2001|
|---|---|---|---|---|---|
|RegisteredPensionFunds|1704|2095|2368|2720|2959|
|<br>SugarIndustryPensionFunds|1180|1750|2005|2500|2196|
|InsuredandAdministered*"|5502|6460|7210|8120|8904|
|TotalOccupationalPensionFunds|8386|10305|11583|13340|14059|
|NPF|12174|14266|16464|18899|21772|
|NSF|948|1366|1825|2385|2849|
|InsuranceCompanies|14130|16672|19200|21123|23971|
|Total|35638|42609|49072|55747|62651|
|LessDouble Countng**|5502|6460|7210|8120|8904|
|ContractualSavingsAssets|30136|36149|41862|47627|53747|
|||(perc|entofGDP)|||
|Registered PensionFunds|1.93|2.10|2.21|2.30|2.25|
|Sugar IndustryPension Funds|1.34|1.75|1.87|2.11|1.67|
|Insured&Administered**|6.23|6.47|6.72|6.85|6.77|
|Total OccupationalPensionFunds|9.50|10.32|10.80|11.26|10.69|
|NPF|13.78|14.28|15.33|15.95|16.56|
|NSF|1.07|1.37|1.70|2.01|2.17|
|Insurance Companies|15.99|16.69|17.88|17.83|18.23|
|Total|40.34|42.66|45.71|47.05|47.65|
|Less DoubleCounting"*|6.23|6.47|6.72|6.85|6.77|
|ContractualSavingsAssets|34.11|36.19|38.99|40.20|40.88|
|||(percent|oftotalass|ets)||
|RegisteredPensionFunds|5.65|5.80|5.66|5.71|_5.51_|
|SugarIndustryPensionFunds|3.92|4.84|4.79|5.25|4.09|
|Insured&Administered**|18.26|17.87|17.22|17.05|16.57|
|TotalOccupationalPensionFunds|27.83|28.51|27.67|28.01|26.16|
|NPF|40.40|39.46|39.33|39.68|40.51|
|NSF|3.15|3.78|4.36|5.01|5.30|
|InsuranceCompanies|46.89|46.12|45.86|44.35|44.60|
|<br>Total|118.26|117.87|117.22|117.05|116.57|
|LessDoubleCounting**|18.26|17.87|17.22|17.05|16.57|
|ContractualSavingsAssets<br>|100.00<br>|100.00<br>|100.00<br>|100.00<br>|100.00|
|*estimates;**ins|uredandadm<br>Source: FSC|ninisteredp<br>,NPF,NS|ensionfund<br>F.|s||

2
Contractual savinFs amounted to MUR 54 billion in 2001, equivalent to 41 percent of GDP (Table 1). In 2001, the sector covered the National Pensions Fund, the National Savings Fund, 22 active insurance companies and 1007 occupational pension funds created by statutory bodies and private sector companies (of the latter, 37 were self-administered and registered with the Registrar of Associations; the remainder were either insured or administered by insurance companies).

Funded occupational pension funds accounted for 26 percent of total net assets of contractual savings institutions, the NPF and NSF together represented 46 percent of total net assets, while the non-pension assets of insurance companies accounted for the remaining 28 percent. Public sector institutions, including the NPF, NSF and SICOM were responsible for managing 57 percent of the total, although the operations of SICOM are no different from those of any private sector manager.

The main types of contractual savings institutions exhibit significant differences in their asset allocation policies (Table 2). As a group, contractual savings institutions favor government securities (mostly two-year treasury bills) and housing loans. The NPF invests more heavily in government securities, but is underweight in company shares and foreign assets. The NPF provides substantial indirect support to the financing of the housing market, through its sizable loans to the Mauritius Housing Corporation.

**Table 2: Asset Allocation of Contractual Savings, 2001**

|Percentoftotalassets|Pension<br>Funds|NPF|Insurance<br>Companies|All|
|---|---|---|---|---|
|GovernmentSecurities<br>|21|58|_15_|35|
|Non-GovernmentBonds<br>|3|5|8|6|
|CompanyShares<br>|15|7|17|12|
|Bankdeposits<br>|6|11|9|10|
|HousingLoans<br>|27|8|23|17|
|LoanstoSponsors<br>|4||||
|RealEstate<br>|8|2|6|_5_|
|ForeignInvestment<br>|12|4|9|7|
|Other<br>|4|_5_|13|7|
|Total|100|100|100|100|

Source: Estimated on the basis of data collected by the FSC, NPF and Registrar of Associations Pension funds and insurance companies are more heavily involved in extending direct housing loans and in holding company shares and foreign assets.<sup>2</sup> However, there are large differences in asset allocation policies among individual pension funds and insurance companies, which tend to deviate significantly from the average pattern of their respective sectors.

' The reported data aggregate statistics of individual pension funds. Most funds have financial years ending in December but several report at the end of June and some use other months.

2 The asset allocation of insurance companies differs from the data published by the FSC. This is because official statistics do not divide clearly the various types of assets. The figures reported in Table 2 were estimated from a perusal of the annual reports of all operating companies. The high level of "other assets" is worth noting. To some extent, it reflects "loans to shareholders" among the more closely held companies 3
Most types of contractual<sup>savingsinstitutions benefit from positive cash flowsand</sup> their total assets are likely<sup>to continue togrow relative to GDP.This has important</sup> implications for the need<sup>to develop robustly regulated and effectivelysupervised</sup> financial institutions and markets,<sup>but also for the need to increase overseas investments</sup> in order to achieve a more<sup>optimal levelof risk diversification.Pension fundsand</sup> insurance companies play<sup>anactive part in theprovision of long-term and fixed-rate</sup> housing loans and have in<sup>generala strongdemand for long-duration assets.They can</sup> stimulate the issue of long-term<sup>government bonds(both inflation-linkedandzero-</sup> coupon) and the development<sup>of corporate debentures,mortgage bondsand mortgage-</sup> backed securities.

# ERl. ffnsfitutionalt Structure of<sup>IPenson System</sup>

The institutions of the Mauritian<sup>pensionsystem can be divided into twoseparate</sup> groups: those that are occupationally<sup>based and those thatare basedon more general</sup> characteristics. The BRP,<sup>NPF and NSF belongto the secondgroup,whereas the CSPS</sup> and the funds established by statutory<sup>bodies and private companiesform the firstgroup.</sup> This section summarizes<sup>the main featuresof the general group andthen reviewsthe</sup> different types of occupational<sup>pensionschemes.</sup>

## A. Non-Occupational Pension<sup>Schemes</sup>

## Basic Retirement Pension<sup>(BRP)</sup>

The BRP is a universal<sup>pension that is financedfrom generaltaxes. It is equal to</sup> 20 percent of average earnings<sup>and ispaid to all peopleaged over 60years.Its current</sup> cost is estimated at 3 percent<sup>of GDP (2000), but demographicagingis projected to raise</sup> this to 6 percent by 2020 and<sup>11 percentby 2050(World Bank 2001).The government is</sup> considering various options for<sup>containingthe cost of theBRP.Theseessentiallyinclude</sup> raising the retirement age and<sup>introducing means tested benefits(see the Annex to this</sup> paper for more details).

