Chapter VI. Other questions.

Financing

International standards

192. This study of the financing of national schemes in national legislation and practice shall be confined to the context of Convention No. 102. In accordance with the opinion of the Committee of Social Security Experts convened in 1962 to revise Conventions Nos. 35 to 40 of 1933 concerning old-age, invalidity and survivors' insurance that it would be desirable to avoid "establishing standards of a technical nature relating to methods of organising and administering pensions" in the new instrument, (Endnote 1) the Conference did not introduce any new provisions on the financing of benefits in Convention No. 128.

193. Convention No. 102 confined itself to laying down a number of principles for financial and administrative guarantees and procedural safeguards. According to the Convention, financing must be carried out by way of insurance contributions, taxation, or a combination of both (Article 71). The Convention also establishes some provisions for the distribution of costs and stipulates in a general way that financing must be carried out in a manner which avoids hardship to persons of small means and takes into account the economic situation of the Member and the classes of persons protected. For the specific case of contributory schemes, this Article stipulates that the total of the insurance contributions borne by the employees protected shall not exceed 50 per cent of the total of the financial resources allocated to the protection. (Endnote 2) Whatever the method of financing, Article 71 provides in paragraph 3 that the Member shall accept general responsibility for the due provision of benefits and shall take all measures required for this purpose. (Endnote 3) Thus, the competent authority must ensure that benefits are provided in any case.

Financing of benefits in national legislation and practice

194. Of the two methods of financing pension schemes, i.e. the one based on employers' and workers' contributions, with or without state subsidies (known as contributory schemes), and the one based on taxes (known as non-contributory schemes), the method based on contributions is more widespread. (Endnote 4)

195. As for the distribution of costs, the methods used vary considerably. Tripartite financing is often used, (Endnote 5) with contributions from both insured persons and employers, as well as state subsidies. Such subsidies may take various forms: the State may pay a fixed portion of each pension, a subsidy proportional to the contributions made by employers and employees, a fixed annual subsidy, or simply cover any possible shortfall. On the other hand, some countries rely exclusively on contributions made by the insured persons and employers. (Endnote 6) Others finance benefits out of employers' contributions and state funds, (Endnote 7) while in a minority of cases benefits are financed entirely either by the workers. (Endnote 8) This method of cost distribution is contrary to Convention No. 102, Article 71, paragraphs 1 and 2, which provide that benefits provided in compliance with this Convention and the cost of the administration of such benefits "shall be borne collectively", and "the total of the insurance contributions borne by the employees protected shall not exceed 50 per cent of the financial resources allocated to the protection".

196. With the exception of the few schemes which depend entirely on workers for financing, the reports show that employees usually do not pay more than half of the cost, and usually pay less. Because of the variety of financing methods used, however, it is not always possible to assess exactly how the actual costs involved in each scheme affect the persons covered by it. Moreover, the financing of a pension scheme within a social security system cannot be regarded as immutable. An institution may undergo major changes over the years on account of external constraints such as economic crisis, unemployment, an ageing population and inflation.

197. In this context, it is interesting to note that in October 1987, on the occasion of the national debate on social security (Etats généraux de la sécurité sociale) held in France, a committee of experts known as the "Comité des Sages" drafted a report describing well the situation that France will have to face in the future. It is a situation which probably applies to other industrialised countries, as well as to some developing countries which have long-established pension schemes. The report emphasised that old-age insurance in France had, in the past, enjoyed favourable conditions, such as sustained economic expansion, growth in employment, and the fact that the scheme was in its initial stages. These conditions will not return. Old-age insurance now faces more difficult prospects, because of demographic factors (an ageing population), economic and sociological factors (growing unemployment, early retirement) and legal factors (resulting from the more generous approach to the qualifying conditions and calculation of pensions adopted in better times). (Endnote 9)

198. As some governments have pointed out, demographic factors such as the increase in the number of beneficiaries resulting from the increase in early retirement and from longer life expectancy have and will have repercussions on the level of contributions and state subsidies. Moreover, these contributions and subsidies are often insufficient to maintain benefits at a satisfactory level. Preserving the purchasing power of pensions while maintaining the stability of the old-age benefits system thus appears to be one of the major challenges facing social security schemes in the future.

