A. BACKGROUND

Mongolia has received a credit from the international Development Association (IDA) for the Strengthening Fiscal and Financial Stability Project (SFFSP). The Objective of the SFFS Project is designed to improve fiscal policy and sustainability in a mineral-based economy, protect the poor and vulnerable, and restore confidence in the financial sector. The project is designed into five components: (I) Strengthening Macroeconomic and Fiscal Management; (II) Improving the Efficiency of Public Financial Management; (III) Enhancing Financial Sector Stability; (IV) Strengthening the Social Protection System; (V) Project Management and Monitoring. The objectives are to Strengthening fiscal responsibility and implementing relevant policy measures, improving fiscal discipline, strengthening the resiliency of the banking system, improving public expenditure quality in social protection, providing support for Project implementation, coordination, monitoring, and evaluation, including, inter alia, audit arrangements, reporting requirements, procurement, and financial management activities respectively. For more details, please refer to the Project Appraisal Document Report No. PAD2269. The World Bank is providing technical assistance through SFFSP project under which Component D to assist the Ministry of Labour and Social Protection (MLSP) in strengthening the pension system.  This contract involves preparing long-term actuarial projections of the pension system, including the simulation of reform options.

Previous projections undertaken have shown that the Pension Insurance Scheme poses a sharply growing fiscal burden as a result of the rapidly aging population and several measures introduced in recent years which increased benefits and/or reduced eligibility requirements. The state subsidy to pensions amounted to about 2.5% of GDP in 2020 (about 8% of government revenues and grants) and is projected to increase to over 6% of GDP by 2030 (about 22% of revenues and grants if held constant) and 11% of GDP by 2050. The increase is primarily attributed to the insufficiency of contributions, rapid aging of the population (the proportion of the population over age 60 is projected to triple from 6.2% in 2015 to 18.8% in 2050) and government policies of the recent past which have liberalized pension benefits and loosened qualifying conditions.  

Some background of the policy evolution provides useful insights into the current assignment. In 1999 the authorities enacted a Notional Defined-Contribution (NDC) scheme which would apply only to cohorts born on or after 1960. They subsequently revised this legislation essentially pushing back the application of the NDC scheme to cohorts born in 1979.  In 2012, the authorities introduced a heavily discounted buyback scheme which had the effect of substantially increasing worker coverage and effectively made retiree coverage universal. At the same time, the minimum pension was increased at a rate faster than the growth in real wages so the proportion of retirees receiving the minimum escalated. In 2017 and 2018 several amendments were enacted to pension rules including: (i) increases in the vesting period; (ii) gradual increase of the normal retirement age subsequently reversed in 2018 by a provision to allow early retirement in case of meeting the increased vesting period requirement ; (iii) an increase in the pension contribution rate also subsequently partially reversed; and (iv) increase of wage reference period for calculating pension benefits; and (v) a reduction in the retirement age for herders. During COVID, the authorities subsidized employer and employee contributions and in 2022 materially increased the minimum pension well in excess of the growth in wages. The authorities in October 2021 have submitted to parliament draft laws which will modify the existing pensions policy framework as well as make changes to other forms of social insurance.

The World Bank in 2020 prepared a report: Mongolia; Pension Policy Reform Options. The report summarizes actuarial projections supported by Pension Reform Options Simulation Toolkit (PROST), including simulations of several parametric reforms to strengthen the financial sustainability of the Pension Insurance Fund while protecting the adequacy of benefits.

B. OBJECTIVE OF THE ASSIGNMENT

The objectives of this consultancy are to prepare baseline actuarial projections of the existing Pension Insurance Scheme and to simulate multiple parametric and structural reforms consistent with the thinking of the authorities and embodied in the draft Pensions Law.  

C. SCOPE OF THE WORK

The scope of work for an international consultant will consist of the activities below (but not limited to and subject to by mutual agreement of the Client and Consultant). 

