TNAG-0531-FCO40-626-Application-of-International-Labour-Convention-to-Hong-Kong-1975 — Page 91

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pensions does not

concessionary

necessarily entail high initial rates of contributions, because according to the financial systems selected this may be borne by successive generations of members.

16. Provident funds have popularised the notion of saving and have made some inroads into the problems of providing financial support in old age, invalidity and on the death of the breadwinner. Persons who have had 20 years or more of continuous membership are noW receiving relatively large suns which have some potential for income protection. However, the aim of the provident fund to promote a form of financial security on permanent cessation of earnings cannot be achieved to any reasonable extent unless the worker has been a member for almost the whole of his working life. 1 In conditions of widespread unemployment, and when there are migratory patterns of employments, for example between urban and rural sectors, such long periods of membership will be very rare. Other important considerations are the amount of the benefit in terms of recent earnings and the effects of inflation. In pension schemes it is usual to relate the pension to average earnings over the last few years prior to retirement, death or invalidity, as the case may be. It is possible to revalorise wages for the purpose of the pension calculation in order to counteract a decline in purchasing power, and thus assure the beneficiary of a pension with the desired relationship to recent earnings. A provident fund is unable to obtain additional finance in respect of past periods of membership and, therefore, the sum paid out reflects the earnings history and cannot be adjusted in respect of increases in earning power or to offset falls in the value of money. The addition of interest is normally not fully effective in this respect because, even if investments maintain their real worth during periods of inflation, on grounds of equity a long-term common rate of interest is usually applied to all accounts. This precludes general action to realise capital gains and thus compensate in full for the depreciation of the accrued balances. After payment of the lump sum it is vulnerable to a decline in purchasing power but cannot be adjusted periodcally as can a pension. According to the financial system adopted, the increases in current pensions may be financed in different ways, if necessary by rises in the contribution

This flexibility of pension systems is of considerable significance to governments faced with the effects of inflation or desircus cf extending to pensioners, benefits of any general rises in living standards.

rates.

17. Another aspect of great interest to governments is the size of reserves accumulated because they are an important source for investments in conformity with natural development plans. In the case of a provident fund, a controlled accumulation of reserves is not possible since its contribution rate is governed by the need to provide adequate sums on the occurrence of the contingencies. Consequently, the reserves шау be larger than is desirable, given the suitable investment opportunities in particular countries. In a pension scheme, the financial system may be selected according to such requirements as the desired level cf reserves and the amount of contribution which presently can be borne by the national economy. Many developing countries have preferred a system of partial funding with correspondingly smaller reserves than a fully funded provident fund, but it should be noted that if the general average premium system of pensions financing is used the scheme can, contrary to popular belief, accumulate equivalent or greater capital sums than a provident fund.2

18. Another misconception exists regarding the comparative difficulties of administering provident funds and pension schemes. It is thought that, because of the simplicity of the benefit system, a provident fund is easier to administer than а pension scheme. Most of the main procedures are similar, but record keeping in a provident fund is more elaborate and complicated because of the annual computation of compound interest. The problem of evasion of contribution liability has to be faced by a provident fund because it is usual to pay the member full benefit although the employer may have defaulted. In a pension scheme entitlement has to be determined only when a pension is claimed, and it is usual to adopt reasonably simple formulae capable of being understood by the members. The requirement to pay pensions periodically imposes additional administrative burdens compared with a provident fund, but this should be merely a routine procedure, except in areas remote from the networks of banks and post offices. Over-all similar administrative costs can be expected from the two types of scheme.

This is illustrated in the study "The role of national provident funds and pension schemes in capital formation", S.N. Iyer, ILO.

2 "The role of national formation", S.N. Iyer, ILO.

provident funds and pension schemes in capital

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