199. Some developing countries have stated that the actuarial deficit stemming from the increase in applications for old-age benefits may jeopardise the ability of these institutions to disburse benefits in the near future.

200. Other factors, such as an economic crisis, inflation, insufficient social and economic development, and administrative and financial factors (such as difficulties in collecting employers' contributions), have been cited by developing countries as obstacles to the implementation of Conventions Nos. 102 and 128. These countries further noted that such factors hinder the introduction and extension of the pension scheme to other classes of persons and, understandably, the adjustment of benefits to the real cost of living.

201. The information available shows that there is a wide variety of financing systems for pension schemes. This is perfectly consistent with the spirit of Convention No. 102 which does not prescribe a uniform system for financing, but confines itself to setting out principles regarding financial, administrative and procedural guarantees.

202. In any case, and whatever the financing system used, the method adopted must serve two purposes. On the one hand, it must provide resources to cover benefits and administrative costs. On the other, it must ensure an equitable distribution of the financial burden. To do so, periodic actuarial studies should be made to monitor the long-term financial stability of the schemes. Such studies should, in any case, be made prior to any change in benefits, in insurance contribution rates or in taxes used to cover benefits.

203. The Committee can only express its concern faced with the actuarial deficits mentioned by many countries. These deficits have been brought on by various factors, and they may jeopardise the institutions' ability to disburse pensions. It cannot be emphasised enough that old-age protection as part of social security is based on long-term forecasts. Variations in the economic climate, though admittedly hard to predict and sometimes harder still to control, should not affect either the reliability of resources or the feeling of protection against economic vicissitudes that old-age schemes should offer to insured persons. The State's role seems more vital in this field of social policy than in any other, because it consists essentially in long-term, or even very long-term, forecasting and ensuring that costs are equitably distributed among the generations. However, the interested parties, whether contributors or beneficiaries, must themselves be able to play a role, if necessary through the representative organisations concerned.

Organisation and operation of social security schemes

International standards

204. Like the other common provisions, those relating to the administration of social security schemes in Convention No. 128 (Article 35, paragraph 2, and Article 36) were drafted along the lines of the provisions in Convention No. 102 (Article 72). In this way, rather than seeking to impose a uniform type of organisation, (Endnote 10) the Conference tried to provide simultaneously for the interests which should be represented in the administration of the schemes and for the share of the responsibility which would ultimately rest with the State.

205. Both Conventions set certain criteria of broad scope: where the administration is not entrusted to an institution regulated by the public authorities or to a government department responsible to a legislature, representatives of the persons protected shall participate in the management (Endnote 11) under prescribed conditions; national laws or regulations may likewise provide for the participation of representatives of employers and of the public authorities. Furthermore, whatever the type of the administration, the Member shall accept general responsibility for the proper administration of the institutions and services concerned in the application of the protection.

Organisation and operation of schemes in national legislation and practice

206. The administrative organisation of national social security schemes varies widely. Various solutions have been adopted by the member States, based on tradition, social structure or other characteristics specific to each country. There is therefore no single model or paradigm for the administration of social security. However, no matter how complex and multifarious the schemes, the general responsibility for the proper administration of social security still rests with the State. It often falls within the purview of the Ministry of Labour, although sometimes it may be the responsibility of the Ministry of Social Security, the Ministry of Health, or even the Ministries of Finance or the Interior.

