Transcript VPS – What is the Future? - Pakistan Society of Actuaries

The Voluntary Pension
System
What is the Future?
Pakistan Society of Actuaries
Seminar on Private Sector Retirement Schemes
14th May 2013
Presentation by Nasim Beg
VPS – Key Features
• Designed to manage individualised pension savings during
accumulation as well as the consumption stage
• Low fee structures and distribution commissions
• Structured as a unit trust with three sub-funds representing
equity, debt and the money-market asset classes.
Commodity asset class announced by SECP last week.
• Thus, asset allocation can be managed and optimised for
each each individual (unlike other retirement fund
structures)
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VPS – Key Features
Continued
 Open to all Pakistani individuals, employed,
unemployed, self-employed etc., irrespective of their
being beneficiaries of any other retirement schemes.
Investment can be built up in small amounts of savings
from time to time (as and when the saver has the
ability to invest)
 Employers can contribute as well but cannot tie
employee to any vesting period.
 Tax incentive at three levels – rebate relating to
amounts invested in the scheme and tax free
accumulation of investments in the scheme. Tax
exemption on drawings during retirement provided
certain conditions are met.
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VPS – Key Features
Continued
• VPS plans offered by several Pension Fund Managers
licensed by the SECP
• Plans offered under conventional as well as Shariah
compliant schemes
• Plans include life-cycle asset allocation structures at
accumulation stage; and
• Orderly, inflation-risk-managed drawdown plans during
retirement
• Savers have choice of changing Fund Managers and Plans
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Hindsight – Some design defects
 The sub funds should have been structured as index
funds. Expecting the Fund Management Company
of today to retain alpha creating ability over a 60year period is a bit optimistic
 Current system requires Fund Managers to be
assessed against the average performance of peer
group. This can lead to excessive risk taking and
unnecessary churning
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How VPS has done thus far
• Total funds under management Rs 4
billion, (VPS started in June 2007).
• This compares with Rs316 billion AUM
of Mutual Funds.
• The biggest challenge is our extremely
low propensity to save, as indicated on
next slide:
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Gross National Savings (as % GDP)
Afghanistan
Bangladesh
China
Hong Kong
India
Malaysia
Pakistan
Philippines
Singapore
South Korea
Sri Lanka
Thailand
(Source: World Economic Outlook - IMF)
2011
28.7
29.1
51.3
28.1
31.6
34.6
13.2
24.9
44.4
31.8
20.3
30.1
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Challenges
 Employees by far and large are used to the idea of
employers’ promises of pension and have not as yet
realised that the DB system is on the way out
 DC transfers the burden of taking the right investment
decisions to the saver (with little or no financial
literacy)
 Self employed do not normally save and invest
specifically with the objective of providing for
retirement
 Preference to invest in National Savings Schemes and
real estate (No KYC or AML Regulations and weak tax
reporting)
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Challenges
 Lack of understanding of the need to match the quantum of
savings with the objective for which one is saving. Lets look it
it very simplistically – a few assumptions:
 that most people are at best able to achieve investment returns
equal to inflation over the long term.
 an inflation free economy and a person working 40 years at a
fixed wage of Rs.10,000 per month
 that this person saves 10% of the wage towards retirement
 that this person will consume the accumulated savings over a
period of 20 years once retired.
 the amount available to this person will be Rs. 2,000 per month
during the 20 years, i.e., an income replacement ratio of 20% where
the person does not advance from entry level position
 If we assume a growth in wage of 5% per annum attributable to
advancement in the organisation, the income replacement ratio
works out to 9% of the last drawn wage.
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Challenges
 Expecting that less than the required amount of savings will
somehow meet the ultimate objective through clever investing.
Life-cycle asset allocation can help but it cannot produce magical
results
 Stories of market manipulation and lack of understanding the risk
associated with each asset class keeps the average saver away from
having an equity allocation
 Low availability/under-developed market for investible securities
 In most developed economies, an average family could buy a home
on mortgage and had the option of selling it to supplement
retirement income but this is not likely to continue and will
certainly not happen in Pakistan – as DB structures die out and life
insurance remains stagnant; this will also become an issue in the
developed economies as appetite for long-term bonds (from DB
funds) diminishes
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Conclusion
 Given our low propensity to save, not much of a future for
voluntary savings; we need to introduce mandatory savings
 VPS can be one of the vehicles for investing mandatory saving.
However, if we move to index fund structures, we will only
need an administrator and can do away with Fund Managers
 EOBI is a mandatory structure (though not universal) but
grossly under funded. The employer contributes 5% and the
employee 1% of the minimum wage. The pay out usually ranges
around 25% but is 45% of minimum wage. EOBI will need to be
bailed out at this rate.
 Political will is needed to introduce mandatory savings, which
are meaningful and extremely well regulated
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Thank you for your attention
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