A Framework for Occupational
Savings Schemes Regulation
Summary of Recommendations
for the
Securities and Exchange Commission of Pakistan
Jeremy Gadbury
on behalf of
The International Securities Consultancy Limited
Islamabad Wednesday 27th June 2007
The SECP’s role
Securities and Exchange Commission of Pakistan Act,
1997 as amended by the Finance Act, 2003, as follows:
20 (4) The Commission shall be responsible for the
performance of the following …
promoting and regulating development of private Pension
Scheme and Funds
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Savings Regulation
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The SECP’s role
Legislation generally expected to include
Pension funds and pension arrangements
Provident Funds
Gratuity Funds and gratuity arrangements
in the private sector, and to some degree the public sector.
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Savings Regulation
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The Terms of Reference
Scope of Work;
• Develop a regulatory and supervisory framework for
occupational saving schemes.
Detailed Tasks:
• 1. Assist the SECP in developing a framework for
regulation of occupational savings schemes.
• 2. Assist and guide the SECP in collating relevant data on
occupational savings schemes and, based on international
best practices, provide a sequential roadmap for their
regulation.
• 3. Targeted review of the operational processes of the
SECP Pensions Wing and update them with regard to
regulation and monitoring of pension funds.
Output/Reporting Requirements:
• Make detailed recommendations for the tasks detailed
above.
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Savings Regulation
A Framework for Occupational
Savings Schemes Regulation
The legislation
Surveys and Statistics
Points of concern – and suggested solutions
Major features of the Consultancy
to date
•The Workshop on considering the Regulatory Framework
for Occupational Savings Schemes on 25th June,
•Organising an internal study of pension and gratuity
arrangements of leading Pakistani companies.
•Developing the Survey questionnaire of occupational
savings arrangements to be sent out to all listed companies
in Pakistan.
•Designing the style and content of a Report based on the
Survey.
•Providing advice on the Voluntary Pension System.
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Savings Regulation
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The 25th June Workshop
Participants
Investment Managers
Atlas, Arif Habib, JS Abamco
Actuaries
Nauman Associates, Sidat Hyder Morshed
Custodian, Trustees
Central Depositary Company
Corporate Sector
Pakistan International Airlines, Engro Chemical
SECP attendees – Pension Wing
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Savings Regulation
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The 25th June Workshop
Approach
SECP has a planned approach of regulation
Invited workshop participants
• To comment on the approach
• To develop ideas related to the approach
• To highlight contentious issues
• To highlight matters omitted
• To discuss the timing of certain measures
In a workshop environment
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Savings Regulation
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The recommended regulatory approach
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Savings Regulation
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Principles behind the Regulation
• The idea of a light regulatory touch
• Staggered introduction of measures
• Compatibility with Voluntary Pension Scheme
Rules
The preferred route is to focus on
• Registration,
• Trust structure and
• Audit
to ensure that pension and provident funds are
financially strong and responsibly managed…
…and go from there.
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Savings Regulation
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Principles behind the Regulation
• Establishing a robust system of occupational savings that
will add to the social and financial stability of the country.
• Enabling employers to develop appropriate employee
benefit structures that will assist their own competitive
position.
• Protecting the interests of the employer.
• Protecting the current and future interests of the
employee.
• Protecting the interests of a pension beneficiary .
• Encouraging the development of professional
management of occupational savings schemes.
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Savings Regulation
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Principles behind the Regulation
• To recognise that the pension and provident fund
systems are, as far as we can tell, generally well
managed.
• To build on those strengths.
• To make it straightforward for pension and provident
funds to continue.
• To discover and eliminate any bad practices and
misdemeanours.
• To recognise it is not only a matter of regulating
occupational savings schemes but also the benefits and
how they are paid.
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Savings Regulation
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Points of interest and concern
General points on legislation.
