Summary note on the status World Bank assistance for ...



Republic of Iraq

Pension Reform Implementation Workshop

January 27 – February 6, 2008

Summary Note

I. Introduction

1. A World Bank Social Protection team from the Middle East and North Africa Region visited Amman, Jordan, during the period January 27 – February 6, 2008 to undertake a workshop on Iraq’s implementation of pension reforms. The objectives of the workshop were (i) to develop a medium-term action plan for implementation of pension reforms in Iraq; (ii) to identify areas in which the Bank can provide support in this area; and (iii) to undertake initial capacity building. The workshop was led by Mr. Ghassan Alkhoja, and was composed of Mr. Andras Bodor (Pension Specialist), Mr. Eimar Coleman (Pension Administration Consultant), and Ms. Celine Gavach (Operations Analyst). The Iraqi delegation was led by Dr. Azez Jaafar, Advisor to the Minister of Finance, and was well attended by staff from the Ministry of Finance (MOF), the State Pension Fund (SPF), and the Social Security System at the Ministry of Labor and Social Affairs (MOLSA), and USAID/BearingPoint (a full list is provided in Annex I). Mr. Hedi Larbi (Country Director for Iraq) participated in a wrap-up meeting with Dr. Azez, which was also attended by Mr. Simon Stolp (Country Manager for Iraq, via audio), and Mr. Ziad Badr (Head of Mission, World Bank Office in Amman). This note summarizes progress made during the workshop, and highlights the key issues arising.

2. The Iraqi delegation indicated a strong desire for future World Bank technical assistance to support the implementation of the reforms. In addition, the workshop was successful in supporting the Iraqi delegation in the development of the draft implementation Action Plan and in delivering high quality capacity building. The Action Plan provides the key set of activities that will need to be undertaken by the GoI to move forward on implementation of pension reforms (Annex II). In addition, the outcomes of the workshop has provided sufficient grounds for discussions between senior management representatives of the World Bank and the Government of Iraq to determine the areas of World Bank support in pension reform implementation on the short-run and further pension policy cooperation in the medium-term. In terms of capacity building, substantial time was dedicated to delivering training in the areas of pension reform implementation, and covered the following topics: (i) Governance; (ii) Organization and Business Systems; (iii) Technical Systems Design; (iv) Contribution Collection; (v) Public Information and Communications; (vi) Human Resources; (vii) Project Implementation and Planning); and (viii) Policy, Budget, and Legal Issues.

II. Background and Issues

3. The recent pension amendments require substantial resources, capacity and time requirements for implementation. Pension expenditures represent a high proportion of the national income imposing a major fiscal burden and offering benefits to the otherwise privileged former formal sector employees when resources are scarce to target subsidies to the most vulnerable social groups. In 2006, Law 27, the public sector pension law, represented a threefold expansion of pension benefits for public employees, an unsustainable policy move that was suspended in line with IMF and World Bank advice. However, the suspension created an uncertainty for new pensioners. Further amendments to Law 27 to improve financial sustainability were passed in October 2007, and became effective in December 2007. The World Bank team’s assessment is that substantial resources and capacity will need to be built in Iraq to implement the law. This capacity does not fully exist in Iraq at this point, and will need to be built gradually over time, and the assessment of the team is that there is no viable short cut in the capacity building. Furthermore, the otherwise desirable merger of the pension schemes of the public and the private sectors are legislated with an unrealistic deadline, January 1, 2010.

4. The recently enacted amendment to the public service pension law requires that extensive and instant implementation efforts take place. Eventually the law should also be improved to become consistent with international best practices in relevant system design features. Various short- and medium-term activities need to be planned in order to respond to the challenges imposed by the recent enactment of amendments to Law 27. As implementation planning and administrative capacity building received low priority in conjunction with the legislative process, there are urgent activities in progress just to remain in compliance with the main provisions of the law. There are other short-term needs for strengthening administrative capacities in new areas brought about by the law, e.g. contribution collection and investment management, but the risk is high that the urgent needs undermine a path of rapid, but organic development of the organization of the State Pension Fund. In addition, the new pension law reflects some deviations from international best practices that need to be addressed in the not too distant future. It is recommended that in the future the policy level coordination between the government of Iraq and the World Bank is augmented with advising on the actual text of the proposed legislation in order to ensure consistency with international best practices in pension reforms.

