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Management of Pension Funds in Jordan:

The Case of the Jordanian Social The Case of the Jordanian Social Security CorporationSecurity Corporation

Workshop on Options for Reform of Current Defined-Benefits PAYG Pension Systems

Malta, June 9-13, 2003

Organized by the World BankOrganized by the World Bank

Mohammad M. SartawyMohammad M. SartawyP.O.Box 142212P.O.Box 142212

Amman 11814 Jordan Amman 11814 Jordan e-mail: e-mail: mm_sartawy@yahoo.com

April 2003

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C o n t e n t s1.Jordan's Main Economic and Demographic Indicators

2.The Jordanian Social Security Scheme (JSSS).

3.Management and Operation of the JSSS

3.1 Objectives of the Social Security corporation of Jordan.

3.2 Governance.3.3 Organizational Structure3.4 Administration Costs3.5 Coverage3.6 Payment of Pensions and Other

Benefits4.Amendment of the Social Security

Law5.Management of the Investment Fund6.Scheme Funding and Financial

Balance

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*GDP : 7930 million U.S. Dollars

*GDP Growth(2000/2001): 4.18%

*Standard of Living (GDP per

Capita) : 1704 U.S.Dollars

*Discount Rate : 5%

Main Economic Indicators 2001

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*Average Wage: JD 230*CPI : 106.3 (1997 = 100)*Total labour force: 1.508

million of which 82% are Jordanian

*Participation Rate : 29.1%*Unemployment Rate among

Jordanians : 13.2%*Exchange Rate: 1JD = 1.412

U.S.Dollars.

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Population: 5.2 million (2001 estimates).

Population growth rate: 2.8%

Life expectancy : 69 male /

71 femaleCrude mortality : 5 per

thousandTotal Fertility : 3.5

Major Demographic Indicators:-

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The Jordanian Social Security Scheme

• (JSSS) was operated in the beginning of 1980 and is considered the third public pension fund in Jordan.

• JSSS is operated and managed by the Social Security Corporation of Jordan

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Old-age, disability and death.

Work injuries and occupational

diseases.

JSSS at present , providers two types of insurance:-

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JSSS also stipulates four other categories of insurance :-

Temporary disability due to sickness or motherhood.Health care insurance.Family allowances.Unemployment.

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The basic principles governing the JSSC Compulsory participation by the

employee and the employer. The scheme is self-financed. An important principle is that of

ensuring scheme continuity by maintaining a balance between revenues and expenditures.

Pensions provided by the scheme depend on the wage (Pension Formula).

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Objectives of the SSCJ*Providing pensions and compensation to workers thus satisfying their basic needs and achieving psychological stability to the workers.

*SSCJ aims at redistribution of income inter-and intra-generation, reducing poverty level in the country.

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*Creating a social compulsory

saving mechanism.

*Creating more job opportunities .

*Expanding the productive capacity

of the Jordanian economy.

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Governance

SSCJ has a juristic personality and

financial and administrative

independence. The corporation is

governed by a tripartite Board of

Directors (BOD) made up of

representatives of :-

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*The Government (five

members).

*The General Federation of the

Labor Unions (four members).

* The employers (four members).

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1.The management of the SSCJ affairs.

2.The supervision of its activities.

3.Approving annual budgets and end-of-

year financial accounts and balance

sheet.

4.Setting-up the general plan for

investing SSCJ funds.

The BOD The BOD responsibilitiesresponsibilities

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5.Determine the organizational charts,

job descriptions.

6.Drafting the necessary regulations and

proposing the legislations related to

the Social Security aspects.

7.Issuing executive and regulatory

financial, administrative and technical

instructions.

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Administrative Cost

YearMillion

JD

Cost per 100 JD

contributions

1997 - 5.4

2000 7 4.3

2002 8.7 4.1

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The SSCJ adopted a gradual

approach for implementing the

categories of insurances. SSCJ at present covers workers in

private sector establishment, all

workers and employees working for

ministries and organizations who are

not covered by the Civil or Military

Pension Schemes.

Coverage

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Contributors

Year Nos% of labour

force

1991 171000 18.6%

2002 412000 25%

2008 480000 --

2023 967000 --

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Contribution Revenue

Year Million JD

1991 56

2002 209

2003 237

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Payment of Pensions & Other Benefits

SSCJ has provided insurance benefits

to 470,000 beneficiaries (56000

pensioner, 245000 lump-sum

compensation and 169000

beneficiaries from the insurance for

work injuries and occupational

diseases). The total number of survivors has

reached 54000 at the end of 2000.

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JSSC expects the number of pensioners and survivors to increase to 120000 and 246000 in 2008 and 2023 respectively.

Total insurance benefits paid by JSSC since incorporation till end of 2001 reached 565 million JD (413 million JD pension salaries, 127 million JD compensations and the balance for work injuries compensations).

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Amendment Of Social Security Law

The following policy measures have been implemented during the period (1993 – 2000):-

• The minimum pension was raised from JD (480) to JD (600) a year as of 1/7/1993.