1. Pension regulation is not pension reform.
2. But no matter how accommodating it is to well run
existing schemes and encouraging to the formation of
new arrangements, new regulation will shape the
structure of occupational savings in the years to come,
and affect the social and economic structure of the
country.
Unless the law is carefully considered, its impact may be
very different to that intended. Even the prospect of
compliance with legislation may result in funds closing.
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Savings Regulation
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The recommended regulatory approach
Code of practice
Legislation with
Mandatory registration
Conditions to apply to registrants
Timetable October, November
2007
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Savings Regulation
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The recommended regulatory approach
Develop a Code of Practice as to how Occupational Savings
Schemes should behave
To be introduced prior to legislation and continue afterwards
Shows major target features, including
• Audit
• Schemes should be separate from employer’s books,
under trust
• Reporting to members
• Schemes should be fully funded
• Data collection
Has no legislative impact but shows future intention
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Savings Regulation
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The recommended regulatory approach
REGISTRATION
TRUST
AUDIT
SECP CAN INTRODUCE REGULATIONS
FOR REGISTRANTS
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Savings Regulation
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The recommended regulatory approach
1.
Registration with SECP of all pension arrangements,
provident funds and gratuity funds, suitably defined, with
an exemption category - overseas schemes with local
employees.
2.
All registered arrangements to be established under
Trust by a target date, with the exceptions - those
established by legislation, mostly public sector.
3.
All registered arrangements to be audited by a target
date, again with possible exceptions.
4.
SECP to introduce requirements that apply to
registrants.
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Savings Regulation
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The recommended regulatory approach
Existing pension, provident fund, gratuity legislation under
Income tax Ordinance and Income tax Rules, part
under control of SECP.
•
Recommended: Responsibilities of Central Board of
Revenue to be transferred to SECP, including process
of giving approval for tax relief, whether by
consolidating tax legislation or giving SECP powers.
Existing practice mainly under IAS 19, IAS 26.
•
Recommended: to be codified and apply to all
schemes, not just for those schemes of companies that
are listed.
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Savings Regulation
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The recommended regulatory approach
Legislation: Further measures to be introduced, including
•
Fully funded pension, gratuity funds, again with
exceptions
•
Annual filing, data collection
•
Trustee responsibilities and liabilities
•
Structure for approving corporate trustees
•
SECP may appoint trustees in certain situations
•
SECP has power to investigate, prosecute, fine
•
Winding up provisions and process
•
Appointment of liquidator
•
Court may intervene, powers of the court, legal
processes
•
Appeal board on winding up
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Savings Regulation
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The recommended regulatory approach
Legislation: Further measures to be introduced, including
•
Independence of solicitors and auditors.
•
Ability of members to make complaints.
•
SECP process for investigating complaints and its
various other roles.
•
•
•
Restriction on investing in associated companies.
Standards on payment of benefits, and where benefits
cannot be paid or are unclaimed.
Standards on making contributions.
Code of Practice to be continuously reviewed and updated;
elements to become regulations over time.
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Savings Regulation
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The recommended regulatory approach
Voluntary Pension System
Separate category of occupational savings, intention is to
add this category into the broader legislation over time.
Detail to be as near identical in rules and their application,
•
•
•
•
•
Standards on trustees
Standards on recordkeeping
Standards on payment of benefits
Member’s investment choice principles to apply
Broadly same investment rules
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Savings Regulation
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The recommended regulatory approach
On who will be liable under the legislation.
Regulation will require…
1.
2.
3.
4.
Employers – funding requirement on defined benefit
Trusts and trustees – payment of benefits, investment
policy
Custodians – holding assets
Investment Managers – breaches, contractual
agreements to manage funds
…to comply, so it will need to be legislation, with the ability of
the SECP to write binding conditions on registrants.
