The last twelve months have marked a major milestone for Lebanon’s social protection system. In April 2023, the country witnessed the launch of a national disability allowance, its first-ever social grant to exemplify the shift in the approach to social assistance from targeted to universal. In November, amendments to the Social Security law were passed in the General Assembly, improving maternity benefits and coverage of children, and allowing women workers to insure their spouses through the National Social Security Fund (NSSF) at parity with men. In December, the Lebanese Parliament adopted Law 319, introducing a new pension scheme within the Fund and significant reforms to its governance structure and operational framework. In February of this year, the Council of Ministers approved the National Social Protection Strategy (NSPS), which is the first of its kind comprehensive and long-term vision, revolving around five main pillars: social assistance, social insurance, social welfare, employment opportunities for the most vulnerable, and financial support for access to education and health. Moreover, attempts to integrate Lebanon’s two major social safety net programs – the Emergency Social Safety Net program (ESSN) and the National Poverty Targeted Program (NPTP) – have been seen, accompanied by attempts to slowly phase these programs out through substantial funding cuts and reallocations.

Of all these developments, the new pension system, which is a key component of the new strategy, stands out as one of the most ambitious socioeconomic reforms, given the genesis and evolution of Lebanon’s social protection system, the country’s poor baseline of retirement benefits, and its politico-economic model. The International Labour Organization (ILO) has been the driving force behind most of these improvements. As stated by Shawki Bou Nassif (Bureau Chairman and Finance Director at the NSSF) during a public webinar held by Institut des Finances Basil Fuleihan on February 28, 2024: “The pension reforms would not have been possible without ILO’s technical and administrative support, including the actuarial and legal standards advice, as well as their facilitation of the social dialogue and their escort throughout the process.” We interviewed Rania Eghnatios and Luca Pellerano, the Social Protection Specialist for Lebanon and the Senior Social Protection Specialist at ILO’s Regional Office for Arab States, to better understand the constituents of the new pension scheme and its accompanying reforms – situating it in the bigger map of recent developments, the process that led to this accomplishment, and the prospects moving forward.

The Importance of these Reforms

Farah Al Shami (FA): Since the eruption of the economic crisis in 2019, Lebanese people lost their deposits and lifetime savings and the value of their end of service indemnities, making dignified retirement more inaccessible to the majority than ever. How important are these reforms and what do they mean for Lebanon?

Luca Pellerano (LP): This step is a major breakthrough for the social protection system in Lebanon. Until this stage, Lebanon was the only country in the region, together with Palestine, that did not provide a proper pension system for workers in the private sector. The lack of such a system aggravated people’s vulnerability, especially amid protracted and compounded crises. Older persons have been forced to continue working to make a decent living amid economic hardship. Under such circumstances there is a dire need for a proper pension system in Lebanon. There cannot be social security without such a system.

These pension reforms have been put on hold for more than thirty years now. The fact that they just passed is a promising sign, but now full attention should go to ensuring their sound implementation.

Rania Eghnatios (RE): These reforms have indeed been pending since the establishment of national social security schemes in 1964. The end of service indemnity (EOSI) system had become largely unfunded. EOSI benefits – already inadequate prior to the crisis – had completely lost their value following the collapse of the local currency and ongoing under-declaration of salaries. The new system is financed through employers and workers’ social contributions as the main source of funding. It is expected to provide sustainable and sufficient benefits. Our simulation of the benefits one would be eligible to through the new pension system, based on contribution period and salary level, show that today’s value of the stream of monthly pensions will largely exceed the EOSI one-off entitlement for a large majority of workers within only a few years (see page 7 in this document).

LP: This law is also important from a labor market perspective, especially given the increase in in-formalization and the practice of under declaration of salaries that have become widespread since the outset of the crisis and is reflecting in depressed revenues to the social security system. These reforms have the potential to change labor market dynamics, rebuild trust in the national social security system and the NSSF, and reestablish a strong public channel to deliver insurance, thus reinforcing the role of the State and the social contract that ties it with its people.

FA: You keep emphasizing that “the new law should encourage employers to declare full salaries to the NSSF.” Why is this the case?

LP: In the current EOSI system, virtuous employers are penalized as they bear the high cost of settlement payments¹The settlement payment is the difference between the entitled EOSI amount, as per the last salary, and the contributions that have been paid throughout one’s career or that are due, in addition to the interest payments and the naturally embedded wage inflation. . Any worker who has insufficient savings in the NSSF fall back on their last employer to cover this gap, as a condition to cash out their indemnity. The new law will remove disincentives for employers to declare salaries, especially since it will take into account the career history of the worker for the calculation of the final pension benefits (in the new pension system, the value of any contribution, at any point in time, matters). This will provide a stronger reason to ensure that, every month, the correct full salary is declared.

