What is Pension Pillar
A pension pillar is one of five pension formats as outlined by the World Bank in 2005 and which has since been adopted by many economically reforming countries in Central and Eastern Europe. The goal of the five-pillar system is to separate the major objectives of pension (retirement) plans into the following pillars:
Pillar 0 – A general social assistance designed to specifically deal with the poverty alleviation
Pillar 1 – Addresses, among other things, the risks of individual myopia, low earnings, and inappropriate planning horizons due to the uncertainty of life expectancies, and the lack, or risks, of financial markets.
Pillar 2 – A funded system that recipients and employers pay into; this includes pension funds and defined-contribution accounts/plans with a wide array of design options.
Pillar 3 – Voluntary private funded accounts, including individual savings plans, insurance, etc.
Pillar 4 – A non-financial pillar that provides access to informal support (such as family support), other formal social programs (such as health care and/or housing), and other individual financial and non-financial assets (such as home ownership and reverse mortgages where available).
BREAKING DOWN Pension Pillar
The World Bank's pension pillar policy framework focuses on how best to achieve the core objectives of pension systems, that being the protection against the risk of poverty in old age and smoothing consumption from one’s work life into retirement.
In establishing these objectives, the World Banks encourages policymakers to consider broader questions of social protection and social policy, which consider the poverty and vulnerabilities of different income groups. Key questions for consideration in this context are, for example, should scarce resources be devoted towards providing old-age poverty protection in those societies where data indicates there are other groups, such as children, that may face greater risk of poverty prevalence or vulnerability? How much should a society aim to redistribute income through the pension system, and how can it ensure that this redistribution is made transparent and progressive? What measures should be taken to strengthen the enabling environment which are conducive to reform options best satisfying the core objectives? Once these core objectives have been identified, one can then identify the mandate of the public pension system, the balance between insurance and adequacy functions and appropriate system design options.
The Five-Pillar Pension Policy Applied to Individual Countries
The World Bank’s policy five-pillar framework defines a range of design elements to determine the pension system modalities and options that should be considered. Country-specific conditions require a tailored approach that should substantially define what is feasible for each country.