By Philippe Auffret

The government of Guinea Bissau is considering implementing the pension fund included in the 2015 Budget Law. It requested a technical assistance from the World Bank to conduct an initial diagnostic of the pension system with a focus on the public service pension scheme. The objective of this note is an initial step to respond to this request.

The analysis shows that it is not recommendable for Guinea Bissau to set up a pension fund for the public service pension scheme at this stage. Although the 2015 Budget Law envisages to create a pension fund, its financing (6 percent of payroll) would not be enough to pay existing pensions. Importantly, creating a pension fund in a weak governance environment is extremely risky while the establishment of a strong regulatory framework would be a prior condition for the implementation of such a pension fund. As such, establishing a pension fund for the public service employees would bring significant administrative and fiscal challenges and therefore is not in the interest of the pensioners.

However, some measures could be taken immediately to improve the public services pension schemes. These measures include to review and update the list of current beneficiaries including “proof of life,” systematically make pension payments through the banking system and introduce some administrative reforms. Changes to the parameters of the current public pension could be also be adopted to provide more equitable pension benefits.

The government may also want to consider developing a model like World Bank’s PROST toolkit to:

(i) assess the fiscal costs of the current scheme, and

(ii) evaluate different pension reform options.

The World Bank’s pension reform options simulation toolkit, PROST, models pension contributions, entitlements, system revenues and system expenditures over a long period. It is designed to help policy-making make informed policy decisions and is currently used in 46 countries. The World Bank could provide technical assistance to develop such a model although the ability to develop this model will depend on the availability of sufficient data.

As a conclusion, the Government of Guinea Bissau is advised to maintain the current institutional structure of the public service pension scheme, introduce administrative reforms and develop and introduce a coherent reform package on the basis of a model like PROST to introduce parametric reforms to improve fiscal sustainability and equity.

Source: SSRN