The Role of Pensions in Pakistans Social Security Systems

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The Role of Pensions in Pakistans Social
Security Systems

• Omer Morshed
• 11 August 2005

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Social Security Systems

• Different countries define social security
  systems differently. A fairly comprehensive
  definition was that used in Japan by the Advisory
  Council on Social Security in a report of 1950 .
  This is as follows
• "Social security systems mean the systems to
  enable every citizen to lead a worthy life as a
  member of cultured society. Social security
  systems provide countermeasures against the
  causes for needy circumstances including illness,
  injury, childbirth, disablement, death, old age,
  unemployment and having a lot of children by
  implementing economic security measures through
  insurance or by direct public spending.
• Social security systems ensure the minimum level
  of living to the needy by public assistance, and
  they also promote public health and social
  welfare."

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Components of a Social Security System

• Old-age, invalidity and survivors
• Pensions or, more completely, Retirement Benefit
  Schemes
• Employment Injury
• Sickness and Health-care
• Unemployment benefits
• Family benefits

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Where does Pakistan stand on Social Security ?
Large amount of individual philanthrophy not
documented
Source of Table ILO - Social Protection -
Financial, Actuarial and Statistical Services
Branch - 1996
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Where Does Pakistan Stand ?
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Where Does Pakistan Stand ?
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Pensions - Where Does Pakistan Stand ?
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Where Does Pakistan Stand ?

• Not currently at a desirable level with respect
  to our social security system including, more
  particularly, our arrangements for retirement
  benefits/ savings
• Historically the social security system in the
  country (and, for that matter, in the region) has
  been largely family based, with the family
  stepping in in times of need
• More particularly children support parents after
  retirement.
• Is this system sustainable in the long run ?
• Perhaps not as trends are beginning to change.
• As family sizes shrink and the population ages
  there would be increased pressures on the working
  population which, almost certainly, will cause
  severe social strain unless supported by a
  credible social security system

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Retirement Benefit Schemes Role

• The basic purpose of retirement benefit schemes
  is to provide financial resources after
  retirement
• The prime role is, therefore, social
• The requirement for the government/ employers to
  provide of retirement benefits is, therefore,
  often a part of social security legislation
• There is also a savings element deferring
  consumption of earnings for a time when earnings
  disappear but there is still a need to consume.
• Various models for providing pensions exist
  throughout the world, ranging from full
  responsibility resting with the state (in
  socialist economies) to economies where very
  little is done by the state, with the exception
  of public servants
• Systems are, however, becoming increasingly
  standardized, not least because of the
  intervention of international lending agencies,
  who are promoting a standard model for pension
  schemes, based on a multi-pillar concept

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Pensions The World Bank Model
Objective
Redistribution
Savings
Savings
Minimum Pension
Occupational Pension
Individual Accounts
Form
Tax Financed
Fully Funded Regulated
Fully Funded Regulated
Financing
Mandatory State Pension
Mandatory Occupational Schemes
Voluntary Individual Ret. A/cs
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Fitting the Standard Model to Pakistan
Government/ Public Sector
Government Pension and Contributory Provident
Fund
EOBI
Pension, Gratuity, PF
Large/Medium Private Sector
VPS
Small/Private/ Self Employed
VPS
?
?

Agricultural Workers
?
?
?
Mandatory State Pension
Occupational Schemes
Individual Ret. A/cs
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Issues

• Large Implicit Debt re Government Pensions
• Do we have an effective first pillar ?
• What is needed to strengthen and promote the
  second pillar ?
• What impact will the VPS have ?

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Govt Pensions Implicit Debt

• Government schemes (especially military)
  extremely generous relative to government pay
• Coupled with benefits such as free medical
  benefits government sector (again especially
  the military) the only one which has effective
  social protection
• There is, however, a large cost for this, being
  paid by the rest of the country including the
  very poor
• More importantly there is a large deferred and
  unaccounted for liability being passed on to
  future generations
• Government has examined the issue but a
  resolution appears to be elusive
• Likely to be painful to those who have a vested
  interest hence necessary decisions are not
  taken.

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EOBI The First Pillar ?

• EOBI theoretically forms the first pillar
• There are, however, some significant issues
• Very limited coverage
• Serious concerns about viability, especially
  following the withdrawal of the Governments
  financial support
• Significant issues with respect to administration
  of the scheme
• In the past some suggestions have been made to
  convert the scheme into a defined contribution
  one
• Misplaced concept as the first pillar must,
  almost by definition, have a target (defined)
  benefit structure

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EOBI - Coverage

• In 2002 Pakistans work-force was estimated by
  the Pakistan Labour Survey at 43 million
• - 92 were deemed to be employed
• - of the employed 64 worked in the agricultural
  or related sectors
• EOBIs coverage was under 2 million insured
  persons
• Coverage is, therefore, minimal
• Efforts at enhancing coverage have focused around
  redefining the employers covered by the scheme to
  include smaller employers
• Most significant issue, however, is that there is
  no coverage for rural areas where the majority of
  Pakistans workforce resides
• Protection taken in definition of this workforce
  as self-employed.
• The most needy are, therefore, conveniently
  removed from even active consideration of how to
  bring them into the net.

