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### I. OPTIONS FOR MANAGING SYSTEMIC LIQUIDITY RISK — Introduction and Context
- Fully dollarized/euroized countries or countries with a currency board arrangement (CBA) limit the monetary authority's discretion to print money, constraining its ability to back bank deposits and guarantee the whole payment system.
- Vulnerability to liquidity shocks increases with the size of the financial sector relative to GDP and fiscal capacity.
- Key trade-off: elimination of exchange rate risk reduces risk premiums and borrowing costs, but a large financial sector raises the possibility that banks may run out of liquid assets and the central bank could run out of reserves, creating conditions for a self-fulfilling run.
- Risks are greater when financial institutions lack affiliation with international banks able to provide funding via Head Offices; open-ended support from foreign parents can substitute for domestic liquidity buffers.
- Contingent credit lines from private providers or international financial institutions may support crisis resolution but face enforcement and reliability obstacles.
- San Marino characteristics relevant to systemic liquidity risk:
  - Fully euroized but not part of the euro area.
  - Financial sector very large compared to GDP.
  - Few banks have parent banks in major financial centers.
  - No formal financial support arrangements with the ECB or the Bank of Italy (BI).
  - Business model prone to large potential outflows due to reliance on bank secrecy and tax discount pillars.
- Paper structure: literature review (Section B), country experiences (Section C, and Appendix Table), discussion of policy options (Section D), and policy recommendations (Section E).

### Review of the Literature — Main Findings
- Dollarization and CBAs restrict traditional central bank LOLR capacity because central banks lose autonomous monetary and exchange rate policy and generally lack sufficient foreign exchange reserves relative to total banking system liabilities (citing Baliño et al. (1999), Berg and Borensztein (2000)).
- Motivations for LOLR (Freixas et al. (1999)):
  - (i) Informational asymmetry making otherwise solvent banks vulnerable to withdrawals and interbank drying up.
  - (ii) Preventing failure of the financial system as a whole.
- Trade-offs and caveats:
  - LOLR interventions carry moral hazard and potential taxpayer losses.
  - Some authors argue LOLR limitations are similar under fixed exchange rates and CBAs (Antinolfi and Keister (2001)); dollarization does not imply the complete absence of a LOLR—only that the domestic central bank cannot perform it (Chang (2000)).
  - Alternatives include government stabilization funds or contingent credit lines with private banks, but size, enforcement, and reliability are uncertain (Calvo (1999)).
- Policy prescriptions emerging from the literature:
  - Tighten prudential regulation and impose currency-specific liquidity requirements (Gulde et al. (2004)).
  - Two insurance approaches for dollarized systems (Ize et al. (2005)):
    - (i) Self-insurance via holding substantial foreign-currency liquid assets by central bank or banks.
    - (ii) External insurance via contracts with private providers or international institutions.
  - Prefer decentralized liquid foreign assets requirements (LAR) on dollar deposits, complemented by circuit breakers (automatic and early suspension of convertibility of dollar deposits).
  - Combine risk-based supervision of liquidity management with minimum liquidity requirements; limits on maturity gaps help idiosyncratic risk but may not suffice for systemic shocks (Cayazzo et al. (2006)).
  - In CBAs, LOLR facilities should follow best practices: collateralized lending to solvent banks, short-term, at a penalty rate; higher reserve or liquidity requirements and enhanced prudential regulations can reduce but not eliminate LOLR needs (Santiprabhob (1997), Baliño et al. (1997)).
- Operational note: High reserve requirements, unless remunerated at market rates, may harm bank profitability and promote disintermediation; liquidity requirements are often better suited to prudential objectives.

### Key conclusions from the literature (enumerated)
- Dollarization and CBAs:
  - May enhance macroeconomic stability at the price of limiting central bank functions such as monetary regulation and LOLR support.
  - Limits arise from potential limited availability of liquid foreign assets and from commitments under CBAs.
- Liquidity buffers and supervision:
  - High liquidity buffers and strong bank supervision are essential to reduce vulnerabilities from limited LOLR capacity.
  - Broad consensus: bank supervision and prudential regulation in dollarized economies and CBAs should be more stringent than international standards.
- Contingent credit lines:
  - Have limitations; useful but unlikely to provide adequate insurance against systemic liquidity risk unless the domestic sector is integrated with reputable international banking groups.
- Role of LOLR:
  - Some form of LOLR is desirable because self-insurance has limits.
  - Effectiveness depends on the size of the liquidity buffer available for LOLR operations relative to the size of the financial sector.

### Key lessons from the survey of fully dollarized economies and CBAs
- Prudential norms on liquidity are stringent; all surveyed countries require banks to maintain high levels of liquidity (self insurance).
- Reserve requirements (RR) act as a liquidity buffer in a number of countries; authorities have used RR as a countercyclical tool (examples: Bulgaria, El Salvador, Lithuania).
- Support by parents located in major financial market centers has helped during liquidity crises where subsidiaries of foreign banks dominate (examples: Bulgaria, Estonia, Lithuania, El Salvador, Panama).
- Contingent credit lines from non-parent banks are uncommon; obligation exists in one country only (El Salvador) and efficacy untested.
- Liquidity for LOLR can be expanded with swap arrangements with central banks where parents are located (example: Estonia with Sweden).
- Arrangements exist in all surveyed countries to ensure LOLR support is provided to solvent banks, typically short-term and against eligible collateral according to pre-established rules.
- A few countries (Ecuador, Panama) do not have LOLR frameworks; plans or development efforts face financing or implementation delays.

### Attributes of San Marino’s financial sector — Key statistics and facts
- Currency and formal arrangements:
  - San Marino uses the euro based on a formal arrangement concluded in 2000; as of January 2001, euro banknotes and coins have legal tender status in San Marino.
  - The CBSM is not a member of the European System of Central Banks (ESCB); local banks do not have access to Eurosystem liquidity.
- Payment system access and risks:
  - San Marino banks have only indirect access to EU payment systems via Italian banks acting as direct participants on behalf of San Marino banks, generating credit risk and potential additional costs.
- CBSM LOLR capacity and past operations:
  - The CBSM can provide liquidity using savings accumulated over the years.
  - In 2006 the CBSM provided liquidity assistance equivalent to 1.7 percent of GDP to a small bank eventually placed under special administration; the government assumed repayment of the loan.
  - On November 25, 2009, a Decree-Law was adopted allowing the government to guarantee the repayment of CBSM borrowing from domestic or foreign financial institutions (Article 1); proceeds would be used for LOLR operations to financial institutions confronted with a temporary liquidity need (Article 4).
- Size and macro-financial mismatch:
  - Ratio of total assets of the financial sector to GDP rose from 7 in 2003 to close to 9 at the end of 2008.
  - Contribution of the financial sector to GDP increased from about 16 percent in 2002 to 18.6 percent in 2007.
  - Growth averaged 3.1 percent annually from 2000 to 2008 compared with Italy’s 1.2 percent.
  - Available resources for LOLR operations (CBSM own funds and surpluses accumulated by the State) amount to less than 5 percent of broad money.
- Concentration and fiscal exposure:
  - Sector concentration: the two largest banks, locally owned, represent more than half of the sector; the three largest banks about 75 percent.
  - Financial institutions’ contribution to total government revenues was about 10 percent in 2007.
- Financial soundness and profitability:
  - Banks have a relatively high capital cushion and nonperforming loans have been contained, but profitability indicators are relatively low.

