Sistèm Pansyon Ayiti: Rekòmandasyon pou Amelyore Regleman an

NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION 10 March 2018 Dr. Edgar Robles Copyright © [2018] Inter-American Development Bank. This work is licensed under a Creative Commons IGO 3.0 Attribution- NonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB’s name for any purpose other than for attribution, and the use of IDB’s logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license. Note that link provided above includes additional terms and conditions of the license. The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent. Foreword The Labor Markets Division of the Inter-American Development Bank (IDB) supports countries in Latin America and the Caribbean in building stronger pension systems by seeking to increase their coverage (support for the vast majority of the population in old age), sufficiency (pension benefits that facilitate a dignified life in old age) and sustainability (pension benefits financed in the present and in the future). To advance these objec- tives, in 2015, the IDB created the Network for Pensions in Latin America and the Caribbean (PLAC Network), a regional public good that serves as a platform for dialogue and learning among pension institutions and experts. It is one of the mechanisms through which the IDB supports the efforts of countries in the region to improve the institutional and technical capacity of their pension entities. The PLAC Network funds many activities aimed at helping the region’s pension institutions learn best practices from other countries not only within Latin America and the Caribbean, but also worldwide. In this context, during the period 2016-2017, the PLAC Network held three calls for proposals on technical assistance for its members. As a result, the Network supported 13 countries through nine technical assistance projects in areas such as pension supervision and regulation, coverage, financial sustainability, and non-contributory pillars. As a result of this effort, we have created the PLAC Network Technical Assistance Document Series. This tenth document in the series entitled “Haiti pension system - Recommendations to improve the reg- ulation” provides general recommendations for the regulatory framework of the pension system in Haiti and tries to identify broad key policy options to improve the performance of the pension system. The policies are directed to strengthen and harmonize the rules of governance for the Office Nationale d´Assurance-Vieillesse – ONA (covering private salaried workers) – and the Plan de Retraite de l´Administration Publique – PRAP – and to increase their capacity to manage risks, facilitate supervision of pension funds, improve sustainability, adequacy and equity and establish guidelines for investments policies. This document is the result of the technical assistance funds assigned to Haiti in May 2017. It was prepared by Edgar Robles (external consultant), whose work was supervised by Carolina Cabrita Felix, consultant of the Labor Markets Division of the IDB and coordinator of the PLAC Network, and Waldo Tapia, lead specialist of the Labor Markets Division of the IDB and team leader of the PLAC Network. We also invite you to review the other documents in the series. PLAC Network Team 3 Please direct any comments or inquiries about this publication to the PLAC Network team redplac@iadb.org Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 5 Table of contents Foreword ....................................................................................................................................................................................................................................................................................................... 3 1  Introduction ..................................................................................................................................................................................................................................................................................... 6 2  The Haitian Pension System ............................................................................................................................................................................................................................... 7 2.1  The Office Nationale d’Assurance-Vieillesse (ONA) .................................................................................................................................................... 8 2.2  The Plan de Retraite de l’Administration Publique (PRAP) ............................................................................................................................. 9 2.3  Retirement plans of public institutions .................................................................................................................................................................................... 10 3  International Principles of Pension Regulation ................................................................................................................................................................ 12 4  General recommendations for improving the pension regulatory framework in Haiti ................................. 16 4.1  Conditions for effective regulation ................................................................................................................................................................................................. 21 4.2  Establishment of pension plans, pension funds and pension entities ......................................................................................... 