KARACHI, Aug 27: The task force on private pension funds set up by the Securities and Exchange Commission of Pakistan (SECP) has finalized its report which is being fine-tuned by the Commission staff for submission to Finance Minister Shaukat Aziz early next month.

“The focus of the report is on asset allocation, investment holding and safeguards of fund,” a source here said.

For the pensioner, the asset allocation is an issue of risk and reward on investment mix of corporate bonds, government papers and equities. The mix is linked to the age of the individual. It is assumed that the younger an individual, the more risk he can take.

On the basis of the recommendations of the SECP task force, the rules and regulations would be formulated by the government for launching the pension scheme for the private sector.

Sources here said the task force had adopted in its recommendations the practice of private pension funds elsewhere in the world. It is the individual who takes the risk and the employer’s responsibility is restricted to making the contribution on behalf of the employee as long as he is in service. If the employee changes his job, the new employer provides the contribution. Thus an individual parks his contribution in the fund and shares the end-benefit in proportion to his contribution.

In a changing environment, the corporates are unable to provide a pre-determined pension benefit to the employee at the time of retirement. In developed markets, the private pension funds are filling the vacuum. But in the change-over, the facility of pre-determined or defined benefit disappears.

Speaking at a ceremony to honour NIT for the best performing mutual fund for 2002-03, Finance Minister Shaukat Aziz advised the mutual fund industry to examine the possibility of meeting the needs of retiring people by offering them retirement pension funds. In his remarks, the finance minister, however, did not rule out defined benefits for pensioners.

In a written speech, he asked the mutual fund industry to “look at the options like the defined benefits, which will ensure a pre-determined pension to a retiring person or defined contribution scheme, which in turn will determine the benefits for the retiring person depending on the profitability of the investments by the mutual funds.” However, the industry is unlikely to opt for defined benefits.

At the launch of the HBL House Finance Scheme, the finance minister said the pension funds could be productively invested in corporate bonds of triple AAA companies, particularly the multinationals. It is only

Pension scheme big corporates which have pension scheme for their employees. These funds have been invested selectively in Term Finance Certificates.

The SECP task force has had four meetings to finalize the report. It comprises Chowdhry Anwar, actuary at the Ministry of Finance, Nasim Beg, Omar Morshed, Sadia Khan and Ayesha Beyg.

The Ministry of Finance has also set up an office of an actuary to look after the pension in the public sector. Officials say that pension fund reforms are long overdue. There are big pension funds and avenues should be found to invest these funds. These unfunded liabilities should have corresponding assets.

Similarly, they say that the corporates have to budget pension payments. They have to match maturity of assets with payments. For this, the company must be healthy and fit enough to honour pension payments. Many local corporate deaths deny the retired personnel of pension benefits. It is different from governments which enjoy the “AAA” status because of their capacity to raise taxes. In theory, a sovereign default is possible but happens in extremely extra-ordinary circumstances. Recent example is Russia.

Liabilities (pension cash flows) and assets should match in the long-term as pension liability is a contingent liability, says an official.