Pension system reform in Morocco : Needs for institutional complementarities and an opportunity for international promotion

In accordance with national guidelines, the social insurance sector in Morocco is engaged in a process of transformation and development for the sustainability of the pension system.

This transformation is an opportunity to set up a new institutional architecture of the retirement and social security sector with the goal of making it a real lever for economic development.

Generally, a pension system is based on three main pillars.

The majority of the first-pillar pension systems are pay-as-you-go plans that are financed by contributions levied from current workers.

The pas-as-you-go pension plan is solidarity between the generations at a given time, and among all the generations that follow over time.

However, this meaning reaches its limits for the "later generations" of the system. The word distribution could describe the pay-as-you-go plan: distributing contributions directly to retirees at the time, is what is being done in distribution.

In other words, in a pay-as-you-go system, contributions of one period are directly transferred to the recipients of benefits in the same period, while members acquire claims against the system by today's contributions, no actual capital is accumulated.

The funded pension plan appears to be the individual interest, as opposed to the collective interest. It is not obvious if we consider the current generations’ effort that can be granted to future generations by accepting, for the same burden, a slightly less important pension to allow the constitution of sufficient financial reserves for the "later generations".

The word reservation could describe the funded pension plan: reserve all or part of the contributions for the future is what is done in funded pension system.

The third pillar consists of voluntary savings contributions (supplementary pension plan).

For their sustainability, pension plans need sustainable economic growth and a structural demographic balance.

However, as in many other countries, this last condition is not always fulfilled in Morocco because of the deterioration of the demographic ratio and the increase in longevity.

To this is added the reduction of the length of professional careers with the late entry into the working life because people are staying in school longer.

In an open economic context, with issues of competitiveness for the private sector, the retirement sector in Morocco will undoubtedly have to face one of the major economic, financial and social challenges for the coming decades.

Historically, the "retiree" was the man who was no longer able to fight and thus to earn his living as a soldier of the Roman Empire.

The pension was a payment for the needs of survival, an expense supported by the state for its soldiers.

In 1881, the chancellor of Germany BISMARCK declared :

”... Not only a defensive mission to protect the existing rights, but also promoting by appropriate institutions and using the means of the community at its disposal, the well-being of workers and in particular the poor and needy people”.

In 1889, BISMARCK introduced the first pay-as-you-go pension plan in Germany, which became the First nation in the world with a global income security system based on the principles of social insurance.

The German Chancellor was motivated to introduce social insurance in Germany to keep the German economy operating at maximum efficiency.

In 1935 the US President ROOSEVELT signed into law the Social Security Act, incorporating a new term that combines “economic security” with “social insurance”.

Next, the first unified social security system was established in England, following the parliamentary report by the British economist and politician BEVERIDGE in 1942 on social services and related services.

The report provides the basis for reflection on the establishment of the welfare state for the post-war Labor government.

In France, Minister LAROQUE set up social security by the decrees of 4 and 19 October 1945, drawing from the BEVERIDGE report.

In 1945, the United Nations General Assembly adopted the Universal Declaration of Human Rights, whose Article 22 recognized that “Everyone, as a member of society, has the right to social security”.

Over time, this concept has taken the form of a mandatory mutualist system fully replacing the initial notion of national solidarity. The notion of subsistence income has substituted the notion of alternative income: the exchange of a portion of income today against retiree income tomorrow.

The absence of a single individual patrimony reflects, for the financing of pensions, the solidarity between generations of contributors.

The mandatory nature is necessary for the sustainability of the system: the active workers contribute to the benefit of the retirees and the system ensures them the pension once they are retirees, it will be the new active workers that contribute to their pensions.

After the success of the pay-as-you-go pension plan, with the decrease of the rate of monetary poverty, the demographic transition, observed at world level for several years, has negatively impacted the pension systems since there is proportionately less active workers to fund pensions.

(The demographic transition is the Economic theory that links population changes to levels of economic, education, and healthcare development. It states that as women become better educated and financially independent, the global fertility rates will continue to decline since women will (1) have fewer children, (2) delay having them, or (3) forgo having them. Low birth rates combined with low death rates (due to better health care and nutrition) will result in an increasing number of older people dependent on pension schemes.)

The demographic transition initially concerned the countries of the North, whose fertility and mortality have declined considerably, but it is beginning to seriously affect the countries of the South and should be one of the major social changes during this century.

That is why many pension reforms have been operated to redefine the modalities of intergenerational solidarity in a context affected by demographic and economic developments.

Not to mention whether these solidarities would be able or not to benefit each generation of a decent replacement income, in an uncertain future.

During all these developments, actuaries have always been involved in the set-up of pension systems. The development of pension funds in the English speaking countries was particularly a determining factor in the birth of the actuarial profession at national levels.

The evolution of actuarial techniques, related in particular to the worldwide set-up of social security systems and pensions, in a controlled manner, has implied the organization of the actuarial profession at international level through the creation of the International Actuarial Association (see map 2017 below), which includes the national affiliate associations including the Moroccan Association of Actuaries.

