Transcript Investment Team - The Institute of Chartered Accountants

Retirement Planning
with Voluntary Pension Schemes (VPS)
1
2
The Need for Retirement Planning
3
The Need for Retirement Planning
• “Retirement” is a phase of life where one’s source of income ceases. While
your INCOME stops, your EXPENSES don’t !
• A Pension is an income that one will NEED at retirement
• While we may be compelled to think of “Retirement” as a tedious phase of our
life – it is in fact a stage marked by:
•
•
•
•
•
Limited Income
Dependency on children
Sacrifices & hardships
Difficulty in meeting expenses
No enjoyment
Therefore, we must ‘Plan’ today for a healthy, happy
retirement tomorrow
4
Why need Pension Reforms in Pakistan
• Changing Social Norms: Children either don’t wish to or are actually
unable to support their Parents;
• Low savings rate;
• Lack of social security net in Pakistan – Poor health and educational
facilities;
• Very limited retirement benefits only available to formal employment
sector;
• No retirement saving options for self-employed individuals and
workers engaged in informal/daily wage activities;
• Inflationary pressures - Cost of living increasing/ real value of money
declining;
• Changing employment behaviors – Frequent job switching requires
employer independent pension saving mechanism; and
• Budgetary constraints for Government to continue to fund large work
force – Government being the largest employer in Pakistan
5
Global Pension Statistics
USA &
Canada
20,329
Source: Towers Watson
UK, Netherlands,
Germany, Switzerland ,
France & Ireland
6,216
AUS
1,565
Total Assets 2013 –
USD billion
% GDP
1,565
101%
284
13%
Canada
1,451
80%
France
169
6%
Germany
509
14%
Hong Kong
114
41%
Ireland
130
59%
Japan
3,236
65%
Netherlands
1,359
170%
South Africa
236
67%
Switzerland
786
122%
UK
3,263
131%
USA
18,878
113%
Details
Australia
Brazil
Japan
3,236
6
Pension Alternatives in Pakistan
To date, private citizens of Pakistan have not had access to any
pension saving platform, which would enable them to plan for their
retirement in a methodical manner.
Provident funds cater to similar needs
but provide:
• Less Investment returns due to lack of
active fund management
• Lack
of
transparency
Private citizens primarily depend on:
• Depend on the next generation to support the
grey days
• Yield on property
as
mainly
• Interest on bank deposits/NSS
managed by the employers
• Lack of premature accessibility (in most
cases)
• Lack
of
individualized
investment
portfolio
• Generally consumed at the change of
the employment
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Introducing ‘The Voluntary Pension Scheme’ (VPS)
8
VPS as a Tool for Effective Retirement Planning
The Benefits of VPS in Retirement Planning can be countless…
 VPS is a flexible Investment Based Retirement Savings Plan - facilitates individuals to
save for retirement in a systematic and disciplined manner;
 Managed by experts with professional approach and experience in terms of managing
savings and finances;
 Participants can define their own Investment Plan through choice of asset allocation
based on their Age and Earning Capacity which defines their individual risk tolerance and
return expectation;
 Investment in VPS grows Tax free;
 Contributions in the VPS allows Participants to make tax savings in the current year
resulting in additional savings
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VPS as a Tool for Effective Retirement Planning
 Provides Special Tax benefits, not available in any other Investment vehicle
 At Contribution Stage:
Annual Tax Credit on up to 20% (or more if one is over 40 yrs.) of your
annual taxable income
 At Investment Stage:
All investment income/gains tax free till retirement
 At retirement:
Receive 50% of amount lump sum tax free
Remaining Balance (or entire balance) can be invested in an annuity plan or
an Income Payment Plan. No Tax on receiving monthly income (pensions)
post retirement from Approved Income Payment Plan if invested in such Plan
for 10 years
 Benefits for the Employers – Tax admissible expense for employers for their
contribution
 Flexible investment allocations that may be changed twice a year
 May invest in Lump sum or at regular frequency
 No penalty on missing any payment
 Conventional and Shariah Compliant Options are available
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VPS as a Tool for Effective Retirement Planning
 Coupled with Insurance/ Takaful benefits, to reduce the uncertainty in your life
 Allows you to choose your own retirement age (between 60 and 70) or 25 years from the
age of first contribution whichever is earlier. You may also revise your retirement age at a
later date.
