Social insurance for the informal sector: Why modeling and monitoring is critical

In the wake of the COVID-19 (coronavirus) pandemic, flexible voluntary savings plans that could be tapped for immediate needs (unemployment, health care, housing, etc.) and encourage participants to save for old age could also respond to the social protection needs of non-poor informal (NPI) households, which account for a large share of the population in Africa. But launching such a plan could trigger a lot of questions for policy makers and practitioners; those that can only be answered through an in-depth viability assessment.

Assessing viability: a modeling exercise

Assessing the viability of a voluntary savings plan is no different from a business case development exercise, except that, because it deals with old-age savings, projections are conducted for a time span of 40 years or more. The assessment should allow all stakeholders to make an informed decision on whether launching the plan makes “financial” sense and what budget support would be needed before it can become self-sustainable.

The assessment should project both the costs (fixed and variable components) and benefits. Ultimately, the key questions to answer are when and how the savings plan will reach the critical mass of participants, i.e. the number of active contributors large enough for its fixed costs to be self-financed by its revenues.

The “when” is nothing but the breakeven point. Before it is reached, a sponsor, usually the government, must cover the costs of running the plan. The “how” is a function of both actionable levers and exogeneous parameters: communication and outreach, behavioral nudges and non-monetary or monetary incentives will influence the take-up rates, but at a cost.

As usual, there exists an inverse relationship between the “when” and “how”: Incentives may hasten the growth in coverage and savings and bring forward the breakeven point while increasing the overall cost of running the plan. Only a robust viability assessment will help finding the right balance.

The net real return on savings is central for the “social” and “financial” viability

Maximizing the net real return on members’ savings is important to build trust and interest in the plan. But it also plays a central role in determining financial viability, because the costs of running theplan are usually covered by a portion of the return on invested assets. As such, it represents a source of revenues for participants as for the plan itself.

Hence, temptation is high to make this central assumption as “appealing” as possible, to both attract new participants and again shorten the breakeven horizon. But there is no return without risk, and a particular attention should be paid in the choice of this parameter, which should be driven only by financial considerations.

The World Bank has developed a defined contribution Scheme Viability Assessment Tool

The World Bank Social Protection and Jobs Practice, in collaboration with the World Bank Pension Department, has developed a Scheme Viability Assessment Tool (SVAT) to assist new and existing voluntary plans in carrying out a viability assessment. The tool was developed in response to demand by governments in the Africa region that have launched such plans or are considering doing so. The model projects expenditures and potential revenues over a period of 40 years. The SVAT uses baseline data from the plan (if one exists) or survey data (if a new plan is being designed) to inform its assumptions of coverage and savings.

The model can be customized to any defined contribution plan design and includes a scenario testing module. It has been used in two different occasions so far, first for a new plan to be launched in Benin, and for an existing one (Ejo Heza LTSS) in Rwanda, both for the informal sector. In both cases, the baseline assumptions were determined through a collaborative approach between the World Bank team and the architects of the plan in the country, to not only accurately consider the country context but also to ensure the model is sufficiently understood by the government officials involved. This process proved to be essential to the ownership of outputs from the SVAT.

The SVAT model is a monitoring tool

The SVAT model, or any model of its kind, should be, as much as possible, anchored in the reality of the country. The set of assumptions, together with the outcomes, should describe a credible universe, mirroring the targeted population, the macro-economic environment, the financial context, etc.

But because no model ever proved to estimate outputs to precision, it is also very much a prescriptive tool that sets forth a path, but needs constant adaptation, as experience grows. Beyond assessing the viability of a given social protection program, the SVAT is a monitoring tool that helps plan administrators to match actual versus expected outcomes and make course corrections if needed.

This blog post is the final in a series focused on the different chapters of the report, Social Protection for the Informal Economy: Operational Lessons for Developing Countries in Africa and Beyond. Read the previous blogs in the series here:

• Innovations to address the social protection needs of the informal economy—an operational perspective
• Not poor and not formal: Who are the “missed middle” of social protection?
• Leveraging identification to extend social insurance to the informal sector
• Informal sector pensions: Sensibly investing for a better future
• Planning for the future: Behavioral insights to help informal workers save