Does insurance improve informal sector participation in a voluntary,defined contribution pension system?

Abstract: An important goal of pension reform in low-income countries is to increase coverage from the current abysmally low levels. One approach is to encourage voluntary savings in pension accounts. A pension product, however, locks up wealth for several decades until retirement. Models of consumption with liquidity constraints show that the precautionary saving motive gets exacerbated, especially for low income households. Participation in contributory pension programs, therefore, can be onerous for low-income households. It follows that if other financial products, such as credit and insurance can be provided to relax liquidity constraints, pension participation and persistence of contributions would improve. In this paper we ask if the availability of insurance affects participation of low-income workers in pension products. We find that insurance participation does improve pension participation