207. Social security is directly administered by the State in many countries. (Endnote 12) The system is managed by the public authorities. When the administration of schemes is delegated to autonomous or semi-autonomous institutions, management is often entrusted to an administrative board, which usually includes representatives of employees and employers alongside civil servants from the main competent ministerial departments. The protected persons are generally represented, sometimes de facto, either in consultative committees or in the administrative bodies. In many countries, (Endnote 13) the administration of general social security schemes is entrusted to a single body, such as a social security institute, national social insurance office or national social security fund. In other countries, (Endnote 14) the administration of the various branches is divided among various bodies, while in other cases (Endnote 15) a particular body is entrusted with the management of pensions and/or old-age benefits. Lastly, in one country, (Endnote 16) the management of pensions is assigned to establishments which act as private profit-making companies, without participation of insured persons as such in the management of the insurance institutions.

208. In the light of the available information, it is clear, therefore, that there is no single model or paradigm for the administration of social security schemes. This is in keeping with the spirit of the Conventions, which impose no uniform method of organisation.

209. Although the administrative structure may vary from one country to another, it would be desirable to provide for the various interests, which should be represented in the administration. This is especially true when the administration of schemes is delegated to autonomous or semi-autonomous institutions, in which case representatives of the persons concerned should be able to participate in the administration of such institutions.

210. One last point worth mentioning is that whatever type of management is used, the institutions are always monitored in one way or another and to varying degrees by the State, in accordance with Conventions No. 102 and 128. However, the State's supervisory or monitoring powers should in no way permit it to avail itself of monies earmarked for old-age pensions. Such a system would not only run the risk of leading to a kind of indirect expropriation of contributions and interest, but might give rise to an even more serious situation by causing insured persons to lose confidence in the institutions responsible for protecting them in old age.

Right of appeal

International standards

211. The right to appeal in the case of refusal of benefit or complaints as to its quality or quantity is a principle enshrined in both Convention No. 102 (Article 70, paragraph 1) and Convention No. 128 (Article 34, paragraph 1) although neither of the Conventions stipulates what form the appeal should take. During the preparatory work for the adoption of both Conventions, however, it was pointed out that "the concept of appeal implies -- if this right is not to be fictitious -- that decisions must be taken by an authority independent of the administrative body which made the original decision. The mere right to ask for re-examination of the case by the same body is not enough to constitute an appeal procedure". (Endnote 17) However, Article 70, paragraph 3, of Convention No. 102 stipulates that no right of appeal shall be required where a claim is settled by a special tribunal established to deal with social security questions and on which the persons protected are represented. This provision was not repeated in Convention No. 128, but Article 34 of this Convention does introduce a new provision in paragraph 2 calling for procedures to be prescribed permitting the claimant to be represented or assisted, where appropriate, by a qualified person of his choice or by a delegate of an organisation representative of persons protected.

The right of appeal in national legislation and practice

212. From the available information, it appears that the right of appeal against administrative decisions concerning benefits is a recognised principle in the laws and regulations of most countries. The procedure for exercising this right obviously varies from one country to another, depending on its administrative and legal structures. In many cases, the legislation provides a right of appeal before an authority independent of the administrative authority which made the original decision. Thus, in several countries, (Endnote 18) the interested party is given the opportunity to apply to a higher administrative authority than the one which made the original decision, and/or to special social security (Endnote 19) or labour courts, (Endnote 20) the ordinary courts (Endnote 21) or arbitration courts. (Endnote 22) In some countries, the highest authority in the event of a dispute is either the competent minister (Endnote 23) or the competent state bodies. (Endnote 24) It also appears that the claimant's right to be represented or assisted is either expressly recognised in many legislations, whether through social security law or the general provisions regarding procedure, or implicitly recognised in so far as there are no provisions denying this right.

213. The right of appeal against administrative decisions taken on the occasion of application for benefits is a principle enshrined in nearly all of the national laws or regulations studied. While neither Convention No. 102 nor Convention No. 128 stipulates what form the appeals procedure should take, it would seem desirable for a number of recognised principles to be enshrined in national legislation, such as that procedures are expeditious and free of charge, and the appeal authority is independent. The claimant should have the right to be represented or assisted by a qualified person of his choice. It should be remembered that a large proportion of insured persons depend mainly, if not entirely, on their pensions for their livelihood. For them, a protracted and costly procedure could indeed amount to a denial of justice, with sometimes drastic repercussions on their everyday lives.

