KARACHI, April 3: The tax incentives and regulatory framework for a voluntary private pension fund scheme that would shift responsibility from firms' to individuals to pick up saving products and make payments
, is expected to be announced in the next budget.
Employees would, however, be able to make payments to the fund managers through their employer(s). The risks, if any, would be that of the individual and not the company.
In the current business and low interest rate environment, a few major firms that had pension schemes for their employees, are finding it difficult to manage defined benefits with low yields on their pension investments. Only Term Finance Certificates (TFCs) offer limited avenue on a selected basis.
The companies 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 payments. Many weak local corporates deprive the retired personals of their pension benefits.
A flexible labour policy adopted by corporates are also making firm's pension schemes irrelevant.
The governments in developed economies are trying to shift the burden of paying for pensions off the state and on to the individuals. Pakistan is also revamping the pension scheme for government employees. These unfunded liabilities need to have corresponding assets. There is no pension scheme for the private sector employees with the exception of a few major companies.
In a bid to fill the void, the government had set up a task force last year on private pension fund. Its report has been submitted to the ministry of finance after scrutiny by SECP. To opt for the best possible model, finance minister Shaukat Aziz has asked Etrat Rizvi, a senior SECP official, to study the latest system inducted in Kazakhistan, before giving final touches to the pension rules.
The task force is reported to have spelt out the regulatory and the fiscal incentives required to boost the private pension industry. It is stated to have recommended that anyone not covered by an employee-related deferred benefit should be entitled to tax relief upto 20 per cent on their annual income.
In recent speeches, Shaukat Aziz has asked mutual fund industry to "look at the options like defined benefits which would ensure a pre-determined pension to a retiring person or defined contribution scheme, which will in turn determine the benefits for the retiring person depending on the profitability of the investments by the Mutual Fund."
Sources here said the task force has shown preference to shifting global practice in which the individual takes the risk and the employers' responsibility is restricted to make the contribution on behalf of the employees as long as he is in service. If the employee changes his job, the new employer provides the contribution. Thus, the individual parks his contribution in the fund and shares the end-profit in proportion to this contribution.
However, it is believed that the pension funds would be managed through trusts which would have representatives of employers and independent trustees. The sales and purchases would, however, be conducted by the Mutual Fund managers who create the pension fund.
To take care of the risk and reward issue, the task force has focused on asset allocation, investment holding and safeguards of fund. 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.