The consultant will be provided with English translations all the relevant laws, regulations and guidelines pertinent to the Pension Insurance Scheme. The consultant will also be provided with anonymous individual data for all covered contributors to the mandatory and voluntary schemes include birthdates, gender, covered wage and contribution density.  The consultant will be provided with anonymous individual data for all old age retirees including birthdates, date of retirement, gender and benefit level. Similar data will be provided for disability retirees and survivorship beneficiaries.

Task 1. Conduct medium and long-term actuarial projections of the pension insurance fund contributions, other revenues and expenditures consistent with the current law. This should include a projection of treatment of post-1979 cohorts under the existing law, as amended. Undertake projections of parametric reforms such as those specified below. 

a. Project a baseline including projections of contributions, other revenues, state subsidies and benefit payments for both the Mandatory and Voluntary pillars of the Pension Insurance Scheme. To the extent possible, this should include projections of the special qualifying conditions for specific groups of workers specified in the law. These include: Mothers with four or more children, herders, workers in hazardous, high heat or special professions. The projection should include simulations of the costs for disability and survivorship benefits as specified under the existing law.   The analysis should be focused both on the anticipated growth of the required State Subsidy as well as the anticipated replacement rates for retirees both at retirement and in the years that follow.

b. Simulate the effects of parametric reforms.  The following reforms should be simulated: 

• Automatic indexation of pensions according to the increase in the consumer price index. Similarly, increasing the minimum pension according to the same rate.
• Increasing the retirement age from M60/W55 to both at age 65 at a pace of 3 months increase per year and applying a penalty of 4%/year for early retirement prior to the normal retirement age. 
• Increasing the early retirement age from work performed underground, high heat and hazardous conditions from M50/F45 to M55/F50 at a pace of 3 months per year.
• Gradually eliminating early retirement age from work performed under the difficult working conditions after 2025. 
• Increasing the wage base for calculating pension benefits from  84 to 120 months at a pace of 3 months every year, and valorize the wage base according to the growth in covered wages. This should include an evaluation of the fiscal costs and effect on replacement rates of valorization according to the growth in prices instead of wages
• Increasing the minimum vesting period for eligibility to partial/proportional pension from 10 to 15 years, at a pace of 3 months each year.

The consultant are highly encouraged to suggest additional parametric reforms aimed at improving sustainability, adequacy and/or equitable treatment between workers.

Task 2. Evaluate options to smooth the transition to an NDC scheme for affected cohorts. Consultant should evaluate options to smooth the reduction in replacement rates through a phase-in of an NDC scheme. The consultant should propose and simulate choices for reform options and support these with the projected impact on retiree replacement rates. This could include, for example: (i) a NDC hybrid option whereby part of the contributions would be earmarked to the NDC scheme and, at the same time, the accrual rate for service after a reform date would be materially reduced for the remaining DB scheme; or (ii) retaining the 1979+ cohort-based approach but establish a formula for a declining supplement that re-aligns the pensions for new retirees over a transition period of 10 years. It will be important in this task for the consultant to suggest options, if any for retaining the existing notional interest rate or modifying it as they may suggest. In addition, the consultant should review the framework for disability and survivorship as indicated in the existing and proposed for affected cohorts and propose amendments as necessary to facilitate a better alignment with the NDC scheme and a smoother transition between cohorts.

Тask 3. Evaluate options and simulate the effects of earmarking 1 percentage point of contributions into funded individual accounts as specified in the draft law, including simulating its effects on fiscal costs and replacement rates. This should include:

• Estimates of the fiscal transition costs necessary to finance this funding requirement;
  
• Project the size of the fund as a percent of future GDP;
• Propose options and recommendations as to how to remunerate funded accounts;
• Propose options and recommendations as to how to segregate FDC accounts;
• Prepare an assessment of the institutional, regulatory and supervisory requirements for establishing a funded scheme

Тask 4. Prepare an analysis of pension policy reform options based on the projections undertaken in Tasks 1-3. The analysis should indicate the projected baseline projected fiscal costs, the projected cost reduction through the parametric reforms suggested, the projected cost impact of proposed transition arrangements for the NDC scheme, and the fiscal transition costs associated with the introduction of an FDC scheme. The analysis should also evaluate the impact on future replacement rates of the proposed measures.