Equality of treatment

International standards

214. From its inception, one of the ILO's basic tasks has been the protection of foreign workers. Thus, the principle of equality of treatment for nationals and non-nationals in social security is a fundamental objective of social policy enshrined in a number of instruments.

215. Special provisions for foreign workers may be found in a number of general social security Conventions, including Convention No. 102. They may also be found in Conventions such as the Equality of Treatment (Accident Compensation) Convention, 1925 (No. 19), and the Equality of Treatment (Social Security) Convention, 1962 (No. 118), which were adopted specifically to deal with the situation of non-nationals. In addition, Convention No. 118 was the subject of a general survey carried out by the Committee in 1977. (Endnote 25) This explains why equality of treatment is not included in Convention No. 128 as supplemented by Recommendation No. 131, these questions having been dealt with by Convention No. 118. Lastly, there are two basic texts which deal specifically with the situation of migrant workers and which aim at securing equality of treatment for these workers: the Migration for Employment Convention (Revised), 1949 (No. 97), and the Migrant Workers (Supplementary Provisions) Convention, 1975 (No. 143).

216. Bearing the above in mind, the question of equality of treatment for nationals and non-nationals will be studied in the context of Article 68 of Convention No. 102. (Endnote 26) This provision, which covers all branches of social security, stipulates that non-national residents must have the same rights as national residents. However, in paragraph 1, it allows the prescription of special rules for benefits which are paid wholly or mainly out of public funds and for transitional schemes. As the Committee pointed out in paragraph 23 of its 1961 General Survey on Convention No. 102, this provision "was included to prevent possible abuses and safeguard the financial balance of non-contributory schemes, particularly as regards old-age ... benefits. It seemed necessary to permit, for example, the imposition of a qualifying period of residence on non-national residents (or nationals born abroad), although it might not be required from other residents, or of a longer qualifying period than for the latter".

217. As for contributory social security schemes which protect employees, Article 68, paragraph 2, allows for equality of treatment to be limited, for the application of any Part of the Convention, to nationals of another Member which has accepted the obligations of the relevant Part. Such equality of treatment may be subject to the existence of a special agreement providing for reciprocity. According to this paragraph, the enforcement of equality of treatment thus presupposes the satisfaction of two conditions. The first condition is achieved, ipso jure, when the non-national resident is a national of another member State which has accepted the obligations arising from the relevant Part of Convention No. 102. The second condition is potential in nature: equality of treatment may be made subject to the existence of a bilateral or multilateral agreement of reciprocity. (Endnote 27)

Equality of treatment in national legislation and practice

218. Applying the principle of equality of treatment in the field of social security raises complex technical problems which were considered by the 1977 survey by the Committee of Experts on Convention No. 118; the survey's conclusions are still valid. In this regard it is worth mentioning that only rarely has the application of this principle elicited comments from governments.

219. Most countries which have ratified either of the Conventions provide for equality of treatment either expressly, or implicitly in so far as national legislation contains no provision to the contrary; this holds true as well for most of the countries that have not ratified either of the Conventions. Only a few of the countries that have ratified either one of the Conventions (Endnote 28) or neither (Endnote 29) apply restrictions based on nationality. Some of these restrictions, however, should not be considered contrary to Article 68 of Convention No. 102, on account of the special rules States are permitted to prescribe. Usually, these take the form of a residence requirement imposed under non-contributory schemes, (Endnote 30) or a reciprocity requirement under contributory schemes. (Endnote 31)

220. In addition to the Conventions specifically dealing with the situation of migrant workers, many social security Conventions explicitly lay down the principle of equality of treatment between nationals and non-nationals. Thus, Convention No. 102 includes specific provisions stipulating that non-national residents must be entitled to the same rights as nationals, provided the application of this principle may be made subject to the adoption of special rules for non-contributory benefits and for transitional schemes, or subject to reciprocity conditions for contributory schemes.

