Topic 1: The World Bank’s Five Pillar Framework


Learning Objectives

After reading this topic, you should be able to answer these questions:

  • What is a pension system and a pension plan?
  • What are the ‘five pillars’ of a pension system?
  • What are the process criteria for national pension system reform?
  • What are the ‘pillars’ of the Canadian Pension System?
  • What explains the emphasis on the five pillars in a national pension system?

Data on pension assets from different countries reported in the Global Pension Asset Study, show that the share of assets under management under different occupational pension designs differ significantly, between countries. Countries like Canada, Netherlands and Japan have more than 90% of their pension assets under defined benefit plans. Other countries have less, with the US having 40% and Australia only 13% of its pension assets under defined benefit plans. What explains this variation in assets in different types of pension plans?  How does society provide for old persons who never participate formally in the paid work force, not necessarily, because they are unwilling to work, but more likely because they participate in unpaid work in the family; family businesses or farms where their contribution is never formally monetized and paid as wages? How do societies choose to provide for the post working years of different segments of the population who either because of the form of their participation in the labour market or because of lack of skill sets or some health-related issues or being unable to find employment, do not have an occupational pension? These are some of the questions that will be discussed in this topic, and a framework developed to explain pension system design.


The World Bank’s (2005) Pension Reform Primer is a useful resource for updates on country experiences and also as a toolkit for the design and implementation of pension reform. Explore the resource at:

The World Bank’s (2008) Five Pillar Framework  is  a conceptual  overview of national pension systems around the world. A national pension system is the set of plans that together constitute a nation’s approach to old age financial security. The various pension plans for the provisioning of old age financial security in different countries can be broadly classified into five groups or pillars, depending on their funding mode and target population.  Thus, at a conceptual level the five pillars together constitute a pension system and the individual pillars are the different pension plans or designs.

The generic characteristics of the five pillars are summarized in Table 2.  The five pillars can be classified into two categories depending on their financing mode. One category of financing is called ‘pay-as-you go’ or PAYGO (hence unfunded) and the other group of pillars falls under the asset based or funded category. For example, the programs under pillars 0 & 1 are unfunded and under the PAYGO category and pillars 2 & 3 are under the funded category. This means that promises and payout of programs under pillars 0 & 1 are not accumulating savings or have assets in place but are financed out of the current tax revenues. Pillars 2 & 3, in contrast, have savings being accumulated and invested or have assets in place for future payouts. Pillar 4 is of specific interest given the increasing longevity. Labour market changes will be necessary to reflect the new normal for retirement where older workers may seek to combine their retirement with limited hours of paid work. Similar flexibility in work place may be required in workplace practices for the so-called sandwich generation with the dual responsibilities of caring for aging family members (parents) and bring up children.

Table 2
The Five Pillars of Modern Retirement Systems

Pillar Essential Characteristics
Pillar 0 Non-contributory minimal assistance to the poor, typically means-tested
Pillar 1 Public (government) pension (social security) schemes to provide for basic needs; contributory, redistributive, and typically financed on a pay-as-you-go basis
Pillar 2 Private occupational pension schemes (sponsored by employers) to supplement Pillar 1; can be voluntary or mandatory (i.e., required by the state); and can comprise defined benefit (DB) or defined contribution (DC) plans
Pillar 3 Individual savings to provide for future withdrawals and/or annuities in various forms; can be voluntary, but often enforced by the state
Pillar 4 A set of labour market policies to extend work life and enable more part-time work for the formally retired; informal family support as additional dimension

Note. Adapted from World Economic Forum (2013).


The Five Pillar Framework is the template that the World Bank uses for recommendations regarding  reform of country-wide pension systems. The template allows for the bench marking and  identification of the future structure and emphasis of a nation’s national pension system. It begins with the identification of the initial conditions and concludes with comments on the reform process. Thus it identifies a framework that can be applied to assess the existing state of a national pension system and proposals for  how to move the pension reform process. The World Bank Pension Conceptual Framework (2008) states: “A major emphasis should be given to the process of pension reform, including what are commonly termed the political economy aspects (p.6).