## National Pensions Fund (NPF)

The NPF is a compulsory<sup>scheme that coversall employees of privatesector</sup> firms, except those on very<sup>lowwagesand somesugar industry employees.3It is a</sup> defined benefit scheme operating<sup>on the French pointsystem. It coversover 300,000</sup> employees or 60 percent<sup>of the labor force. Beneficiaries are stillless than 50,000,</sup> resulting in a support ratio<sup>of over 6active contributorsper beneficiary.</sup> Contributions are paid by<sup>both employers and employeesand amountrespectively</sup> to 6 and 3 percent for a total of<sup>9 percentof coveredearnings (subject to a ceiling).</sup> Contributions result in the accumulation<sup>of points on the basis of the declared cost of a</sup> point at the time of contribution.<sup>Pension benefitsdependon theaccumulated points and</sup> the declared value of a point<sup>at the time of retirement.The cost andvalueof points have</sup> 3 The NPF also admimsters the BRP,<sup>the benefits andadministrationexpenses of whicharecovered by</sup> budgetary transfers.

4
been set a ratio of 11 to 1 (implying<sup>an annuityconversion factor of 9.09percent).In a</sup> fully-indexed system (or in<sup>a world without inflationand wage growth),a 40-year</sup> contributory career would produce<sup>a replacementrate of just below33percent of indexed</sup> earnings.

Initially, the cost and value of<sup>apoint lagged inflation by a significantmargin.As</sup> a result, the real level of the cost<sup>andvalueof a point fell to 75 percentof the original</sup> level. However, since 1989<sup>the cost and valueof a point havebeenadjusted in linewith</sup> price inflation. Because of this<sup>under-indexationand of the positive realwagegrowth,the</sup> resulting pensions have been<sup>a lower percentageof pre-retirement earningsthan the</sup> targeted level of 33 percent. As<sup>**a result, the performance of the NPF as a pension**</sup> **institution has not been**<sup>**fullysatisfactory.**</sup> The ceiling on covered earnings<sup>was initially set at a very high level(175 percent</sup> of average earnings). However,<sup>it hasalsobeen broadly indexedto prices(rather than</sup> wages) and this has resulted in<sup>its relativedeclineover time(presently it amounts to 80</sup> percent of average earnings).<sup>Thishas left morescope for thedevelopmentof</sup> occupational pension schemes.<sup>Thelower earningslimit has alsofallenin relativeterms</sup> (from the original 25 percent to<sup>about11.5 percentof average earningsin 2001), thus</sup> widening the net of covered workers.

The NPF has accumulated substantial<sup>financial resources equivalentto17 percent</sup> of GDP. These are heavily invested<sup>in government bonds(58 percent)with relatively</sup> small shares in corporate securities<sup>and foreignassets. Assetallocationis not subjectto</sup> legally imposed limits but is decided<sup>by an InvestmentCommittee, comprisingsenior</sup> civil servants. **The performance**<sup>**of the NPFas a rmancial institution has been**</sup> **satisfactory.** The real investment<sup>returnaveragednearly 4 percent in the1990s(and</sup> almost 5 percent over the past five<sup>years),while its operatingexpenseshave been ona</sup> declining trend. In 2001, they amounted<sup>to 9.2 percentof contributionsor 48 basis points</sup> of average total assets. The NPF's<sup>investmentand operating performance has been</sup> superior to that of the average private<sup>sector pensionfund duringthe period under</sup> review.4 This satisfactory performance was<sup>marred by the discoveryin February 2003of a</sup> fraud that had been ongoing for<sup>five years and involveda time deposit of MUR500</sup> million with the Mauritius Commercial<sup>Bank (MCB), thelargest and oldest commercial</sup> bank in the country. The details<sup>of thescandalare stillunravelingat the time of writing</sup> this paper. However, its non-detection<sup>for manyyears indicatesa major deficiency in</sup> internal audit and control systems<sup>at both of these nationally important institutions.The</sup> NPF accounts are audited by the<sup>Directorof Audits,but usuallywith a lag of at least two</sup> years. This incident underscores<sup>the importanceof commissioningexternal auditsby</sup> private international firms as well<sup>as the need to strengtheninternalauditand control</sup> systems.

> 4 This is related to the poor performance<sup>of domestic andforeign equitiesin thelate1990s.Over a longer</sup> period, the average private pension<sup>fund probably outperformedthe NPF.</sup>

5
The N]PF faces two major challenges. First, there is a need for a greater diversification of its assets in non-government securities (corporate securities and foreign assets). Investing a greater proportion of assets in such securities would require the creation of a more transparent, professional and independent fund governance and asset management structure. The second challenge is to enhance the transparency of its operations, simplify the link between contributions and benefits, and improve its performance as a pension institution. The authorities are considering conversion of the NPF from its current opaque point system to a defined contribution system with individual capitalization accounts, crediting of net investment returns to workers' accounts and purchase of a real annuity on retirement (see the Annex for more details).

# Nationnal Savings Fund (NSF)

The NSF is a defined-contribution scheme that offers covered workers a lump sum on retirement. All employees are required to participate in the NSF, including civil servants and employees of statutory bodies. The contribution rate amounts to 2.5 percent of covered earnings and is paid by employers. The NSF has accumulated resources equivalent to 2 percent of GDP. These are heavily invested in government securities. The NSF does not play a major part either as a pension fund or as a financial institution. It could be merged into the activities of a reformed NPF in the future.

## B. Oc-cupational ]Pension Schemes

Occupational pension schemes cover three main types: the civil service pension scheme (as well as those covering local government employees); pension schemes for various statutory bodies; and pension schemes established by private sector entities. The latter two types operate heavily (but not fully) funded schemes that have accumulated substantial resources, amounting to MUR 14 billion in 2001 and corresponding to 11 percent of GDP. However, the scheme covering civil servants is unfunded and is financed from the budget. Its cost was estimated at 1.3 percent of GDP in 2001.

Table 3: Number of Approved Occupational Pension Schemes (1998-2002)

||1998|1999|2000|2001|2002|
|---|---|---|---|---|---|
|TotalNumber|882|922|967|1007|1095|
|Registered|30|32|35|37|42|
|Insuredand/orAdministered|852|890|932|970|1053|
|Source:Tax Comm|issionera|ndRegist|rarofAs|sociation|s|

Approved pension schemes, outside those covering civil servants and local government employees, increased from 882 in 1998 to 1007 in 2001 (and 1095 in 2002). The number of self-administered and registered funds rose from 30 in 1998 to 37 in 2001 (and 42 in 2002). The vast majority of funds, old as well as new, continues to be insured and/or administered by insurance companies (Table 3). Anglo-Mauritius Life Assurance Company appears to have the lion's share of group pension insurance business, facing competition from a small number of life insurance companies.

6
However, about 100 pension schemes of statutory bodies and some 40 private company schemes are administered (but not insured) by the State Insurance Corporation of Mauritius (SICOM). In terms of total assets (and perhaps also membership) these exceed the funds insured and managed by other insurance companies.