• Pensions were increased by (10%) (with a minimum of JD 15 and maximum JD 50) effective Jan. 1st, 1996, resulting in shifting the minimum pension from JD (600) to JD (780).

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Further amendments of SSL were introduced effective Jun, 1st 2001 including:-

1.Increase benefit factor from 2% to 2.5% for pensioners who already retired and those that will retire in the future.

2.Adjust the lower limit of the 10% pension increase effective since 1/1/1996 from JD 15 to 30, such adjustment shifted the minimum pension from JD 780 a year to JD 960 a year (equal to 94% of the minimum wage in Jordan).

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3. Increase disability and death pension as follows:-1% for each year if contributory

period is 120 months.0.5% for each year if contributory

period is 60 months.

4.Rationalization of early retirement for

males by increasing eligibility period

from 15 years to 18 years and by

applying the following pension

reductions:-

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Early retirement Age Pension Reduction

46 18%

47 16%

48 14%

49 12%

50 10%

51 9%

52 8%

53 7%

54 6%

55 5%

56 4%

57 3%

58 2%

59 1%

60 0%

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5.Increase contributions for old

age, disability and death

insurance from 13% (8% + 5%) to

14.5% (9% + 5.5%).

6.Increase old-age pension

eligibility from 10 to 15 years.

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Management Of The Investment Fund

1.Sound investment through preservation

of the assets and reserves , while

observing the principle of risk

distribution.

2.Maintaining the real value of investment

vis—vis inflation factor.

3. Increased self-reliance through the

realization of adequate profits capable of

balancing the revenues and obligations.

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4.Providing the liquidity necessary to

meet obligations through a balanced

distribution of investments based on

liquidity.

5.Contributing to the development of the

productive base of the national

economy through participation in

economically feasible projects that, at

the same time, have an appropriate

developmental dimension.

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The current asset allocation of the SSCJ is as shown below:-

ItemAsset

Allocation at the end of

2001

Shares in companies in various sectors

30%Loans of all types 15%Real Estate investments 5%Deposits in banks, bank accounts and treasury bills

50%

T o t a l 100%

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SSCJ project selection criteria based on social, economical and financial factors .

1.There are several economic, political

and legal factors that limit both

domestic and foreign investment

opportunities in Jordan. The domestic

investment function at the SSCJ is

performed under limited opportunities

due to the following reasons:-

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a.The financial market is thin.

b.Lack of opportunities of new projects

particularly in the industrial field since

the industrial base of Jordan is small.

c.Being a public sector body, the SSCJ

may face some pressure dictated by

certain requirements to pursue social

goals which limits investment returns.

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Separate investment function and insurance

function by establishing an independent

investment entity called Social Security

Investment Commission (SSIC) which has

its own BOD consisting of seven members

three of which are SSCJ representatives.

SSIC started operation on Jan, 2003.

Increase of investment return through

portfolio/Asset management contracts.

Improvement of the investment function by:-

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Upgrading internal human resources. Streamlining the investment decision

process to adjust to the amendments of laws and regulations (Security Law, Companies Law, Customs Law, ..etc) and the economic and political developments in Jordan and the Middle East region at large.

Review of investment policy and amend asset allocation taking into consideration medium and long-term obligations as well as demographic and economic factors.

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2.Follow-up and action plans on studies conducted to initiate major investment projects in the field of electricity generation and other strategic projects in order to bring those projects into reality (Mining & Downstream, Water, Touristic projects, IT, Privatization….etc).

3.Cooperation and coordination with concerned institutions to develop capital markets in Jordan.

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Scheme Funding And Financial BalanceSSCJ Revenues, Expenditures and Surplus 1980 – 2023

(million JD)

Year

Contribution

Revenue(1)

Investment

Return(2)

Total Revenu

e1 + 2 =

(3)

Total Expenditur

es(4)

Surplus(3 - 4)

Surplus/total

Revenue

Size of Investm

ent Fund

1980 4.7 0.104 4.8 0.309 4.491 93.6% 4.5

1985 34.4 5.4 39.8 6.24 33.56 84.3% 121

1990 50.5 25.4 75.9 20.3 55.6 73.2% 357

2002 200 63 263 142 121 46% 1800

2003 237 72 309 169 140 45.3%

2008 400 241 641 295 346 54% 3170

2023 1758 939 2697 1788 909 33.7% 12533

Note:

1. 1980 – 2002 : actual data

2. Data for 2003 are based on SSCJ budget

Data for 2008 – 2023 are based on SSSJ fourth actuarial valuation study

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In ConclusionIn Conclusion

SSCJ is strong in terms of efficiency in management and administration.

Contribution collection efficiency has improved significantly. There is still some room for improvement.

In-house analytical capacity has improved. Further specialties are needed (actuary).

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Investment funds are adequately managed and the scheme is achieving financial balance till the end of the 1st quarter of the century.

Financial management is efficient and law amendment would facilitate in collecting the money owed to SSCJ