How micro pensions will help informal workers

Financial experts discuss the value of financial education and digitalisation in encouraging people to save for the future.

According to the International Labour Organization, an estimated two billion workers, or 61.2% of the world’s total labour force, are in the informal sector. These workers are 80% of the population in developing countries in Asia, Africa, and South America. They all have limited access to a social protection programme, including social insurance, that they cannot afford or contribute to due to their lower income.

This lack of pension for informal workers might create a bigger problem in the future. According to Parul Seth Kanna, Director of pinBox Solutions, taxpayers might catch the burden of paying each worker for their social insurance, especially when they reach old age.

“The government will pay out any kind of tax-funded benefits to the elderly, which is not going to be an option because all of us will pay a $1 per day for their pension,” she said during a panel discussion at the Singapore Fintech Festival.

To address this issue, regulators will have a pending task to provide innovative financial solutions that may provide financial security to informal workers. One of the said solutions is micro pensions.

These life insurance products — which have gained traction in recent years, particularly in emerging economies — provide small, affordable contributions and benefits designed to be flexible, simple, and accessible to any informal worker.

However, to make micro pensions work for the workers in the informal sector, according to Dr David Tuesta, the former Minister of Finance in Peru, it required financial education, which is another pending task for regulators.

“Until now, regulators have been taking timid steps in this area. The potential is there. We need to continue preaching to regulators to open their minds to this decision,” Dr Tuesta said in the same panel discussion.

To make the task easier, several regulators integrated technology into tools they used for behavioural finance and financial inclusion to help them encourage informal workers to save.

Aside from financial education, regulators must also emphasise the importance of digitalisation. According to Kamal Quadir, Founder and CEO of bKash Limited, a growing technological infrastructure in developing countries and cheaper access to smartphones allowed informal workers to contribute and receive micro pensions easily through digital platforms such as WhatsApp.

“Today, technology is allowing poor people to participate in the financial platform. So instead of putting the money in the pocket or under the mattress, you're putting the money in the system, and you feel very safe because you can access that money anytime you want,” Quadir said.

However, the panelists agreed that the challenge in developing long-term micro pensions remains. According to Quadir, regulators need to build trust to make long-term savings for informal workers happen. “Trust is based on how the system is built. And that system includes regulatory bodies, the financial institutions, and the technology they offer,” he said.