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Savings Regulation
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The recommended regulatory approach
The roles of the SECP will include
•
Registration
•
Annual returns, filing
•
Monitoring
•
Industry data collection and publication
•
Developing regulatory role
•
Ensuring compliance with legislation, regulations
•
Handling member, employer complaints and enquiries,
with legal power to access information
•
Investigations
•
Winding up schemes
•
Enforcement, prosecutions, fines
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Savings Regulation
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A Framework for Occupational
Savings Schemes Regulation
Surveys and Statistics
Surveys and Statistics
The need for statistics…
•
•
•
•
•
•
•
•
For the SECP to understand what it is to regulate
For monitoring, establishing trends
To know if the regulations are encouraging or
discouraging savings structures
For an assessment of penetration of savings markets,
their success
For knowing how assets are invested, helping in
growth of securities markets
For the industry to develop new products
For employers to be aware of employee benefit trends
For broad policy purposes on social security, pensions
…leading to their publication and ease of access.
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Savings Regulation
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The July 2007 Survey
Part of building up knowledge base, a Survey of the over 600
listed companies in Pakistan.
Requests to be sent out before the end of June.
Replies to be received within 30 days.
Outline Report and Contents already drafted.
Report given to respondents, made available on SECP
website, target date October 2007.
Looking at pension, provident and gratuity arrangements.
Recommend that it should be repeated every two years.
This would help in the development of capital markets by
establishing investment patterns of occupational savings
schemes.
A forerunner of information to be required under legislation.
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Savings Regulation
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The first internal Survey on
Occupational Savings Schemes
KSE top 100
98 companies, of which
• 35 have funded Pension funds: Rps.123 billion,
• 24 in surplus, 11 in deficit.
• Largest deficit is 36% of assets.
• 52 have funded gratuity funds: Rps. 11 billion
• 35 in surplus, 15 in deficit.
27 have unfunded gratuities: Rps. 6 billion
77 have Provident Funds
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Savings Regulation
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A Framework for Occupational
Savings Schemes Regulation
Points of concern – and suggested solutions
Points of interest and concern
Trust structures are recommended, but…
• Is 1882 Trusts Act strong enough for a much more
progressive occupational savings environment?
• Should insurance policies be allowed?
• Should an occupational savings scheme be established
under an insurance policy?
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Savings Regulation
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Points of interest and concern
On transferring the effective regulatory responsibilities of the
Central Board of Revenue under the Income tax Act and
the Income Tax rules to SECP, where their main purpose
is to see if tax relief should be granted.
• Legislation would be required.
• Would the CBR find this acceptable?
• How might it be acceptable?
• What is involved in a transfer, considering CBR have a
number of regional offices?
• Would it be staggered?
• Would CBR staff move to SECP?
• What capacity is needed at SECP to handle this?
• Would relevant Income Tax Act and Income Tax Rules
would become part of SECP pension legislation.
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Points of interest and concern
How do you address the problem of companies seeing
regulation, however it is packaged, as a reason to close
down occupational savings schemes?
A challenge, how do you encourage companies to establish
defined contribution pension funds and establishing
provident funds?
Voluntary Pension System covers pension funds, but you
may need a new Master Trust provident fund structure for
establishing provident funds for smaller companies.
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Points of interest and concern
Gratuities : Two types
1. Where gratuity fund is established to save for legal
obligation.
West Pakistan Industrial and Commercial Employment (Standing Orders)
Ordinance, 1968 where employers fifty or more employees are obliged under
to pay a gratuity to a leaving employee, at the rate of thirty days wages for
every completed year of service, or part of a year in excess of six months.
2. Where provident fund (and now VPS too) replaces this
legal obligation and a separate gratuity fund is then
established that has different qualifying periods and
benefits.
And possibly some hybrid versions with both types of
members and memberships.
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Savings Regulation
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Points of interest and concern
Gratuities
Recognising gratuity obligation under the West Pakistan
Industrial and Commercial Employment (Standing Orders)
Ordinance, 1968 –
• Do they need to be registered?
• Do they need to be funded? How would small employers
cope with funding rules?