### Recent environment, risks, and San Marino’s responses
- Business model pressures:
  - The “deposit-taking bank” model with bank secrecy, low taxation, free capital movement is under pressure from international initiatives on transparency, AML/CFT, and tax information exchange.
  - Short-term effect: potential liquidity pressures as banks and customers adjust.
  - Medium-term effect: greater transparency and alternative services could strengthen San Marino’s attractiveness and allow development of a less shock-prone business model.
- EU Savings Tax Initiative (Directive 2003/48/EC):
  - Under withholding tax option local tax authority keeps 25% of amount collected and remits 75% to relevant tax authorities.
  - Withholding tax rates: initially 15%; raised to 20% from July 2008; will reach 35 percent in 2011.
  - Effective in San Marino in 2005; implementation did not trigger an immediate outflow.
- OECD and G20 tax cooperation:
  - San Marino committed to exchange tax-related information in April 2000.
  - Between April and end-September 2009, San Marino signed 12 bilateral agreements; eight additional by mid-January 2010.
  - As of September 25, 2009, only 20 jurisdictions remained in the “grey list”.
- AML/CFT (MONEYVAL):
  - MONEYVAL evaluation in 2007 placed San Marino under compliance-enhancing procedures.
  - Reports submitted in September and December 2008 and September 2009; progress report submitted March 2009.
  - On September 24, 2009, MONEYVAL lifted the enhanced compliance procedure while restating concerns about effective implementation.
- Operational cooperation with Italy:
  - 2009 database for exchange of information between San Marino banks and Italian intermediary banks on cross-border transactions; contracts signed between CBSM and Italian banks; renegotiated information provisions.

### Initiatives to strengthen cooperation with Italy
- Economic Cooperation Agreement (signed March 31, year of official visit) and Financial Cooperation Agreement (signed November 2009) aim to:
  - Facilitate development and integration of financial systems and collaborate on prudential supervision, AML/CFT, and combating market abuses without confidentiality constraints on information exchange.
  - Allow Memoranda of Understanding between CBSM and the BI for exchange of information and joint on-site inspections.
  - Potentially grant San Marino banks access to euro-zone payment systems on terms established by the BI and subject to ECB approval.
  - Facilitate effective cross-border oversight to protect stability, integrity, and transparency of the financial sector.
- Protocol amending the Convention on Double Taxation with Italy (signed March 2002 but unimplemented) amends exchange-of-information provisions to meet OECD standards; signature expected in 2010.

### Range of policy options for San Marino to manage systemic liquidity risk — Overview
- General framework:
  - Options include self insurance and external insurance mechanisms.
  - Self insurance is typically first line of defense; external insurance covers where self insurance reaches limits.
  - If systemic solvency problems exceed banks’ shareholders’ capacity, survival depends on strength and willingness of the fiscal authority to allocate resources.
- (The source indicates a subsequent section "Self insurance mechanisms" begins, but detailed contents beyond the supplied excerpt are not included.)

### Liquidity management framework for banks — Rules and recent developments
- Regulatory rule: Banks limited in medium and long term lending to 80 percent of the sum of medium and long term deposits, regulatory capital and 30 percent of other deposits.
- Banks required to:
  - Establish time buckets.
  - Forecast liquidity mismatches.
  - Set minimum limits for themselves.
- Recommendation: CBSM should focus on requirement for banks to forecast liquidity mismatches and set limits, and verify robustness of banks’ analyses.
- Note: Requirement for banks to provide a maturity ladder on assets and liabilities, eventually leading to daily reporting, introduced in June 2009.

### Reserve requirements and CBSM operational options — Exact measures and characteristics
- Option: Consider subjecting banks to reserve requirements (RR), i.e., keeping a fraction of deposits with the CBSM.
- Operational use: In a liquidity shock CBSM could lower required reserve ratio, allowing banks to utilize reserves to meet depositor demands.
- Historical action: Early December 2009 the CBSM imposed a mandatory 8 percent deposit requirement to deal with short-term liquidity pressures. Characteristics:
  - Temporary in nature and shall end in January 2010.
  - Applies to interbank deposits as well as customer deposits.
  - Deposits required to be held with the CBSM will be blocked for the whole (monthly) maintenance period.
  - Derogation may be granted based on demonstrated liquidity stress.
  - Liquidity assistance provided to banks through interbank lending can be deducted from the mandatory deposits.
- Caution: Liquidity raised by an RR system could be used for LOLR operations only with a robust and transparent collateral policy for liquidity provision operations, given the temporary (“borrowed”) nature of these resources.
- Competitive implication: To provide an effective buffer, the required reserve ratio would probably need to be higher than the ECB’s, potentially disadvantaging San Marino banks relative to euro area competitors.

### External insurance mechanisms — Options, feasibility, and examples
- Contingent credit lines with reputable foreign banks:
  - Market-based insurance limits moral hazard relative to LOLR frameworks.
  - Feasibility obstacles for San Marino:
    - If contracted by the central bank, contingent credit lines would need to be very large (in the vicinity of 70 percent of GDP to cover 10 percent of deposits) to provide system-wide protection, making them difficult to secure.
    - Relying on contingent credit lines contracted by banks themselves may not provide system-wide insurance because only about 25 percent of deposits are in banks affiliated with international banks.
  - Historical examples:
    - Argentina’s USD 6.1 billion private contingent credit line in 1996 was about 2 percent of GDP.
    - Mexico’s USD 2.5 billion contingent credit line in 1997 was less than 1 percent of GDP.
- Precautionary arrangement with a neighboring central bank:
  - Example: swap arrangement between Sweden and Estonia.
  - Rationale: San Marino’s financial system is closely linked with Italy, suggesting a case for an agreement between the CBSM and the BI.
  - Effect: Such an arrangement would reduce the size of the cushion the CBSM would need; resources made available by the BI would be utilized by the CBSM to provide liquidity assistance to banks in San Marino.
  - Operational requirements for CBSM:
    - Develop framework for liquidity-providing operations, including collateral policy to ensure liquidity is provided only against high quality collateral and to fundamentally solvent banks.
    - Make clear such transactions are short-term and at penalty rates to limit moral hazard.
  - Resource note: ECB framework could serve as a model, but human resources and technical infrastructure required should not be underestimated.
- Full access to Eurosystem liquidity:
  - Would require either becoming full member of the euro area, or securing access to the Eurosystem monetary policy operations for San Marino banks in the context of the monetary agreement between Italy—on behalf of the European Community—and San Marino.
  - The monetary agreement between France—on behalf of the European Community—and Monaco is offered as a framework that could be emulated.
  - Commission recommendation (October 2009) cited: recommendation for a Council decision on renegotiation of the monetary agreement with San Marino; recommendation does not envisage Sammarinese banks’ access to Eurosystem liquidity and recommends a new monetary agreement enters into force on January 1, 2010, with a transitional period of 5 years (January 1, 2015) for introduction in San Marino of all relevant Community banking and financial legislation.

