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Guyana Strengthens the Regulation of Insurance and Pensions

Private pensions have an important role in improving poverty and shared prosperity sustainably.

July 9, 2014

Synopsis

Guyana has embarked on the regulatory strengthening of the pension and insurance sectors. Proposed insurance and pension laws will increase the solvency, governance, and depth of both sectors. Insurance and pensions protect the poor against vulnerability and livelihood risks, allowing for an increase income and consumption and an accumulation of assets.

Challenge

The collapse in 2009 of CLICO Guyana, a systemic insurer with assets amounting to 3% of GDP, reduced the insurance market by 75%. Because various pension funds were exposed, the collapse destroyed wealth, undermined confidence in the financial sector, and highlighted weaknesses in the insurance and pension regulatory framework.

A thorough reform of the regulatory framework was required to prevent future crises, ensure consistency with international standards, and foster sound growth of the insurance and pension sectors.

The pension reform also needed to address key weaknesses of the voluntary private pension system. Weaknesses included limited coverage (less than 4 percent of the labor force), long vesting periods (10 years) which particularly affect pensions for women, and a high rate of withdrawal.

Private pensions have an important role in improving poverty and shared prosperity sustainably.  They can help prevent old age poverty, broaden financial inclusion, provide funds for investments and are essential for a sustainable and diversified solution to demographic challenges to relieve pressure on over-stretched government budgets.

Solution

The World Bank provided a number of solutions to address deficiencies in the regulation of non-bank financial institutions in Guyana. Under the “Supervision of Non-Bank Financial Institutions” Project, the Bank helped the Government of Guyana draft a new law strengthening the regulation and supervision of insurance companies, in line with international standards on insurance supervision, as well as new insurance regulations.

Under the “Pension Regulation” Project, the Bank helped the Government draft a new pension law. Improvements of Guyana’s current minimal framework for pension regulation include a shorter vesting period (which will particularly benefit women and low income workers with broken career histories) and more restrictions on cashing in before a participant has vested (to motivate pension holders to accumulate savings).

In addition, the reform includes requirements for appropriate safeguards in the management of pensions, such as having a trustee and a custodian, to ensure that companies sponsoring pension plans do not misappropriate pension funds.  Simpler pension products were created for employers who want pensions but do not have the time or expertise needed for traditional occupational pension provision.

Results

The draft insurance law benefitted from the Bank’s advice, which was peer reviewed to ensure technical quality. In February 2013, the client organized meetings with representatives of the insurance industry and Bank technical experts to obtain feedback from stakeholders. The consultations went well, and the reform is generally considered consensual. The law is pending presentation to Parliament, which is expected this calendar year according to the budget speech delivered by Minister of Finance Dr. Ashni Kumar Singh on March 24, 2014.

The draft pension law benefited from an Outcomes-Based Assessment framework, developed by the Bank, which sought to ensure that the proposed changes were the most important in terms of improving the ultimate outcomes from a pension system for the people, for the employers and for the Government. The new pension law had to be created from scratch. The law provides a foundation for good existing practice to continue and grow and for more, simpler, forms of provisions that will be more suitable to smaller employers and individuals. It was developed with strong input from stakeholders and positively received by industry representatives in November 2013.

The ultimate result of these reforms will be a much stronger oversight of non-bank financial institutions. Insurance penetration (the second lowest in Latin America with 0.8% of GDP) and pension coverage (about 4% of the labor force) should experience stronger growth with lower costs of pension provision and more diversified investments to reduce risks. 

Bank Group Contribution

For the Supervision of Non-Bank Financial Institutions Project, the Bank-executed Financial Sector Reform and Strengthening (FIRST) Initiative Trust Fund provided US$195,000.  

For the Pension Regulation Project the Bank provided US$15,000, and the FIRST Trust Fund provided US$118,000.

Partners

The World Bank’s primary partners in the Government of Guyana were the Central Bank, particularly the insurance and pension department, and the Ministry of Finance. The strong involvement of the supervisor for insurance and pensions ensured ownership and successful delivery of this technical assistance.

Moving Forward

Achieving the broader development objective of strengthening insurance and pension supervision will require some follow-up technical assistance to build capacity of the supervisor, elaborate implementing regulations, and ensure effective supervision. To achieve these objectives, a third FIRST grant for the supervision of insurance and pensions in Guyana is currently in preparation. The project will focus on the effective implementation of risk-based supervision in the insurance and pension sectors. The pension project used a new Outcomes Based Assessment Framework for pensions and the learning from the project in Guyana has helped to improve this framework, and roll it out to other client countries.

Beneficiaries

Regarding the insurance reform, the Bank of Guyana’s 2012 Annual Report states, “With the assistance of the World Bank significant progress was made in the drafting of new insurance legislation to repeal the Insurance Act 1998 and the Insurance (Supplementary Provisions) Act 2009. The legislation will provide for the regulation of insurance in Guyana, the promotion of competition in the insurance industry and the protection of consumers.”

On the pension reform, the CEO from the John Fernandes Ltd Shipping Company wrote, Our founder, Mr. John Fernandes, always considered our employees as our main asset. He felt so strongly that all of our employees share in the success of our company that, in addition to their National Insurance pension, our company voluntarily provides and contributes to a pension scheme for the employees.

We continue to honor this culture and are firmly committed to investing the assets of the pension fund to provide our workers with the best possible pension on their retirement. We feel it has been the right decision for both the long run performance of the company and the many employees who continue to benefit.”

Deodat Indar, CFO of Sterling Products Ltd., a food manufacturer, wrote, “We as a Board and Management understand the importance of post-retirement benefits to our employees. Therefore, we strongly support the financial health of the pension scheme. It is a corporate value of the company to care for our employees, and this is one of the ways we show how much we care.”