In Morocco, the evolution of social security system in general and retirement in particular has gone through several stages.

After the independence, The kingdom of Morocco set up a modern, compulsory and universal system of social insurance, based on the minimum standards of the Convention No. 102 adopted by the International Labor Organization in 1952.

Having fulfilled its obligations up to now, the pension system in Morocco is facing a fragility of financial balances that ultimately jeopardize its effectiveness and viability.

The pension system is characterized by the diversity and non-convergence of the pension plans, the low rate of assets coverage, the structural imbalance of some pension plans, the lack of actuarial bridges between pension plans and the diversity of their governance.

The Moroccan pension system, with several pension plans operating in different regulatory frameworks, is confronting the need of rebalancing or of actuarial adjustments related to demographic, economic and social developments.

The Moroccan actuaries that work in the sector had clearly predicted well in advance these difficulties.

The implementation of the parametric reform of the pension plan of the Moroccan Pension fund (Caisse Marocaine des Retraites) in 2017 has constituted the first step of the global pension system reform initiated in Morocco, which aims to set up a bipolar pension system in the medium-term.

The reform considers successively the set-up of a bipolar pension system, including a public pole and a private pole, and long-term convergence towards a single national system.

With regard to this pension system reform, the use of scientific research will help economic decision-makers to give relevant opinions on measures to be taken to build a new system of global pension system, viable and sustainable granting the current and future rights of the affiliates.

Although not yet recognized in-law by Moroccan regulation, the actuarial profession in Morocco could play an essential role in the conceptualization, definition and set-up of the main axes and the actuarial implementation of the global pension system reform.

Moroccan researchers, professional organizations and the Moroccan Association of actuaries, with an actuarial approach for the pension plans, could provide the quantitative elements of decision-making.

The added value of the actuarial profession could be its ability to collaborate with scientific research and integrate the results of the multidisciplinary research work in order to estimate the value of the assets, the value of liabilities and work out the value of the underlying risks in the economic context in which they are required.

? A natural collaboration between the actuarial profession and scientific research regarding the complexity and diversity of the topics involved.

? A recommendation of the Court of Auditors (La Cour des Comptes) of the Kingdom of Morocco in its report 2013 (Point 452 ch. Architecture of the system): It is important that all stakeholders can be properly represented...this includes representatives of the asset managers,..., employers, public authorities and even professionals in the field of social welfare, finance or members of the scientific community.

On the other hand, an hybrid financial system, combining the bank-based model where banks occupy a central position and the market-based model in which the capital market dominates seems to be the most effective model for economic growth: the point of equilibrium depending on the structure of the economic fabric and industrial policy. And this broadens, and makes endogenous, the field of the key factors.

(Currently, the Moroccan capital market contributes up to 5 % in the financing of the national economy.)

Indeed, a funded pension system requires the existence of a large and liquid capital market for the management of the portfolios and defending the interests of pension funds.

A pay-as-you-go pension system is better suited to bank financing and a concentration of capital.

Several researches show the complementarity of pay-as-you-go pension and funded pension systems. Over the long term, the pattern of chronological economic cycles confirms the relevance of a combination of pay-as-you-go pension and funded pension plans. The two systems are feeding in different ways and complementary to the incomes of labor and capital.

In this context, the architecture of the pension system should be configured according to the overall financial architecture.

Clearly, it appears that there are needs for institutional complementarities to ensure the efficiency of the pension system as a lever for economic development, through its good economic and actuarial articulation with the Moroccan Financial system.

The actuarial profession is naturally one of the major players in this reform. It should play a key role in this strategic issue for Morocco. The pension system reform is a real challenge the profession needs to take up.

The Moroccan actuarial profession should make the effort to be imaginative, go beyond the current and best available classical actuarial techniques and be open-minded to new developments of the capital market.

In a nutshell, the pension system reform is a real opportunity for the strengthening of the actuarial profession in Morocco, in a global and collective approaches that aim to position the Moroccan pension sector as a lever of international promotion of Moroccan Expertise.

The strengthening of the actuarial profession is a lever for the development of the Moroccan pension sector: a need to strengthen the Moroccan Association of Actuaries in accordance with the International Social Security Association (ISSA) guidelines on actuarial work on Social Security.

? The pension system is a lever for financial development, through its good economic articulation with the Moroccan financial system;

? The financial system and the pension system are real levers for the promotion of the Moroccan Financial Center in Africa and at the international level.

?Mohamed Amrani

President of the Moroccan Association of Actuaries

At that period the last year, the 5th African Actuarial Congress of the International Actuarial Association was held on March 15th, 16th , 2018, in Casablanca.

The 5th African Actuarial Congress was organized by the Moroccan Association of Actuaries , under the High Patronage of His Majesty the King Mohammed VI, The King of Morocco.

I would like to benefit from this opportunity to re-post the short video (4 minutes) of this congress.