Voluntary Pension System Brief background

All individuals, whether engaged in the formal employment or self employed earn up to a certain physiological age, which is generally referred to as their retirement age. After the retirement age, their natural capacities to work and earn deplete to an extent that they are unable to generate enough resources to support their living style and other needs of old-age. This is the stage in individual’s life cycle where the need is eagerly felt for voluntary or occupational pensions and savings schemes in which individual could have saved enough to provide earnings today which could conveniently replace the pre-retirement cash flows.
In nature, for private sector, these pension and savings schemes could be either employer sponsored or self sponsored. The Voluntary Pension System as discussed later ahead, can be used both as an employer sponsored as well as a self sponsored savings vehicle. Other examples of retirement benefit arrangements are gratuity, provident fund and superannuation schemes – these schemes, due to insufficient legal mandates; and today’s high employee turnover, are left with limited utility as retirement benefit arrangements. This whole portrait led the regulator to take the initiative and launch a pension system which could cater to the pension needs of both, the employed and the self-employed individuals.
The SECP took the first step in the new direction – ‘Voluntary Pension System’:
Back in year 2003, the mandate to promote and regulate private pension schemes and funds, was conferred upon in SECP vide an amendment in the SECP Act, 1997 through Finance Act, 2003. In Pursuance of its mandate, the SECP, after screening the applicants on rigorous criteria, has licensed four asset management companies to act as Pension Fund Manager under the Voluntary Pension System Rules, 2005 – the rules notified in year 2005, to give effect to the SECP’s pension mandate. Nine Pension Funds, of which Five are Islamic and four are conventional, have been launched by the Pension Fund Managers.

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Voluntary Pension System – a Quick look

The Voluntary Pension System provides a comprehensive framework for the employed and self-employed individuals to contribute into the Pension Funds launched under this system, during their working life to provide regular income after retirement. This way, an effort is made to enable the participants maintain a reasonable standard of living at retirement. This, therefore, inevitably makes the Pension Funds a savings-cum-investment Vehicle. Pakistani nationals holding National Tax Number or a Computerized National Identity Card can avail tax credit by investing a part of their salary or income from business as specified in the tax laws. Current tax laws grant EEE status to gratuity and superannuation funds. These schemes are largely “Defined Benefit” schemes, and the pension liabilities are kept as book reserves. Provident fund is contributory scheme and is partially tax exempt if the employer also contributes on behalf of the employees. The employer sponsored retirement schemes work out almost 30% of the income of employees, whereas contribution to VPS is restricted to 20% of individual’s income. In order to bring uniformity in treatment between VPS and employer sponsored schemes, SECP and private pension industry are striving to create a level playing field between the two schemes. We are also working to devise a mechanism for inter-transferability of funds between employer sponsored retirement schemes and VPS with the objective to introduce best practices in respect of all retirement schemes.
Individuals contributing to the Pension Fund have the flexibility to choose between various investment options as well as between various fund managers. The REITs, Pensions and Private Equity Wing of the Specialized Companies Division of SECP regulates and monitors the Pension Funds.

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Registration under Voluntary Pension System Rules

Six entities have been registered under VPS and Nine Pension Funds have been authorized by the Commission as per the following details:

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Survey of Occupational Savings Schemes 2007/ 2008

Way Forward

The Commission engaged a consultant under ADB sponsored project TA -4956 for developing a comprehensive regulatory framework for occupational pensions and savings schemes. Terms of reference (ToR) for the consultant are as under:

• Review of existing laws and mandate of different ministries / organizations governing pensions, superannuation, gratuity and provident fund schemes (collectively referred to as Occupational Saving Schemes).
• Review of existing Tax Laws.
• Propose amendments in the existing laws / tax regime.
• Draft a unified supervisory and regulatory framework in the context of SECP mandate under SECP Act (Section 20 (4) (W) ) encompassing the following:
• Product structure & flow;
• Responsibilities (rights / obligations) of Trustees, employers, employees, participants;
• Responsibilities, duties & powers of regulator;
• Monitoring and enforcement mechanism; and
• Any other aspect necessary to regulate and promote the Occupational Savings and other post employment benefit schemes in the country.

In line with the ToR, the consultant prepared draft bill in 2010, envisaging a legislation empowering SECP to oversee the pension schemes in a phased manner i.e. first phase envisaged registration of all schemes; the second phase, was aimed at transforming the schemes in trust structure and conforming to investment guidelines; and the third phase, was to consist of developing a reporting and auditing mechanism for ensuring compliance. 

Draft bill was discussed with Ministry of Finance, Ministry of Labour and Federal Board of Revenue to get their feedback on the proposed legislation. The representative of Ministry of Labour disclosed that some policy developments at the national level saw the constitution of Pakistan to devolve the subject of legislation on labor to provinces, through 18th amendment dated April 8, 2010, abolishing the concurrent list. The amendment has the effect of conferring the powers of legislation relating to labor solely upon the Provincial Governments. The Federal Government has constituted an Implementation Commission which shall complete all the devolution of functions from the Federal Government to the Provincial Governments till June 30, 2011.The devolution period is currently in progress. Once this period is over, the labor mandate of Federal and Provincial Governments would be accordingly revised. The Law department (Legislation Wing) was of the view that till the completion of devolution period, further action on the bill cannot be initiated.