### Conclusions and Policy Recommendations — Enumerated actions and trade-offs
- Macro-financial diagnosis:
  - Unfinished integration with the euro area and a large internationally active banking sector have led to macro-financial vulnerabilities.
  - CBSM has accumulated some liquidity for short-term assistance to individual banks but cannot act as an effective LOLR in the event of systemic liquidity shock.
- First line of defense — strengthen self-insurance:
  - Require banks to hold a substantial stock of liquid assets.
  - CBSM should ensure banks properly assess liquidity mismatches and set appropriate limits.
  - Banks could be required to secure credit lines from reputable international banking groups.
    - Currently, two of the banks operating in San Marino are affiliated with international banking groups; enforcing such a policy on these banks would insure about a quarter of total deposits.
    - Other banks should be asked to secure credit lines; those unable to do so could be required to hold a larger stock of liquid assets.
- Strengthen institutional framework for the LOLR function:
  - Seek ways to strengthen institutional framework for the LOLR function.
  - Recommendation: Use renegotiation of the 2000 Monetary Cooperation agreement with Italy to explore the feasibility of securing access to Eurosystem liquidity for San Marino banks.
  - Argument: Creating a level playing field could naturally lead to banks having access to the ECB’s monetary policy operations.
  - Prudential alternative: In absence of an effective LOLR, a smaller scale financial sector focused on the needs of San Marino’s economy would be prudent.
- Integration with international parents as an alternative model:
  - Better integration with reputable international banking groups would lessen the need for a LOLR framework and allow the sector to remain large and internationally active.
  - That model depends on the soundness of parent institutions; strong regulation and supervision remain necessary because parental support cannot be taken for granted.
  - Policy challenge: Balance prudential liquidity and related-party exposure requirements against business needs entailing high exposures to the parent.
  - Operational need: Close cooperation with home supervisors to review parent groups’ financial health and contingency planning, ensuring host-country interests are considered in parental intervention.

### Pension System of San Marino — Current system, spending, projections, and reform options
- Coverage and 2005 reform (effective January 1, 2006):
  - Gradual increase in retirement age from 60 to 65 years by 2017; retirement at 60 allowed for those with at least 40 years of contributions.
  - Rise in minimum contribution period from 15 to 20 years.
  - Change in pension calculation formula to reduce benefits.
  - Plan to set up optional defined-contributions second pillar scheme by 2007, with view to make mandatory later (not implemented as of end 2009).
  - Gradual increase in social security contributions—especially for employers.
  - Disincentives to early retirement for 60 year olds with 35–39 years of contributions.
  - Change in indexation: ordinary pensions indexed to CPI inflation of the previous year; indexation partial and lower for higher pensions.
- Implementation setbacks:
  - 2008 law introduced minor changes that made the system a bit more generous (increasing benefits for part-time workers and reducing disincentives to retire earlier).
  - As of end 2009, second pillar scheme had not been started.
- Relative indicators:
  - Gross replacement ratio remains significantly above that of other European countries despite the reform.
  - Statutory and average retirement age and minimum contribution years for early retirement now similar to other European countries.
  - Demographic indicators close to other European countries.
- Pension spending and financing:
  - Pension expenditure higher than in other small European countries but lower than in some large European economies, including Italy.
  - Increases in pension spending continued after the 2005 reform.
  - Financing through payroll contributions and government transfers from central government in the amount of 10 to 25 percent of total contributions.
  - Contributions credited to seven separate pension funds; no cross subsidization among funds in principle.
  - Artisan and trader funds needed extraordinary state transfers since 2005.
  - Social Security Institute administers pensions and also provides healthcare and social services.
- Recent trends and magnitudes:
  - Contribution revenues increased significantly since 2005 and in 2008 were overall able to cover pension benefits.
  - Government transfers to pension funds rose and reached nearly 2 percent of GDP in 2008, owing to rule automatically linking budget transfers to total contributions and need to cover deficits of certain funds.
  - For farmers state transfers are 80 percent of total contributions; farmers fund also receives transfers from other worker categories.
- Contribution rates and coverage (selected category figures preserved as in source):
  - Dependent workers before reform Employee 1.6 Employer 10.3; after reform Employee 3.6 Employer 14.3.
  - Artisans before reform 19.5/22.
  - Farmers before reform 10/11.
  - Traders 18.5/21.
  - Entrepreneurs 10/13.
  - Professionals 10/13.
  - Agents and brokers 10/13.
  - Commuters from Italy represent about 30 percent of total contributions.
- Sustainability and actuarial projections (November 2009 assumptions and results):
  - Projection assumptions:
    - Labor productivity assumed to grow at 1 per year.
    - A 2 percent annual inflation rate postulated.
    - Annual yields on pension fund reserves assumed to be 4 percent; even assuming a 7 percent annual return, by 2035 the dependent workers’ pension fund will post a deficit.
  - Dependent workers’ fund:
    - After 2020 employees’ and employers’ contributions will not be able to cover pension benefits.
    - Even with state transfers reaching the maximum limit of 25 percent of total contributions, and taking into account returns on outstanding reserves, the fund will post a negative balance by 2030.
  - Other worker categories:
    - Contributions—even including state transfers and yields—are already lower than pension benefits.
  - Projections detail:
    - For dependent workers state contributions are assumed to be 10 percent of total employees' and employers' contributions up to 2020, and 25 percent of total contributions afterwards.
    - For independent workers state contributions are over 25 percent of total contributions.
    - Annual yields are assumed at 4 percent of fund reserves.
- Policy implications and reform options — Suggested measures:
  - Overall conclusion: 2005 reform increased contributions and brought contributions overall in line with benefits, but certain pension funds remain constantly in deficit; actuarial projections point to long-term unsustainability; further reforms are urgent.
  - Suggested measures:
    - Harmonize contribution rates across worker categories to avoid cross-subsidization.
    - Increase contribution rates.
    - Change the way earnings are measured to calculate benefits (examples cited: extend averaging period; move to lifetime average).
    - Introduce defined contribution plans and link pensions to higher life expectancy.
    - Encourage retirement savings through introduction of a fully funded second pillar.
  - Specific reform considerations:
    - Increase and harmonize contribution rates: scope exists to increase rates without necessarily jeopardizing competitive advantage since rates are still lower than in Italy; reconsider rule automatically linking state transfers to total contributions.
    - Change earnings measurement for benefit calculation: consider extending averaging period (examples: France, Austria, Finland, Poland, Portugal, Sweden).
    - Introduce DC mechanisms and link benefits to life expectancy: DC schemes accumulate pension capital in individual accounts and transform it into payments at retirement using formulas based on life expectancy; alternatives include increasing standard retirement age and/or number of contribution years necessary for full benefit.
    - Encourage private retirement savings: voluntary provisions needed; options include automatic enrollment with opt-out, financial education, tax incentives (deductibility, matching contributions, or tax credits for low earners), while acknowledging distributional and labor-market trade-offs.