The main self-administered funds include the pension schemes of the Rogers Group, the Mauritius Commercial Bank and the New Mauritius Hotels Group as well as some statutory bodies (e.g., the Central Electricity Board and from this year the State Bank of Mauritius). Most large companies establish two pension schemes, catering separately for clerical and manual staff.

There are no detailed data on the total coverage of occupational pension schemes and on how many of them continue to be active. The Civil Service Pension Scheme has some 50,000 civil servants and the schemes administered by SICOM have close to 22,000 members. The three Sugar Industry Pension Funds list 6,000 members, while four large self-administered funds have over 800 active members each. Thus, all these schemes collectively have over 80,000 members. It follows that even on very conservative assumptions, the total coverage of occupational pension schemes is likely to exceed 100,000 employees or 20 percent of the labor force.

Private sector companies establish their pension schemes under the Employees Superannuation Fund Act of 1982 (which amended the earlier 1954 Act), while the schemes of statutory bodies are governed by the Statutory Bodies Pension Funds Act of 1978. Private schemes are sometimes established as trusts. The use of trusts is likely<sup>to</sup> grow, especially in the offshore sector. Irrespective of legal form, private pension schemes often outsource several aspects of their administration even when they are not insured. The terms and conditions of all schemes must be approved by the Tax Commissioner in order to be eligible for the considerable tax benefits. These include deductibility of contributions without any ceilings and exemption of investment income from any tax. Pension benefits, but not commuted lump sums, are subject to income tax.

Another important component of the overall system is the obligation under the Labor Act for most employers to provide a lump sum retirement gratuity of half<sup>a</sup> month's pay for each year of service. This is not a prefunded benefit. In the case of many employers it is the only retirement benefit offered on top of the BRP and NPF.

# **The Civil Service Pension Scheme** (CSPS)

The CSPS covers civil servants and operates on an unfunded basis. In line with similar schemes in most countries around the world it has elements that tend to distort incentives and cause large increases in expenditures (such as use of the last monthly salary for calculating pensions, early retirement with generous benefits, indexation to same rank earnings, and lump-sum commutation by using a fixed formula, irrespective of life expectancy and level of interest rates). Because of progressive aging of the covered population, the cost of the CSPS is projected to increase from its current level of 20 percent of the total salaries bill to 30 percent in 15 years time and 50 percent by 2050.<sup>At</sup> that time, benefits paid could increase from the current level of 1.3 percent of GDP to 7
between 3 and 3.5 percent. The unfunded accrued liabilities are estimated at 33 percent of GDP (World ]Bank 2001).

The CSPS faces several critical policy issues. The first concerns the establishment of an appropriate basis and level of funding in order to protect benefits from future budgetary pressures. The second is a need to harmonize its terms and conditions with those offered by private sector entities in order to facilitate labor mobility between the civil service and the private sector. However, in addressing these challenges it is important to examine the whole compensation package of civil servants to ensure that the civil service continues to be able to attract, train and retain high caliber staff.

As in many other countries around the world, one feasible reform option would be to create a defined-contribution scheme for new recruits to the civil service, while continuing the defined-benefit scheme for existing civil servants. A DC scheme would be both funded and fully portable and would not pose any obstacles to labor mobility.<sup>5</sup>

# Pension Funds of Statutory Bodies

The pension schemes for the employees of statutory bodies also are noncontributory and offer similar benefits to those of the civil service scheme. However, one fundamental difference is that the pension schemes of statutory bodies are required, by virtue of the Statutory Bodies Pension Funds Act of 1978, to create a fund covering their actuarial liabilities. These funds are administered by the State Insurance Corporation of Mauritius (SICOM) but are not insured by it. They are not therefore included in its balance sheet but are reported in the notes to its annual report. SICOM administers the pension funds of 100 statutory bodies covering nearly 13,000 members. (It also manages 38 private sector funds with nearly 10,000 members.) The statutory pension funds have contribution rates ranging from 15 to 25 percent of covered earnings. The market value of the total assets of the pension funds managed (but not insured) by SICOM amounted in June 2002 to MIUR 6.2 billion.

While most occupational pension schemes are heavily funded with assets invested outside the sponsoring employer, the two funds of the Central Electricity Board (for manual and non-manual workers respectively) effectively operate on an unfunded basis. This is because the vast majority of their resources have been lent back to the CEB. For the two funds together, loans to the CEB represent 75 percent of total assets and housing loans to staff another 23 percent. The CEB pension schemes are in principle contributory schemes, with employees required to contribute 6 percent of covered earnings. However, since 1993, the contributions of employees have been paid by the CEB. The 2 pension funds of the Central Electricity Board are among a few funds of statutory bodies that are not managed by SICOM. The financial situation of the CEB pension funds is currently complicated by fact that the CEB is suffering losses, has accumulated a huge debt, and has plans under study for a major restructuring.

> 5 The terms and conditions of the new scheme and the benefits of greater mobility would need to be well communicated to members to minimize the risk of political backlash.

8
# **Private Company Pension Schemes**

Most of the nearly 1000 private company pension schemes are non-contributory and operate as defined-benefit plans offering pensions equal to two-thirds<sup>of finalsalary</sup> on the last month of employment after 40 years of service (480 months). They are<sup>thus</sup> somewhat less generous than the civil service pension scheme or the statutory<sup>bodies</sup> pension funds. Moreover, annual pension increases are limited by tax regulations<sup>to no</sup> more than 3 percent per year.

Private company pension schemes tend to be paternalistic, operating on a noncontributory basis and offering several additional services, including in particular<sup>housing</sup> loans. Some funds extend housing loans to members at low, below-market, rates. However, sponsoring employers compensate their pension funds for the rate<sup>subsidy.</sup> The high level of benefits of most private company pension schemes, especially because they involve the offer of deferred long-term annuities in the face of<sup>a serious</sup> dearth of long-term assets, should raise questions about the continued affordability<sup>of</sup> these schemes. This also underscores the importance of effective supervision<sup>to ensure</sup> the security of pension assets and the honoring of the pension rights of workers.

A recent exception to the prevalence of defined benefit plans is the Rogers Group, which converted its plan into a money purchase scheme (defined-contribution plan) in 1999. Another 100 small pension schemes, including that of Mauritius Union,<sup>a medium</sup> size insurance company, have also converted to DC plans.

The new Rogers Group pension fund offers a good example of the continuing paternalistic approach adopted by sponsoring employers. The Rogers Group covers all administration costs of the new DC fund. It has also offered a guarantee to all employees in service at the time of conversion, such that their pension benefits would<sup>be no lower</sup> than what they would have been entitled to had the conversion not taken place.<sup>This</sup> guarantee is of course on maintaining contributions to the scheme. The Rogers money **6** purchase scheme is contributory and contribution rates increase with age.

