Ask a teenager what he would do to earn a living after he turns 60 he is likely to laugh it off. Time is on his side. He wants to experience life first-hand while preparing for his lifetime career.

But ask a grey-haired financial guru what he can offer for the young — and he will put forward an investment plan spread over decades. Private pension schemes fall into this category.

Four fund managers are set to offer these pension schemes before the close of this fiscal year or early next year. Arif Habib Investments, Atlas Asset Management, JS Abamco and Meezan Asset Management, are going to get such schemes approved from the Securities & Exchange Commission of Pakistan (SECP) before launching them. They have already got licences to act as pension fund managers.

“We expect to launch our respective voluntary pension system (VPS) within next two to three weeks,” says Mr Nasim Beg, CEO of Arif Habib Investments.

The government has already offered very attractive tax incentives for private pensions. Tthere is a tax credit up to 20 per cent on one’s income each year for the amount invested in voluntary pension scheme. (But this tax credit is available up to half a million rupees’ investment). And the money invested in VPS will accumulate tax-free over the years’ till one’s retirement.

“The only thing the government can now offer is that the pension should be drawn tax-free,” says Nasim Beg.

It is not clear whether the government would announce this incentive in the next budget. But fund managers say as elections draw closer, the government may entertain this and other demands aimed at broadening the social safety net.

Under the rules that govern VPS, anyone in Pakistan over the age of 18 years and having National Tax Number can open an account with the approved pension fund managers. He may contribute up to 20 per cent of his net taxable income towards a pension scheme of his choice.

In the government pension, the amount of pension payment is based on the last drawn salary of an employee and thereafter is adjusted for inflation from time to time on its (government) own discretion. On the other hand, VPS is a voluntary savings scheme open to both employed and self-employed people. “Their accumulated savings would determine the likely amount of pension, which is not guaranteed and is dependent on whatever the investments would yield,” says a pension fund manager.

Under the rules, people investing in VPS would not only be free to decide how much to invest in it, and how to invest, but their savings would stay with them even if they change jobs. This gives VPS a clear advantage over other schemes.

Despite this and several other advantages including the tax rebate, it would be too optimistic to expect that private pension schemes would be an instant success. Some two million employees of the government including those from the armed forces currently get pensions from the government. Fund managers fear they would not be able to sell private pension schemes even to a fraction of this number in the first two to three years.

They even find it difficult to assess the size of the private pension fund market. But to begin with they can target only a percentage of the taxpayers in the country, which is very small relative to the total population. At end-June 2006, there were 1.5 million taxpayers equal to about one per cent of the population.

But can’t the fund managers reach out to more than four million overseas Pakistanis to sell pension schemes? “Voluntary pension schemes would be open to overseas Pakistanis as well provided they register themselves with the tax authorities here,” explains Nasim Beg.

The question of marketing these schemes abroad would arise only if these are successful at home and that is not too easy as Pakistanis have poor saving habits—let alone very long term savings spread over decades.

“Private pension policies by their nature should begin with long-run targets,” says Mr. Khalid Jamil, ex-president Financial Markets Association of Pakistan.

Experts say that in recent years two trends have emerged globally. The first is toward greater pre-funding of pensions and the second is toward greater competition and private sector provision of pension services. They say that by allowing private pension funds, Pakistan is going to benefit from the second trend, the hallmark of which is public private partnership.

But regulations are not enough to protect private pension fund members, especially when the consumer of such products has little or no experience. Clearly, a strong regulatory authority would be needed to enforce accounting, reporting, investment and other rules.

From the public point of view, private pension schemes should be inflation-protected and adjusted on a monthly basis to the movements in consumer price index. (CPI). But fund managers say this would not be practical for them because that would require employment of the pension fund contributions in high yielding and high-risk investment avenues.

Former SECP chairman is on record saying that SECP may eventually allow pension fund managers to invest in foreign markets and in the real estate. If that happens, then the fund managers can, perhaps, think of offering inflation-protected schemes.

Professional asset managers are yet to tap real estate market as the market lacks full documentation and formal price-discovery mechanism. The government is busy removing such hurdles to facilitate creation of Real Estate Investment Trusts and other modes of investment into real estate.

There is also a need to encourage private pension schemes entirely as a matter of choice. “That is, an individual may have to belong to an approved contracted-out scheme of private pension fund managers, but could not be forced by their employer to join a company scheme,” says Mr Jamil. Under the VPS rules, individuals are free to switch in their working life between different types of pension plans.

Experts say that as specialised fund management companies will be handling private pension schemes this will lead to improved investment results as long as strictly monitored investment guidelines, applicable to pension funds, are in place. The modest average return on these instruments undermines one key purpose of a funded approach to pension reform, namely future cost reduction.

The active participation of pension fund managers in domestic capital markets will also lead to more pressures for improved corporate governance and greater market stability. Pension fund managers typically take a long-term view of the corporations and capital market instruments in which they invest (for example they have the largest appetite to absorb 30-year Pakistan Investment Bonds). They pay close attention to the performance of corporate managers.

Many in the financial sector say that private pension schemes can be marketed among certain communities settled in urban areas.

Several communities from rural areas and their families do need some degree of social protection in the urban areas where they live. A large number of Pathans living in Karachi and engaged in transport industry is one example. This is also important for the stability and the security of the communities in which they live. “This applies also to the rapidly growing population of towns and villages with an urban character that are not classified as "urban" and therefore not covered by any pension fund schemes,” says an analyst.

Analysts point out that these schemes also involve risk sharing between individuals and the pension schemes fund managers. This issue is an important one in a mandatory transition strategy, particularly where individuals perceive the change as implying a change in the risk environment.

However, the voluntary nature of contracting out presumably permits those with different risk-return trade-offs to choose alternative strategies. The issue therefore is one of whether people fully understand the risks involved in alternative pension choices.