Botswana's pensions industry has grown rapidly in recent years as an increasing number of firms have established pension funds for their employees, and following Government's establishment of the Botswana Public Officers Pension Fund (BPOPF). The growth of pension provision means that an increasing proportion of employees are building up a funded provision that will provide for a comfortable pension upon retirement.

However, not all employees are covered by pension funds, and there is also a major contrast between coverage in the public sector and the private sector. Overall, around 37 percent of employees in the formal sector are members of pension funds. However, in the public sector (central and local government), over 60 percent of employees are covered by pension fund membership. In the private and parastatal sectors, only around 20 percent are covered.

In the private sector, those who are pension fund members tend to be more senior, better paid employees, while less skilled and lower paid employees are often not covered. This is potentially a major problem, as it means that such employees will face a major drop in living standards when they stop working. Indeed, poverty in Botswana is particularly concentrated amongst the elderly.

Those who are not covered by private pension schemes are reliant upon the state Old Age Pension scheme (which provides a non-means tested, universal pension), and funds received under the gratuity/severance entitlement provided for under the Employment Act. The state pension is relatively low, but nonetheless does relieve some of the poverty pressures felt by the elderly.

The statutory gratuity/severance scheme entails a periodic payment to employees in lieu of a pension and has some attractive aspects but also has problems. On the positive side, it provides a form of employer-financed forced saving that pays out to employees in a way that gives them flexibility to decide what is the best use for the money they receive, which may include saving for their retirement.

However, the scheme also has a number of problems. One is that while employers are saving on behalf of employees over the five year period between payouts, these funds are not invested and there is no investment return earned that could benefit employees. It is the investment return, generated by the fund managers who generally manage private pension funds, that is a major contributor to the value of pensions received by members of conventional pension funds. A second problem is that when employees receive their payments every five years, the money is spent in various ways but generally not saved and invested in a way that could provide a pension-type income upon retirement. This problem is not confined to low-paid employees who have other immediate financial pressures; recent concerns about impoverished former Members of Parliament show that even those who are better paid may not invest their gratuities to provide for their future needs. Finally, there have been stories about unscrupulous employers who find an excuse to fire employees shortly before they are due for their five-yearly payout, thus depriving those employees of any financial benefit.

The lack of adequate pension provision for lower paid employees raises questions regarding the desirability and feasibility of establishing a long-term contractual savings scheme that would be suitable for those on lower incomes. This could help to address some of the problems of the statutory gratuity/severance scheme and provide a more effective financial asset or income for the low paid upon retirement.

One way to do this would be change the gratuity/severance payout into a proper pension contribution. Instead of making a once-off payment every five years, employers could be obliged to make regular payments (say quarterly) into a pension fund managed by a professional fund manager. This could be designed in such a way that the pension benefits were transferable between jobs, so the entitlement was not lost if an employee changed jobs and the pension provision built up through an employee's entire working life. Upon retirement, the employee would then receive a regular pension based on the contributions made over their working career. While this would have some similarities to established company pension schemes, it would differ in that it would not be tied to employment with any particular company and would follow the employee from one job to another.

There are some tricky issues that would need to be resolved in order to make such a scheme work. Perhaps the most difficult of these is the need to keep administration costs down. Given that such a scheme would be aimed at relatively low-paid employees, the amounts of money contributed regularly would be fairly small, and it would be important to keep administrative costs low enough that they did not eat up too high a proportion of the value of the contributions. One way of keeping costs down would be to have a nationwide scheme managed by a single manager, so that the cost impact could be reduced by spreading over a large number of members - bearing in mind that such a scheme could potentially cover two thirds of the formal sector workforce, or around 200 000 people. The manager could be awarded the mandate to look after the assets based on an auction in which the charge to be levied is the main differentiating factor. A variation on this might involve more than one manager, also awarded the mandate on the basis of charge, but facilitating continuing competition for investments on the basis of both charge and investment performance.

A second issue would be the rate of contribution. The existing gratuity/severance scheme requires employers to contribute the equivalent around 5 percent of basic pay for the first five years of employment and 10 percent for subsequent years. Most company pension schemes would have a somewhat higher rate of employer contribution - for instance the Government contributes 15 percent of salary into the BPOPF. In addition, employees are often required to make a contribution - typically 5 percent (or more) of salary. An employee contribution might be difficult to implement for low-paid employees, but should not be ruled out. Similarly, the employer contribution would have to be kept moderate if it were not to add excessively to employment costs and potentially have a negative impact on employment levels. Perhaps an appropriate start is to consider redirecting the existing gratuity/severance scheme contribution to a new central fund, significantly adding to retirement saving without impacting the cost of employment.

How much might such a pension be worth? As an example, ignoring inflation and the impact of collection and administration costs, if 10 percent of salary was contributed to a pension fund over 25 years of employment, and the fund manager succeeds in generating returns of 6 percent in real terms, this would enable a pension of around 40 percent of salary to paid for 20 years after retirement. Therefore, an employee earning the minimum wage of around P600 per month would therefore earn a pension of around P250 a month after retirement, which could make a large difference to the standard of living of that retiree.

Such a scheme could make a significant difference to the living standards of the elderly, and could in turn be an important contributor to reducing poverty. However, it is not a perfect answer. Some people may prefer to receive a lump sum every five years rather than a pension, but in general a long-term perspective is to be preferred. Not all workers would be covered - those in the informal sector, for instance, or in traditional agriculture, would be difficult to include. And as noted above, the scheme would have to be well designed and efficiently run to keep administration costs very low. Nevertheless it is worth considering, and is something that would be well suited to a partnership between government and the private sector.

These issues were discussed at a recent breakfast forum organised by BIFM and FinMark Trust. BIFM is Botswana's largest manager of pension and related funds, while FinMark Trust is a regional organisation whose mission is "to make financial markets work for the poor".