221. An examination of national laws and regulations and the information provided by the governments shows that the principle of equality of treatment for nationals and non-nationals seems to have been widely adopted. However, it is equally clear that Convention No. 102's scope as to equality of treatment between nationals and non-nationals is substantially weakened by the possibility of making equality of treatment contingent on the existence of a reciprocity agreement in the case of contributory social security systems which protect employees (Article 68, paragraph 2). No such possibility is allowed by Convention No. 118 which also stipulates that old-age benefits be paid abroad both for non-nationals and for the nationals of the States having ratified this Convention (Article 5). The Committee therefore considers it appropriate, or even imperative, to repeat the appeal it made in paragraph 156 of its 1977 General Survey on this Convention: "It is to be hoped, in the interests of millions of non-national and migrant workers, that member States will continue to make every effort to extend application of the principle of equality of treatment as regards social security in accordance with the provisions of Convention No. 118."

222. The Committee wishes to emphasise that neither Conventions Nos. 102 and 128 nor Recommendation No. 131 prescribe equality of treatment between men and women in matters of social security. The Committee had brought this issue to the attention of the Working Party set up by the ILO's Governing Body to examine, inter alia, possible subjects for new standards. The Committee subsequently noted with interest that the above-mentioned Working Party had included this question among the subjects which might require new instruments. (Endnote 32) Therefore, the Committee would like to draw the attention of the International Labour Conference to this serious flaw in social security matters, with a view to the possible adoption of universal standards on this subject. (Endnote 33)

Suspension of benefits

International standards

223. Both Convention No. 102 (in Article 26, paragraph 3, and Article 69) and Convention No. 128 (in Articles 31, 32 and 33) provide for a number of cases in which the benefits to which a protected person should be entitled may be suspended or reduced. The list of these cases is essentially the same in both Conventions. As regards old-age benefits, however, only the following cases of suspension or reduction seem relevant.

224. Firstly, suspension and/or reduction of benefits is authorised when the beneficiary is absent from the territory of the member State. In this respect, Convention No. 128 allows suspension in such a case, except under prescribed conditions, for contributory benefit. According to Recommendation No. 131 (Paragraph 26), however, the benefits to which a person protected would otherwise be entitled should not be suspended in the event of absence of the beneficiary.

225. Secondly, suspension is authorised when the beneficiary is maintained at public expense or by social security. Whereas Article 69(b) of Convention No. 102 provides that only in cases where the benefit exceeds the cost of this maintenance, the difference should be granted to the dependants of the beneficiary, by contrast, Convention No. 128, in Article 32, paragraph 2, broadens the scope of this rule, by stipulating that "in the cases and within the limits prescribed, part of the benefit otherwise due shall be paid to the dependants of the person concerned".

226. Benefits may also be suspended if the beneficiary receives other benefits or compensation. Article 69(c) of Convention No. 102 authorises the suspension of benefits in certain conditions and within certain limits, especially when the person concerned is in receipt of another cash benefit, other than a family benefit. Furthermore, Article 33 of Convention No. 128 also provides for the reduction and suspension of benefits, subject to prescribed conditions and limits, if the beneficiary is concurrently entitled to more than one benefit. Benefits may also be suspended when the beneficiary is engaged in gainful activity. They may also be reduced if the beneficiary's earnings (or other means in the case of non-contributory benefits) exceed a prescribed amount (Convention No. 102, Article 26; Convention No. 128, Article 31).

Suspension in national legislation and practice

Suspension when the beneficiary is absent from the territory of the Member (Article 69(a) of Convention No. 102; Article 32(a) of Convention No. 128)

227. In a number of countries the laws and regulations impose no territorial restrictions on the payment of old-age benefits if the beneficiary resides abroad. (Endnote 34) In other countries, (Endnote 35) however, the laws and regulations authorise the suspension of payment of benefits if the beneficiary is absent from the national territory. This applies to nationals as well as non-nationals. Some countries (Endnote 36) make the payment of old-age pensions to non-nationals conditional upon the existence of a reciprocity agreement with the beneficiary's country of residence or of an international Convention.