The conversion of company schemes from DB to DC plans may represent<sup>an</sup> early response to the high cost uncertainties of DB plans. However,<sup>DC plans transfer the</sup> investment risk to workers. As they proliferate, there will be a growing need<sup>for</sup> developing "protected" investment products, whereby employees benefit from<sup>protection</sup> against downside risk but have less than full participation in the upside potential.<sup>The</sup> modalities of "protected " investments are still evolving around the world. To be<sup>effective</sup> they require development of efficient risk-sharing facilities with specialized<sup>financial</sup> institutions. DC plans also require the development of an efficient and robust annuity market for fulfilling the objective of providing an adequate and secure pension<sup>to retired</sup> workers.

> **6** The no-worse-off guarantee may have set an expensive precedent since<sup>participatingemployeeswill reap</sup> the benefits of good investment returns, while employers will have to<sup>make anyshortfall.</sup>

9
WV. Rimvestment and Gjperagniag Performance The various occupational pension funds appear to adopt different investment policies and are characterized by large variations in their asset allocations (Table 4). There are significant differences between large pension funds (those with more than MUR 100 million in assets), medium funds (those with between MUR 30 and 100 million under management) and small funds (those with less than MUR 30 million in assets). Most funds invest heavily in equities and also have substantial assets in foreign securities, but some focus more heavily on housing loans and real estate.

The Sugar Industry Pension Funds are heavily engaged in the latter two areas. Apart from the funds administered by SICOM and some of the smaller self-administered funds, the large occupational pension funds invest small amounts in government securities. Rather surprisingly given that they are managed by large insurance companies, the insured funds have a small proportion of their assets invested overseas. The CEB funds are predominantly invested in loans to the sponsoring employer and housing loans to members but several smaller funds also have large exposures to their sponsors. Some of the medium and small pension funds invest increasingly in mutual funds, which are classified as other assets in Table 4. The category "other assets" is relatively large for several pension funds and insurance companies. In addition to investments in mutual funds, it also includes "loans to shareholders", which are important for some insurance companies.

Table 4: Asset Allocation of Pension Funds, 2001

||Govt<br>Sec|NonGvt<br>Bonds|Comp<br>Shares|Bank<br>Deps|Hsng<br>Loans|Loans<br>Spons|Real<br>Estate|For<br>Assets|Other<br>Assets|
|---|---|---|---|---|---|---|---|---|---|
|LargePension Funds|0.4|0.6|24|9|23|25|6|11|1|
|MediumPensionFunds|11|17|26|12|8|4|2|13|7|
|SmallPensionFunds|18|6|22|13|0.4|6|1|13|20.6|
|TotalRegistered|3|4|24|10|19|20|5|11|4|
|SugarIndustry||2|9|5|37||32|14|1|
|SICOM|43|2|11|1|26||2|15||
|Insured|9|6|20|13|30||6|5|11|
|Totaloccupational|21|3|15|6|27|4|8|12|4|
|NPF|58|5|7|11|8||2|4|5|
|TotalPension**Fnds**|43|4|10|9|16|2|4|7|5|
|InsuranceCompanies|15|8|17|9|24||6|9|12|
|NSF|82||3|6|9|||||
|Total|34|5|12|9|18|1|_5_|8|8|
|DoubleCounting|32|3|13|5|28||3|12|4|
|GrandTotal|35|6|12|10|17|1|5|7|7|

> Source: Estimated on the basis of data collected by the FSC, NPF and Registrar of Associations.

Registered pension funds invest small amounts in government securities. This is especially true for the larger funds and is attributed to the short maturity of government debt. Insurance companies hold about 7 percent of outstanding domestic government debt while the NPF and NSF account for a combined 28 percent of total domestic public debt.

10
Thus, the asset allocation of self-administered funds<sup>differssubstantiallyfrom thatof the</sup> NPF. In some respects, this underscores the<sup>scopefor further asset diversificationby the</sup> NPF. However, it is important to note that<sup>many of theequity holdingsof occupational</sup> pension funds represent locked-in positions.<sup>Somefund managerscomplain that the</sup> equity market is so illiquid that it moves<sup>against them whetherthey want tosell or buy.</sup> The pension funds and insurance companies play<sup>an important part inhousing</sup> finance (Table 5). They account for 36 percent<sup>of the market,a similarshare to that of</sup> commercial banks (35.percent) and somewhat larger than<sup>that of the MauritiusHousing</sup> Corporation (29 percent). However, the share<sup>of housing loansdeclined from30 to 24</sup> percent of the total assets of insurance companies<sup>and pensionfundsbetween1998and</sup> 2001.

Housing loans are attractive to the large self-administered<sup>funds aswell as the</sup> funds insured or administered by insurance<sup>companies becauseof their high return,low</sup> default rate and long maturity. Insurance companies<sup>and pensionfunds lend at fixed rates</sup> of interest whereas commercial banks provide<sup>variable rateloans.Developing marketsfor</sup> mortgage bonds and mortgage securitization<sup>would allowpension funds and insurance</sup> companies to support the housing finance<sup>market indirectlyand thusavoid the high</sup> expense of mortgage loan origination and servicing.<sup>These marketswould also enable</sup> commercial banks to avoid the interest rate risk they currently assume.

**Table 5: Role in Housing Finance, 1998-2001**

|(percent oftotalhousingloans)|1998|1999|2000|2001|
|---|---|---|---|---|
|InsuranceCompanies<br>|28.48<br>|27.23<br>|28.28<br>|29.13<br>|
|Sugar IndustryPensionFunds<br>|4.56<br>|4.51<br>|4.34<br>|4.18<br>|
|Self-AdministeredPensionFunds<br>|3.21<br>|3.00<br>|2.97<br>|2.90<br>|
|AllContractualSavings Institutions|36.25<br>|34.75<br>|35.59<br>|36.22<br>|
|CommercialBanks|32.37<br>|36.33<br>|35.18<br>|35.21<br>|
|MHC|31.38<br>|28.92<br>|29.22<br>|28.58<br>|
|Total<br>|100.00<br>|100.00<br>|100.00<br>|100.00<br>|
|Total(MURmillion)|15357<br>|17294<br>|18332<br>|19213<br>|
|Total(%GDP)<br>|15.37<br>|16.11<br>|15.47<br>|14.61|
|Source:FSC, Regis|trarofAssoci|ations,MH|,<sup>SIPF.</sup>||

The operating and investment performance of<sup>occupationalpension fundshas</sup> varied considerably over time (Table 6). Data<sup>derived fromthe annual reportsthat self-</sup> administered funds submit to the Registrar<sup>of Associationsshow that over the period</sup> 1997-2001 reported operating expenses have<sup>beenon a rising trend,relativeto both</sup> annual contributions and average assets.

