Most workers do not have access to pension system

By Kazim Alam, The Express Tribune

KARACHI: “Chase your passion, not your pension,” said American author Denis Waitley. But not everyone is as rich as Waitley to live life as if there is no time like the present.

With only 36% of Pakistan’s employed workforce of 53.8 million being classified as “employees,” according to the Labour Force Survey 2010-11, the fact remains that an overwhelming majority of the workforce does not have access to a pension system.

No reliable data on pensions is available for the bulk of employees even in regulated sectors of the employed workforce, let alone people who are self-employed (34.8%) and unpaid helpers (27.69%).

Although the government has an enormous pension system, it is designed on an unfunded, or pay-as-you-go, basis. It means that government pensions are “defined benefit” in nature, which can potentially result in widening fiscal deficit in the medium to long term, as no assets are set aside today to pay for retirement benefits tomorrow.

Against this backdrop, the Securities and Exchange Commission of Pakistan (SECP) notified Voluntary Pension System (VPS) Rules in 2005. By the end of fiscal year 2012, 11 out of 159 mutual funds in Pakistan were dedicated pension funds designed specifically to meet employees’ post-retirement needs.

“Besides individuals, employers can also become part of the VPS. For example, an employer can opt for the VPS instead of setting up his own provident fund. Even in that case, the employee will ultimately decide which fund manager to invest with,” said Atlas Asset Management CEO M Habibur Rahman while speaking to The Express Tribune in an interview.

Noting that many medium-size companies find it difficult to manage retirement funds on their own, Rahman says managing investments is a full-time responsibility, which should better be left to professional fund managers.

Regulatory oversight ensures that a pension fund has markedly different features than a typical mutual fund. For example, unlike a mutual fund, each pension fund needs to have at least three sub-funds – namely equity, debt and money market sub-funds – with flexible asset allocation options.

“Roughly, 20 out of 1,500 participants in our pension funds are companies. While our total assets under management are about Rs9 billion, 7% of them belong to the VPS,” Rahman says. At the end of fiscal 2011-12, net assets in pension funds in Pakistan were Rs2.7 billion, or 0.7% of the total net assets of the country’s mutual funds industry.

Atlas Asset Management runs one of the best performing pension funds in Pakistan. For instance, the Islamic equity sub-fund of Atlas Pension Islamic Fund posted a return of 30% in fiscal year 2012. The returns of comparable sub-funds managed by Pakistan Islamic Pension Fund, JS Islamic Pension Savings Fund and Meezan Tahaffuz Pension Fund were 24.7%, 18.3% and 16.8%, respectively.

Atlas Asset Management’s equity sub-fund posted a cumulative return of 122.8% in the last three fiscal years, which is the highest among all comparable sub-funds.

Rahman says the pace of investments in the VPS remained sluggish until 2011 because laws made it convenient for established companies to stick to their old practices. “Tax laws didn’t allow companies to disband their own retirement schemes and switch over to the VPS. But the tax laws were amended last June, which will help us increase the size of our pension funds now,” he adds.

Rahman says that the Mutual Funds Association of Pakistan (MUFAP) is going to launch an aggressive marketing campaign in 2013 to create awareness of the VPS in society. MUFAP is also going to set up a dedicated website for the VPS that people can refer to for getting real-time information about different pension funds with historical data on their assets under management and returns, he adds.

Published in The Express Tribune, January 6, 2013.

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