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FINANCE: Unions Urge World Bank to Stop Pushing Private Pensions

Emad Mekay

WASHINGTON, May 26 2003 (IPS) - International labour unions are urging the World Bank, one of the world’s largest development agencies, to stop pushing private pension plans on millions of workers and employees worldwide because the schemes do not deliver jobs and other promises.

In two days of meetings here that ended late last week, several members of the International Confederation of Free Trade Unions (ICFTU) tried to dissuade Bank officials from advocating the controversial plans for workers in poor nations.

For the past decade, the Bank has promoted private pension plans – in which part or all of an existing plan’s pension money is channelled to capital markets – at the expense of the traditional "pay-as-you-go" plans, often financed by an employer payroll tax or by paycheque deductions.

The meetings coincided with the release of an ICFTU report detailing the damage that the Bank’s pensions initiatives have caused in Latin American, Eastern European and developing countries over the past decade.

The ICFTU, whose unions represent 157 million workers in 148 countries, says those pension reform experiences, were actually counterproductive.

The report criticises the Bank’s ”radical” approach, often followed in co-operation with international private investment firms that stand to gain billions from the privatisation of social security.

It argues that the Bank’s plans are based on ”the false notions that private is always better than public” and that the market is ”somehow more secure than inter-generational solidarity”.

The ICFTU says it has gathered evidence that proves otherwise in countries like Argentina, Chile, Kazakhstan and Latvia among.

”These things tend to be subject to all kinds of abuse by all sorts of fly-by-night operators unless it’s very well regulated and very well supervised,” said Peter Bakvis, the ICFTU Washington office director.

Bakvis told IPS that private brokers siphon money off of pensions, with exorbitant administration fees, for example, which are often levied as a percentage of a transaction’s value.

”That’s one of the major problems. It’s hard enough to supervise in Canada or Europe, let alone in developing countries. In countries that don’t have a strong regulatory regime or a lot of expertise in this, people tend to get away with murder.”

Over the last decade, more than a dozen countries in Latin America and Central and Eastern Europe have partially or completely replaced public pay-as-you-go pension systems with funded systems managed by private financial institutions, mostly European or North American.

The Bank has been a major power behind this shift, providing loans and technical support and sometimes tying credit to acceptance of the change.

It argues that privatising pensions injects workers’ savings into national economies, boosting the capital market, making funds available for local enterprises and creating jobs.

But that has not happened either, according to the ICFTU. The union’s research discovered that the private funds invested money overwhelming in government bonds.

”So it is the government that is really financing these things,” said Bakvis, ”and if you are doing it with government bonds, then why don’t you just maintain it as a public regime instead of giving private administrators, who are taking absolutely no risk, an opportunity to skim off it?”

While the Bank also claims that retirees will be better served by private plans that have diversified sources of pensions and fewer of the political risks facing public funds, the ICFTU says risks are sometimes even higher in the private sector.

”There are lots of bankruptcies in the private sector,” said Bakvis. ”This is even more so if it isn’t well supervised and well regulated.”

The report says that the transition from public to partially or wholly privatised plans has burdened governments with enormous fiscal strains, ”sometimes with disastrous consequences, most dramatically in the case of Argentina”.

The labour representatives say they recommended to Bank officials that ”instead of dogmatically pushing costly pension privatisations”, the Washington-based institution should ”redirect its considerable expertise and financial resources towards assisting countries in improving their existing programmes”.

The officials acknowledged their fears and promised to act on at least some of the advice, the representatives added, cautioning that they are unsure if that will lead to changes on the ground.

Major problems, according to the ICFTU report, ‘World Bank Involvement in the Privatisation of Public Pension Systems in Developing and Transition Countries’, include lower benefits for retirees – particularly women – under Bank-backed reforms. Most changes have been intentionally designed to cover fewer retirees, leaving large numbers without any protection, it adds.

For example, it says, the payments from some private plans are based on gender-specific life expectancies. This means that a woman who retires at a particular age will get a smaller pension than a man retiring at the same age with identical accumulated benefits because she has a longer life expectancy.

Labour unions say the traditional "pay-as-you-go" plans are, however, distributive, and therefore tend to reduce inequality and poverty.

The World Bank model has been implemented in countries like Colombia and Hungary, which shifted towards a largely privatised system. Other countries, like Slovenia, have rejected the Bank’s approach and maintained public pensions.

Nations like Brazil are still engaged in public debate about the future of their pension system and are waiting to see the results of the debate between the World Bank and labour unions.