• Are the members adequately protected under the existing
laws?
• Should the law be revised to include a wider range of
employers?
Recommend that are not funded but that SECP/Ministry of
labour determines who should regulate them.
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Savings Regulation
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Points of interest and concern
Gratuities
For those established as an employee benefit and not
subject to West Pakistan Industrial and Commercial
Employment (Standing Orders) Ordinance, 1968,
Benefit is defined, should follow same path as pension
funds and provident funds, and be
• Registered
• Under trust
• Audited
with the rest of the legislation to follow.
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Savings Regulation
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Points of interest and concern
Gratuities – A recommendation
For small companies finding they have to establish a trust
for either of their gratuity arrangements, this will be
expensive and difficult.
• Recommend one or more Gratuity Master Trusts be
established, possibly under the VPS umbrella
• Easy to adhere to for creating a trust
• Satisfy existing Income Tax legislation requirements
• Assets pooled
• Appropriate investment policy
• Corporate Trustee
As a savings vehicle for a company to cover some of it
liabilities
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Savings Regulation
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A Recommendation…
ALLOWING THE DEVELOPMENT OF PROVIDENT FUND
MASTER TRUSTS
For employers and employees to join
ALLOWING THE DEVELOPMENT OF GRATUITY MASTER
TRUSTS
for employers to join, for both voluntary and legal obligation
arrangements, to allow for partial funding
These could be under same umbrella structure as VPS, using
same investment pools, or merely add different classes of
investor with different rules under an existing VPS structure.
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Savings Regulation
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A Recommendation…
Under a single umbrella, a single master trust…
PROVIDENT
VPS
FUND
MASTER
MASTER
TRUST
TRUST
•To allow for new types of master trusts for existing and
newly established occupational savings schemes to join.
•Easier for the SECP to regulate and monitor.
•Corporate trustees instead of individual trustees.
•Small companies would find it very straightforward.
•Takes away the burden of compliance.
•Requires regional distribution capability.
GRATUITY
MASTER
TRUST
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Savings Regulation
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Points of interest and concern
Public Sector – Government employees
Saving systems established under and derived from
Ordinances
Generally unfunded, payable out of general revenue
Provident Fund assets within Government
Some legislative requirements should apply… Ability of
members to make complaints, SECP investigating
complaints, Annual filing, data collection, standards on
payment of benefits…
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Savings Regulation
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Points of interest and concern
Military pensions
Generally unfunded, payable out of general revenue
Some legislative requirements should apply… Ability of
members to make complaints, SECP investigating
complaints, Annual filing, data collection, standards on
payment of benefits…
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Savings Regulation
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Points of interest and concern
Government and provincially owned organisations,
universities established under charter or equivalent
Generally unfunded, payable out of specific revenue
Most legislative requirements should apply…
Requirement to be funded, provident fund assets separate
from employer
Ability of members to make complaints, SECP investigating
complaints, Annual filing, data collection, standards on
payment of benefits, appeals process…
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Savings Regulation
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Points of interest and concern
On the payment of due benefits
• Benefits are properly calculated and recorded.
• They are not withheld without good cause.
• They are paid on time at a place where the beneficiary
can access them.
• That the beneficiary can readily appeal to an authoritative
body if they are not paid as expected.
• SECP should liaise with Ombudsman Offices on pension
problems
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Savings Regulation
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Points of interest and concern
On encouraging interested groups from within the community
• Employer groups, such as an Occupational Savings sub
committees of a Chamber of Commerce
• WEBCOP, Workers Employers Bilateral Council of Pakistan
• Employee groups
• Actuaries
• Accountants
• Auditors
• Investment Managers
• Solicitors
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Savings Regulation
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The Social Goal
That more people are promised a benefit
through working and occupational savings.
That someone who is promised a benefit
receives that benefit when it is due.
That benefits should be fair and affordable.
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Savings Regulation
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