 Early Retirement is possible on the unfortunate event of disability. In case of untimely
death, the Pension proceeds are transferred to the Nominees
 Portable - can easily switch between available Pension Fund Managers at a later stage,
and continues if you switch jobs
 Plan Continuity – with job switches, your pension scheme is not disbanded
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How VPS Works (Essential Mechanics)
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Structure of a Voluntary Pension Scheme
Management
Fee (upto
1.5%)
Pension Fund Manager
Front End Fee
(upto 3%)
Contribution
Allocation Policy
Voluntary Pension
Fund
Equity Sub Fund
Tax free
redemption
Retirement age
b/w 60 -70
or 25 yrs
from first
contribution,
whichever
is earlier
50%
Income Payment
Plan till 15 years from retirement
(tax free if plan is for ten years)
50%
OR
Expiry
Annuity from of IPP
Insurance Co./
Another IPP or
Lump sum withdrawal
Debt Sub Fund
Before
Retirement
All withdrawals taxed
At last 3 yrs tax rate
M.M Sub Fund
Disability
Before
Retirement
Deemed retirement
Death
Before
Retirement
Cash withdrawal – 50%
tax free (deemed retirement)
OR
Transfer amount to
survivor’s VPS account
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Who can Invest?
All Pakistani National over the age of 18 years and holding a
Computerized National Identity Card (CNIC) or a valid National Tax
Number (NTN)
All Non-resident Pakistani holding a National Identity Card for
Overseas Pakistanis (NICOP) or a National Tax Number (NTN)
All Employer on behalf of their employees
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Option of Transferring Balances from Provident Funds
The participants may bring in their accumulated balances from their existing
PF into the VPS without any tax implications
The balances of the PF and the corresponding investment returns may be
withdrawn at any stage without any tax liability
Have a single consolidated retirement saving account with complete flexibility
of asset allocation
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Sub-Funds
VPS is a one-window operation which provides investments in a diversified portfolio of equity
securities and fixed income instruments. SECP mandated investment policies govern each
asset class.
Each VPS has three mandatory sub-funds, under the umbrella.
Additional Sub-Funds (non Mandatory/ Not offered by all Pension Fund Managers):
SECP has allowed the launching of a Commodity Sub Fund in addition to the above three sub-funds. The Commodity Sub-Fund and any other
sub-funds for different asset classes introduced in the future will be optional and offered in addition to the three mandatory sub-funds.
Gold Sub-Fund: Invest minimum of 70% in gold or gold futures contracts and minimum of 10% in government bills or government securities with
a maturity of less than 90 days.
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Investment Allocations
You select one of the following Investment Strategies (to invest in these Mandatory Sub Funds)
Allocation Schemes
Risk/Return
(Investment Strategies)
Profile
Equity Sub Fund
Debt Sub Fund
Money Market
Sub Fund
Allocation*
High Volatility
Medium Volatility
Low Volatility
Lower Volatility
Life Cycle Allocation
Customized Allocation
High
65%
20%
(Nil)
Moderate
35%
40%
5%
Low
10%
60%
15%
Lower
(Nil)
40%
40%
Automatically adjusts your allocation from High Risk assets towards Lower
Risk based on your age profile
Varies
0-80%
20-75%
0-60%
* Total allocation to be 100% between the sub-funds.
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Benefits at Retirement
 You can choose retirement age any time between ages 60 – 70
At Retirement you can:
Withdraw up to 50% as cash tax free
 Remaining amount to be used to:
Purchase an annuity from a Life Insurance Co (LIC)
or
Invest in an Approved Income Payment Plan with a Pension Fund Manager
No Tax on receiving monthly income (pensions) post retirement from Approved Income
Payment Plan if invested in such Plan for 10 years
 Tax deductions for any withdrawals in excess of 50% at retirement
 Investor may withdraw total or a part of total accumulated savings any time by paying
tax on the average rate for the last three years tax
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Benefits of investing through VPS
•
•
•
•
•
•
•
For Employers
Defined Contribution (no liability on
company the than the contribution amount
, no need for actuarial valuations, no need
for funding for the future unknown liability.