To some extent this may reflect a fuller reporting<sup>of costs.Many funds only</sup> include out of pocket expenses among the reported<sup>operatingcosts(for instance,</sup> professional fees for auditors and actuaries<sup>and levies paid to the Registrar). Other costs</sup> are incurred directly by the sponsoring employers.<sup>But an increasingnumberof funds</sup> report most expenses, even if the sponsoring<sup>employercovers thetotal costs.</sup> 11
Tablle 6: Operating Performance of Registered Pension Funds (1997-2001)

|(percent)|1997|1998|1999|2000|2001|
|---|---|---|---|---|---|
|OperatingExpenses/Contributions|3.82|4.81|6.47|7.56|5.86|
|OperatingExpenses/AverageAssets|0.53|0.56|0.61|1.06|0.66|
|InvestmentIncome/AverageAssets|8.66|9.09|7.24|9.61|4.71|
|Benefits/Contributions|42.3|46.0|54.4|46.1|45.3|
|Benefits/TotalInflows|26.1|25.8|30.3|11.8|31.4|
|InvestmentIncome/TotalInflows|38.3|43.7|43.0|17.5|29.0|
|GrowthRateofTotalAssets|19.2|22.9|12.6|15.4|7.8|

Source: Estimated on the basis of date collected by the FSC and Registrar of Associations.

Table 7: Operating Perforrmance of Occupational Pensionm Funds, 2001

||OperExp/<br>Contr|OperExp/<br>AverAssets|Inv Inc/<br>Aver Assets|Inv Inc/<br>TotInflow|NetFlow/<br>AverAssets|
|---|---|---|---|---|---|
|LargePensionFunds|4.24|0.49|4.27|26.5|10.3|
|MediumPensionFunds|11.40|0.97|5.75|40.1|7.6|
|SmallPensionFunds|12.07|2.15|7.69|29.5|20.9|
|TotalRegistered|5.86|0.66|4.71|29.0|10.3|
|SugarIndustryPF|6.80|0.43|6.92|52.4|5.5|
|Registered&SIPF|6.14|0.56|5.67|38.0|8.2|
|NPF|9.22|0.48|11.16|68.3|14.3|

Source: Estimated on the basis of data collected by the FSC and the Registrar of Associations.

|Table8:Comparative Oper<br>|atingand <br>|Investme<br>|ntPerfor<br>|mance(1<br>|997-2001<br>|)<br>|
|---|---|---|---|---|---|---|
|(percent)|1997|1998|1999|2000|2001|Average*|
|OperatingExpenses|||||||
|LargeRegistered PensionFunds|0.39|0.41|0.44|0.97|0.49|0.56|
|MediumRegisteredPension Funds|0.78|0.92|0.96|1.03|0.97|0.97|
|Small Registered PensionFunds|2.41|1.95|1.96|2.35|2.15|2.13|
|AllRegisteredPensionFunds|0.53|0.56|0.61|1.06|0.66|0.72|
|NationalPensionsFund|0.77|0.70|0.58|0.53|0.48|0.61|
|InvestmnentReturns|||||||
|LargeRegisteredPensionFunds|9.03|9.07|7.13|10.27|4.27|7.93|
|MediumRegisteredPension Funds|6.87|9.23|7.37|7.81|5.75|7.40|
|SmallRegisteredPension Funds|9.04|8.72|8.58|8.94|7.69|8.59|
|AllRegisteredPensionFunds|8.66|9.09|7.24|9.61|4.71|7.85|
|NationalPensionsFund|10.00|14.26|10.57|10.56|11.16|11.30|
|Insured/AdministeredPensionFunds|10.88|13.38|10.94|10.21|9.49|10.97|

* The average investment return is the compounded average for the five-year period. All reported rates are weighted averages.

Source: Estimated on the basis of date collected by the FSC, NPF and Registrar of Associations.

12
In contrast to company pension funds,<sup>the operating costs of the NPF have fallen</sup> relative to its contributions and<sup>assets.However,both the NPFand thecompany funds</sup> report low operating expenses<sup>in comparisonto thelevels found in Chile and other Latin</sup> American countries or to personal<sup>pension plansinthe UnitedKingdom. To a large</sup> extent this is explained by the<sup>absenceof marketing and selling costs.</sup> The investment performance of registered<sup>funds has fluctuated considerablyover</sup> time, reflecting realized (and in<sup>a few cases, unrealized)capitalgains andlosses. In</sup> general, the investment performance<sup>of occupationalpension funds has been inferior to</sup> that of the **NPF** over the second half<sup>of the 1990s(Tables 7and 8).Althoughdetailed</sup> data covering a longer period are<sup>not available,it islikely that the privatepension funds</sup> outperformed the NPF in earlier<sup>periodswhendomesticand foreignequity marketreturns</sup> were much higher.

. The operating and investment performance<sup>of occupationalpension funds also</sup> varies considerable from fund<sup>to fund (Table7).Data for 2001showthat large pension</sup> funds report lower operating<sup>expenses.This is explainedby the presence of economiesof</sup> scale. Nevertheless, the high<sup>level of operatingexpensesof small funds at over 2percent</sup> of assets is worth noting. In contrast,<sup>small fundsseem toearnhigher investment returns,</sup> even though all company pension<sup>fundsperformedbadly in 2001,especiallyrelativeto</sup> the NPF. The 3 Sugar Industry Pension<sup>Fundsreport better retums in 2001than the</sup> registered pension funds. This<sup>probably reflects theirgreater investmentsin real estate</sup> and housing loans compared to<sup>companyfundsthat are more heavilyinvestedin</sup> company shares.

The differences in operating and investment<sup>performanceof differenttypes of</sup> pension funds over time are shown<sup>clearly in Table8.Small fundsconsistentlyreport</sup> high operating costs as well as<sup>slightlyhigher investmentreturns.Asnoted, part of the</sup> difference in operating costs may be<sup>explained by under-reportingof costs by large</sup> pension funds. Large employers<sup>are morelikely thansmall employersto absorbvarious</sup> types of operating expenses, such<sup>as rentfor premises and the salarycost of fund</sup> administrators and asset managers.<sup>On the basis of collected data,some self-administered</sup> funds that probably outsource<sup>theadministrationandinvestmentfunctionsto specialist</sup> providers tend to report full operating<sup>costs, while others clearlyunderstateoperating</sup> costs. In the calculation of these<sup>operatingcost ratios,insurancepremiumspaid for</sup> various insurance services have<sup>been excluded asthese do not constitutecosts incurred</sup> for the administration and investment<sup>managementof pension funds.</sup> The good investment and operating<sup>performanceof the NPF and of the funds</sup> insured and/or administered by<sup>insurance companiesshould be noted.For the NPF this is</sup> linked to the absence of prescribed<sup>investmentlimitsand thestrong performanceof</sup> government securities in which<sup>the NPF invests more thanhalf of its assets.Operating</sup> performance has clearly benefited<sup>from the presenceof considerableeconomiesof scale.</sup> The investment performance of<sup>insuredfunds has also benefitedfrom the heavy</sup> allocation in government securities<sup>and housing loans.</sup> 13
> * While detailed data on the administration fees charged by insurance companies

> are not publicly available, market practitioners indicate a level of around 70 basis points,

> at least for the larger funds. The smaller pension funds are very likely to be charged

> higher fees. Insured pension funds pay death and disability insurance premiums, administration charges deducted from contributions before investments are made, and fund management fees. Comparison with the performance of self-administered funds would thus be difficult even if full data were available. Self-administered funds are able

> to seek better deals from specialist providers in each of these areas rather than rely on the

> same provider for all of them.