Suspension when the beneficiary is maintained at public expense or by social security (Article 69(b) of Convention No. 102; Article 32(b) of Convention No. 128)

228. The legislation of many countries provides for the suspension of benefits if the beneficiary is hospitalised, (Endnote 37) serving a sentence of imprisonment (Endnote 38) or placed in a public establishment for the elderly. (Endnote 39) With a few exceptions, (Endnote 40) the legislation provides for at least the difference between the cost of maintenance and the total of the benefit to be provided to the beneficiary's dependants.

Suspension or reduction of benefits when the beneficiary receives other benefits or compensation (Article 69(c) of Convention No. 102; Article 33 of Convention No. 128)

229. Most of the national laws and regulations studied which allow a beneficiary to receive more than one benefit at a time either impose a ceiling (Endnote 41) on the total benefits, or provide for suspension or reduction of one of the benefits, (Endnote 42) when they exceed certain limits. Furthermore, most legislation prohibiting or restricting receipt of more than one type of benefit allows insured persons to choose the highest one. (Endnote 43) In a few cases, it appears that there is no restriction on receipt of more than one benefit at a time. (Endnote 44)

Suspension of benefits when the beneficiary is engaged in gainful activity (Article 26, paragraph 3, of Convention No. 102; Article 31, paragraph 1, of Convention No. 128)

230. Many of the laws and regulations studied make the granting of benefits contingent upon actual cessation of gainful employment, (Endnote 45) or prohibit concurrently engaging in an occupational activity or an insurable activity. (Endnote 46) In some cases where the exercise of an occupational activity is authorised by law, (Endnote 47) the benefits are subject to a ceiling, which is determined by the earnings and/or the sum of the pension and the earnings. Pensions may be suspended or reduced accordingly.

231. It is important to emphasise that the provisions of Convention No. 102 and Convention No. 128 permitting cases of suspension of benefit are in fact flexibility clauses designed to take account of the range of economic, social and legal situations in various countries. Obviously, these provisions are optional in that the States are not obliged to avail themselves of them. As they constitute exceptions to the general rules laid down in these Conventions, however, it would be desirable that their application be more restrictive so as to avoid any abuse which might result from drafting suspension clauses in national legislation in excessively broad terms.

232. From the examination of the available information and of the national laws and regulations, it is clear that the types and definitions of possible cases of suspension provided for in the Conventions cover most of the situations provided for in national law and practice. However, in accordance with Convention No. 128 (Article 32, paragraph 2), it would be desirable that in certain cases of suspension part of the benefits otherwise due be paid to the dependants of the person concerned, particularly to their children.

Endnotes

Endnote 2

Endnote 3

Endnote 4

Endnote 5

Endnote 6

Endnote 7

Endnote 8

Endnote 9

Endnote 10

Endnote 11

Endnote 12

Endnote 13

Endnote 14

Endnote 15

Endnote 16

Endnote 17

Endnote 18

Endnote 19

Endnote 20

Endnote 21

Endnote 22

Endnote 23

Endnote 24

Endnote 26

Endnote 27

Endnote 28

Endnote 29

Endnote 30

Endnote 31

Endnote 32

Endnote 33

Endnote 34

Endnote 35

Endnote 36

Endnote 37

Endnote 38

Endnote 39

Endnote 40

Endnote 41

Endnote 42

Endnote 43

Endnote 44

Endnote 45

Endnote 46

Endnote 47

Cross references
Constitution: Article 19
Constitution: Article 22
Constitution: Article 35
Conventions: C035 Old-Age Insurance (Industry, etc.) Convention, 1933
Conventions: C036 Old-Age Insurance (Agriculture) Convention, 1933
Conventions: C037 Invalidity Insurance (Industry, etc.) Convention, 1933
Conventions: C038 Invalidity Insurance (Agriculture) Convention, 1933
Conventions: C039 Survivors' Insurance (Industry, etc.) Convention, 1933
Conventions: C040 Survivors' Insurance (Agriculture) Convention, 1933