- the world is moving away from DB to DC
schemes);
Professional Investment Management (no
additional responsibility of investment
management)
Transparency (Well regulated & monitored
by SECP)
Choice of allocation schemes left to
employee
An additional employment incentive for
employees without any strings attached
No responsibility or work post retirement
(in pension schemes the hassle of making
monthly pension payments remains)
Tax admissible, just like salary expenses
or contributions to the PF
•
•
•
•
•
•
•
•
•
For employees/ self employed
individuals
Personalized investments
Freedom of choice of allocation schemes
according to individual risk aptitudes
Portable (Can be transferred with change
in employment)
Can continue to contribute for as long as
desired
Savings being accumulated to maintain
pre-retirement standard of living
Diversified investment portfolio
50% lump sum at retirement to meet
immediate liquidity needs
Remaining amount received as monthly
installments over the remaining life period
May withdraw earlier by paying tax
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Voluntary Pension Schemes vis-à-vis other retirement schemes
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Gratuity/Pension vs. VPS
Gratuity/Pension
(Defined Benefit Plans)
VPS
(Defined Contribution Plan)
1 Terminal benefit on last pay (to be No additional liability other than
funded out of every years current contributions by employer
budget)
2 Employer takes investment risks
Investment risk on employees
3 Periodical actuarial calculation
determines employer’s liability and
require regular funding
Known costs to employer
4 Participants can only collect the
benefits defined in the scheme
Participants entitled to all
investment returns
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VPS vs. Provident Fund
Components
Provident Fund
Purpose
Voluntary Pension Scheme
Both provide employees or dependants with income after retirement
Both are based on Defined Contribution (DC)
Benefit
Lump sum on resignation
Lump sum plus regular pension payments after
retirement
Discipline
High chance of beneficiary spending
this money immediately
The VPS structure promotes disciplined savings and
spending after retirement while allowing withdrawal of
accumulated cash (50%) to meet immediate needs
Tax Rebate
Not Available (Employers
contribution over and above100,000
is subject to tax, more than 16%
income distributions are subject to
tax)
Very attractive Tax rebate (upto 20% of the total taxable
income which results in tax saving up to 20%)
Portability
Not allowed
Continues to contribute even in case of termination of
employment. Also Can easily transfer from one pension
fund manager to another (at no front end load)
Selection of Pension
Fund Manager
Nil
Choice amongst various pension managers
Conventional and Shariah Pension Schemes
Death and Disability
Savings/ Investments go to
Nominees
Savings/ investments go to Nominees, who then have the
options that were available to the deceased
In case of disability, benefits available at retirement
become applicable.
Some plans are also supplemented with Free Insurance
/Takaful Covers
and
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VPS vs. Provident Fund (cont..)
Components
Provident Fund
Voluntary Pension Scheme
Asset Allocation
Flexibility
No control over your investments
Desired asset allocation as per risk profile & investment
horizon.
Shariah Compliant
Investment option
Absent
Available
Account Balance
Information Frequency
Annual
Updated statement available daily on-line
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Pension Funds in Pakistan
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Comparison of AUMs Conventional Vs Shariah Compliant
Pension Funds
Assets Under Management as on 31st Dec 2014
41%
59%
Conventional Pension
Funds
Shariah Compliant
Pension Funds
Assets Under Management as on 31st Dec 2014 (in mn)
Conventional Pension Funds
Rs. 4,102
Shariah Compliant Pension Funds
Rs. 5,894
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Pension Fund Managers In Pakistan
Shariah Compliant Fund
Managers
Pension Fund Names
Assets Under
Management
(As on 31st Dec 2014) in mn
Al Meezan Investment
Management Limited
Meezan Tahafuz Pension Fund
ABL Asset Management
Company Limited
ABL Islamic Pension Fund
Atlas Asset Management
Limited
Atlas Pension Islamic Fund
HBL Asset Management
Limited
HBL Islamic Pension Fund
JS Investments Limited