FA: What else do these reforms entail?

RE: The new law stipulates significant reforms to the governance structure of the NSSF, modernizing the Board of Directors, which will now consist of 10 members, down from 28, with 2 representing the government, 4 representing workers, and 4 representing employers. This tripartite Board will oversee all operations under the Fund, including the management of the new pension system and the pension fund investment. The law likewise introduces a dedicated investment branch to oversee asset investment according to a set policy. This branch will be led by an independent Investment Committee comprising 6 experts, plus the NSSF Director General and Executive Investment Director who will participate in the committee ex-officio and without the right to vote.

In addition, the law mandates the NSSF to set up a financial and digital system for payments, registration, and easy access to pension account information.

LP: The new law strikes a balance between capitalization and redistribution principles. When this law was first conceived it was based on a private savings model with minimum guarantees for low-income earners. Nonetheless, as it is now, it allows a high level of solidarity, both inter- and intra-generational, and amongst all categories of contributors. This means it has more resilience to economic downturn and stronger potential to shield people from the socioeconomic repercussions of unforeseen events in the future.

Key Design Features of the New Pension Scheme

FA: You published a living Q&A document that clearly details the technical operations used in the new pension system and its characteristics, namely in terms of eligibility requirements, benefit types and levels, governance, and operational processes. What are – in a nutshell – the key features of this system?

RE: This pension system is for private sector workers and is coming to replace the EOSI system. There are those who will mandatorily transition to the new scheme. These are the new entrants to the labor market and workers under the age of 49 who are currently enrolled in the EOSI system. Those above 49 can decide to transition voluntarily to the pension system or remain under the current EOSI system (the two systems are mutually exclusive). Lebanese residing in Lebanon who are self-employed workers, domestic workers, employers and non-permanent agricultural workers²We distinguish between non-permanent agricultural workers and those who work permanently at agricultural institutions that are already covered by the EOSI.  Permanent employees, who work in an agricultural enterprise, will be mandatorily covered by the new pension system. , and Lebanese working abroad will also have the option to enroll voluntarily in the new system.

As for public sector workers, those who are currently insured under the civil servants’ cooperative and are enrolled in a pension cannot be covered by the new system, whereas the others will be covered mandatorily.

LP: Similarly, voluntary participation is possible for foreign employees working on Lebanese territory, provided that they have a regular work permit. These will be entitled to receive full benefits in the form of periodical pensions if their country has a reciprocity agreement with Lebanon. If there is no such agreement, their right to pension is limited to a lump sum liquidation upon leaving Lebanon indefinitely.

The law also includes benefits to the survivors in the case of death, and covers the insured with a lifetime pension in case of the occurrence of a disability thus losing at least two thirds of their capacity to work. All these aspects make the law compatible with ILO’s international labor standards and minimum requirements on social security as set by ILO’s Convention 102.

More Technical Components of the Reform

RE: As for the benefits, the new system works through a notionally defined contributions system. Every insured person has a notional account in which they accumulate contributions (previously estimated at 12.25% of their earnings), throughout their career. The account is credited on a yearly basis at a rate equal to the increase in average earnings of all members covered by the pension scheme.

Upon retirement, the individual notional account is not disbursed as a lump sum. Instead, it is transformed into a pension amount using a conversion formula that is based on various factors including life expectancy, cost of living adjustments, and the presence of eligible survivors following the person’s death. The retiree would receive the highest between this calculated pension and two minimum guarantees.

LP: Indeed, the calculation of the pension benefits takes into considerations two guarantees. The first is a minimum wage guarantee, which is mainly meant to protect low income workers, and yields pension money valuing ‘55-80%³Depending on the years of the service of the insured, with 80% being after 30 years of service. of the last minimum wage in Lebanon times (x) the number of service years’. The second guarantee is a career wage guarantee, which is mostly meant for higher income workers, and is based on the following formula, as set in ILO’s standards: ‘1.33% times (x) the years of contribution times (x) the average revalorized career earnings’. The pension cannot be lower than the highest between the two minimum guarantees. These guarantees are nothing but a combination of a minimum of the accrued wage and a minimum of the revalorized wage. The method of calculating the revalorized wage is outlined on page 3 of the Q&A document, and lends proof to the fact that the contributions made throughout one’s whole career count towards their final pension benefits.

Workers are eligible for pension after 15 years or more of service, whereas they are only eligible for a lump sum cash out before 15 years. More details regarding pension collection and the specificities of the case of disability or death can be found in the Q&A document.

FA: Mohammed Karaki, Director General of the NSSF, mentioned to L’Orient Le Jour that “the new system will have three main funding sources: NSSF’s leftovers, contributions from employers and employees, and interests generated by the investment fund.” He estimates the total amount currently available at the NSSF to be the equivalent of around USD 333,000 at the current exchange rate. How does the contributory segment operate? How will the financial viability of the system be ensured? How will people be assured that their contributions are invested and guarded responsibly after they have lost trust in State systems, and the long history of cooptation of the NSSF by the government?

