The Role of Pensions in
Pakistan’s Social Security
Systems
Omer Morshed
11 August 2005
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."
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
Where does Pakistan stand on
Social Security ?
Total social security
expenditure
(percentage of GDP)
All Countries
14.5%
Europe
24.8%
Asia
6.4%
India
2.6%
Pakistan
1.1%
Large amount of individual philanthrophy – not documented
Source of Table : ILO - Social Protection - Financial, Actuarial and Statistical Services Branch - 1996
Where Does Pakistan Stand ?
Coverage ?
Old-age, invalidity and
survivors
Employment Injury
Some
Sickness and Health-care
Some
Unemployment benefits
None
Family benefits
None
Some
Where Does Pakistan Stand ?
Coverage ?
Old-age, invalidity and
survivors
Employment Injury
Some
Sickness and Health-care
Some
Unemployment benefits
None
Family benefits
None
Some
Pensions - Where Does Pakistan
Stand ?
Country
Covered Wage
Bill/GDP (%)
Contributors/
Labour Force
(%)
Contributors/
Working Age
Pop. (%)
Pakistan
0.6
3.5
2.1
India
3.2
10.6
7.9
Malaysia
17.4
48.7
37.8
89.7
84.5
UK
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
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”
Pensions – The World Bank Model
Objective
Form
Financing
Redistribution
Minimum Pension
Tax Financed
Mandatory
State
Pension
Savings
Occupational
Pension
Fully Funded &
Regulated
Mandatory
Occupational
Schemes
Savings
Individual
Accounts
Fully Funded &
Regulated
Voluntary
Individual
Ret. A/cs
Fitting the Standard Model to Pakistan
Government/
Public Sector
Large/Medium
Private Sector
Government Pension and
Contributory Provident Fund
EOBI
Pension,
Gratuity, PF
VPS
Small/Private/
Self Employed


VPS
Agricultural
Workers


?
Mandatory
State
Pension
Occupational
Schemes
Individual
Ret. A/cs
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 ?
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.
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 Government’s 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
EOBI - Coverage
• In 2002 Pakistan’s 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
• EOBI’s 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 Pakistan’s
workforce resides
– Protection taken in definition of this workforce as “selfemployed”.
– The most needy are, therefore, conveniently removed from even
active consideration of how to bring them into the net.
EOBI – Financial Viability
• EOBI’s 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
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
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)
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
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 nonprofit basis by employers having similar benefit
structures.
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”.
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
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
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
Thank you