The consultant should not only specify the quantitative effects of the various reforms proposed but should also opine on the merits of the reforms as well. The consultant are encouraged to offer alternative options and provide their views on recommended options and parameters. The consultant’ assessment should also aim to reflect the inputs provided by MLSP counterparts during the workshop to present initial findings.

D. DELIVERABLES

All deliverables should be discussed with relevant officials of MLSP, SIGO, and other entities such as the Ministry of Finance with the incorporation of comments in order to ensure quality.  The consultant will be expected prepare the following drafts and reports as well as conduct workshop(s) in the course of the work:

• Deliverable 1. Inception report outlining the assignment, providing a work plan, specifying critical data and other information requirements, and preparing a draft annotated outline of the Consultant’ report;
• Deliverable 2. PPTs and Client Workshop – The PPTs should summarize the consultant’ preliminary view of their research methodology, initial findings and recommendations.  The consultant will be expected to present their findings and the supporting modeling methodology at a virtual workshop.  The workshop will be an opportunity for the counterparts to ask for clarification of the research methodology, the key assumptions used in the projections, and the initial results. They will also have the opportunity to offer their initial response to the findings and, as necessary, request additional reform scenarios; 
• Deliverable 3. Draft Report – The draft report should generally follow the outline in the inception report. The report should include key recommendations along with all conducted analyses, projections, narratives on the proposed policy changes and comparison of the parameters in the current law and the revised draft law. The draft should reflect the comments received during the workshop. It is anticipated that the consultant will have further consultations with the counterparts to clarify the draft report and provide reactions to any comments not received during the Client Workshop. The consultant should also prepare a 3 pages summary progress report detailing the achievements and impediments in executing the entire assignment effectively .  
• Deliverable 4. Final evaluation report should address the comments of key counterparts.

E. CONSULTANT QUALIFICATIONS/ SELECTION CRITERIA 

Education: Suitable candidates should have an MA in economics, mathematics, finance, or an MBA.

Professional qualifications: Suitable candidates should be fellows of the international Society of Actuaries and have demonstrated experience with pension policy issues.  

Experience: Candidates should have at least 10 years of relevant professional experience. Previous consultancy services individually or with the team on pension parametric reforms would be plus.  

Language skills: Excellent oral and written skills in English.

Computer literacy: Candidate should be familiar with data management software such as STATA, VISUAL BASIC, and have access to actuarial projection software.

Other: Excellent interpersonal skills with the ability to function effectively and collaboratively in a team environment. 

F. SUPERVISION AND REPORTING

The consultant will report directly to the Head of the Technical Working Group on Pension Policy Reform, who is the Director of Policy, Planning Department (PPD) in the MLSP.  Work progress will be presented during the working group meeting or other meetings as needed. The Director of PPD shall evaluate the performance on the agreed deliverables and approve the invoices for the delivered outputs.

The MLSP and SFFS PIU will provide input to the evaluation of the consultant’s performance.

G. CONTRACT DURATION

The expected commencement date of the contract is August 2022.  The contract is expected to have a duration of 4 months.  The duration of the contract will also depend upon the timely receipt by the consultant of the input data and the timely response by the counterparts to the draft report.

Based on the evolving needs of the MLSP and the performance of the consultant, the contract may be extended if needed. If any task is not finished and approved by the MLSP within the agreed-upon timeline, the consultant should complete the task/s without any additional cost.

H. INSTITUTIONAL ARRANGEMENTS

The consultant will have access to all necessary data and information and free access to the staff of the MLSP, and SIGO.  

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