*Italic: IMF staff report content as provided in the supplied PDF excerpt.*

### 2010. The views expressed in this document are those of the staff team and do not necessarily reflect

### I. OPTIONS FOR MANAGING SYSTEMIC LIQUIDITY RISK

### A. Introduction
- Fully dollarized/euroized countries or countries with a currency board arrangement (CBA) limit the monetary authority's discretion to print money, constraining its ability to back bank deposits and guarantee the whole payment system.
- The vulnerability to liquidity shocks increases with the size of the financial sector relative to GDP and fiscal capacity.
- Key trade-off: elimination of exchange rate risk reduces risk premiums and borrowing costs, but a large financial sector raises the possibility that banks may run out of liquid assets and the central bank could run out of reserves, creating conditions for a self-fulfilling run.
- Risks are greater when financial institutions lack affiliation with international banks that could provide funding via Head Offices; open-ended support from foreign parents can substitute for domestic liquidity buffers.
- Contingent credit lines from private providers or international financial institutions may support crisis resolution but face enforcement and reliability obstacles.
- San Marino characteristics relevant to systemic liquidity risk:
  - Fully euroized but not part of the euro area.
  - Financial sector very large compared to GDP.
  - Few banks have parent banks in major financial centers.
  - No formal financial support arrangements with the ECB or the Bank of Italy (BI).
  - Business model prone to large potential outflows due to reliance on bank secrecy and tax discount pillars.
- This paper draws on a literature review (Section B) and country experiences (Section C, and Appendix Table) to discuss policy options (Section D) and to conclude with policy recommendations (Section E).

### B. Review of the Literature
- Literature focus: implications of dollarization and CBAs for bank soundness and the central bank’s ability to operate a lender-of-last-resort (LOLR) facility.
- Baliño et al. (1999) and Berg and Borensztein (2000):
  - By relinquishing autonomous monetary and exchange rate policy, monetary authorities in dollarized economies lose ability to act as LOLR.
  - Effective LOLR would require central bank holdings of liquid foreign exchange reserves sufficient to finance large deposit outflows, but reserves are generally insufficient relative to total banking system liabilities.
- Freixas et al. (1999):
  - Central bank motivations for LOLR: (i) informational asymmetry making otherwise solvent banks vulnerable to withdrawals and interbank drying up; (ii) preventing failure of the financial system as a whole.
  - LOLR interventions should weigh benefits against costs, notably moral hazard and potential taxpayer losses.
- Counterpoints:
  - Antinolfi and Keister (2001): LOLR limitations are similar under fixed exchange rates and CBAs.
  - Chang (2000): Dollarization does not imply complete absence of a LOLR—only that the domestic central bank cannot perform it.
  - Calvo (1999): Alternatives include government stabilization funds or contingent credit lines with private banks, though size, enforcement, and reliability of such lines are uncertain.
- Gulde et al. (2004):
  - Safeguards vary across highly dollarized countries; few have explicit regulation to limit currency-induced credit risk.
  - Recommend regulatory tightening and currency-specific liquidity requirements to reduce bank risk exposure.
  - Administrative measures (securitization of deposits, extension of deposit maturities, restrictions on withdrawals) may be needed for severe liquidity shocks.
- Ize et al. (2005):
  - Two insurance approaches for dollarized systems: (i) self-insurance via holding substantial foreign-currency liquid assets by central bank or banks; (ii) external insurance via contracts with private providers or international institutions.
  - Central bank LOLR induces moral hazard; large central bank liquid holdings raise intermediation costs; external insurance faces contractual limitations, high premia, moral hazard, and hedging needs.
  - Prefer decentralized liquid foreign assets requirements (LAR) on dollar deposits, complemented by circuit breakers (automatic and early suspension of convertibility of dollar deposits).
- Cayazzo et al. (2006):
  - Liquidity risk is idiosyncratic (individual bank withdrawals) and systemic (widespread liquidity shock).
  - Supervisory framework should combine risk-based supervision of liquidity management and minimum liquidity requirements to internalize dollarization risks.
  - Limits on maturity gaps help idiosyncratic risk but may not ensure sufficient foreign currency liquid assets during systemic shocks.
- Currency board arrangement literature:
  - Santiprabhob (1997): CBA backing and exchange rate rules reduce scope for monetary operations and LOLR support; LOLR facilities should follow best practices: collateralized lending to solvent banks, short-term, at a penalty rate; high reserve requirements and stricter prudential regulation may help.
  - Baliño et al. (1997): Tradeoff between credibility and flexibility in CBAs; some LOLR support may be needed and should be arranged (preferably under central bank control) to address systemic problems without bailing out insolvent banks.
  - Higher reserve or liquidity requirements and enhanced prudential regulations (e.g., higher capital adequacy, limits on interest rate and liquidity risk) can reduce but not eliminate LOLR needs; foreign exchange backing for LOLR can come from the central bank or a common pool of bank resources; an autonomous, bank-funded deposit insurance fund with limited coverage and risk-based premiums can limit moral hazard.
- Operational note: High reserve requirements, unless remunerated at market rates, may harm bank profitability and promote disintermediation; liquidity requirements are often better suited to prudential objectives.

### Key conclusions from the literature
- Dollarization and CBAs:
  - May enhance macroeconomic stability at the price of limiting traditional central bank functions such as monetary regulation and LOLR support.
  - Limits arise from potential limited availability of liquid foreign assets in dollarized economies and from the commitment to backing and exchange rate rules in CBAs.
- Liquidity buffers and supervision:
  - High liquidity buffers and strong bank supervision are essential to reduce vulnerabilities from limited LOLR capacity.
  - Buffers can result from liquidity or high reserve requirements.
  - Broad consensus: bank supervision and prudential regulation in dollarized economies and CBAs should be more stringent than international standards.
- Contingent credit lines:
  - Have limitations; while useful, they are unlikely to provide adequate insurance against systemic liquidity risk unless the domestic financial sector is integrated with reputable and dependable international banking groups.
  - External insurance can suffer from contractual uncertainties that limit effectiveness.
- Role of LOLR:
  - Because of limitations of self-insurance, some form of LOLR is desirable.
  - LOLR frameworks can mitigate liquidity crises by addressing banking problems timely and limiting contagion.
  - High liquidity requirements and strong supervision reduce the need for LOLR but do not eliminate it.
  - The effectiveness of a LOLR framework depends on the relative size of the liquidity buffer available for LOLR operations compared to the size of the financial sector.