5. The legislative intent behind the recent pension amendment was to establish a financially sustainable pension scheme, but it remains to be seen whether the legislated mandate and associated contribution rates are truly consistent with long-term financial sustainability. Currently there is no sufficient data available on the contributors and beneficiaries of the pension system so robust actuarial assessments cannot be carried out as of now. These data will become available through the public employee census, the contributor and beneficiary surveys in the work program of the Emergency Social Protection Project, and the technical system development in the pension administration. Thus it is expected that better grounds for actuarial analysis will be created soon. The outcome of such actuarial assessment of long-term financial sustainability may require to better align the contribution rate, the accrual rate and the changing life expectancies as it was recommended by the World Bank in 2006.

6. Both the recent legislation and the needs of a more flexible labor market point towards the unification of the public and private sector pension schemes, but the merger will not be possible without further legislative action. The amendment to the public sector pension law requires that the private sector pension scheme will be consolidated under the National Board of Pensions as of January 1, 2010. The legislative intent behind this rule, i.e. making pension rights portable and the labor market more flexible, is a desirable policy direction. However, true pension right portability cannot be achieved without harmonizing the benefit and contribution provisions of the currently separate schemes, and also without resolving the differences in the social insurance package enjoyed under the different schemes (e.g. health insurance under the Social Security scheme.) Once again, this harmonization will require legislative action. In summary, the need for improving some of the design features of the public sector pension law, the possible need for reinstating financial sustainability and the necessary harmonization of the public and private sector pension schemes will require further pension legislation.

III. Workshop Outcomes

7. However, it is recognized that the most urgent activities are those that will need to serve the implementation of the recently enacted legislation and the establishment of the State Pension Fund. The workshop has identified a high level action plan for implementation which will determine the possible areas of World Bank support in pension reform implementation. The World Bank organized the workshop for the relevant officials of the government of Iraq with participation of the USAID/BearingPoint team, which has been focusing on knowledge sharing about all the relevant aspects of pension reform implementation. These knowledge areas include, but are not limited to, governance, business and organizational architecture, contribution collection and recording, technical systems, benefit processing, human resource managements, project implementation planning and public communications. A key outcome of the workshop is the high level action plan outlining the implementation process identifying the possible areas of support from the World Bank and USAID/BearingPoint. The following knowledge products are potential support activities from the World Bank:

i) Technical note on pension benefit processing system

ii) Technical note on contribution collection and recording system

iii) Technical note on disability pension processing systems

iv) Technical note on the requirements and assignment mechanism of identity number used in pension administration

v) A series of focused workshops addressing specific areas of reform, including:

a. Pension actuarial analysis - PROST training

b. Business process and systems design and implementation.

c. Contribution Management.

d. Developing the regulation of investment practices of the State Pension Fund and support for developing appropriate investment policies, and business procedures for the implementation for the investment policy to be adopted.

8. The World Bank team also provided interim technical assistance on the draft regulation on the establishment of State Pension Fund in order to alleviate the risks in the fields of investment regulation, policy and management; and also related to how embedded the SPF will be in the system of government finances. The Pension Reform Steering Committee with support from the Bearing Point team has prepared a draft regulation on the establishment of the State Pension Fund. While it is outside of the scope of the current workshop to finalize this draft regulation, the World Bank team offered interim technical assistance in the form of comments on the text of the draft regulation. Among other things, the World Bank team would like to ensure a balance between the functional independence of the SPF, and the need for it to remain an integral part of the government financial system with effective controls and oversight from the Ministry of Finance and other relevant parties. In addition, the initial general regulation on the SPF will have to be consistent with future detailed regulation on investment practices and policies that should separate the functions of prudent investment policy development and the day-to-day implementation of these investment policies.

