A new retirement benefit scheme, called 'Voluntary Pension System (VPS)', would allow every citizen having a National Tax Number (NTN), whether formally employed in the organised sector or not, to get a regular pension from the time of retirement.
The VPS is a voluntary, defined contribution system where anyone in Pakistan over 18 years age with a valid NTN can choose to create an account with any of the approved pension fund managers and may contribute up to 20 percent of his or her net taxable income.
Dr Salman Shah, Advisor to the Prime Minister on Finance, SECP Chairman Dr Tariq Hasan and representatives of World Bank (WB) highlighted the salient features of the new scheme at a seminar organised by the Securities and Exchange Commission of Pakistan (SECP).
Dr Tariq quoted Prime Minister as saying, "the VPS is the first regulated pension scheme for private sector which is a new step towards socio-economic welfare of the private/self-employed individuals. The scheme would be a giant leap towards better and faster socio-economic development".
Dr Salman said that VPS is the only scheme that allows everyone with an NTN to get a regular pension. VPS is a first-of-its-kind scheme for two reasons. First, majority of current pension schemes are defined benefit schemes. Such schemes are limited in number targeting small audience.
Second, under the VPS, pension fund managers would provide the individual what he never had before--the power of exercising his choice. An individual can choose between competing pension fund managers in addition to deciding the level of risk and return of his or her portfolio. Such options are not provided under the systems currently offered.
He said that the government's current privatisation policy is playing a major role in the expansion of the markets that would be needed by the pension funds. "Both pension fund participation in equity and privatisation of public sector enterprises should go side by side, so that both have very good chances of success," he added.
Dr Shah said that old age population as a percentage of total population is increasing and it is getting increasingly difficult to pay for their costs. In Pakistan, this problem is expected after 30 years. By that time, a large percentage of population should be enrolled in the VPS and would be able to receive monthly income in accordance with what they contributed in the earlier years.
He said that the applications of VPS are not just limited to private employees. It will prove to be a great system for government employees as well. Presently, annual pension expenditures for the military and government employees are approaching Rs 50 billion and are expected to rise with time.
The VPS can be a great alternative to the current defined benefit system and provide similar benefits to future retirees with lower cost to the government.
Dr Shah said that the CBR would make the relevant amendments to the tax structure in the forthcoming Finance Bill to give tax incentives to the users. Being a tax-incentive scheme, co-operation and speedy resolution of issues between SECP and CBR would be a key factor for the initial success of the scheme, he added.
Dr Tariq said that the VPS is based on several tax incentives and a large part of the population would benefit from it.
While tax incentives encourage people to participate, and little penalties on early withdrawals promote long-term savings, participants still get a lot of control over the income that they will ultimately receive after retirement.
The VPS has one considerable advantage over the defined benefit system. People not only have power over how much to invest in their pensions, and how to invest it, but their savings stay with them even if they change jobs, he added.
He said that the applications for Pensions Fund Managers will be thoroughly scrutinised and assessed before allowing them to manage such funds. These Pension Fund Managers would be carefully selected, based on past performance and current management and practices.
For long-term success of the VPS, it is imperative that it be allowed to compete with existing schemes on level ground. This will require certain changes in the current tax structure and SECP recommendations would be sent to the CBR in the near future.
Dr Tariq said that following the launching of VPS, next step is to effectively monitor it, with proper collection of data in the coming years. SECP will seek to consolidate all pension schemes, for effective monitoring and regulation, as well as data collection and analysis that would be helpful in formulating future policies. Eventually, SECP will allow pension fund managers to invest in foreign markets, as well as in real estate.
With taxation benefits, as well as introduction of further long-term investment opportunities, it is hoped that VPS will become the foremost vehicle for providing post-retirement income in Pakistan and will help its contributions in maintaining their living standards after retirement.
Richard Hinz of Social Protection Unit, World Bank, appreciated SECP for evolving an excellent private pension system in a short span of time. He said that pension systems reforms needed to be evaluated on their ability to meet objectives and not any particular structure. The primary goal of a pension system was to provide adequate, affordable, sustainable, and robust old-age income. Talking about ideal pension systems, he said the VPS could be used as a model for the rest of the developing world.
Anne Maher, Chief Executive Director of Pension Board, Ireland, talked about Ireland's experiences in particular and those of Europe in general. She highlighted the need for effective regulation and talked at length about the regulatory framework in Ireland. She concluded by saying that while there was no single solution or best practice to fit every country, people could still learn from one another.
Robert Palacios, of World Bank, talked about growth of pensions funds in Asia and operational frameworks of certain countries such as India, Thailand, and Hong Kong. He said that there were encouraging examples in the Asia-Pacific region and he was optimistic about the growth of the VPS in Pakistan.
Other speakers at the seminar were Naseem Beg, Chief Executive, Arif Habib Investment Management Limited, Samee-ul-Hassan, Consulting Actuary, Akhtar Hassan (Pvt) Ltd, and Dr Susan Thomas, Professor, Indira Gandhi Institute of Development & Research. They touched upon various aspects of VPS, international best practices such as those in India, reforms in Pakistan's pension system and impact on the socio-economic condition of the people.
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