_Prepared by Bernard J. Laurens, Edda Zoli and Valentina Flamini (EUR); Approved by the European Department; February 2, 2010._

### 15.      Fully dollarized economies and countries with a CBA have responded to the

### _cr1066 - 15.      Fully dollarized economies and countries with a CBA have responded to the

### Key lessons from the survey of fully dollarized economies and CBAs
- Prudential norms on liquidity are stringent and all countries require banks to maintain high levels of liquidity (self insurance). This is the most common feature.
- Reserve requirements (RR) act as a liquidity buffer in a number of countries. Authorities have used RR as a countercyclical tool in times of stress by either allowing banks to utilize part of the liquidity (Bulgaria, El Salvador), or reducing the level of the requirement (Bulgaria, Lithuania).
- Support by parents located in major financial market centers has helped during liquidity crises; this insurance is important because in a majority of countries the banking sector is dominated by subsidiaries of foreign banks (Bulgaria, Estonia, Lithuania, El Salvador, Panama).
- Contingent credit lines from non-parent banks are uncommon; such an obligation exists in one country only (El Salvador) and its efficacy has not yet been tested.
- Liquidity available for LOLR can be expanded with swap arrangements with central banks where the parents of local banks are located (example: Estonia with Sweden).
- Arrangements exist in all surveyed countries to ensure LOLR support is provided to solvent banks. Typically, LOLR is short-term and provided against eligible collateral, most often according to pre-established rules rather than case-by-case.
- A few countries (Ecuador, Panama) do not have LOLR frameworks. Plans exist to set up a fund financed by contributions from banks in Ecuador; Panama is developing a framework but implementation faces delays because of lack of financing.

### Attributes of San Marino’s financial sector
- Currency and formal arrangements:
  - San Marino uses the euro on the basis of a formal arrangement concluded in 2000 with the European Community; as of January 2001, euro banknotes and coins have legal tender status in San Marino.
  - The CBSM is not a member of the European System of Central Banks (ESCB); local banks do not have access to Eurosystem liquidity.
- Payment system access and risks:
  - San Marino banks have only indirect access to EU payment systems via Italian banks acting as direct participants on behalf of San Marino banks, generating credit risk, potential additional costs, and uncertainty if a direct participant cannot be found.
- CBSM LOLR capacity and past operations:
  - The CBSM can provide liquidity using savings accumulated over the years. In 2006 the CBSM provided liquidity assistance equivalent to 1.7 percent of GDP to a small bank eventually placed under special administration; the government assumed repayment of the loan.
  - On November 25, 2009, a Decree-Law was adopted allowing the government to guarantee the repayment of CBSM borrowing from domestic or foreign financial institutions (Article 1); proceeds would be used for LOLR operations to financial institutions confronted with a temporary liquidity need (Article 4).
- Size and macro-financial mismatch:
  - The ratio of total assets of the financial sector to GDP rose from 7 in 2003 to close to 9 at the end of 2008.
  - Contribution of the financial sector to GDP increased from about 16 percent in 2002 to 18.6 percent in 2007.
  - Growth averaged 3.1 percent annually from 2000 to 2008 compared with Italy’s 1.2 percent.
  - Available resources for LOLR operations (CBSM own funds and surpluses accumulated by the State) amount to less than 5 percent of broad money.
- Concentration and fiscal exposure:
  - Sector concentration: the two largest banks, locally owned, represent more than half of the sector; the three largest banks about 75 percent.
  - Financial institutions’ contribution to total government revenues was about 10 percent in 2007.
- Financial soundness and profitability:
  - Banks have a relatively high capital cushion and nonperforming loans have been contained, but profitability indicators are relatively low.

### Recent environment and risks to liquidity
- The banking model (“deposit-taking bank” model with bank secrecy, low taxation, free circulation of capital) is under pressure from international initiatives on transparency, AML/CFT, and tax information exchange.
- Short-term effect: these international initiatives could lead to liquidity pressures as banks and customers adjust.
- Medium-term effect: measures toward greater transparency and alternative services could strengthen the attractiveness of San Marino as an international financial center and allow development of a less shock-prone business model.

### San Marino’s responses to international initiatives
- EU Savings Tax Initiative (Directive 2003/48/EC):
  - Under the withholding tax option the local tax authority keeps 25% of the total amount collected and remits 75% to relevant tax authorities.
  - Withholding tax rates: initially 15%; raised to 20% from July 2008; will reach 35 percent in 2011.
  - The UE Savings Tax Initiative became effective in San Marino in 2005 following signing of an agreement with the EU; its implementation did not trigger an immediate outflow of funds.
- OECD and G20 tax cooperation:
  - San Marino committed to cooperate in the exchange of tax-related information in April 2000.
  - Between April and end-September 2009, San Marino signed 12 bilateral agreements, allowing a move to the “white list”. Eight additional agreements were signed by mid-January 2010.
  - As of September 25, 2009, only 20 jurisdictions were left in the “grey list” and all jurisdictions had committed to the international standard.
- AML/CFT (MONEYVAL):
  - MONEYVAL conducted an evaluation in 2007 and placed San Marino under compliance-enhancing procedures.
  - San Marino reported to MONEYVAL in September and December 2008 and in September 2009, submitted a progress report in March 2009.
  - On September 24, 2009, the MONEYVAL Plenary decided to lift the enhanced compliance procedure for San Marino, while restating concerns about effective implementation.
- Operational cooperation with Italy:
  - A database for exchange of information between San Marino banks and Italian intermediary banks on cross-border transactions settled through the Italian payment system was created in 2009; contracts signed between CBSM and Italian banks providing settlement services; San Marino banks renegotiated information provisions.

### Initiatives to strengthen cooperation with Italy
- Economic Cooperation Agreement (signed March 31, year of official visit) and Financial Cooperation Agreement (signed November 2009) aim to:
  - Facilitate development and integration of financial systems and collaborate on prudential supervision, AML/CFT, and combating market abuses without constraints of confidentiality in information exchange.
  - Allow signature of Memoranda of Understanding between CBSM and the BI for exchange of information and joint on-site inspections.
  - Potentially grant San Marino banks access to euro-zone payment systems on terms established by the BI and subject to ECB approval.
  - Facilitate effective cross-border oversight to protect stability, integrity, and transparency of the financial sector.
- Protocol amending the Convention on Double Taxation with Italy (signed March 2002 but unimplemented) amends exchange-of-information provisions to meet OECD standards; signature of the Protocol amending the March 2002 Convention on Double Taxation is expected in 2010.

