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Conference on the Voluntary Pension
System (VPS)
Karachi, 11 Aug 2005
Sponsored by the Securities and Exchange Commission
of Pakistan
VPS in the Context of the Whole
Retirement System
A presentation by Samee-ul-Hasan
Consulting Actuary, Akhtar & Hasan (Pvt) Ltd
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Contents
A. Introduction
B. Points from Labour Force Survey 2003- 2004
C. Growth of the informal sector
D. (EOBI)
E. Retirement schemes other than EOBI
F. Total number of Provident, Pension, Gratuity
Funds.
G. Critical current issue for such Funds
H. How will VPS fit into the scene?
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A. Introduction
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 The VPS should be warmly welcomed. It will raise the level of
pension consciousness, and introduce new players into the
market.
 I congratulate the SECP and CBR on a thorough job, with
good co-ordination between themselves.
 The description of the VPS has been assigned to other
speakers. The object of this presentation is to place VPS in the
context of the whole retirement benefit system in Pakistan.
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 This presentation does not refer to the pension and
“general provident fund” schemes run for Federal
and Provincial Government Servants, Railways,
Defence personnel and certain other government,
autonomous or semi-autonomous bodies. It
relates primarily to other categories of employed
persons, and self-employed persons, in the socalled “formal sector”.
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B. Points from Labour Force Survey 20032004, based on 18,912 households
 Est Population 1 Jan 04: 148.72 million
 Employed Persons:
 Un-employed Persons:
 Civilian Labour Force:
41.75 million (34.69 males
+ 7.06 females)
3.48 million (2.44 males
+ 1.04 females)
45.23 million (37.13
males +8.10 females)
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 Distribution of employed persons aged 10 or more
by monthly income:
Monthly income group
Upto Rs 1,500 pm
1,501-2,500
2,501-4,000
4,001 and above
Average monthly income
Percentage of all
employed persons
aged 10 or more
18.13
24.80
27.64
29.44
Rs 4,088.49
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Monthly income group
Upto Rs 1,500 pm
1,501-2,500
2,501-4,000
4,001 and above
Average monthly income
Percentage of Male Urban
Employed age 10 or more
9.71
19.15
31.44
39.70
Rs 5,107.69
Clearly, most Pakistanis live from hand to mouth. Their
capacity to save is limited or zero. When they can no longer
work, they depend on their children or family members, or
charity. In many cases, they live in dire poverty.
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C. Growth of the informal sector
 The informal sector grew from 65% in 2001-2002 to
70% in 2003-2004.
 The reason for this growth in the informal sector is a
subject by itself. This is not the place to discuss it. But
allow me to quote from the Labour Survey:
“However, the inhibiting influence of
government’s long held predilection to generate
revenue by hook or crook cannot be discounted
altogether as a reason for the surge in informal
activities”
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 The rest of this presentation relates to the “formal
sector”, which covers less than 30% of the workforce.
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D. Employees' Old-Age Benefits Institution
(EOBI)
 Currently EOBI pays old-age, spouses, and invalidity
pensions to 200,000 people. This is a fraction of
people over 60, widowed and invalid persons, who in
a civilised society should be getting subsistence
pensions.
 Only 1.5 million individuals working in 33,000
establishments are currently insured, and stand to get
pensions eventually.
 EOBI is and will remain the pension scheme with the
largest coverage.
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 BUT the great majority of Working Pakistanis
remain out in the cold.
 The ONLY way to provide a minimum subsistence
income for working Pakistanis is to expand the
EOBI scheme, and convert it into a National
Minimum Pension Scheme. Commissions,
Committees and some individuals have made doable recommendations on EOBI’s phased
expansion to cover the entire working population.
But there has been zero action. The scope of
EOBI remains the same as it was in 1976.
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 EOBI’s expansion requires political will, and a
real concern for the average Pakistani. Let us hope
this political will and this concern can be
generated in future.
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E. Retirement schemes other than EOBI.
 GRATUITY SCHEMES
With very rare exceptions, Pakistani gratuity
schemes are Defined Benefit (DB), and the gratuity is
defined in terms of last drawn basic or gross salary.
(a) Statutory Gratuity under the Standing Orders:
Every industrial or commercial establishment in
which 20 or more “workmen” are employed must, if
the “Standing Orders” apply to it, pay a gratuity of
30 days’ last drawn gross wages for each year served
on the cessation of a “workman’s” service
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BUT if there is a Provident Fund to which the
Employer's contributions equal those made by
workmen, no gratuity applies to the period for
which the Provident Fund has existed.
(b) Non-statutory gratuity schemes: A very large
number of employers have set up gratuity schemes
outside the scope of the Standing Orders. These
apply to employees who are not workmen
governed by the Standing Orders. They may also
apply to workmen who get a Provident Fund, but
for whom the Employer has in addition provided a
gratuity, either voluntarily or as a result of
collective bargaining.
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There is no legal requirement to fund a gratuity
scheme. But income tax law encourages funding.
Many schemes remain un-funded, backed by Book
Reserves. But many employers have set up
Income Tax approved Gratuity Trust Funds.
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 PROVIDENT FUNDS
These are Defined Contribution Schemes, in the form
of Tax approved Trust Funds.
The Employee can contribute up to 10% of basic
salary. The law does not require the Employer to
contribute. But under almost all Provident Funds set
up outside Government and the Defence Services, the
Employer matches Employee contributions.
