“Improvements required in
Voluntary Pension System
Regulatory Regime”
Nauman A. Cheema
Actuary
INTRODUCTION
 Co-ordinated attempt by SECP and CBR made to
introduce Voluntary Pension pillar in Pakistan
 Previous attempts did not meet desired success
(RAS)
 RAS did not fit into overall environment
 VPS is a step-forward but to what extent?
 In my opinion, improvements needed to make the
Scheme effectively workable.
IS VOLUNTARY PENSION
SCHEME NEEDED?
Certainly
 Few people covered by retirement
benefits in Pakistan
 For covered people, amounts are
grossly inadequate.
EXISTING RETIREMENT
SCHEMES
 Individually purchased Schemes practically
non-existent
 Employer sponsored Schemes, in some
percentage of formal sector, in the shape of
 Provident Funds
 Gratuity Schemes
 Superannuation Funds
 Important to view all 3 as part of Pakistan’s
existing “Pension System” (apart from EOBI).
MAJOR REASONS FOR NONEXISTENT INDIVIDUAL
ANUITY/PENSION SCHEMES






Short-term “lump-sum” thinking generally prevalent
in the country, accentuated by Government policies
Capital gains non-taxable and that too regardless of
holding period (stocks, mutual funds, real estate etc.)
Extremely unattractive and irrational tax regime for
annuities, even as compared to insurance
Lump-sum withdrawals from life insurance policies
at any age considered tax exempt
Labour laws mandate lump-sum schemes
Non-tying up with Corporate Pension System
environment
CORPORATE PENSION
ENVIRONMENT
 Employer paid benefits enjoy extremely tax
favoured environment
 E, E & E all the way
 Heavily geared towards tax free lump-sums (PF
receipts are tax exempt on leaving service
regardless of age)
 Employee money has less favoured T,E,E
treatment
 Employee money is relatively small in
employer schemes – mainly PF’s
ESSENTIALS FOR VPS TO
SUCCEED
 Needs to enjoy tax treatment at least as
favourable as corporate schemes (E,E,E)
 Needs to incorporate short term tax
incentives
 Needs to incentivize lump-sum
withdrawals (within limits)
 Needs to be able to attract corporate
money
VPS SCHEME – INDIVIDUAL,
CORPORATE SPONSORED
OR BOTH
 Basically for individuals
 Corporate involvement appears to be an
after thought (changes are required).
IMPROVEMENT AREAS IN EXISTING
VPS REGULATORY REGIME

A.
In view of above “essentials” for success, following areas (in my
opinion) need to be amended
Unfavourable tax treatment on retirement (E,E,T)


Installments fully taxable
Commutation gray area
Changes required in IT laws
B.
Unfavourable tax treatment on death


Withdrawals taxable
Annuity fully taxable
Changes required in IT laws
C. Unfavourable tax treatment on disability



VPS Rules envisaged disability as regular retirement
IT laws do not incorporate VPS thinking
Disability restrictively defined in VPS Rules
Amendments required in VPS Rules & IT laws
….
IMPROVEMENT AREAS
Contd……..
D. No tax relief in case of emergencies OR needs above
certain age

essential to introduce tax exempt limited withdrawals for
above
Amendments required in VPS Rules & IT laws
E. Tax relief on 25% commutation apparently allowed
(gray area) compared to 50% in occupational scheme

accumulated tax free withdrawals (including commutation)
upto retirement should be 50%
Changes required in VPS Rules & IT laws
F. Eligibility Criteria
Extremely important to review eligibility criteria in VPS Rules
and IT Ordinance and understand differences
VPS Rules
Eligible Persons are
i.
Pakistani Nationals
ii. Over 18 years of age
iii. Have valid NTN
iv. Not employed in any position entitled entitling them to
benefits under any “approved occupational scheme”.
Provided contributions can be made if occupational scheme
does not entitle to benefits in current year of service.
Eligibility Criteria
Contd……..
IT Ordinance
Eligible Person is :
i.
an individual Pakistani
ii. has NTN
iii. not entitled to benefits under any other
approved employment or annuity scheme
Eligibility Criteria
Areas of difference are :
i.
18 years condition waived in IT laws
ii.
Contd……..
Eligibility criteria made more restrictive by
a. Excluding persons currently or prospectively
entitled to benefits under pension scheme of
another employer
b. Excluding persons, under all conditions,
employed in positions covered by approved
pension or annuity schemes
iii. Terminology of “approved occupational scheme”
is used in VPS whereas “approved employment
pension or gratuity scheme” in IT Ordinance. Is
there a difference? Government or Army
Schemes?
Eligibility Criteria
Contd……..
Areas of difference need to be removed

Little rationale for excluding individuals covered in
occupational/employment pension schemes due to :
i. general low and variable levels of occupational
pensions
ii. “pensions” provided by other schemes such as
Gratuity and PF

NTN condition needs to be removed for corporate money
Amendments required in VPS Rules and IT Laws
ISSUES TO BE ADDRESSED AND
CHANGES TO BE MADE FOR
EFFECTIVELY ALLOWING VPS TO
ACT AS EMPLOYEE BENEFIT
SCHEME
 Some areas that need to be addressed :
 Total employer contributions to all EBF
 Limit of Rs.500,000/- employer
contribution on behalf of all employees (?!)
ISSUES TO BE ADDRESSED
Contd….
 Employer contribution can be currently
many times employee’s salary(?!)
 How is tax credit determined if
employer and employee both contribute
to VPS
 Taxability of employer contribution to
employee above a certain limit
 NTN condition will exclude low paid
employees (!)
ISSUES TO BE ADDRESSED
Contd….
 IT eligibility criteria will exclude employees in VPS
entitled to benefits under another pension scheme(!)
 Retirement age in VPS needs to be made more
flexible to conform to employer’s retirement age
 Areas of difference between VPS and
“Superannuation Fund” need to be analyzed and
co-ordinated. Some examples are :
 Commutation limit
 Taxability of various benefits
 Benefits such as early retirement pension cannot be offered
under VPS
Changes required in VPS Rules & IT Ordinance
RISK OF MISSELLING
 Key area of concern
 Risk of misselling increased due to
 Only scheme having upfront employee
contribution tax credit
 General lack of understanding of whole
system
 Short-term thinking of saver/investor
RISK OF MISSELLING
Contd…
 As examples, may seem attractive
 for high-paid individual investor, but is it really in
current largely (capital gains driven) tax free
environment?
 for PF but is it so after considering full regime of tax,
free benefit at all ages, loans etc.?
 Huge international scandals, more risk for Pakistan
 SECP will need to
 educate
 monitor and effectively regulate this risk
SUMMARY

First important step taken by SECP
supported by CBR
 Further changes and refinements
needed to make system more effective
in view of
Prevalent individual related investment
environment
ii. Existing corporate environment
iii. Short-term culture
i.
SUMMARY
Contd…
 Greater co-ordination between SECP and
CBR required for Scheme’s success and
increased rationalization
 Potential risks need to be monitored and
regulated by SECP
 VPS needs to move in tandem with
investment environments related to
individuals and EBF’s
Thank you