### Range of policy options for San Marino to manage systemic liquidity risk
- General framework:
  - Options include self insurance and external insurance mechanisms. Self insurance is typically first line of defense; external insurance takes over where self insurance reaches limits.
  - If a systemic solvency problem exceeds banks’ shareholders’ capacity, only the strength and willingness of the fiscal authority to allocate resources determines banks’ survival.
- (Subsequent section titled "Self insurance mechanisms" begins in the source but detailed contents beyond this point are not included in the supplied excerpt.)

*Italic: IMF staff report content as provided in the supplied PDF excerpt.*

### 23.      Requiring banks to maintain at all times high levels of liquidity is the first line of

### _cr1066 - 23.      Requiring banks to maintain at all times high levels of liquidity is the first line of

### Liquidity management framework for banks
- Banks operating in San Marino are subject to a rule limiting medium and long term lending to 80 percent of the sum of medium and long term deposits, regulatory capital and 30 percent of other deposits.
- Banks are required to establish time buckets, forecast liquidity mismatches and set minimum limits for themselves.
- Recommendation: The CBSM should focus on the requirement for banks to forecast liquidity mismatches and set limits for themselves, and satisfy itself that banks are doing this analysis robustly.
- Note (from source): The requirement for banks to provide a maturity ladder on their assets and liabilities, eventually leading to a daily reporting, were introduced in June 2009.

### Reserve requirements and CBSM operational options
- Option: Consider making banks subject to reserve requirements (RR), i.e., keeping a fraction of their deposits with the CBSM.
- Operational use: In the event of a liquidity shock, the CBSM could lower the ratio of required reserves, allowing banks to utilize all or part of their reserves at the CBSM to meet demands from depositors.
- Historical action: In early December 2009 the CBSM imposed on banks a mandatory 8 percent deposit requirement to deal with short-term liquidity pressures at the time. Characteristics of that instrument:
  - Temporary in nature and shall end in January 2010.
  - Applies to interbank deposits as well as customer deposits.
  - Deposits required to be held with the CBSM will be blocked for the whole (monthly) maintenance period.
  - Derogation to the requirement may be granted based on demonstrated liquidity stress.
  - Liquidity assistance provided to banks through interbank lending can be deducted from the mandatory deposits.
- Caution: Liquidity raised by an RR system could be used for LOLR operations only with a robust and transparent collateral policy for liquidity provision operations, given the temporary (“borrowed”) nature of these resources.
- Competitive implication: For such a framework to provide an effective buffer in the event of a liquidity shock, the ratio of required reserves would probably need to be higher than the ECB’s, putting San Marino banks at a disadvantage compared to their euro area competitors.

### External insurance mechanisms
- Contingent credit lines with reputable foreign banks:
  - Market-based insurance limits moral hazard relative to LOLR frameworks.
  - Feasibility obstacles for San Marino:
    - If contracted by the central bank, contingent credit line would need to be very large (in the vicinity of 70 percent of GDP to cover 10 percent of deposits) to provide system-wide protection, making it difficult to secure.
    - Relying on contingent credit lines contracted by banks themselves may not provide system-wide insurance because only about 25 percent of deposits are in banks affiliated with international banks.
  - Historical examples: The USD 6.1 billion private contingent credit line contracted by Argentina in 1996 with a group of banks was about 2 percent of GDP; the USD 2.5 billion contingent credit line contracted by Mexico in 1997 was less than 1 percent of GDP.
- Precautionary arrangement with a neighboring central bank:
  - Example cited: swap arrangement between Sweden and Estonia.
  - Rationale: San Marino’s financial system is closely linked with Italy, suggesting a case for an agreement between the CBSM and the BI.
  - Effect: Such an arrangement would reduce the size of the cushion of liquidity the CBSM would need; resources made available by the BI would be utilized by the CBSM to provide liquidity assistance to banks in San Marino.
  - Operational requirements for the CBSM:
    - Develop a framework for liquidity-providing operations, including a collateral policy to ensure liquidity is provided only against high quality collateral and to fundamentally solvent banks.
    - Make clear that such transactions are short-term and at penalty rates to limit moral hazard.
  - Resource note: While ECB framework could serve as a model, the human resources and technical infrastructure required should not be underestimated.

- Full access to Eurosystem liquidity:
  - Would require either becoming full member of the euro area, or securing access to the Eurosystem monetary policy operations for San Marino banks in the context of the monetary agreement between Italy—on behalf of the European Community—and San Marino.
  - The monetary agreement between France—on behalf of the European Community—and Monaco is offered as a framework that could be emulated by San Marino.
  - Reference: In October 2009 the Commission of the European Communities adopted a recommendation for a Council decision on the position to be taken regarding the renegotiation of the monetary agreement with San Marino; the recommendation does not envisage the possibility for Sammarinese banks to access Eurosystem liquidity and recommends a new monetary agreement enters into force on January 1, 2010, with a transitional period of 5 years (January 1, 2015) for the introduction in San Marino of all relevant Community banking and financial legislation.

### Conclusions and Policy Recommendations
- Macro-financial diagnosis:
  - The combination of an unfinished integration of San Marino with the euro area and a large internationally active banking sector has led to macro-financial vulnerabilities.
  - The CBSM has accumulated some liquidity with which it can provide short-term assistance to individual banks, but it cannot act as an effective LOLR in the event of systemic liquidity shock.
- First line of defense — strengthen self-insurance:
  - Banks should be required to hold a substantial stock of liquid assets.
  - The CBSM should ensure banks properly assess their own liquidity mismatches and set appropriate limits.
  - Banks could be required to secure credit lines from reputable and dependable international banking groups.
    - Currently, two of the banks operating in San Marino are affiliated with international banking groups; enforcing such a policy on these banks would insure about a quarter of total deposits.
    - Other banks should also be asked to secure credit lines; those unable to do so could be required to hold a larger stock of liquid assets.
- Strengthen institutional framework for the LOLR function:
  - Authorities should seek ways to strengthen the institutional framework for the LOLR function.
  - Recommendation: Take advantage of current discussions for the renegotiation of the 2000 Monetary Cooperation agreement with Italy to explore feasibility to secure access to Eurosystem liquidity for San Marino banks.
  - Argument: Creating a level playing field in San Marino’s financial sector could naturally lead to banks having access to the ECB’s monetary policy operations.
  - Prudential alternative: In the absence of an effective LOLR, a smaller scale financial sector focused on the needs of the economy of San Marino would be prudent.
- Integration with international parents as an alternative model:
  - If the banking sector were better integrated with reputable and dependable international banking groups, this would lessen the need for a LOLR framework and allow the financial sector to remain large and internationally active.
  - That model depends on the soundness of parent institutions; strong financial sector regulation and supervision capacities remain necessary because parental support cannot be taken for granted.
  - Policy challenge: Balance prudential requirements for liquidity and exposure to related parties against business needs entailing high exposures to the parent.
  - Operational need: Close cooperation with home supervisors to review the financial health of parent groups and their ability to support local subsidiaries; cooperation is important for contingency planning and ensuring host-country interests are considered in any parental intervention.

