Analysis of a Reform Option for the Tanzanian Pension System

Abstract

In this study, an analysis of a reform option for the Tanzanian pension system was done. The current system is dominated by mandatory defined benefit operating under pay-as-you-go principles. The retirement benefits are based on the average of the three best final salaries in the ten years preceding retirement. Several studies and international experts have shown that such systems face unsustainability. We propose a reform to a notional defined contribution system in which the benefits depend on accumulated contributions indexed by internal rates of returns. Simulation of results for a time horizon of fifty years shows that the notional defined contribution reform will much improve the sustainability of the pension system. The liabilities are lower and allow higher funding ratios. Also benefit payouts are lower and improve cash flows.

Keywords: pay-as-you-go defined benefit; pension reform; defined contribution; notional defined contribution