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EOBI Financial Viability

• EOBIs financial viability continues to be an
  issue
• Discussions on funding pattern have not led to
  any firm conclusion. EOBI continues to function
  on a partially funded basis with a large
  deferment of cost to future generations
• Without really defining who in the future
  generations will pay this deferred cost
• Even using the partially funded basis the scheme
  is not viable
• No serious thought being given to sort out this
  issue

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EOBI Image and Systems

• Large improvements made in last few years
• Still continues to be a major problem
• Still perceived as a tax
• Corruption still prevalent at lower levels,
  leading to avoidance and, therefore,
  ineffectiveness
• Need to continue the improvement brought around
  in the last few years

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The Second Pillar - Occupational Schemes

• Three major types
• Gratuity (mandated by law for large employers)
• Provident Fund
• Pensions
• Bulk of legislation/regulation focused around tax
  treatment
• Very little available to ensure protection of
  benefit rights (other than Provident Funds)
• Financial reporting largely focused on financial
  reporting of employer organization (IAS-19).
  Negligible reporting of funded position.
• Almost nothing in the form of employee awareness
• Current tax laws require a rigid approach to
  implementation of funded schemes through
  employer administered trust funds
• Regulation of provident fund schemes also lacks
  effectiveness (compare with India where the
  Employees Provident Fund Organization is
  exceedingly effective, operating through a
  network of Provident Fund Commissioners)

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Occupational Schemes Suggestions for Improvement

• Suggest implementation of principles designed by
  the International Network of Pension Regulators
  and Supervisors (INPRS). In particular
• Mandate the funding of schemes
• Strengthen reporting and monitoring focus more
  on viability reporting (IAS-26) rather than
  IAS-19 reporting
• Need to introduce more implementation
  alternatives with possibility of third party
  providers for administration, asset management
  and risk coverage
• Need to seriously examine and reform the existing
  occupational pension framework and perhaps
  introduce a pensions law
• Understand that an initiative is being taken
  under the auspices of the ADB

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Occupational Schemes Delivery Options

• Schemes administered by the public sector, which
  can be subscribed to by private sector
  organizations. An example is the Employees
  Provident Fund Organization in India or the
  Central Provident Fund Board of Singapore.
• Pension fund companies dedicated to administering
  pension schemes. This is prevalent especially in
  South America, where a number of countries have
  mandatory defined contribution pension schemes
  geared towards retirement savings. Such companies
  tend to be privately sponsored and managed, but
  are, per necessity, heavily regulated.
• Insurance companies, who could offer services
  from providing annuity contracts to management of
  investments to complete management of schemes.
• Multi-employer pension fund companies set up on a
  non-profit basis by employers having similar
  benefit structures.

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Occupational Schemes Delivery Options

• In addition there are a number of options for
  partly outsourcing functions, including
• Third party administration of the schemes
  themselves, taken on by firms set up for the
  purpose as well as actuarial firms (Watson Wyatt,
  Towers Perrin and the like)
• Asset management, which is outsourced to asset
  management firms, with the custody function being
  outsourced to custodians and sometimes even
  management of asset managers being outsourced to
  gatekeepers.

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The Third Pillar - VPS

• The VPS is an important addition to the pension
  framework in Pakistan.
• Provides an opportunity for
• Individuals who have no retirement benefits to
  save for retirement in a tax efficient way
• Topping up of retirement benefits provided by
  gratuity and provident fund schemes (existing
  members of pension schemes excluded)
• A simple mechanism for implementing small
  occupational schemes although the defined
  contribution nature may prevent larger schemes
  from using this mechanism
• The impact which this will have will largely be
  based on a number of factors, including
• Ability to effectively market the scheme
• Returns on managed assets achieved over time

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VPS Challenges Impact

• The major challenge of the VPS is that of
  effective marketing/ distribution
• Charge structure will not allow compliant
  products to be marketed through a typical life
  insurance sales force
• Products are more likely to be bought rather than
  sold
• Impact is likely to be minimal from a social
  security viewpoint
• Likely to be taken up by affluent individuals
• Charge structure again will dictate fairly large
  average savings in order for providers to be able
  to absorb costs

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Conclusion

• A very long way still to go in making pensions
  effective as a form of social security provision
  in the country
• The VPS, while being an important step in
  promoting retirement savings, is not really
  expected to contribute towards the social
  protection side
• Much needs to be done to strengthen the EOBI
  scheme and also the occupational pension framework

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Thank you