CHRISTINE O ASABA says reforming the public pension systems in Rwanda is overdue, should not target the poorest and need to involve firm adjustment to demographic change. For self employed individuals or where an employer does not have an occupational pension scheme they must establish a private pension scheme.

What is a pension?

A pension is a way to have a regular income to live on when you retire. If you are a member of a private pension scheme, the amount of pension you get when you retire depends on how the scheme works. This can include things like how long you have been a member of that scheme, how much has been paid in (contributed) over time, how the money is invested, or how much you earned when you were at work.

Private pension scheme

A private pension scheme is where an employer does not have an occupational pension scheme or where an individual is not eligible to join their employer’s pension scheme or wants to make additional contributions independent of the employer. This could be a defined contribution personal pension or a stakeholder pension. Now that Rwanda is striving to boost the economy through financial markets, its high time, regulator(s) and relevant authorities embark on the move to reform our pension schemes.

A stakeholder pension

As with other types of personal pensions, the pension you get does not depend on your salary and the money you save is put into investments for you.

The fund value that determines the pension income at retirement age will depend on contributions made and the investment return. Contributions made will usually be wholly by the scheme member although occasionally an employer will make a percentage contribution. Rwanda currently does not have such facilities while other investments are managed by insurance companies. Thus individuals are limited and can not decide on different portfolios in pension plan.

Personal pension scheme

Personal pension scheme is arrangements under which individuals who are self-employed or in employment but not in an occupational scheme make pension provision, usually by means of investment products offered by a financial institution.

Pension plan (defined-benefit plan and defined-contribution plan).

A type of retirement plan, generally tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee’s future benefit. The pool of funds is then invested on the employee’s behalf, allowing the employee to receive benefits upon retirement. In many ways, a pension plan is a method in which an employee transfers part of his or her current income stream toward retirement income.

A defined-benefit plan

In a defined-benefit plan, the employer guarantees that the employee will receive a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool.

A defined-contribution plan

In a defined-contribution plan the employer makes predefined contributions for the employee, but the final amount of benefit received by the employee depends on the investment’s performance.

Many developing countries have recently reformed their pension plans from a defined benefit to a defined contribution plan. One of the reasons for this shift is that it is beneficial for the development of domestic financial markets. In defined contribution plans, the accumulation of assets by pension funds bolsters the domestic market, which in turn leads to more efficient allocations of moneys to productive investments in the domestic economy. Theoretically, this will lead to increases in productivity and growth. Pension funds have a unique role to play in the development of national stock markets in developing nations. They can trade frequently thereby increasing the liquidity of the domestic stock markets, or introduce innovations and new financial instruments to reduce costs. The most important thing that pension funds can do is improve the corporate governance of publicly traded firms. Because pension funds are so large, they can use their influence to monitor insiders and improve shareholder legal protections. Pension funds impact stock market development and may have a positive relation between pension funds and stock market development.

Everyone needs to plan for their retirement... People are living longer and healthier lives, so it’s even more important to think about how and when to save for retirement and how long to continue working. Pensions can be confusing and many people don’t know where to begin, especially when there are so many other things to spend your money on.

So, if you do a bit of planning, you can really help yourself get ready for retirement. Making changes now can make a difference to your life in the future. The earlier you start, the better, but don’t assume you’ve left it too late to make decisions about your pension arrangements.

The picture that emerges of the "typical" plan and its significant variations is crucial to all those with a financial stake in pensions. With this information, workers can evaluate just how generous their employer is; job applicants can compare fringe benefits of prospective employers; personnel directors can judge their competitive edge.

Pension funds are becoming the largest institutional investors in global financial markets. They help individuals save for their old age and protect the value of their pensions. In so far as they improve risk sharing along time and across individuals, pension funds may also support innovation and growth in the economy. However, pension funds operate in an environment characterised by a number of serious market imperfections (poor financial education of investors and managers, informational asymmetries in the delegation of saving and portfolio management decisions, imperfect labour markets, and potential supply versus demand imbalances in financial markets).

The common thrust of the recommendations is to avoid a scenario in which public sector pension systems crowd out private funded savings for retirement, private sector pension funds shed all risk to banks and to governments, and inflexible labour markets harm the accumulation, maintenance, and use of human capital, resulting in early retirement, low fertility rates, excessive investment in government bonds, and lack of innovation, harming long-term growth.

sebasore@yahoo.com