22 4.3  Governance ..................................................................................................................................................................................................................................................................... 23 4.4  Investment and risk management ................................................................................................................................................................................................. 25 4.5  Plan design, pension benefits, disclosure and redress ...................................................................................................................................... 26 4.6  Supervision .................................................................................................................................................................................................................................................................... 27 5  Conclusions ................................................................................................................................................................................................................................................................................ 32 6  Bibliography ............................................................................................................................................................................................................................................................................. 34 7  Appendix ........................................................................................................................................................................................................................................................................................ 35 Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 6 1  Introduction The purpose of this report is to provide general recommendations for the regulatory framework of the pen- sion system in Haiti. This system is composed primarily by the Office Nationale d’Assurance-Vieillesse (ONA), covering private salaried workers, and the Plan de Retraite de l’Administration Publique (PRAP) for public servants. Both regimes are defined-contribution plans, public and mandatory. There are also alternative specific pension regimes for workers of some state-owned firms, which are also mandatory and of a defined-benefit nature. Finally, some private firms have their own voluntary defined-contribution pension regimes for their labourers, although those are closer to savings accounts than to pension plans. Currently, a specialized pension authority does not supervise these regimes. In addition, the pension coverage under the ONA and the replacement rates of the two main regimes in Haiti are among the lowest in Latin America and the Caribbean. One reason for these low indicators is a lack of inflation compensation for the benefits offered by these regimes. Therefore, this document tries to identify broad key policy options to improve the performance of the pen- sion system in Haiti. The policies are directed to strengthen and harmonize the rules of governance for the ONA and PRAP and increase their capacity to manage risks, facilitate supervision of pension funds, improve sustainability, adequacy and equity and establish guidelines for investments policies. To prepare this report, there was a field visit to Haiti in January of 2018 to meet with the ONA, the PRAP and other pension funds stakeholders. In the appendix is a list of the meetings made and the institutions visited during the field visit. This report is divided into four additional sections. In the second section is a description of the pension regimes with a special emphasis on the ONA and PRAP regimes. The third section reviews the main international principles or good practices of pension fund regulation. The fourth segment gives general recommendations to improve the pension regulation framework of Haiti. The document finalizes with the main conclusions and findings of the study and the field visit. This report is part of the technical assistance of the Network for Pensions in Latin America and the Caribbean (PLAC Network) of the Labor Market Division of the Inter-American Development Bank. The PLAC Network’s main objective is to improve the institutional and technical capacity of pension institutions in the Latin Amer- ica and Caribbean region. This Network provides technical support for member countries with the following specific activities: (i) supporting the areas of regulation and supervision of pension systems; (ii) providing technical support to pension policies with an emphasis on coverage, sustainability, adequacy, equity and efficiency of pension systems and (iii) fostering experience exchanges between countries in and outside the region. The PLAC Network provides technical support for policies and regulations with a long-term horizon, focusing on strengthening human capital and governance. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 7 2  The Haitian Pension System The pension system of Haiti consists of a regime for private workers, called the Office Nationale d’Assur- ance-Vieillesse (ONA), and a regime covering the public servants named the Plan de Retraite de l’Administration Publique (PRAP). Both regimes are defined-contribution plans, publicly managed and mandatory. In addition, there are alternative specific pension regimes for workers of some state-owned firms, which are also mandatory and of a defined-benefit nature. Finally, some private firms have their own voluntary pension regimes for their labourers. These private plans are defined-contribution regimes with tax advantages over the contributions, and according to the IMF (2008), the pension funds are means to grant credit access to the participants at advantageous interest rates. The private plans are more closely related to savings plans than to pension plans, since the affiliated workers are able to take the money as a lump sum when the working relationship ends. None of the pension regimes in Haiti are regulated by a specialized institution, and in the case of the private pension funds, there is no regulation at all. This paper performs an analysis of the two main pension regimes in Haiti (ONA and PRAP) with the intent to advise the government on how to establish pension regulation in the pension system of Haiti. According to the OECD (2014), one distinctive feature of the Haitian pension system is the low replacement rate of the ONA regime when compared with other countries in Latin America and the Caribbean. Meanwhile, the PRAP regime provides a replacement rate, which is below the average of the region. Graph 1 shows this comparison. GRAPH 1  GROSS PENSION REPLACEMENT RATES FOR AVERAGE EARNERS 0.0 25.0 50.0 75.0 100.0 DOM MEX SUR HTI (ONA) GBR TTO USA BOL DEU CHL CAN SLV FRA HTI (PRAP) URY PRT BHS BRA BRB LAC 26 HND GUY GTM BLZ PER COL JAM ESP ARG PAN CRI NIC ECU VEN PRY Source: OECD (2014) and own calculation for Haiti's PRAP, based on an affiliate contributong 25 years and receiving adjustment in wage equal to the inflation rate plus 1%. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 8 Another characteristic of the pension system in Haiti is the low coverage. Rofman (2011) shows there is a highly negative correlation between old-age pension coverage and old-age poverty. In fact, Haiti shows both the lowest pension coverage and the highest poverty rate among its population of those 65 years old and older. Therefore, it is important to strengthen the pension system through regulation to improve the access to and adequacy of pensions over time. 2.1  The Office Nationale d’Assurance-Vieillesse (ONA) ONA was created in 1965 by the Decree of November 8 as a substitution for the Institut d’Assurances Sociales d’Haiti (IDASH), which had been in place since 1949. The regime was reformed in 1967, 1968, 1971, 1974, 1976 and 1983 to transform it from a pure pension plan to a loan and savings plan. Since 1965, the ONA has been a division of the Ministère des Affaires Sociales et du Travail (Ministry of Social Affairs and Labor). It is an autonomous institution with its own jurisdiction and financial autonomy. The Board of Directors, called Conseil d’Administration des Organismes de Sécurité Sociale (CAOSS), governs the regime, and the president of the republic appoints the members of the Board. CAOSS is also in charge of three other social security regimes. According to law, the ONA covers all private workers and those public servants who do not contribute to the public servants’ regime, the PRAP. All salaried workers are obliged to contribute to the ONA, while it is vol- untary for autonomous or self-employed workers. Due to the extension of the informal sector in the country and the scarce efforts to inscribe and collect the pension contributions, according to the World Bank, the coverage of the ONA in 2007 was around 8.6% of the working population, one of the lowest percentages in Latin America and the Caribbean. The contribution rate for the ONA is 6 per cent for the worker and 6 per cent for the employer, for a total of 12 per cent. As stated, self-employed workers may enrol in the ONA voluntarily, but they must cover the 12 per cent contribution of the reported income. The retirement age is 55 years for both men and women. The pension benefit depends on the number of contribution years. If a worker has more than 20 years in the system, the replacement rate is 1/3 of the aver- age salary of the last 10 years. When the worker reports between 10 and 20 years of contributions at age 55, the replacement rate is 1.6 per cent times the number of years in the system multiplied by the same salary of reference. Finally, if the worker does not consolidate 10 years of contributions, said person gets back all con- tributions from the worker and the employer as a lump-sum amount. All these formulas are calculated on a nominal basis, and pensions are not indexed to inflation. Data from the IMF shows an average annual inflation rate in Haiti of 11.7 per cent over the last 20 years, which translates to a rapid decrease in the real value of a pension from the ONA over time. The ONA also pays disability pensions for workers who have contributed between 10 and 20 years to the system. The pension amount is equal to 1/60 times the number of contribution years multiplied by the same reference wage (nominal average of the last 10 years). Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 9 A pension to dependents is paid to the unmarried partner of a deceased affiliate and their underage children – or adult children who are students. This pension is equal to 50 per cent of the original payment. All affiliates have the option of asking for a personal or mortgage loan from the ONA at special, lower-than-mar- ket interest rates. In the case of personal loans, the affiliate may request up to 50 per cent of his contributions at a rate of 15 per cent per annum for a period between 6 and 18 months. For a mortgage loan, the affiliate may apply for a credit of up to 70 per cent of the value of a house or land they wish to buy or develop, with a repayment period that is up to 300 months and based on the payment capacity of the debtor. During the interviews made in the field visit, there was a general concern from the banking sector and other pension stakeholders