The World Bank's Women, Business and the Law study has documented persistent gender pension gaps in many countries, rich and poor. This divergence is partly due to gender-specific legal differences, for example different retirement ages and the lack of counting of childcare periods. Because women have shorter working lives, earn less, and have longer life expectancies than men, they often earn less money in retirement and have to make sure it lasts longer.
However, the problem is even worse in low- and middle-income countries. Approximately two-thirds of the world's population aged 60 years or older lives in developing countries, and this proportion is expected to increase to 80% by 2050. In many of these countries there is no proper indexation of pensions according to inflation, but rather they are increased at will when there is tax flexibility. And as Sri Lanka's recent debt restructuring shows, the deepening of the sovereign debt crisis threatens to further weaken pension provision and push more older women into poverty.
After defaulting on foreign creditors in early 2022, Sri Lanka's government agreed to a restructuring of external and domestic debt as stipulated in the rescue agreement with the International Monetary Fund. The adjustment had serious consequences for the Workers' Provident Fund (EPF), the country's largest pension fund managed by the Central Bank of Sri Lanka (BCSR) and covering almost 60% of workers in the private and parastatal sector.
In September, the BCSR announced that the EPF had two options for its public bond portfolio under the domestic debt restructuring plan. The first was to increase the tax rate on the income that the EPF receives from its investments to 30% (more than double the current value, i.e. 14%). The second was to replace current government bonds with others with a lower annual interest rate, which is 12% until 2026 and 9% thereafter, a significant reduction from the current average yield of over 20%. The BCSR Monetary Policy Committee chose the latter, but both options resulted in significant reductions in retirement savings.
This is bad news for all older people in Sri Lanka, who are already the poorest part of the country, but women will be hit hardest. First, they are less covered because EPF benefits apply to workers with formal employment and women's participation in the labor market has been consistently low for several decades, at 30 to 35%. But what has happened will also affect women who do not have direct access to these savings, as many are financially dependent on a man or are receiving a deceased husband's pension.
Spread out payments further
The feminization of aging has extended the retirement period of Sri Lankan women, who not only live six years longer than their male counterparts, but can also claim EPF pension at the age of 50, while men have to wait until they are 55. This is important because the EPF delivers the result of the mandatory contributions from employees and employers plus the accrued interest in a single payment at the time of retirement. In 2021, this payment averaged around $2,000 (1,856 euros), a value equivalent to four years of consumption for a typical person, according to the central bank. An in itself insufficient amount that women have to raise for years than men. And by lowering the interest rate on government bonds, the one-off payment that workers receive will be even lower.
This is an example of the risk that domestic debt restructuring poses to the financial security and economic independence of women as they age. It also highlights the importance of protecting pension funds to ensure the well-being of the older population in general.
Sri Lanka's restructuring plan did not treat all public bonds equally, but specifically targeted those held by pension funds (rather than financial institutions or private bondholders). Furthermore, EPF beneficiaries had no opportunity to oppose this policy as neither employees nor employers have a say in the management of the fund.
To improve transparency, a restructuring of the EPF Board of Directors is needed so that members' interests are represented in the decision-making process (after all, poor governance poses a risk to beneficiaries). This allows employers and employees (of both sexes) to hold the board accountable for the institution's investment portfolio and resist changes that reduce retirement savings. For example, the decision to tax EPF capital gains (which were initially tax-free) was taken despite workers' opposition.
The law introducing the EPF needs to be amended so that the retirement age is the same for men and women, and mechanisms need to be created to allow childcare periods to be taken into account. Furthermore, Sri Lanka should follow the example of other countries and encourage more competition in the pension fund market, providing more alternatives to beneficiaries while promoting a service philosophy in the management of the funds. Finally, beneficiaries need to be more involved in the management of their pensions.
In the long term, ensuring the economic well-being of retirees in Sri Lanka (and in all developing countries) requires thoughtful and well-funded policies to improve beneficiaries' access to formal sector jobs. But in the meantime, authorities must create pension fund management systems with greater transparency and accountability to protect workers' pensions from further cuts.
Translation: Esteban Flamini
Nisha Arunatilake is Research Director at the Institute of Policy Studies of Sri Lanka and Research Fellow at the Partnership for Economic Policy.
Copyright: Project Syndicate, 2024. www.project-syndicate.org
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