Using hindsight to gain foresight
This blog has been authored by group of Life actuaries led by IFoA Fellow Rosalind Rossouw*. This group has a focus on Capital Management and ...
Laura Llewellyn-Jones, of the IFoA’s COVID-19 Action Taskforce (ICAT) Social Security group, looks at the challenges of workers in vulnerable or informal employment and the impact of the covid-19 pandemic.
Informal sector workers have a number of different definitions. In many countries, informal workers are individuals who are neither taxed nor monitored by any form of authority. They typically do not have formal employment contracts and so do not receive paid annual or sick leave. The informal sector makes up a significant portion of the economies of developing countries and therefore needs to be taken into account in their social security responses to the pandemic.
In the UK we don’t have the same kind or scale of ‘informal sector’ as in developing countries; but we do have vulnerable workers. These individuals may be on zero hours contracts, low pay or insecure employment. A zero hours contract is a type of contract used by employers under which workers have no guaranteed hours and agree to be potentially available for work. They may be used by companies seeking labour flexibility and by workers seeking flexibility around their other commitments; or as more stable employment is not available.
In terms of government support during the pandemic crisis, the UK government provided just under 10 million workers with partial salary replacement payments from the furlough scheme. This was designed to help people who couldn’t do their jobs because of the outbreak, and to prevent mass redundancies. In a very similar way, a compensation structure was devised for those who are self-employed, contracting with businesses to do variable amounts of work. This was based on a recent history of self-employed earnings, creating anomalies for example where earnings have been lower in a recently-assessed period, or have been non-existent, for example for those at the start of a career working for themselves. In terms of social security, individuals out of work who failed to qualify for furlough payments could apply for universal credit.
We have also looked at South Africa and Nigeria below. South Africa attempted to make payments available to all, with a fixed grant payable to individuals who didn’t qualify for other benefits. In Nigeria the majority of the workers are in the informal sector, and so no support payments were available to individuals.
South Africa has a population of just under 60 million people (compared to around 66 million in the UK). Before the pandemic, South Africa had approximately 5 million people working in the informal economy.
There was no furlough scheme in South Africa; which is likely to be because of the high number of informal sector workers, challenges with administering such a scheme, and cost. However, the government did provide a range of support measures which included providing payments or grants to workers who did not qualify for other support (providing certain conditions were met). The Special COVID-19 Social Relief of Distress grants amount to R350 (around £16) per month. These payments are due to be paid for the period from May until October 2020.
Nigeria on the other hand has a significantly larger informal sector; and has far less coverage of benefits compared to South Africa. The population in Nigeria is estimated to be around 200 million. The informal sector reflects a significant part of the economy; 65% of GDP in Nigeria according to an IMF blog post (2017). The majority of workers in Nigeria work in the informal sector; therefore, the majority of workers do not qualify for social payments or grants; and there was therefore no furlough scheme. In terms of the lockdown, Nigeria had past experience with dealing with contagious diseases following the Ebola outbreak in 2014, and the lockdown was taken very seriously. In practice, many informal workers had to continue working to enable survival.
Governments across the developing world were unable to create sufficient financial incentives that would mean the poorest, most often employed in the informal sector, could remain in lockdown and didn’t need to go looking for work. Governments therefore struggled to balance the potential economic damage against the health impacts of Covid-19. The UN Development Program has highlighted the risk from informal sector workers with the virus failing to isolate and trying to carry on working because of the lack of meaningful financial support. The broad comparisons above illustrate that countries have very different challenges.
One thing that has been striking throughout the pandemic is the lack of good quality data that could be relied on to produce estimates of the financial assistance required. This is an area in which actuaries could be more involved; both in overseeing what data is collected, and then providing estimates of potential financial assistance. Governments with large informal sectors should appreciate that what can be measured can be better managed. There should therefore be a significant push towards improving data governance.
Actuaries assessing social security programs need to consider the informal sector; and in light of the Covid-19 crisis even more so to see how social security could better support the population, whether during working lifetimes or at the end of their working lives. It is important that the informal sector is considered in order to understand a country’s economy, and to consider the most effective means of supporting the population. However, for countries with a large informal economy this challenge will be even more difficult and as the economy contracts and changes as a result of the crisis the informal sector may increase in size further as unemployed workers take informal employment.
In addition, the format of social security programs will affect a country’s experience of a pandemic or other adverse event. Actuaries should consider this when modelling these.
The IFoA Covid-19 Action Taskforce Social Security group comprises Laura Llewellyn-Jones, Stephen Moncrief, Alan Newton, Peter Tompkins, Dave Williams, Chris Sutton and Tawanda Chituku.