*Source: IMF staff analysis and recommendations as presented in the supplied chapter excerpt.*

### 31.      This paper reviews the current pension system of San Marino, in comparison with

### 31.      This paper reviews the current pension system of San Marino, in comparison with other European pension systems, and analyzes its sustainability.

### The Current Pension System (post-2005 reform)
- Covers local residents and commuters in San Marino; major 1993 revisions failed to prevent deterioration in social security balances.
- 2005 reform measures (effective starting January 1, 2006):
  - Very gradual increase in retirement age from 60 to 65 years by 2017; retirement at the age of 60 allowed for those who have accumulated contributions for at least 40 years.
  - Rise in the minimum contribution period from 15 to 20 years.
  - Change in the pension calculation formula to reduce benefits.
  - Plan to set up an optional defined-contributions second pillar scheme by 2007, with a view of making it mandatory later.
  - Gradual increase in social security contributions—especially for employers.
  - Disincentives to early retirement for the 60 year olds who have accumulated between 35 and 39 years of contributions.
  - Change in the indexation system: ordinary pensions indexed to CPI inflation of the previous year; indexation is partial, and lower for higher pensions.
- Implementation setbacks:
  - A 2008 law introduced minor changes that seem to make the system a bit more generous (increasing benefits for part-time workers and reducing disincentives to retire earlier).
  - As of end 2009, the second pillar scheme had not been started yet.
- Relative indicators:
  - Gross replacement ratio remains significantly above that of other European countries despite the reform; statutory and average retirement age and minimum contribution years for early retirement are now similar to other European countries.
  - Demographic indicators are close to those in other European countries.

### Pension Spending and Financing
- Pension expenditure:
  - San Marino’s pension expenditure is higher than in other small European countries, but lower than in some large European economies, including Italy.
  - Increases in pension spending continued after the 2005 reform.
- Financing structure:
  - Funded through payroll contributions and government transfers from the central government in the amount of 10 to 25 percent of total contributions.
  - Contributions credited to seven separate pension funds (for agricultural workers, artisans, etc.); no cross subsidization among funds in principle.
  - Artisan and trader funds needed extraordinary state transfers since 2005.
  - Social Security Institute administers pensions and also provides healthcare and social services.
- Recent trends and magnitudes:
  - Contribution revenues increased significantly since 2005 and in 2008 were overall able to cover pension benefits.
  - Government transfers to pension funds kept rising and reached nearly 2 percent of GDP in 2008, owing to the rule automatically linking budget transfers to total contributions and the need to cover deficits of certain pension funds.
  - For farmers state transfers are 80 percent of total contributions; the farmers fund also receives transfers from other worker categories.
- Contribution rates and coverage:
  - Contribution rates remain relatively low compared to the rest of Europe (particularly compared to Italy).
  - Commuters from Italy represent about 30 percent of total contributions—a share that could increase after the agreement with Italy on double income taxation is signed.
  - Large variance among contribution rates across worker categories, creating disparities (Table 2 shows category-specific before/after reform rates).
  - Contribution categories examples (percent): Dependent workers before reform Employee 1.6 Employer 10.3; after reform Employee 3.6 Employer 14.3. Artisans before reform 19.5/22; Farmers before reform 10/11; Traders 18.5/21; Entrepreneurs 10/13; Professionals 10/13; Agents and brokers 10/13.

### Sustainability of the Current Pension System
- Actuarial projections (carried out in November 2009) indicate the current system is not sustainable in the long term.
- Dependent workers’ fund:
  - After 2020 employees’ and employers’ contributions will not be able to cover pension benefits.
  - Even with state transfers reaching the maximum limit of 25 percent of total contributions, and taking into account returns on outstanding reserves, the fund will post a negative balance by 2030.
- Other workers categories:
  - Contributions—even including state transfers and yields—are already lower than pension benefits.
- Projection assumptions (as stated):
  - Labor productivity is assumed to grow at 1 per year.
  - A 2 percent annual inflation rate is postulated.
  - Annual yields on pension fund reserves assumed to be 4 percent; even assuming a 7 percent annual return, by 2035 the dependent workers’ pension fund will post a deficit, while there will be no change in projections of the independent workers’ fund balances.
- Projections detail:
  - For dependent workers state contributions are assumed to be 10 percent of total employees' and employers' contributions up to 2020, and 25 percent of total contributions afterwards.
  - For independent workers state contributions are over 25 percent of total contributions.
  - Annual yields are assumed to be 4 percent of fund reserves.

### Policy Implications and Reform Options
- Overall conclusion:
  - The 2005 pension reform increased contributions and brought contributions overall in line with benefits, but certain pension funds remain constantly in deficit, requiring subsidization and extraordinary state transfers; actuarial projections point to long-term unsustainability.
  - Further reforms should be implemented as a matter of urgency.
- Suggested measures (building on consensus from 2005 reform):
  - Harmonize contribution rates across categories of workers to avoid cross-subsidization.
  - Increase contribution rates.
  - Change the way earnings are measured to calculate benefits.
  - Introduce defined contribution plans and link pensions to higher life expectancy.
  - Encourage retirement savings through the introduction of a fully funded second pillar.
- Specific reform options discussed:
  - Increasing and harmonizing contribution rates:
    - Scope to increase contribution rates without necessarily jeopardizing competitive advantage given rates are still lower than in Italy.
    - Reconsider the rule automatically linking state transfers to total contributions to avoid automatic increases in central government pension expenditure.
  - Changing earnings measurement for benefit calculation:
    - Consider extending the period over which earnings are averaged (examples: France moving from best 10 years to best 25 years; Austria extending averaging from 15 to 40 best years; Finland, Poland, Portugal and Sweden moving to lifetime average earnings measure).
  - Introducing defined-contribution mechanisms and linking benefits to life expectancy:
    - DC schemes (funded or notional) accumulate pension capital in individual accounts and transform it into pension payments at retirement using formulas based on life expectancy.
    - Alternatives include increasing standard retirement age and/or the number of contribution years necessary for a full benefit in line with life expectancy (examples: Denmark and France).
  - Encouraging private retirement savings:
    - Voluntary private provisions are needed as public pensions will be much lower for current entrants to the labor market.
    - Governments can encourage saving via mandatory or voluntary saving schemes and tax incentives.
    - Arguments for mandatory schemes: protect people from under-saving and protect societies from safety-net costs; arguments against: compulsion can impose welfare losses and mandatory contributions are often perceived as a tax that may discourage work.
    - Alternatives to compulsion: automatic enrollment with opt-out; financial education; tax incentives such as making contributions deductible (with caveats about regressivity), limiting tax relief to lower or standard income tax rates, or offering matching contributions or tax credits to low earners.