9. Donor coordination with the USAID/BearingPoint team is crucial. As noted earlier, the USAID/BearingPoint team participated in the workshop, the cooperation seems to develop in a way that recognizes the importance of BearingPoint’s capability to provide implementation support on the ground in Iraq, but also relying on the World Bank’s leading position in providing highest quality knowledge products in the area of pensions. This combination and cooperation offers the GOI a strong combination of knowledge, skills, and on-the-ground support. The World Bank team would like to highlight that involvement of any additional entities would raise the risk that a larger number of donor organizations involved in one area will cause undesirable coordination problems.

IV. Next Steps

10. The Ministry of Finance will communicate to the World Bank the specific areas of support it will be seeking from the World Bank team (as indicated in Paragraph 7), and based on that a work program will be established and agreed upon between the World Bank and GOI.

Annex I

Iraq Pension Reform Implementation Workshop

January 27 – February 6, 2008

List of Participants

|Name |Title and Organization |

|Iraq Delegation |

|Dr. Azez Jaafar |Advisor to the Minister of Finance |

|Mr. Ali Alwayd |DG, State Pension Fund |

|Ms. Sahar Hadi Hamid |Manager, Budget Department, MOF |

|Mr. Jabar Waheed Hassan |DG of Legal Affairs, MOF |

|Ms. Attiqa Ali Al Tierra |Director of Accounting, MOF |

|Ms. Nital N. Dawad |MOF |

|Mr. Alaa Abdulhamza Ekrayyem |MOF/State Pension System |

|Ms. Layla A. Yousif |MOF/State Pension System |

|Mr. Adnan Qays Noori |MOF/State Pension System |

|Mr. Abbas H. Makhtadh |MOF/State Pension System |

|Mr. Hussain Ali Mindan |Director, Ministry of Labor & Social Affairs / Social Security System |

|Mr. Hecmet Salman |Manager of Accounting, Ministry of Labor & Social Affairs / Social |

| |Security System |

|Ms. Evelyn Michael Rasho |Executive Director, IT Department, MOLSA |

|Ms. Haifa Jassem |Ministry of Labor & Social Affairs / Social Security System |

|Ms. Ferial Ali Gul Behnam |Ministry of Labor & Social Affairs / Social Security System |

|BearingPoint/USAID |

|Mr. Ron Hackett |Deputy Chief of Party, BearingPoint |

|Mr. Peter Moore |Senior IT Consultant, BearingPoint |

|Mr. Kamel Salem |BearingPoint |

|Mr. Ali Jawad |BearingPoint |

|Mr. Araz |BearingPoint |

|Ms. Nour |BearingPoint |

|World Bank |

|Ghassan Alkhoja |Senior Information Officer |

|Andras Bodor |Pension Specialist |

|Celine Gavach |Operations Analyst |

|Eimar Coleman |Pension Administration Consultant |

|Other |

|Simona Marinescu | |

|Annex II |

|Iraq Pension Reform Implementation Workshop |

|Action Plan |

|Action Item |Year 1 |Year 2 |Year 3 |Year 4 |Notes |

|Policy and Analysis |Complete the Pension Survey |Actuarial assessment of |Re-design of Defined Benefit| | |

| | |pension data |formula etc | | |

| |Identify SPF participants for actuarial | | | | |

| |training |Analysis of pension law | | | |

| | | | | | |

| |Actuarial analysis training |Policy analysis – unification| | | |

| | |of public and private pension| | | |

| |Undertake employee census (extract data |system, including decision on| | | |

| |for work flow measurement and staffing |range of social insurance | | | |

| |requirements – per SPF office, also |services to be integrated | | | |

| |estimate future cost of retirements per | | | | |

| |annum) |Develop national unified | | | |

| | |pension strategy | | | |

|Legal |Review existing regulation in Pensions |Post-implementation review of| | | |