about the sustainability and the use of the reserves of the ONA pension fund. There were questions about the transparency in the management of the pension fund as well as preoccupations about the possibility of using the reserves to give benefits other than pensions to affiliates, following political criteria. These potential risks are the result of lack of regulation of the pension fund, including conducting regular actuarial studies and prudential rules to invest the funds according to international standards. In addition, it is a priority to establish minimum corporate governance requirements to assure a risk-based management of the pension fund. 2.2  The Plan de Retraite de l’Administration Publique (PRAP) The pension regime for public servants started with the promulgation of a law on March 15, 1975. This law has been amended more than 20 times, and the current conditions of PRAP were approved in the Decree of October 9, 2015. PRAP covers all public employees with the exception of those from autonomous institutions with their own pension plans. It is part of the Ministère de l’Economie et des Finances (Ministry of the Economy and Finances), where it is administered by the Direction de la Pension Civile (the Office of Civil Pensions). There is a separate pension fund for the Armed Forces. It is mandatory to pertain to PRAP. A public servant has access to a pension after 5 years of contributions. The replacement rate is equal to 2.5 per cent times the number of contribution years. The reference wage is the average of the best 60 monthly salaries of the public servant. The current pension age is 58 years. However, it is possible to anticipate the pension at as low as 55 years of age if the servant pays a penalty equal to 1 per cent, over the replacement rate, per annum of anticipation. PRAP also covers disability pensions, and the benefits are calculated using the same formula for elderly pensions. The contribution rate is equal to 8 per cent of the wage for the public servant and 8 per cent for the State as the employer. In addition, employees who start working in the public sector for the first time make an additional contribution equal to 1/12 of their annual salary payable during the first 4 months of employment. Finally, the employees have to make an additional contribution of 1/12th of the annual wage adjustments. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 10 There are exceptions in the pension age for people employed in some specific activities. Teachers and nurses can obtain a pension equal to 100% of the best salary at age 50 if they have contributed for at least 25 years to the PRAP. Police officers can also retire at age 50 if they have contributed a minimum of 25 years; nonetheless, their pension is calculated according to the general formula. Similarly to the ONA, pensions are not revalued by inflation. Retirees are not allowed to work again in the public sector unless they renounce the pension, and pensions cannot be recalculated if someone decides to work again in the public sector. All pensioners are covered by health and life insurance costed by the State. In case of death of a pensioner, 50 per cent of the decedent’s pension is inherited by the surviving members of the family – that is, by the widow(er) and their children, whether underage or, if they are students, adult (up to 25 years of age). The beneficiaries of a pension by succession have the option of receiving an annuity over the complete period if they comply with conditions or of receiving a lump-sum equivalent of 5 years of benefits. 2.3  Retirement plans of public institutions Some public institutions in Haiti have their own pension fund for their employees. During the field visit, meetings were scheduled with representatives of the National Bank of Credit, the Bank of the Republic, the National Port Authority and Electricity of Haiti to discuss the structure and management of the pension funds offered by these institutions. These systems are defined-benefit regimes with an important amount of accumulated assets under manage- ment. A board of each firm’s employees administers each pension fund, and they do not receive an extra stipend for participating in such activity. The sponsoring institution takes care of the operating expenses of the fund. Since there is no regulation of these pension funds, there are not any standards set to conduct regular actuarial studies. Therefore, it is uncertain whether these regimes are sustainable. In addition, it is not clear if the State has a solidary guarantee if the fund runs into a deficit in the future, in which case any mismanagement could translate into a fiscal contingency. During the interviews conducted in the field visit, there was a reluctance to disclose basic information about the assets being managed by the pension funds. Therefore, minimum transparency policies should be set via regulation to ensure good management practices. These rules need to be extended to the way in which the resources are invested to avoid liquidity problems in the future and promote parametric reforms well ahead of problems arising. The contribution rates are high compared to those of other pension funds in the Caribbean and Latin America, ranging from 12 per cent in the pension fund of the Electricity of Haiti to 25 per cent in the pension fund of the employees of the Bank of the Republic. These contributions are borne by both the employee and the employer. The access to benefits starts at 55 years of age in some institutions, which goes up to 65 years of age in the case of the Bank of Haiti. Some regimes have announced adjustments in the pension age and the contribution rate in accordance with recommendations from actuarial studies. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 11 It is customary for the pension funds to give loans to the participants. They see this as an additional incentive for the employees to retain them in the institution. Besides loans, the pension funds invest most of the admin- istered resources in certificates of deposits of banks and some of them in housing projects for the employees. Despite the lack of regulation, better corporate governance practices in these funds when compared to the ONA and PRAP was observed in these interviews. However, it is necessary to develop regulation and super- vision to ensure minimum administration standards and the control of conflicts of interests. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 12 3  International Principles of Pension Regulation Few individuals act rationally when they have to decide how much to save for a pension. At the beginning of their working lives, most people do not realize the importance of saving for a pension since they cannot see themselves as old people. In fact, they have other priorities, such as raising their children, investing for an education or saving for a house. Therefore, people will not save for a pension voluntarily or will start saving for one too late in their lives. Moreover, people tend to underestimate their life expectancy. This means that even when people make the correct decision to start saving early for a pension, they will not accumulate enough resources to finance their needs in old age. More people, then, will live under poverty in old age, turn to governmental help or depend on their families to provide income. These reasons explain why most countries around the world have established compulsory pension systems to force their citizens to save for a pension. Such savings are not an ordinary financial product, since most people will entrust the administration of their money for 30 or more years, hoping to get a stable source of income when they retire. Therefore, it is necessary to set the rules to manage these savings responsibly, and there is a function of the State to maintain minimum standards among the administrators of pension funds. Like any financial product, pension funds face a number of risks, and regulation needs to be put in place to assure these risks are assessed and managed properly. The list of potential risks the pension sector could face is great. The magnitude and materialization likelihood of these risks can vary from one jurisdiction to another. However, it is possible to mention the most common risks that all pension systems must face, such as the following: • Longevity risk: This is the risk that the resources in the pension fund will not be sufficient to cover the benefits promised by the pension regime. In defined-benefit regimes, such happens when the benefits paid are untied from the contributions made to the fund. In pay-as-you-go (PAYGO) regimes, this risk becomes evident when there is demographic change as the fertility rate of the population decreases and life expec- tancy improves. To avoid the occurrence of longevity risk, the pension fund administration should have to introduce reforms with the use of frequent actuarial studies. The main assumptions and parameters used in these studies need to be regulated by a competent authority. • Political risk: This risk relates to political decisions affecting the affiliates or their resources, the sustainability of the fund or the scope of the regulation. Pension funds call for a prudent and technical administration. However, a pension fund may be subject to political influences when it is sponsored by the State. These influences relate to decisions taken within the fund that do not represent the real interests of the owners of the fund – that is, the individuals saving for a pension. Political risk materializes in many forms. For example, Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 13 the administrator of a pension fund could be forced to buy public bonds in excess; the government may deny paying the right contributions to the fund, with no prosecution for such action; the fund may yield to pressures to pay benefits unrightfully to some people; and the pension funds could be diverted to other activities not related to paying pensions. • Corporate governance risk: Corporate governance is the set of relations and the adequate assignment of powers and responsibilities among the actors in an organization. Governance of a pension fund should respond to the interests of its owners – that is, the affiliates. However, the affiliates generally do not have knowledge of how to manage a pension fund and how important it is from a social security perspective. Therefore, the administrators of a pension fund need to protect the rights of the affiliates. However, this delegation of power is a source of all kinds of conflicts, from inadequate administration of risks to appointing people to the board of directors or administration of the fund who do not have the right aptitudes. • Investment risks: These are the most studied risks of all and refer to faults in managing an investment portfolio in a technical manner. Pension funds are financial products for the long run. There are all sorts of different risks within the investment risk category, such as the following: • Concentration risk: for example, an excessive concentration in public bonds in the short run, in local bonds or in local currency • Liquidity risk: for example, an excessive concentration of the portfolio in the short run (or in cash) or the long run, depending on the schedule of payments of the fund • Market risk arising from changes in the value of assets held by the pension fund: for