# V0 Regiatrion and Sujperisinon

Pension fund regulation is currently fragmented among several laws and tax regulations, while supervision is non-existent. Occupational pension funds benefit from large tax incentives and must be approved by the Tax Commissioner. Self-administered funds must be registered with the Registrar of Associations or as trusts, while insured funds and funds administered by insurance companies must submit an insurance certificate to the Tax Commissioner. There are regulations on minimum vesting and portability provisions, fund governance, and publication of audited accounts. But pension funds are not required to hire qualified auditors, to use external custodians, or to observe limits on self-investing in sponsoring employers. However, sponsoring employers must comply with prescribed accounting standards on the valuation of pension liabilities (IAS 19/MAS 25).

Tax incentives follow the EET regime (Exempt contributions, Exempt investment income, Tax benefits). Contributions and investment income are in fact exempt without any ceiling or limit (except to the extent that pension benefits cannot exceed two-thirds of pensionable salary), while pension benefits are taxed, except for the amount of the pension that is commuted to a lump sum on retirement. This tax treatment is more generous that that of most countries with funded occupational pension schemes. To contain the tax privileges afforded to retirement saving, most countries limit the deductibility of contributions both by applying a limit on the contribution rate and an upper ceiling on eligible earnings (as well as having a limit on pension benefits). Investment income is also often subject to a reduced tax rate rather than benefiting from complete exemption (Davis 1995). However, the tax attractiveness of retirement saving is weakened in Mauritius by the low personal income tax rates and the very wide availability of personal deductions.

The main law for pension funds established by private companies is the Employees Superannuation Fund Act of 1982 (as amended).<sup>8</sup> This provides that any employer may constitute a fund and make contributions for the payment of pensions and other benefits to directors or employees and their dependants (section 3). Pension funds

> 7 This is especially true for approved personal pension schemes, retirement annuities, and retirement savings schemes that are available but apparently little used.

> 8 This Act mainly applies to the self-administered funds. Insured funds are covered for the most part by the Insurance Act. This is geared toward general protection of policyholders (in this case employers) and

> does not cover fully the interests of employees.

14
must be a body corporate<sup>and be registered withthe Registrar of Associations(section4).</sup> The rules of the fund must<sup>stipulate,</sup><sup>_inter alia,_the rate of contributionspaid by the</sup> employer and employees,<sup>the rate of accrualandmethod of calculation of benefits,the</sup> conditions of membership,<sup>the appointmentof employerand employeerepresentativesto</sup> the management committee<sup>of the fund,the securityto be provided by officers of the</sup> fund, the appointment of<sup>auditors,thedisclosure of informationon the rules and</sup> performance of the fund,<sup>and the dissolution of thefund and disposalof itsassets,</sup> including amalgamation<sup>with anyother fund (section6 and SecondSchedule of the Act).</sup> The fund is managed by<sup>a management committeeof no less than5 persons,nominated</sup> by the employer and the<sup>employees(section7). However,no parity of representationis</sup> required. The Act specifies<sup>that no member of the managementcommittee shallbe liable</sup> for any losses unless they<sup>havebeencaused by willfulnegligenceor fraud (section8).</sup> Payments to the fund by<sup>employersandemployees are irrevocable(section10). This</sup> implies that any surplus<sup>overand above the presentvalueof actuarialliabilitiesbelongs</sup> to the fund, although employers<sup>are not preventedfrom taking contributionholidays.</sup> Audited accounts must be<sup>submittedto the Registrarwithin3 months of the end</sup> of each financial year (section<sup>11). The incomeandexpenditurestatementand the</sup> balance sheet must be<sup>auditedby 2auditors,one appointed by the employerand the other</sup> by the employees (section<sup>12).However,the Actdoes not requirethe hiringof qualified</sup> auditors. The Registrar has<sup>broad powersof inspectionand investigation,may causean</sup> inquiry into the affairs of<sup>a fund,and may with theapproval of the Presidentstrike off the</sup> Register a fund for reasons<sup>set out in its decision(sections13and 14).Such Registrar</sup> decisions may be appealed<sup>to the SupremeCourt.On windingup, theassetsof the fund</sup> are vested in the Registrar.<sup>Theyarefirst used to dischargeall third party debtsand</sup> liabilities and are then applied<sup>to the payment of the present value,as determinedby an</sup> actuary, of the amounts<sup>due to pensionersand thento the accruedbenefitsof employees</sup> in active service (section<sup>15). Afee ispayable by each fund tothe Registrarof</sup> Associations to meet its<sup>expenses(section16).This amounts to 0.25percentof the</sup> investment income of each<sup>fund.</sup> The Income Tax Regulations<sup>1996 (as amended)stipulate that pensionschemes</sup> must be approved by the<sup>Tax Commissioner,who requireseither' an insurancecertificate</sup> or registration with the<sup>Registrar of Associations(section5(1)(b)(ii)).The Tax</sup> Commissioner must, _inter_<sup>_alia,_be satisfiedthat:employeecontributionsare reasonable;</sup> all members are treated<sup>equally; annual pensionbenefits,excludingNPF pensions,do not</sup> exceed two-thirds of final<sup>pensionableemoluments(section5(2)(c)(vi));commuted</sup> lump-sum payments do<sup>not exceed12.5times theamount commutedwhich, in turn,does</sup> not exceed 25 percent of<sup>theannual pension due(section 5(2)(c)(vii));permanent</sup> disability and death benefits<sup>do not exceedtwice final pensionableemoluments;</sup> dependent pensions do<sup>not exceedspecified limits;eligibilityand withdrawalprovisions</sup> are reasonable; powers of<sup>investment of fund assetsare reasonable;annualpension</sup> increases do not exceed<sup>same rank salaryincreasesor3 percentof the precedingyear's</sup> pension; employees leaving<sup>after 5 years'serviceare entitledto preservetheir accrued</sup> benefits in the fund of<sup>the old employer,or transferthe actuarialvalue of these benefits to</sup> the pension fund of their<sup>new employer,or transferthis valueto anapproved personal</sup> pension scheme (section<sup>5(2)(c)(xvii));and, employees leaving beforecompleting five</sup> 15
> years' service are entitled to a refund of their accumulated contributions, provided that

> the related actuarial value of the accrued retirement benefits from a previous employment

> has not been transferred to the superannuation fund established by the new employer. 9

The regulatory framework is obviously very extensive. However, it has some important gaps. There are no explicit requirements: for maintaining a proper funding level to secure scheme benefits; for ensuring the safe custody of assets; for hiring qualified actuaries, auditors and custodians; for imposing on actuaries, auditors and custodians the responsibility to inform the supervisory authority of any material breaches of regulations; or for submitting regular reports to the supervisory authority.10 There are also no rules on investments and asset diversification. While the absence of minimum investment rules and the investment freedom enjoyed by fund managers mark a welcome departure from prevailing practice in most developing countries, failure to impose limits on self-investing in sponsoring employers and to require reasonable asset diversification may place pension fund assets at unnecessary risk.

