PSX proposes funded pension scheme

PSX proposes funded pension scheme

KARACHI: Pakistan Stock Exchange (PSX) has proposed funded pension scheme that should offer old age benefits to retired employees at public sector enterprises and government workers, without putting burden on the annual budget.

At present, Pakistan’s pension scheme for government employees is an un-funded, pay-as-you-go scheme. Government of Pakistan exclusively finances the pension expenditure by obtaining a provision in the annual budget for this purpose.

This has all the making of an impending pension crisis in future, and places unfair burden on future generations. In case of public sector enterprises too, much of the pension liability remains unfunded.

The future monetary obligations are taken to be met from taxation, which places undue fiscal burden and responsibility on future generations. Age analysis of population suggests growing state pension expenses given the expected increase in the older age group.

These conditions have led to increasingly stressed pension arrangement.

Pension’s system reforms are focused on extending coverage to funded pension systems, which are professionally managed, extend to the informal sector, and facilitate switching from the existing employer schemes.

While in the public sector, funds have been created at the provincial level to pre-fund the future liability.

The PSX said that government of various countries have actively worked to provide financial security for their aging populations by maintaining adequately funded pension funds.

These pension funds invest in a diversified range of global assets including equities, bonds, mutual funds, ETFs, and even real estate, infrastructure, and alternative assets.

In Canada, the CPPIB (Canada Pension Plan Investment Board) is the government’s primary pension scheme, and has grown to become one the largest pension funds in the world.

The CPPIB invests in the full stack of assets outlined above and returns are used to finance government’s pension liabilities every year. This takes the burden of pensions away from the annual budget.

The CPP fund now manages over $409.5 billion in asset, up from $128 billion in 2010.

An actively managed government pension fund in Pakistan will also help channel investment towards capital markets, since equities feature heavily at global pension funds.

In Pakistan, the federal government could set up such an investment holding as a single-purpose asset management company with 100 percent control, and run by professional investment managers.

The government should start funding its pension liabilities to avert a future pension crisis and encourage capital formation in Pakistan. An adequately funded pension scheme would offer old age benefits to retired employees at public sector enterprises and government workers, without putting burden on the annual budget. Further, it is recommended that a certain percentage of the funded pension scheme be invested in the capital markets.

With Pakistan facing very high levels of poverty and the Government of Pakistan facing a rise in the old age population and having a scarcity of resources and funds to provide any old age benefits. An adequately funded pension scheme is one of the resources which the Government of Pakistan could offer to facilitate retired public sector employees.

This would result in improvement in liability management of Federal Government Employees Pension Scheme.

Appropriate amendment to be made in the Income Tax Ordinance, 2001.