example, changes in interest rates, changes in the credit rating of the bond issuer or credit risk ensuing when the pension fund develops a credit activity to its affiliates. • Operational risks: These risks relate to the operation of the pension fund, especially due to the lack of definition of working procedures and faulty supervision auxiliaries, such as internal and external audits. The risk materializes as fraud, incorrect accounting, incorrect assignment of benefits, wrong assignment of con- tributions, faults in technology infrastructure (loss of data or lack of backups) and danger to the continuity of business given the lack of alternate sites or recovery plans. The Organization for Economic Co-operation and Development (OECD) and the International Organisation of Pension Supervisors (IOPS), which is part of the OECD, are the leading institutions in the world, setting good practices or principles of pension funds regulation. Besides these two institutions, and for the case of corporate governance, the European Parliament has produced a group of principles known as Institutions for Occupational Retirement Provision II (IORP II). The Association of Investment Firms of Pensions in Canada, the National Association of Pension Funds in the United Kingdom and the Stanford Institutional Investment Forum in the United States have all developed similar corporate governance principles on applying for pension funds. OECD (2016) defines ten core principles of private pension regulation. Although these principles are designed for fully funded private pension systems (i.e., not public social security pension regimes), the first six principles, called general principles, apply for both defined-contribution and defined-benefit pension fund regulation, whether in public or in private systems. Below is a presentation of these six principles. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 14 • Core Principle 1: Conditions for effective regulation. Pension systems should have clear and well-defined objectives regarding coverage, adequacy, security, efficiency and sustainability. The achievement of these objectives should be regularly monitored. An effective legal framework, a robust institutional and financial market infrastructure and a sound regulatory and supervisory system for pensions should be in place to support these objectives. Well-functioning capital markets and financial institutions should be in place to ensure productive and diversified investment of retirement savings and the efficient management of risks. The development of pension systems should go hand in hand with the strengthening of the financial markets, based on a sound and integrated regulatory framework for the financial sector and a stable macroeconomic environment conducive to longer-term investment. • Core Principle 2: Establishment of pension plans, pension funds and pension entities. Pension plans, pension funds and pension entities, jointly or separately, should be subject to an adequate, transparent and coherent set of legal, accounting, technical, financial, managerial and governance requirements, without imposing an excessive administrative burden. Pension fund assets should be legally separate from the assets of those involved in managing the pension plan assets. • Core Principle 3: Governance. Regulations on pension governance should be guided by the overriding purpose of serving the best interests of plan members and beneficiaries and ensuring the soundness of pension plans, pension funds and pension entities. The governance structure of pension funds and pension entities should ensure an appropriate division of operational and oversight responsibilities as well as the accountability and suitability of those with such responsibilities. Pension funds and pension entities should have appropriate control, communication and structures that encourage good decision-making, proper and timely execution, transparency and regular review and assessment. The governing body of a pension fund or pension entity should ensure that the investment strategy follows a prudent approach and, where applicable, takes into account the profile and duration of its liabilities. • Core Principle 4: Investment and risk management. Investment by pension funds and pension entities should be adequately regulated. Investments should be aligned with the specific attributes and liabilities of the pension plan and the institutional and market environment in which it operates. Investment regulations should take into consideration principles related to risk diversification, dispersion and asset liability man- agement. Pension funds and pension entities should be required to act in line with the investment horizon and risk return objectives of the plan and take into account the long-term nature of saving for retirement and of eventual liabilities. Quantitative requirements and prudent-person principles for investment should be carefully assessed with regard to the security, liquidity and profitability objectives of the pension fund or pension entity. Self-dealing should be strictly controlled to ensure that transactions are made in the best interest of members. Invest- ment abroad by pension funds and pension entities should be permitted if they are subject to prudent management principles. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 15 Increased reliance on modern and effective risk management techniques and industry-wide risk management standards for pension funds and pension entities should be promoted. The development of asset-liability management techniques should be given proper consideration. • Core Principle 5: Plan design, pension benefits, disclosure and redress. Proper design of pension plans should be promoted, especially when these schemes play a public role. Factors to be taken into consideration include degree of risk sharing, protection of the value of benefits, entitlements, accruals, contributions, cov- erage and financial and market risks. Overall benefit adequacy should be evaluated by taking into account the various sources of retirement income (tax-and-transfer systems, advance-funded systems, savings and earnings). Appropriate disclosure and education should be promoted regarding benefits and members’ rights and responsibilities. Plan members and beneficiaries should be informed on the impact of plan participation and contributions on overall retirement income and the potential misuse of retirement benefits (particularly in cases associated with lump-sum payments and early withdrawal of benefits and accumulations). Pension plan members should have access to appropriate mechanisms for handling and redress of complaints that are accessible, affordable, independent, fair, accountable, timely and efficient. • Core Principle 6: Supervision. Pension supervision should promote the stability, security and good gov- ernance of pension funds and pension entities with the aim of protecting the interests of plan members and beneficiaries. Effective supervision of pension funds must be set up and focused on legal compliance, financial control, actuarial examination and supervision of those with the responsibility for operating or managing the plan. Appropriate supervisory bodies, properly staffed and funded, should be established to conduct, when relevant, off- and on-site supervision, particularly when problems are reported or identified. Supervisory bodies should be endowed with appropriate regulatory and supervisory powers over pension funds and pension entities, including powers over functions that are outsourced. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 16 4  General recommendations for improving the pension regulatory framework in Haiti This section of the document describes the main recommendations to improve the regulatory framework to oversee the pension funds in Haiti, with a special emphasis on the PRAP and ONA, the two most important pension regimes in Haiti. These recommendations take into account the structure of the pension system in Haiti, the results of the field visit interviews and the six international guidelines of pension regulation explained in the prior section. Currently, the PRAP and ONA pension regimes seem sustainable according to basic actuarial calculations, which means these funds will be able to deliver the promised benefits if they follow a technical management and the contributions are collected according to schedule for both workers and their employees. Graph 2 , Graph 3 and Graph 4 compare the replacement rates paid by the PRAP and ONA regimes to the replacement rate affiliates would get if they were to auto-finance their pension. These calculations are basic in the sense that they do not consider the existence of beneficiaries or health and disability insurances. Therefore, the intention to present these calculations here is to propose better policies and regulations; however, formal actuarial studies are needed to calculate exact sustainability of these pension regimes. The replacement rate is defined as the ratio of the pension earned to the last salary received prior to retirement. In the case of the PRAP, pensions are calculated by multiplying the number of contribution years by 2.5 per cent. Then, this calculation is multiplied by the average wage of the last 5 years of contributions. For example, if a public servant has worked 20 years, the pension will be equal to 50 per cent of the person’s average wage for the last five years. Since wages increase over time1, the average wage will always be lower than the last wage received prior to retirement. Therefore, the replacement rate for someone who has worked 20 years will be lower than 50 per cent; in fact, it is 41 per cent, according to the assumptions used in this report. The replacement rates presented in theses graphs assume that the employer and the affiliate make on-time contributions based on a wage of 15.000 gourdes per month at the time of retirement. In addition, an average inflation rate of 10 per cent per year is assumed, as well as a real wage increase of 1 per cent per year and a real return rate on investment of 3 per cent per year. Finally, the calculations assume a life expectancy of 21 years and 4 months at 55 years of age and of 19 years and 1 month at 58 years of age, according to the data for Haiti of the World Health Organization of the United Nations. In general, for the benefits being paid, all affiliates receive a low replacement rate for the contribution paid, independently of their contribution time to the regime. Under the PRAP regime, affiliates get on average 1. It is assumed that wages are adjusted by inflation once a year and a real increase of 1% is paid to workers every year. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 17 around 50 per cent of what they would get under an auto-financed regime. Under the ONA, an affiliate gets between 43 and 24 per cent of an auto-financed pension. The difference between the pension received and the auto-financed pension grows as an affiliate contributes more time to the regime. This constitutes a disincentive for contributing to the regime and promotes retiring as soon as the affiliate reaches the requisites to obtain a pension. In the case of the ONA, these low replace- ment rates also incentivize the informal economy, so it operates against the coverage objective of a social security regime. GRAPH 2  REPLACEMENT RATE OF AN AFFILIATE RETIRING AT 58 YEARS OF AGE IN THE PRAP REGIME               years years years years years years years Contributionyears Received Autofinanced GRAPH 3  REPLACEMENT RATE OF AN AFFILIATE RETIRING IN ADVANCE AT 55 YEARS OF AGE IN THE PRAP REGIME               years years years years years years years Contributionyears Received Autofinanced Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 18 GRAPH 4  REPLACEMENT RATE OF AN AFFILIATE RETIRING AT 55 YEARS OF AGE IN THE ONA REGIME             years years years years years years Contributionyears Received Autofinanced However, the sustainability of the PRAP and ONA regimes is a consequence of the lack of inflation correc- tion for the pensions paid. In other words, the sustainability of the regimes is attained at the expense of the benefits’ adequacy. As a result, given the moderate inflation of Haiti in the few decades, the real value of a pension decreases rapidly. GRAPH 5  REPLACEMENT RATE EVOLUTION FOR A PRAP PENSIONER NOT RECEIVING INFLATION COMPENSATION 0 10 20 30 40 50 60 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Yearsafterretirement Replacementrate Graph 5 presents the evolution of the replacement rate for an individual earning 15.000 gourdes at the time of retirement under the PRAP system. These calculations assume an annual inflation rate of 10 per cent, 25 years of contributions and a retirement age of 55 years. The results show the replacement rate falling from Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 19 51.2 to 38.8 per cent just three years after retirement. Moreover, ten years after retirement, the replacement rate drops to 19.9 per cent, a whopping decrease of more than 41 per cent in a time when individuals are more vulnerable to falling into elderly poverty. Organizations such as the International Labor Organization indicate that social security pensions should provide a retirement income of around 50 per cent of the last wages received. Although the PRAP regime reaches this adequacy threshold among public employees who have contributed at least 25 years, if pensions are not adjusted by inflation, the PRAP regime will give an insufficient amount just a few years into retirement. In the case of the ONA regime, the replacement rate offered is very far from this 50 per cent adequacy objective. One solution is to index the PRAP and ONA pensions to inflation so that the replacement rate does not change over time. This measure would improve the adequacy of these pension regimes but would make both regimes unsustainable. Graph 6 , Graph 7 and Graph 8 compare the replacement rates with inflation correction of these regimes to an auto-financed pension also indexed to inflation. These calculations use the same assumption of Graphs 3, 4 and 5, with the addition of a benefit indexation equal to the inflation rate assumed. GRAPH 6  REPLACEMENT RATE OF AN AFFILIATE RETIRING AT 58 YEARS OF AGE IN THE PRAP REGIME WITH INFLATION CORRECTION OF BENEFITS               years years years years years years years Contributionyears Received Autofinanced Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 20 GRAPH 7  REPLACEMENT RATE OF AN AFFILIATE RETIRING AT 55 YEARS OF AGE IN THE PRAP REGIME WITH INFLATION CORRECTION OF BENEFITS               years years years years years years years Contributionyears Received Autofinanced GRAPH 8  REPLACEMENT RATE OF AN AFFILIATE RETIRING AT 55 YEARS OF AGE IN THE ONA REGIME WITH INFLATION CORRECTION OF BENEFITS             years years years years years years Contributionyears Received Autofinanced If pensions under the PRAP and ONA regimes are indexed to inflation, these graphs show that these regimes will be sustainable only if people contribute for more than 30 years. Therefore, to reach the sustainability and adequacy principles of the Haitian pension system at the same time, benefits, contribution times and pension age would have to be reviewed. To conduct this revision, it is necessary to conduct actuarial studies. Technical Assistance Document Series HAITI PENSION SYSTEM: RECOMMENDATIONS TO IMPROVE THE REGULATION NETWORK FOR PENSIONS IN LATIN AMERICA AND THE CARIBBEAN Network PLAC 21 It is worth mentioning that the Haitian Constitution proposes adopting an adjustment in pensions each time there is an increase of salary in the public administration. Such is the approach the PRAP has adopted in recent years. The general policies to improve the regulation of the ONA and PRAP regimes are presented below. These policies come from the six basic principles of pension regulation of the OECD (2016) and their adaptation to the experience of regimes of this kind in Latin America and the Caribbean. 4.1  Conditions for effective regulation The first set of recommendations aims at achieving clear objectives of coverage, adequacy, security, efficiency and sustainability of the pension system. Today, the institutions in charge of the pension funds administration, in particular the ONA and PRAP, have not defined or attained these objectives. a. Actuarial studies should be performed on a regular basis. These studies would help to establish clear objectives for the role of the regimes in providing retirement income in terms of coverage, adequacy, se- curity, efficiency and sustainability. The ONA and PRAP regimes need to offer an inflation adjustment to the benefits offered. The same applies to some of the pension funds offered to the employees of public institutions. The lack of inflation adjustment today menaces the adequacy of the pension in the future and, in the case of the ONA regime, affects the coverage because it acts as a disincentive to contribute given the uncertainty of the future pension’s real value. Currently, the social secu