Neither the Employees Superannuation Fund Act nor the Income Tax Regulations specify that pension funds must undertake periodic actuarial reviews. Sponsoring employers who must publish audited accounts are required to comply with the revised international accounting standard on pension liabilities (IAS 19, adopted in Mauritius as MAS25). IAS 19 specifies, _inter alia,_ the AA corporate bond yields (or similar) as the discount rates to be used in valuing actuarial liabilities and requires employers to report in their accounts any shortfall in the pension fund they sponsor. Although there is no systematic monitoring of the shortfall situation of pension funds in Mauritius, it is estimated that on average pension schemes suffer from a 20 to 25 percent shortfall. Actuarial reviews are undertaken at regular intervals, mostly every 3 years. Local actuaries use investment return assumptions that are close to, or slightly higher than, projected rates of salary growth. Mortality tables are selected from the set that is produced by the UK Institute of Actuaries.

Pension funds with defined-benefit plans operate with a large duration mismatch of their assets and liabilities, since there is a shortage of long-term assets, other than equities and real estate. At present, this mismatch does not cause problems because interest rates on short-term instruments are high. But pension funds face a large reinvestment risk. They could find themselves in a situation of huge shortfalls as a result of a large and persistent fall in interest rates. Actuaries should be required to report on the exposure of pension funds to such an occurrence, however unlikely it may seem at present, in order to facilitate early preventive action.

> 9 The wording of this provision which was added in August 2000 is not clear. It appears to be stipulating that leaving employees who transferred the actuarial value of accrued benefits from a previous employment

> have the same portability rights as employees with more than 5 years of service.

> 10 As argued further below, financial reports should be submitted in electronic form, preferably on a quarterly basis. The FSC should develop a capability for efficient analysis of financial reports and off-site surveillance.

16
There is clearly a strong need for a new comprehensive pension fund act to consolidate and modernize the regulatory framework. Modernization of regulation should cover: clear designation of a supervisory authority; fund governance; appropriate funding levels; vesting and portability standards; asset segregation and safe custody; asset valuation and diversification (including low limits on investing in their sponsors); actuarial, accounting and auditing standards (including the responsibilities of actuaries, auditors, compliance officers and custodians to report material breaches of regulations to the supervisory authority); financial reporting (through frequent submission of data in electronic form), disclosure and transparency; off-site surveillance and on-site-inspection by the supervisors; and powers of intervention and remedial action (Vittas 1998).

A major shortcoming is the complete absence of any supervision. Most countries that have a large number of occupational pension schemes suffer from inadequate supervision that tends to be passive and reactive rather than proactive with the authorities responding to problems and abuses on an ad hoc basis. The usually large number of company pension funds makes proactive supervision more difficult to implement. Although there have been no reports of major scandal, the lack of supervision is a source of concern.

Pension funds should be supervised by the FSC. The FSC should be required to collect comprehensive data on a quarterly basis and publish periodic data on the performance of the sector and an annual report with a more comprehensive analysis of trends, achievements and challenges. The FSC should cooperate with auditors, actuaries and custodians to ensure that pension schemes are adequately funded and their assets are properly diversified and valued.

Proactive supervision needs to be promoted. It should include sophisticated offsite surveillance based on quarterly electronic financial reporting, use of an early warning system and, in the case of defined benefit plans, application of dynamic solvency testing. The regulator should be empowered to challenge and even vet the actuarial assumptions used by actuaries, such as discount rates and mortality tables, in calculating the present value of pension liabilities and the adequacy of funding levels.

Proactive supervision should also involve adoption of effective on-site inspection programs, focusing on the adequacy of fund governance, internal controls and risk management systems. Auditors, actuaries, custodians and compliance officers should all be required to report to the regulator any material breaches of regulations, irregularities in financial accounts and instances of misconduct that come to their attention. The authorities should also develop efficient crisis response policies to ensure that corrective measures are taken early to prevent failures that might cause large losses to participating workers.

In strengthening the regulation and supervision of pension funds, care should be taken to avoid any disruption to the good overall performance of the larger schemes. Proactive supervision should not be accompanied by the imposition of intrusive investment limits. While clear limits should be imposed on self-investment, no attempt should, otherwise, be made to direct the asset allocation of pension funds. Pension funds 17
should be expected to adopt a "prudent expert" approach and hold diversified investment portfolios. When the NPF is converted to a DC scheme and merged with the NSF, the financial aspects of its operations should also come under the supervision of the FSC.

# VIL IFuture Prospects aaiid lPoHcy llssues

Before discussing the future prospects and main policy issues of occupational pension funds it would be useful to evaluate their structure and performance against a set of economic criteria, such as coverage, affordability, security, investment performance, operating efficiency and transparency.

Employer-sponsored pension funds, especially those based on defined benefit plans, have several advantages and disadvantages compared to other forms of pension provision. At one level, they have the ability to overcome the shortcomings of underdeveloped financial and insurance markets by pooling the mortality risks of their employees and avoiding the adverse selection problems that bedevil annuity markets. At another level, they offer the potential of professional investment management with a better risk/return profile and lower transaction costs than non-employer-based schemes that incur high marketing and administrative costs. In countries with underdeveloped financial and insurance markets, employer-based schemes are well placed to provide retirement income insurance to their workforce (Bodie 1990).

But employer-based schemes also suffer from several disadvantages. They are notoriously less transparent than the pension accounts offered by specialized pension institutions."<sup>1</sup> They often impose vesting and portability restrictions that penalize early leavers.<sup>12</sup> They rely on the solvency and integrity of sponsoring employers. The security of worker benefits depends on the creation of a segregated pension fund, maintenance of an adequate funding level and a well-diversified portfolio as well as proper valuation and safe custody of assets. This implies the existence of robust regulation and effective supervision. Because of the cost and complexity of administration, employer-based funds tend to be established by large employers with a stable and skilled labor force. Tax incentives support the creation of pension funds, although these are also available to other forms of retirement saving.

> A major shortcoming is that employer-sponsored schemes are often seen as an extension of corporate financial and personnel management functions. In this sense, they do not meet the primary objective of pension funds which is to provide retirement benefits to covered workers. Employers almost invariably retain the right to terminate pension plans and often change terms and conditions to suit their requirements, paying secondary regard to the needs of their workers. Nevertheless, and despite these shortcomings, properly regulated employer-based pension funds still have a major role to

> **"1** This is generally true of DC-based schemes operated by specialized institutions in most Latin American countries. Employer-sponsored DB schemes that are insured with insurance companies also lack transparency.

> 12 Early employer pension schemes operated on the so-called tontine principle of insurance whereby benefits were paid only on retirement (Williamson 1992). The costs of pension schemes were low but at the expense of workers who left or were fired before reaching the age of retirement.

18
play in pension provision, especially<sup>in countrieswherefinancialandinsurancemarkets</sup> are underdeveloped.

