December 11, 2006	Monday	Ziqa'ad 19, 1427

THE 1990s was the decade of global pension reforms. A number of countries moved swiftly in the direction of government mandated but privately provided individual retirement plans.

Historically, Pakistan has often lagged behind in innovation of economic policies. However, despite a delayed response by the federal government, the Securities and Exchange Commission of Pakistan (SECP) is now ready to award five licences to pension fund managers under the Voluntary Pension System (VPS) Rules, 2005, anytime this month.

All of the five pension fund managers would have their headquarters in Karachi and branches in various major cities of the country.

Pakistan provides a market of an estimated 25-30 million men and women to the voluntary pension schemes. The authorities also claim that the money in the privately held and administered accounts under the VPS would strengthen capital markets and promote savings and investments.

According to the VPS, all Pakistani nationals above the age of 18 years who have a valid National Tax Number and are not employed in any position entitling them to benefits under any approved occupational pension scheme would be allowed to contribute to such pension funds. They would be assigned a distinct individual pension account number by the Fund Managers.

According to the VPS rules, the retirement age shall be between 60 and 70 years. But, if any participant suffers from any disabilities – which renders him unable to continue any employment he may - he would be treated as having reached the retirement age on the date of such disability.

Such disabilities include: loss of two or more limbs or loss of a hand a foot; total loss of eyesight; total deafness in both ears; very severe facial disfigurement; total loss of speech; paraplegia or hemiplegia; lunacy; advance cases of incurable diseases; or wound injuries or any other disease etc resulting into disability due to which the participants of the scheme are unable to continue any work.

On retirement, the participants can withdraw up to 25 per cent of the amount in their individual pension accounts as cash. They would use the remaining amount to purchase an annuity from a life insurance company of their choice. They can also enter into an agreement with the pension fund manager to withdraw from the remaining amount in their accounts, monthly instalments till the age of 75 or earlier as per an income payment plan approved by the SECP.

Participants who want to withdraw their money before retirement from their individual pension accounts would be subject to the conditions laid down in the Income Tax Ordinance, 2001, and such withdrawals would be subject to withholding tax and any other tax penalty. The fund managers would deposit in the government treasury, all the money deducted through this process.

In the VPS rules, there are also some benefits before retirement as in case of the death of a participant and the payment to bereaved families. The rules also provide a comprehensive plan for setting up of pension fund managers and related matters.

CONCERNS: However, a deeper look into the Pakistani VPS model reveals that it is very much inspired from the 1981 pension reform of Chile. Pakistan is not the only country which was inspired by Chile. Over the last two decades, at least 12 Latin American countries have tried to copy this somewhat successful pension model for the ageing people including Argentina, Bolivia, Colombia, Costa Rica, the Dominican Republic, El Salvador, Mexico, Peru and Uruguay.

But, all the imitators failed to reap the same benefits Chile is enjoying from its indigenous pension reform. On the contrary, they ended up with several complications.

According to some pension experts, Pakistan would also face the same problems if it fails to tailor the Chilean model according to its own specific needs and social environment. They are of the view that the government should look into a number of factors while going ahead with the much-needed private pension system.

First of all, there is the issue of gender equity within a fully privatised pension scheme. Though women constitute more than half of Pakistan’s population, they earn less money and work fewer years than men. Since pension benefits in private systems are strictly determined by the overall amount of money contributed to them, women are likely to receive considerably lower benefits. Public pension systems, in contrast, have the possibility of introducing credits for childcare that reduce this disadvantage.

Besides, different sub-groups within each gender are likely to benefit differentially from the new system. Low earners of both genders could benefit disproportionately less than their highly-earning counterparts.

Second, there is the issue of the lower yield. Except for some tax incentives, there seems to be no profit related incentives that could attract people to this new system. Even, in Chile the yield issue has proved a matter of great concern for the governments from 1982 to 1998. For Pakistan, increasing the overall pension coverage would be a big challenge keeping in view the rate of return.

A question also arises that whether the money held in private accounts would strengthen capital markets, savings and investment? A number of studies have recently concluded that, at best, this effect has been marginal even in Chile.

Similarly, some of the experts are of the view that workers with stable careers and relatively high earnings would be more benefited compared to low-income workers with highly unstable employment record.

Interestingly, private administration of pension funds is a profitable business in most Latin American countries. In Chile, the people in general have also benefited from the macroeconomic effects of this reform given that it helped to develop the capital markets, the insurance sector and provided resources to finance the expansion of credit market to finance mortgages of new home owners.

However, the main concern is the distribution of benefits. So far, people with stable working life careers are the ones benefiting from this new system.

Another important issue for Pakistan is the coverage of the VPS. It seems that the coverage of the new system would be minimum across the country’s labour force. Argentina, for instance, barely touched the 30 per cent mark; in Peru it is about 15 per cent, and in Bolivia 10 per cent.

In fact, reforms were not designed to be more inclusive in these countries. This created new types of inequalities in their labour markets and exacerbated the existing ones.

For the smooth sailing of the VPS, the SECP would have to ensure that the system is efficient and well diversified. The system should continue increasing its coverage by getting more workers.

And, last but not the least, the VPS would have to focus on the low income groups.