13 June 2011

Ethiopia: New Pension Includes Private Sector

Employees of private companies and non-governmental organizations (NGOs) are to be included in the national pension fund as of July 8, 2011, the Ethiopian Private Companies' Workers Social Security Agency announced at its headquarters on Friday, June 10.

The new proclamation on the pension of private company workers, which came into effect on Thursday, June 9, specifies the percentage of salaries to be paid to the pension fund by private companies (employers) based on the salary of individuals working for the companies (employees).

As of July 8, employers will contribute an equivalent of seven per cent of the employee's salary supplemented by five per cent from employees. This will be followed by annual progressive increments to eight per cent, nine per cent, and 11pc for employers, while the contribution of employees will increase to six per cent and seven per cent, over the next two years.

Employees of private companies have to work for at least 10 years to be eligible for the pension fund when they retire, according with the new proclamation.

Upon retiring, the monthly pension they receive would be calculated using 30pc of their gross salaries of the last three years of service. For each year worked, exceeding 10 years, this amount is increased by 1.25pc.

This would benefit those whose remuneration increases with time, and through use of this scheme, an employee's pension would eventually reach up to 70pc of her gross salary, according to the proclamation.

"The proclamation is generous even in comparison with the modern Western welfare states in Europe, which have schemes paying comparatively less, or at least the equivalent," said Getachew Belay, director general of the agency. "A country such as Germany pays 50pc of an employee's gross salary into a pension scheme, while Sweden pays 66pc and France 70pc."

For now, people working in the informal sector, such as housemaids, would not be included in the new pension scheme but through time this will change, according to Getachew.

"The scheme also benefits physically challenged people and women," Getachew told Fortune. "Women can continue receiving her deceased spouse's pension if she remarries after the age of 45. There is no age limit for disabled people, while the limit for men is set at 50 years."

However, the new fund will hurt employees in the private sector who rarely stay in a private company for more than a few years because of its "competitive, risky, and mobile nature," said an economist on condition of anonymity.

"The main purpose of this pension fund is to mobilise resources to finance the GTP," he said. "Pension funds should be independent bodies investing in many other economic sectors, which is the case in other countries. In Ethiopia it is the government that is administrating the pension fund."

In answer to such concerns, Getachew countered that banks and bonds are of the safest places to put money.

"Whether the money saved in banks is a provident fund or borrowed by the government as part of a normal economic activity, it is there when people want it back," he told Fortune. "Apart from the banks and financial institutions in the West failing, their social security systems also failed."

The economist strongly disagreed, arguing that the recent economic crisis in the West was not a social security crisis.

"The crisis stemmed from social security schemes investing in banks and insurance companies, which failed," he said.

The effectiveness of the new pension schemes for whom it's intended, depends on the formation of a new attitude that rejects the conventional wisdom, according to Yared Gebrewahid, 29, a senior administrator in a company. These beliefs include that work in the private sector is transient and wasteful of resources or money as well as the notion that those in the private sector have fewer rights and duties than their counterparts in government.

"Private company employees tend to waste their hard earned monthly income and save less," he told Fortune. "There needs to be a mind and attitudinal change if most of them are going to benefit from this new scheme."

Domestic savings were put at 5.5pc of the country's GDP by a data from the Ministry of Finance and Economic Development (MoFED) 2009/10 fiscal year.

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