How do Mauritian company pension<sup>fundsrate with regard tothese</sup> considerations? They provide deferred<sup>long-termannuitiesto covered workerson terms</sup> and conditions that most likely<sup>are moreattractivethanthose availablein thelocal</sup> annuity market. They seem to operate<sup>with relativelylow operating costs,exceptfor the</sup> smaller funds that suffer from high<sup>expenseratios.This is in</sup><sup>**Iine**with international</sup> experience. Their investment performnance<sup>has not beenfully satisfactoryin the1990s,</sup> probably reflecting the poor returns<sup>of the local and foreignequity markets.</sup> The security of retirement benefits has<sup>improvedin recentyears.Vestingand</sup> portability rights have been strengthened<sup>and nowlook reasonable,providingbetter</sup> protection to early leavers. Accounting<sup>and actuarialstandards requireanadequatelevel</sup> of funding and a reporting of shortfalls.<sup>However,fundinglevelsare not monitored</sup> closely and are estimated to suffer<sup>froma 20 to 25percentshortfall.Actuarial</sup> assumptions look sensible and realistic<sup>at present but increasinglongevityand the</sup> reinvestment risk faced by pension<sup>funds becauseof the large duration mismatch of their</sup> assets and liabilities suggest potential<sup>difficulties in the future. If investment returns were</sup> to fall and stay at low levels for<sup>a prolongedperiod,largeincreasesin contributions</sup> would be required to maintain<sup>appropriatefunding levels.</sup> The regulatory framework is extensive<sup>and coversmany aspectsthat are</sup> important for enhancing the security<sup>of retirementbenefits. However,someimportant</sup> elements are rnissing. These include<sup>theneed for safe custody of assets and for adequate</sup> asset diversification, especially imposing<sup>limitson self-investment in sponsoring</sup> enmployers. Supervision and transparency<sup>requireconsiderablestrengthening(Vittas</sup> 1998).

In terms of coverage, funded occupational<sup>pensionschemes coverabout10</sup> percent of the labor force in Mauritius.<sup>Adding theunfunded civil servicepension scheme</sup> brings the total to 20 percent. This<sup>islow by comparisonto levels prevailingin leading</sup> high-income countries, such as<sup>Australia,Denmark, the Netherlands,Sweden,</sup> Switzerland, the United Kingdom<sup>and the UnitedStateswherecoverageexceeds70</sup> percent and reaches beyond 90 percent of<sup>the labor force (World Bank 1994). But taking</sup> into account the offer of the universal<sup>BRPand the operationof the NPFaswellas the</sup> structure of the local labor market<sup>the currentlevel of coverage looksreasonable.</sup> Long-term affordability is a different<sup>story.The promised benefits,which usually</sup> are not integrated with the BRP<sup>(althougha large proportionare integratedwith the</sup> *NPF), result in high replacement<sup>rates at relativelyyoungages.The growing longevityof</sup> the population, which is likely more<sup>pronouncedamong high-incomepeople,impliesa</sup> continuing increase in cost. The<sup>recent trend towardDC schemes is likelyto accelerateif</sup> companies are constrained by growing<sup>competitionintheir productmarkets from</sup> increasing employer contributions<sup>to the levels that would be required to maintain the</sup> financial soundness of their schemes.<sup>The comparativeadvantageof employer-basedDC</sup> schemes would then depend on their ability<sup>to achievehigh investment returnswithlow</sup> 19
operating costs and offer attractive but non-guaranteed annuity options at retirement. As in most countries, this is likely to be accompanied by a growing demand for protected investment products.

The future role of occupational pension funds in the Mauritian multi-pillar pension system will also be shaped by decisions regarding the continued affordability of the BRP and especially the restructuring of the operations of the NPF.

For instance, a gradual increase in the normal entitlement age for the BRP coupled with an application of some means testing would not only ensure its long-term affordability but would also argue for converting the NPF into a DC scheme, merging it with the NSF, and introducing greater competition with well-run and transparent private pension funds. The latter would be achieved by allowing employers who sponsor such private pension funds to contract out of the NPF.<sup>13</sup> An even greater degree of competition and individual choice would be encouraged by granting workers the right to choose between the NPF and the pension fund established by their employer.

These measures of reform would ensure that the NPF continues to operate efficiently and does not end up by dominating the local financial system. They would also strengthen the multi-pillar structure of the Mauritian pension system. Their success would require, however, a considerable strengthening of the regulatory framework of occupational pension funds and especially implementation of an effective system of proactive supervision. With better regulation and supervision, workers would enjoy greater choice and stronger protection of their pension savings, while the financial system would benefit from greater plurality among institutional investors, intensified competition and expanded innovation.

Pluralistic pension funds can have a major impact on the development of the financial system and the financing of the economy. They can stimulate the development of the long-term government bond market (including inflation protected securities and zero coupon bonds) as well as the growth of company debentures, mortgage bonds and asset-backed securities. They can also increase the liquidity and efficiency of equity markets. Realization of these benefits requires effective regulation and supervision of both primary and secondary securities markets.

Experience from the United States and other high-income countries suggests that they can play an important part in "symbiotic" finance, acting as a countervailing force to the dominant position of commercial banks, supporting the financing of independent leasing, factoring and venture capital companies, and promoting altemative sources of financing expanding SMEs. The promotion of these other markets would require the removal of regulatory and tax obstacles and the creation of a robust and effective framework of financial regulation and supervision.

Mauritian pension funds (and other institutional investors, such as insurance companies) have a huge demand for long-term assets. At present, they are forced to

> **13** The terms of contracting out would need to well specified. If all schemes are based on DC plans, switching between the NPF and employer schemes would be much easier.

20
engage in a significant amount<sup>of reversematurity transformation,investinga large part</sup> of their long-term funds in<sup>short-term treasury bills as wellas medium term bonds and</sup> bank deposits. Their long-term<sup>assets includecorporate equities,realestateand housing</sup> loans. Corporate equities are<sup>illiquidand volatile,while real estate has performed well</sup> over the long run but is also<sup>illiquidandoften produceslowyields.Housingloans have</sup> for the most part performed<sup>well,although it would be more efficientfor pension fundsto</sup> invest in mortgage bonds<sup>and mortgage-backedsecuritiesrather than engagein the</sup> origination and servicing of housing<sup>loans.</sup> A fuller appreciation of their investment<sup>needs and of their potentialfor</sup> stimulating financial innovation<sup>would promote thedevelopmentof efficient and liquid</sup> markets for all kinds of long-term<sup>securities.A simplificationof the complicatedsystem</sup> of taxation of financial institutions<sup>and instrumentsand greater boldnesson the part of</sup> both issuers and investors would<sup>accelerate the process of development.</sup> Occupational pension funds in<sup>Mauritiushavea satisfactory record of</sup> performance. They face many<sup>serious challengesthat couldtransformtheir structureand</sup> mode of operation. But with<sup>the right policies regardingthe extentof publicprovision of</sup> pensions and the creation of<sup>robustregulationand effectivesupervision,their rolecan be</sup> expanded considerably with beneficial<sup>implicationsfor financial sectordevelopment and</sup> economic growth.

21