RE: Again, the main source of funding is social contributions, as per an actuarial analysis that was conducted by the ILO team in 2023. The total contribution rate is expected to fall within the range of 17% to 18% of an insured’s earnings to preserve the financial viability of the system over a hundred years. The distribution of the contribution rate between employers and workers will soon be defined in a supplemental implementation decree, which will also determine the final contribution rate based on revised actuarial projections at the time of the system’s implementation. A gradual increase of the contribution rate from the current rate of 8.5% over a span of several years is possible. Another source of financing for the scheme will of course be the investment returns of the fund, and this is taken into consideration in the calculation of contribution rates.

LP: The new law also takes into account some other sources of funding such as penalties and fines, as well as possible government contributions. However, these are mostly supplementary. For the time being, the system is being modeled on the assumption that there will be no contribution from the State, as the intention is to make it self-sufficient.

The new law guarantees that the benefits will be indexed to inflation through a yearly adjustment process, and that will be conditional on the financial equilibrium of the system. In the short term, pension values will be adjusted to the average increase of earnings declared to the NSSF. This will allow benefits to reflect the wage inflation in the Lebanese economy. In the medium-long run, pensions will be revalorized every year based on the increase in the Consumers Price Index (CPI), an adjustment that reflects changes in the level of economic growth and cost of living.

Over time, the investment of the funds will be significantly important and the NSSF will need to adopt an increasingly diversified investment strategy. The law is not prescriptive in that regard but it does hint that they need to diversify their investment portfolio.

RE: Effective and prudent investment management will be critical for the new pension fund. The governance reforms focus on two elements: composition and qualifications. These reforms are binding in the law and are projected to both foster cooperation and ensure the sound management of the funds. They comprise minimum requirements regarding the expertise of the Board members and financial expertise of the Investment Committee members. It is important that this is enforced.  The law also gives the option of external asset management of the funds upon the approval of the Board of Directors. The focus on investment performance is of utmost importance and in the interest of the insured. Yet, quality management, sound implementation, transparency, and independence from political dynamics in the country need tight follow up and accountability mechanisms.

Process and Prospects

FA: It seems that there needs to be many building blocks in the implementation process. For instance, regarding the electronic payment of contributions and benefits, and the digital platform for workers and employers to access information on their social security rights, is financial and digital inclusion not a worry?

RE: This is very important. Serious changes should be made within the NSSF to implement the new system and the law indicates this. However, we believe that it is possible to build a robust digitized system that can provide quality service, building on other success stories in the country.

LP: The electronic channel will not completely replace the role of the NSSF branches in the different areas of Lebanon. Face to face interactions will still be possible. Additionally, the point of digitalization is to generate stronger awareness among workers about their rights, for example by the development of a digital application for workers and employers to keep track of their transactions and entitlements.

FA: How was the process that led to the pension reforms? What challenges did you face? How could you create the political will for these reforms and help legislate them?

RE: These reforms have been in the making for quite some time. Previous law proposals have been historically shelved. In 2019, a parliamentarian subcommittee tasked with revising the previous proposal was established. We engaged closely with that committee, social partners and stakeholders, and provided technical assistance with regards to actuarial valuations, design of the scheme, governance models, and legal drafting.

LP: What was also instrumental for the success of the process is the close engagement of the different stakeholders. A major part of this process is the social dialogue (involving workers, employers, and the government), which took place at the request of the ministry of labor and was facilitated by the ILO. The lasting repercussions of the economic crisis and the necessity to do something about the ineffective EOSI kept everyone interested. ILO played the role of a mediator, a neutral player that could record the different perspectives, views and concerns. Our role was crucial in creating a space for a constructive dialogue against what was causing the stalemate and subsequently in consensus building.

The most challenging chapter in the consensus building was the part related to governance reforms, where it was critical to ensure a constant flow of communication between the various actors and identify possible points of convergence of different interests. Throughout the process there was a strong cross-party support for the law – overall – across all parliamentary blocs.

FA: How do you see the way forward?

LP: The law still requires implementation decrees but it will be important that it becomes fully operational in a short time. The ILO started engaging with the NSSF and some national partners, namely workers and employers, as the focus has now shifted to ensuring sound implementation. The process is complex but very promising.

RE: Moreover, there is still considerable room for improvement in the scheme, the NSSF, and the system as a whole. It is important as well to think about those who have retired during the crisis and received meaningless benefits – any transitional measures should take these retirees into consideration. Coverage should be extended to encompass all categories of workers, and further measures are needed to ensure old-age benefits are provided to all older persons in Lebanon.