*Prepared by Edda Zoli.*

### Appendix Table. Reforms to Retirement Income

### Appendix Table. Reforms to Retirement Income Systems in Selected European Countries, 2004–2009

### Coverage
- Belgium
  - Tighter job-search requirements before older unemployed eligible for early-retirement benefits.
- Greece
  - New administrative arrangements (see right) aim to increase compliance with and coverage compliance with and coverage of public schemes.
  - Merger of 133 pension funds into 13 schemes; centralised database of members and employers; unique identification numbers issued of individuals.
- Italy
  - Companies’ (with more than 50 employees) severance-pay schemes to be converted into pension plans; choice of employer plan, other private provider or government-run scheme. (The last is the default option.)
- United Kingdom
  - National pension savings scheme from 2012: automatic enrolment of 22-65 year olds without an OP or PP; employee contribution of 4%, employer of 3% and government of 1% phased in.
  - Central clearing house for new national pension savings scheme; aim to have costs of 0.5% of balance initially, falling to 0.3%.

### Adequacy
- Belgium
  - Increase in minimum pensions additional to standard indexation.
- Denmark
  - Adoption of “prudent-person” rule for portfolio allocation of private pensions.
- Finland
  - New guaranteed pension to be introduced from 2011.
  - Cuts in taxes on pensions worth between EUR 15 000 and 30 000 to bring pensioner tax into line with worker tax.
- France
  - New individual retirement-saving plan (PEIR) allowing 10% of earnings up to EUR 24000 to be contributed with tax privileges.
  - Increase in minimum pensions additional to standard indexation.
  - Indexation of public-sector pensions with prices rahter than wages.
  - Increment for working age 60-65 raised from 3% to 4% and 5% from age 65.
- Germany
  - Extension of social security tax exemption (due to expire in 2008) for DC OP contributions up to 4% of earnings.
  - Increase pensions by 1.1% in2008 (rather than 0.46% under the 2005 rules); increase of 2.41% in 2009 (rather than 1.76%). Pensions were not increased inthe period 2003-06.
- Greece
  - One-off payment of EUR 100-200 to pensioners.
- Portugal
  - New centrally managed, voluntary DC plan, with contributions of 2% or 4% forunder 50s and 6% for over 50s.
- Spain
  - Increase in minimum pensions of 6.4%.
- Sweden
  - Cut taxes on over 65s with incomes up to SEK 363 000 from 2009, affecting 90% of pensioners.
  - DB OP scheme for white-collar workers in private sector converted to a DC scheme.
- United Kingdom
  - Basic pension to be indexed to average earnings from 2012; increases 2004-08 in line with earnings.
  - Acceleration of change of state second pension from an earnings-related to a flat-rate scheme, with initial benefits indexed to average earnings; improved credits for carers.
  - Increment for late retirement raised from 7.4% to 10.4% a year; increment now payable as a one-off bonus.

### Financial sustainability
- Belgium
  - Increase in pre-pension eligibility age from 58 to 60 between 2008 and 2012. Abolition of social security tax exemption forsabbatical leave under the “time-credit” program.
- Denmark
  - Increase early pension age from 60 to 62 between 2019 and 2022; increase normal pension age from 65 to 67 between 2024 and 2027; link both ages to life expectancy thereafter.
- Finland
  - Earnings measure moves from final ten years to lifetime average. Link between benefits and life expectancy.
  - Changed adjustments for early and last retirement. Increase in early pension age from 63 to 65 over the period 2011-22 (proposal).
- France
  - Employers compulsory retirement raised from 65 to 70.
  - Increase in contribution years for public-sector workers from 37.5 to 40 by 2012; reduction in benefits for early retirement of public-sector workers.
  - Gradual abolition by 2010 of “Delalande” tax on firing of workers over 50.
- Germany
  - Gradual increase innormal pension age from 65 to 67 between2012 and 2029. (However, early retirement age will remain at 63, subject to benefit reductions.)
- Greece
  - Equalise normal pension ages for men and women at 65; early retirement from 55 with at least 15 years’ contributions.
- Ireland
  - Contribution levy, averaging 7.5%, on members of civil-service pension scheme.
  - Reductions in civil-service pensions for early retirement.
- Italy
  - Reduction in transformation coefficient used to convert notional defined contribution balances into pensions from 2008 to reflect changes in life expectancy. Cuts in pensions range from 6.4% for new retirees aged 57 to 8.5% for 65-year-old retirees.
  - Increase full pension age from 57 to 58 in 2008 and 60 from 2011; increase in contribution years for full pension from 35 to 36 years. (However, this delays earlier laws to reach age 60 from 2008).
  - Phased increase in normal pension age for women to 65 (proposal).
- Netherlands
  - Tax advantages for early-retirement OPs abolished.
  - Increase innormal pension age from 65 to 67 in 24 monthly steps (proposal).
- Portugal
  - Cut pension benefits with life-expectancy increases from 2008; accelerated shift to lifetime earnings measure.
- Sweden
  - Cut employers’social security contributions by 1% from 2009.
- United Kingdom
  - Reduction innumber of years required for full basic pension to 30.

### Economic efficiency
- Denmark
  - Adoption of “prudent-person” rule for portfolio allocation of private pensions.
- Finland
  - Earnings measure moves from final ten years to lifetime average. Link between benefits and life expectancy.
- France
  - Increment for working age 60-65 raised from 3% to 4% and 5% from age 65.
- Germany
  - Extension of social security tax exemption (due to expire in 2008) for DC OP contributions up to 4% of earnings.
- Italy
  - Companies’ (with more than 50 employees) severance-pay schemes to be converted into pension plans; choice of employer plan, other private provider or government-run scheme. (The last is the default option.)
- Netherlands
  - Tax advantages for early-retirement OPs abolished.
- Sweden
  - DB OP scheme for white-collar workers in private sector converted to a DC scheme.
- United Kingdom
  - New Pensions Regulator established in2005, combing previous agencies.

### Administrative efficiency
- Greece
  - Merger of 133 pension funds into 13 schemes; centralised database of members and employers; unique identification numbers issued of individuals.
- Sweden
  - Merger of bodies managing public and mandatory DC plans.
- United Kingdom
  - Central clearing house for new national pension savings scheme; aim to have costs of 0.5% of balance initially, falling to 0.3%.
  - New Pensions Regulator established in2005, combing previous agencies.

*Source: OECD, Pensions at a glance 2009.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1066.pdf_