Voluntary Pension System
‘Features, Issues and Prospects’
Muhammad Afzal
NBFC Department
Securities and Exchange
Commission of Pakistan
SECP Mandate
2002: Part VIIIA of the Companies Ordinance, 1984
(Section 282A-282N) NBFC Rules and Regulations.
2003: Section 20(4)(V) of SECP Act, 1997:
“Promoting and regulating development of Private
Pension Schemes/ Funds”.
2004: VPS was notified as form of Business under
section 282A of Companies Ordinance.
2005: The VPS Rules were notified
2
Briefing Scheme

SECP Mandate

Features of VPS - Pension Funds

Issues

Prospects
3
Other Laws
Income Tax Ordinance, 2001 governs any
taxation matters concerning VPS.
Insurance Ordinance, 2000: Insurance
Ombudsman appointed under section
125 of the Ordinance has the powers to
hear and decide any disputes between
participants and the pension fund
manager.
4
VPS-Purpose

To provide recognized framework for
saving and investment by individuals
(employed or otherwise) during their
working life who wish to have a source of
regular income after workable life.

Individuals holding NTN, NIC or NICOP
are eligible to become participants
subject to provisions of tax laws: Income
derived from salary and business is relevant.
5
VPS Features
VPS is a regulated. The Rules prescribe:
Eligibility criteria for Fund Managers,
Trustees and Participants

Obligations of Fund Managers and Trustee

Minimum contents of constitutive documents

Reporting and disclosure requirements

Nature of and caps on fees and expenses

Rights of Participants

Containment conflict of interest
6
VPS Features

Options to receive monthly income

Nominees are eligible to receive benefits

The system is portable

Participants are granted tax incentives at:
Contribution stage – subject to limits

Distribution stage; and

Disbursement stage – partial
7
Pension Fund Structure
Pension
Fund
Equity
Sub-Fund
Debt
Sub-Fund
Money Market
Sub-Fund
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Equity Sub-Fund



Listed shares
minimum 90% of NAV
Stocks with 5 year operational record
Per company exposure:

Islamic:

Conventional:
05% of NAV
Paid up capital of a company 10%


Or
Companies without operational record:



10% of NAV
Total:
Per company:
05% of NAV
01%
Per sector exposure


Islamic:
Conventional:
25% of NAV
20%
9
Money Market Sub-Fund
Investment in short term debt securities
with average portfolio duration not
exceeding one year




GOP Securities:
100%
Bank deposits:
100%
Per bank exposure:
25%
Other securities: A- and above
20%
 *Islamic lesser of 7.5% of NAV or Issue
(*rated on not rated)
10
Debt Sub-Fund
Investment in debt securities with
weighted average duration up to 10 years
Federal Government Securities: 50% Min.
Investment in other securities, lower of:
5%
of NAV or Issue (AA or Above)

3.75%
of NAV or 5% of Issue (A to A+)

2.5%
of NAV or Issue (BBB to A-)
11
Debt Sub-Fund (Shariah)
Shariah compliant debt securities with
weighted average duration up to 10 years



Federal Government Securities: 50%
Bank deposits:
50%
Other securities: Per security:
10%
 Rating below BBB- total
15%
 Rating below BBB- per security 05% of
NAV or 2.5% of Issue
12
Number of Pension Funds

FOUR AMCs were registered as FMs in 2007

All the registered FMs launched PFs in 2007

At present, there are SEVEN Pension Funds:
FOUR Islamic

THREE Conventional
(Each of the Funds has three sub-funds)
13
Issues

Slow Growth

Comparative Disadvantage:
Terminal Benefit Schemes, MFs,
Modarabs, NSS, Bank Deposits

Capital Market imperfections

New mandate and status of other
laws
14
Prospects
In 2008 SECP mandate extended to
regulate private occupational savings
schemes
Section 20(4)(W) of SECP Act:
“ promoting and regulating any scheme, fund,
arrangement or undertaking (including but
not limited to pension, superannuation
gratuity and provident funds and schemes)
established by or on behalf of companies and
state-owned corporations as employers, for
entitlement of post employment benefits of
their employees.”
15
Actions / Prospects









Survey of OSS
Listed companies:
Responded:
Workforce (approx.) :
Funded Schemes
Gratuity:
GP Fund:
Pension Schemes
Total:
No.
575
355
404,000
(Rs. in billions)
12
91
139
242
16
ACTIONS/ PROPECTS
OSS INVESTMENTS (%)
SECURITY
NSS
PENSION
GP FUND GRATUITY
59
48
50
GOP
Securities
6
5
9
Corporate
Bonds
3
6
5
Equity+ MF
Securities
20
27
14
Deposits +
Others
12
14
22
17
Conflict of Interest-Contained

Trustee to be independent of FMs

Services of affiliated brokers not to be used

Single broker transactions restricted to 10%

Transaction with connected persons prohibited

Merger or take over of other funds only with
prior approval

Auditors to be rotated.
18
Actions- Prospects

Revision of VPS Rules

Rules/ Regulations on OSS

Tax Reforms aimed at level playing field
for retirement schemes
***
19
Conflict of Interest-Contained

Participation in joint accounts
prohibited

Investment with the purpose of
acquiring control or management
prohibited

FMs to contribute seed capital for three
years
20
Actions And Plans
For promotion of VPS:
A document titled “Participants’ guide
to Voluntary Pension System” has
been prepared.
Operational and structural issues are
being addressed based on feedback
from the industry
21
VPS Session Over
22
Provident Funds Investments

Legal framework:

Companies Ordinance provides following
investment options for PF (section 227):





28/06/2016
NSS;
Deposits with Scheduled Banks;
Government Securities;
WAPDA Bonds/securities; or
In listed securities as may be prescribed by
the Commission.
23
Provident Funds Investments
The Commission framed “ The Employees
Provident
Funds
(Investment
In
Listed
Securities) Rules, 1996 which prescribed
conditions for investment in listed securities by
PF as follows:


Total investment in listed securities
10%(1996), 20% (1997) 30% (1998).
1996: Up to 1% of PF in securities of any
Company (the condition was withdrawn in
1997).
24
Provident Funds Investments
Investments not to increase 5% of paid
up capital of a company
Investment in shares of only such
which have:


5 year operational record
15% or more dividend payment in 3
preceding years consecutively.
25
Provident Funds Investments

Investment in Debt securities only if rated
‘BBB’ or above.

No investments if defaulted any financing
facility

The Commission empowered to adjust
conditions and impose fine for any defaults

2002: Investment in listed unit trust
schemes was also allowed.
26
Thanks
27