The World Bank’s  Pension Primer identifies three relevant process criteria for pension: 1) a long-term, credible commitment by the government; 2) local buy-in and leadership; and 3) sufficient capacity building and support for implementation arrangements. The descriptions of these criteria are summarized below in Table 3.


Table 3
Three Relevant Process Criteria for Pension Reform

Criteria Description of Reform
A long-term, credible commitment by the government
  • Aligned with the political economy of the country and supported by a clear political mandate
  • Political conditions for implementation of the reform needs to be sufficiently stable to provide a reasonable likelihood for a full implementation and maturation of the reform
Local buy-in and leadership
  • Includes credibility with the population at large
  • Politicians and technicians of the country prepares for pension reform, and communicates to the population at large to gain acceptance
Sufficient capacity building and support for implementation arrangements
  • May include, reforms in governance, the collection of contributions, record keeping, client information, asset management, regulation and supervision, and benefit disbursement.
  • Initial establishment of a legal framework may need to be followed-up with extensive local capacity and institution building.


There are significant differences between countries in the relative emphasis on these pillars both in existing national pension systems and and the various proposals for their reform. For example, Grech (2017) compared state pension reforms in ten EU countries and found a range of variations in the pension reform process before and after the financial crisis in 2008. In Canada, the mix and emphasis of pension and retirement plans using a two by two matrix is enumerated in Table below. A detailed description of the individual plans in the Canadian pension system is discussed in a subsequent topic in this module.What drives these  variations in emphasis on individual pillars in existing national pension systems and in the various proposals for reform?


Table 4
Two by Two Matrix of Pension Plans in Canada by Ownership/Governance and Funding



  • Canada Pension Plan (CPP)
  • Old Age Security (OAS)
  • Guaranteed Income Supplement (GIS)
  • Guaranteed Annual Income System (GAINS) – Specific to        Ontarians


  • Individual (Employee)
    • Registered Retirement Savings Plan (RRSP)
    • Tax Free Savings Plans (TFSA)


  • Occupational (Employer/Employee)
    • Defined Benefit (DB)
    • Defined Contribution (DC)
    • Pooled Registered Pension Plan (PRPP)





The Primer (World Bank, 2005) does not elaborate what motivates the emphasis on various pillars in a national pension system and what can motivate the pension reform process. . What influences the buy-in and the resolve of the leadership that results in different emphases in the pension systems around the world?  Without this analytical insight into the variations in the emphasis on the different pillars in national pension systems in different countries, we cannot explain a country’s existing pension system design and how it should respond to change or determine its objective for reform. In the absence of an analytical framework, expediency of asymmetrical vested interests will drive the pension reform process. Pension reforms will  reflect the priorities of asymmetrical vested interests such as the financial services industry or the stakeholder groups who have a presence at the negotiation table at the expense of those who cannot lobby their interests or those who are unrepresented at the negotiation, such as young adults who vote less frequently or the future generations yet to be born. An analytical approach to existing and proposals for reform in national pension system design is a requirement for a long term commitment or a buy-in without which we cannot have a sustainable pension system design that represents all stakeholder groups.

An analytical approach to pension plan design and pension systems architecture will be developed next.  The emphasis on the different pillars in different  national pension systems is explained by a a detailed examination of the perspectives on rationality that drives our decisions; how we make intertemporal choice;  and how social contracts motivate the rules of cooperation in a society.




  1. Five Pillars of Pensions (World Bank)
  2. World Bank’s Process Criteria for Pension Reform
  3. Pay as You Go
  4. Canada Pension Plan (CPP)
  5. Tax Free Savings Accounts (TFSA)
  6. Registered Retirement Savings Plan (RRSP)
  7. Old Age Security (OAS)
  8. Guaranteed Income Supplement (GIS)
  9. Defined Benefit Plans
  10. Defined Contribution Plans
  11. Pooled Registered Payment Plans




  1. Distinguish between a pension plan and a pension system.
  2. Pension systems in different countries can be mapped into ‘five pillars’ as proposed by the International Bank for Reconstruction & Development (IBRD). What are these five pillars? Map Canada’s pension system into the ‘five pillars’ framework.
  3. What is the process criteria recommended by the IBRD for pension system reform?



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