There are very many Provident Funds, covering a
large number of employees.
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 PENSION SCHEMES
 Pension schemes have been set up for decades by
progressive employers under the Income Tax, 1922,
and the corresponding provisions of the Income Tax
Ordinance, 1979, and the Income Tax Ordinance,
2001.
 There is no statutory requirement to Fund a pension
scheme. But with very rare exceptions, all existing
Pension Schemes are run as Trust Funds Approved
by the CIT.
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F. Total number of Provident, Pension and
Gratuity Funds, their total size and coverage
 This question is of great interest. Unfortunately,
the information is buried in the files of the Income
Tax Department, the Central Directorate of
National Savings, Banks, listed companies, mutual
funds and other organisations. Nobody has
extracted and collated this data.
 One can only guess at the total.
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 The number of Funds is probably well into 4
figures. The total number of employees is
probably well into 6 figures, perhaps even into 7
figures. The total size of these Funds is probably
well over Rs 100 billion. And the total amount
they have to invest each year, including new
money and maturity of old investments, is
probably well over Rs 10 billion.
 Also, there are a large number of un-funded
gratuity schemes
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G. Critical current issue for Provident,
Pension and Gratuity Funds
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 The issue at the top of the agenda of all Funds is
where to invest the money.
 New investment in National Savings Schemes was
stopped on 25 March 2000.
 NS Schemes were to be replaced by Pakistan
Investment Bonds. But for various reasons, this has
not worked out, (except for some jumbo funds).
 There are illogicalities and inconsistencies in the
investment regulations of such funds. The regulation
is split between the SECP and the CBR.
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 This is a subject by itself, and there is no time to
go into details today.
 Apart from the regulatory aspect, if Government
securities are excluded, is there enough scope for
the existing retirement funds + VPS (plus life
insurance organisations, EOBI, NIT and other
mutual funds) to invest in shares and the
corporate debt market? I personally don't think
so. It will be like trying to fit a gallon into a pint
pot. As of now, Income Funds have invested
heavily in COT and similar things. Do we want to
base our retirement plans on such investments?
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H. How will VPS fit into the scene?
 VPS has not come into a vacuum. There is a
substantial existing retirement system, based on
EOBI, Provident Funds, Pension Funds, Gratuity
Funds and un-funded gratuity schemes.
 As with any new law, experience may require some
corrections.
 Only time will tell how VPS will work.
 It is important for it to work to the Golden Rule of
selling: sell only what you yourself would buy if you
were in the same position.
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 Care should be taken to build up trust in VPS.
 Fiascos like pension mis-selling in the UK should be
avoided. UK proved that a Voluntary, Personal or
Insured Pension scheme cannot provide a better
through-put to the employee than an Employer's selfadministered scheme. A self-administered scheme has
no marketing costs. Administration costs are
generally lower, for all but very small employers. And
there is no profit element to be passed on. Pakistan
will not gain if VPS takes the easy way out by
cannibalising or replacing existing Provident Fund,
Pension or Gratuity Schemes.
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 Life insurers will no doubt keep in mind the
draconian compensation provisions of S.76(4) of
the Insurance Ordinance, 2000, and SECP
Insurance Rule 31. UK life companies came to
grief on account of similar provisions, when their
agents persuaded people to switch OUT of their
employers’ self-administered schemes and IN to
personal pensions
 VPS seems specifically designed for self employed
persons and persons whose Employers provide no
pension.
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 Pakistan will gain if the VPS develops this large
un-tapped market. This is essentially based on
sales to individuals.
 Sales will be made one by one. The VPS fee
structure may need re-tuning to suit this
individual market. Tax relief will be a powerful
tool. Even so, 3% seems too low to cover sales
costs, especially for annual contribution plans.
Expenses allocated by cost could mean higher
sales and other charges as % of contributions,
offset by lower fees as % of assets.
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Points which may need attention now or in the
future:
 Compulsory annuitisation at age 75:
 Improving mortality means well over 50% of
those who retire at age 60 will survive to age 75.
As of now, there is no annuity market in Pakistan
to speak of.
For a life insurer, conventional annuities are a
difficult business. Annuity rates which are
actuarially sound for the insurer may be unattractive for the purchaser.
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In modern life insurance products, like unitlinked or universal life, life insurers offer no
guarantees on mortality, investment income
rates or expenses. The actual experience is
passed through to policyholders, and the
insurer is effectively a manager acting on their
behalf.
o
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 Flexible annuity products can be designed on similar
lines. It remains to be seen whether they will prove
attractive or understandable to a 75 year old person.
 I look forward to Mr Omer Morshed's and Mr Javed
Ahmed's observations on annuities.
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 Investment Management Charges

It is good that the fee of 1.5% of the average value of net
assets is less than 2% or 3% for mutual funds generally.
Investment management fees as % of MV of assets is
market practice. But it creates a conflict of interest
between the Fund Manager and participants. The Fund
Manager gains if market prices rise. Participants, as
buyers, gain if market prices remain low, i.e. a low P/E.
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 Consideration should be given to a composite fee
for investment management, partly based on the
market value and partly on the income. As
mentioned earlier, realism could mean higher
charges as % of contributions, and lower for
investment management.
 The charges and expenses of the Pension Fund
Manager, on a compound basis, could amount to a
noticeable % of the Fund over a period of 20
years. This aspect may need re-examination.