JS Islamic Pension Savings Fund Rs. 223.40
Pakistan Islamic Pension Fund
Rs. 367.05
NAFA Islamic Pension Fund
Rs. 222.80
Al Ameen Islamic Retirement
Savings Fund (Formerly: UBL Islamic
Retirement Saving Fund)
Rs. 749.00
MCB-Arif Habib Savings and
Investments Limited
NBP Fullerton Asset
Management Limited
UBL Fund Managers Limited
TOTAL
Rs.3,409.73
Rs.98.32
Rs.570.00
Rs. 254.17
Rs. 5,894
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Pension Fund Managers In Pakistan
Conventional Pension Fund
Managers
Pension Fund Names
Assets Under
Management
(As on 31st Dec 2014) in mn
ABL Asset Management Company
Limited
ABL Pension Fund
Atlas Asset Management Limited
Atlas Pension Fund
Rs. 602.00
HBL Asset Management Limited
HBL Pension Fund
Rs. 345.95
JS Investments Limited
JS Pension Savings Fund
Rs. 420.40
MCB-Arif Habib Savings and
Investments Limited
Pakistan Pension Fund
NBP Fullerton Asset Management
Limited
NAFA Pension Fund
UBL Fund Managers Limited
UBL Retirement Saving Fund Rs.1,408.00
TOTAL
Rs. 106.58
Rs. 684.46
Rs. 535.00
Rs. 4,102
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Market Share of Pension Fund Managers
Assets Under Management of VPS Fund Managers
Al Meezan Investment
Management Limited
2%
6%
6%
UBL Fund Managers Limited
34%
8%
Atlas Asset Management Limited
MCB-Arif Habib Savings and
Investments Limited
10%
NBP Fullerton Asset Management
Limited
12%
22%
JS Investments Limited
HBL Asset Management Limited
ABL Asset Management
Company Limited
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Market Share of Pension Fund Managers
Assets Under Management of VPS Fund Managers
(in Millions) as on 31st Dec 2014
Al Meezan Investment Management Limited
Rs.3,409.73
UBL Fund Managers Limited
Rs.2,157.00
Atlas Asset Management Limited
Rs.1,172.00
MCB-Arif Habib Savings and Investments
Limited
Rs.1,051.51
NBP Fullerton Asset Management Limited
Rs. 757.80
JS Investments Limited
Rs. 643.80
HBL Asset Management Limited
Rs. 600.12
ABL Asset Management Company Limited
Rs. 204.89
TOTAL
Rs. 9,996
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Industry snapshot
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Industry Overview (Shariah Compliant)
2008
Islamic Pension
AUMs (PKR millions) as on June 30th
2009
2010
2011
466
530
729
903
2012
2013
2014
HY 15
1,640
2,957
4,912
5,894
Shariah Compliant VPS Return
2008
2009
2010
2011
2012
2013
2014
HY 15
Equity sub-fund
0.13%
-15.23%
23.13%
34.76%
19.14%
52.72%
35.97%
16.94%
Debt sub-fund
7.89%
9.91%
8.86%
9.65%
8.99%
8.05%
8.01%
4.26%
Money Market sub-fund
7.54%
9.16%
6.78%
9.03%
9.88%
Shariah Compliant VPS
Weighted Average Return of Allocation Schemes (%)
7.54%
7.36%
4.51%
2013
2014
HY 15
2008
2009
2010
2011
2012
High Volatility
1.68%
-6.20%
20.27%
29.74%
17.11%
43.79%
30.38%
3.98%
-2.73%
15.78%
22.14%
14.15%
30.34%
21.93%
11.04%
6.29%
4.77%
11.40%
14.58%
11.15%
16.91%
13.51%
7.10%
7.72%
9.53%
7.82%
9.34%
9.43%
7.80%
7.69%
4.58%
14.95%
(E:80%, D:20%, M,0%)
Medium Volatility
(E:50%, D:40%, M,10%)
Low Volatility
(E:20%, D:65%, M,15%)
Lower Volatility
(E:0%, D:50%, M,50%)
E: Weight of Equity sub-fund; D: Weight of Debt sub-fund; M: Weight of Money Market sub-fund
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Industry Overview (Conventional)
2008
305
Pension
AUMs (PKR millions) as on June 30th
2009
2010
2011
349
571
655
2012
1,101
2013
2014
1,865
3,263
HY15
4,165
Conventional VPS Return
Equity sub-fund
Debt sub-fund
Money Market subfund
2008
2009
2010
2011
2012
2013
2014
HY 15
-4.41%
-26.78%
20.32%
36.45%
15.87%
60.16%
42.44%
27.80%
3.55%
12.67%
7.64%
10.69%
10.47%
48.00%
7.23%
19.27%
6.27%
10.00%
3.45%
10.94%
10.11%
8.75%
7.32%
4.64%
7.76%
-5.47%
2013
2014
HY 15
Commodity-Fund**
** The commodity sub funds were launched in July 2013 and currently there are only two commodity sub funds
Conventional VPS
Weighted Average Return of Allocation Schemes (%)
2008
High Volatility
(E:80%, D:20%,
M,0%)
Medium Volatility
(E:50%, D:40%,
M,10%)
Low Volatility
(E:20%, D:65%,
M,15%)
Lower Volatility
(E:0%, D:50%,
M,50%)
2009
2010
2011
2012
-2.82%
-18.89%
17.79%
23.30%
14.79%
57.73%
35.40%
26.07%
-0.16%
-7.32%
13.56%
18.59%
13.13%
50.16%
24.85%
22.34%
2.37%
4.38%
9.55%
13.88%
11.49%
44.54%
14.29%
19.16%
4.91%
11.33%
5.55%
10.81%
10.29%
28.37%
7.28%
13.51%
E: Weight of Equity sub-fund; D: Weight of Debt sub-fund; M: Weight of Money Market sub-fund
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Thank You
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