| |Directorate (now NBP) |SPF regulations (within 18 | | | |

| | |months) | | | |

| |Amend NBP regulation, if required | | | | |

| | | | | | |

| |Finalise regulation defining SPF role and | | | | |

| |responsibilities | | | | |

| | | | | | |

| |Finalise bylaws for management of NBP and | | | | |

| |Board of SPF | | | | |

|Governance |Appoint SPF Board | | | | |

| | | | | | |

| |Hire Chief Executive for SPF | | | | |

|Project Planning and |Appoint Project Steering Committee | | | | |

|Management | | | | | |

| |Appoint Project Manager | | | | |

| | | | | | |

| |Develop detailed project implementation | | | | |

| |plan | | | | |

|Infrastructure |Audit existing physical infrastructure |Initiate rehabilitation | | | |

| | | | | | |

| |Prepare rehabilitation plan | | | | |

|Organisation and |Finalise organisation structure of SPF at | | | | |

|Business Model |HQ and Governorate offices | | | | |

| | | | | | |

| |Define roles and responsibilities of SPF | | | | |

| |Departments | | | | |

| | | | | | |

| |Job descriptions for SPF senior managers | | | | |

| |and key grades | | | | |

| | | | | | |

| |Appoint SPF senior managers | | | | |

| | | | | | |

| |Recruit SPF staff | | | | |

| | | | | | |

| |Prepare business plan & expenditure | | | | |

| |estimate for years 1, 2, 3 – including | | | | |

| |data from employee census | | | | |

|Technical System |Define high level user requirements (for |Develop system |Train users |Migrate existing ‘old |Note: survivors pensions arising from death|

| |all functions, including registration, | | |pensions’ (pre-Law 27/06)|of retiree in receipt of pension under |

| |contribution collection, data collection, |Define hardware, operating |Install full system |to updated database |pre-Law 27/06 will be treated under new Law|

| |data management, financial management, |systems and communications | |platform |27/06 rules |

| |accounts reconciliation, pensions |requirements |Prepare Law 27/06 data |(existing database is a | |

| |processing, pensions payments, control and| |migration plan |flat sequential file |Interface and process required to manage |

| |compliance) |Procure hardware, operating | |without applications to |(survivor) pension application from prior |

| | |system and communications |Migrate existing data from |manage those data) |to Law 27/06 |

| |Analyse business processes and work flows | |Law 27/06 to new system | | |

| | |Install pilot system | | | |

| |Define re-engineered business system, | | | | |

| |business rules and user requirements |Test pilot | | | |

| | | | | | |

| |Research system development options |Develop back-up and disaster | | | |

| | |recovery system | | | |

| |Select development option (COTS/In-house) | | | | |

|Training |Undertake SPF training needs analysis – |Deliver training (phase 2) | | | |

| |based on organisational roles & | | | | |

| |responsibilities + job descriptions | | | | |

| | | | | | |

| |Develop training plan (phased) and | | | | |

| |materials | | | | |

| | | | | | |

| |Deliver training (phase 1) | | | | |

|Public Information |Develop SPF corporate identity |Deliver communications | | | |

| | |campaign | | | |

| |Analyse public information needs | | | | |

| | | | | | |

| |Develop public information messages | | | | |

| | | | | | |

| |Build SPF web-site | | | | |

|Investment |Develop investment policy regulatory |Decide investment policy |Implement final investment | | |

| |framework + principles | |policy | | |

| | |Decide investment management | | | |

| |Liquidity planning – to assess reserves |structure | | | |

| |available for investment | | | | |

| | | | | | |

| |Decide and implement interim investment | | | | |

| |policy | | | | |

| |(t-bills, secure deposits) | | | | |

| | | | | | |

| |Assess available investment instruments | | | | |

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