Sustaining a private sector pension scheme
by Dinesh weerakkody
Last week, many unions and politicians were protesting against the
proposed EPF-ETF reforms covering private sector employees. The proposal
was to introduce a mechanism to improve the quality of management of the
Trust Fund and the Provident Fund and also to deliver a pension for
life. Sadly, many of those who protested did not really know what was
going on.
The government also failed because they did not know how to sell the
idea to stakeholders. None of the pump and dump deals involving the EPF
has been fully investigated. If the investigations are complete, the
government should go public with the findings.
Many people like the idea of the EPF being taken out of the Central
Bank. Now the Prime Minister says the proposal has been put on hold. A
private sector pension scheme is on the cards. It is a pity that the
original proposal has now been put on hold, because all the elderly
people in Sri Lanka should have access to at least one reliable,
affordable and a livable pension. A proper pension is essential to
ensure income security for the elderly.
In Sri Lanka, 85 percent of the population between 20 and 59 are not
covered by a pension scheme, and only 30 percent of the population above
60 get a pension that helps them to make ends meet. Any pension scheme
must be contributory and sustainable. The public sector pension system
is mostly unfunded. The EPF or ETF in its current form cannot be
considered a pension scheme.
Therefore, if both funds are to be merged to provide a pension for
life, the fund needs major reform and must be taken out from the Central
Bank. The pension should help to keep a person out of poverty. If that
cannot be achieved it is best the funds are left alone, but at least
ensure there is better governance and more transparency.
Current situation
According to my research there are 24 income support schemes, which
include the State's Public Service Pension Scheme (PSPS) and the private
sector's Employee Provident Fund (EPF). There are also contributory
pension schemes for informal sector workers, which include the Farmers'
Pension and Social Security Benefit Scheme (FMPS), Fishermen's Pension
and Social Security Benefit Scheme (FSHPS) and the Self-employed Persons
Pension Scheme (SPPS).
Apart from these there is a Public Assistance Monthly Allowance (PAMA),
which provides an allowance to households whose monthly income falls
below a minimum amount. The pension system in the public sector is
mostly unfunded, and public sector wages are lower than the private
sector. As a result the public sector pensions are very low. As public
sector schemes are mostly unfunded, current and future taxpayers bear
the burden of the non-contributory pension system we have.
On the other hand, the Employees Provident Fund (EPF) is the largest
social security scheme in Sri Lanka, with an asset base of Rs.1.35
trillion and 2.5 million active accounts. But it cannot be considered a
pension scheme as it is not an annuity. However, it could be converted
into an annuity if recipients use the proceeds in that manner. In Sri
Lanka, pension anomalies are seen not only in the State sector but also
in most schemes in the country, while the access to pensions is also not
uniform.In many countries, pension provision is covered by a mandatory
public scheme that is often supplemented by occupational pension schemes
- Defined Benefit (DB) and Defined Contribution (DC) schemes.
The extent to which occupational pension schemes supplement public
schemes varies substantially in advanced economies. In emerging
economies, the access to any form of pension cover among the working
population is limited. Among public pension schemes, some are funded,
i.e. the pension liabilities are backed by pension assets, others are
unfunded and referred to as pay-as-you-go schemes, i.e. the pension
payments are financed from contributions or payroll taxes paid by
current employees. In advanced economies, when the pension assets
relative to gross domestic product (GDP) are low, it usually implies
that a large share of pension liabilities is tied to future government
revenue.
Principal objective
Occupational pension schemes (DB) schemes offer the employees more
measurable post-employment income benefits; but they lack the
transferability that DC schemes offer employees when they switch
employers. In a DC plan, the amount of money that has to be contributed
to the fund is specified, but the benefits will be known only at the
time of retirement. The design of retirement plans can influence labour
markets, because they have important economic incentives associated with
them that affect employment contracts and terms.
The principal objective of any pension scheme is to provide
beneficiaries with an adequate income stream during the post-employment
period. For funded schemes, this needs assessment of what the
appropriate contribution rates (as a percentage of salaries) into the
pension fund should be, to deliver the anticipated retirement income
stream.
For DB schemes, any asset shortfall arising from poor investment
returns on pension assets becomes a liability of the schemes' sponsor.
For DC schemes, employees bear the risk that the post-employment income
can be lower than what they had planned for.
For unfunded DB schemes and occupational DB schemes, the contractual
commitments that underpin the promised retirement income will serve as
inputs to the actuarial calculations used to estimate the present value
of pension liabilities. In addition, the actuarial calculations will
involve a number of assumptions about the future value of
economic,demographic and financial variables and risks. Due to the
inherent uncertainties involved in estimating these variables in the
long term, investment decisions that deliver the contractual commitments
with minimum risk to the pension sponsor for funded pension schemes can
be extremely challenging. The regulatory restrictions on investments,
and compliance with pension-related accounting standards, often add to
these challenges. Yet, State and public awareness of these challenges
and the costs they impose on the pension from these contractual
commitments is limited and relatively unknown.
Therefore, in the final analysis, the government needs to engage the
right people to structure the pension scheme if they are serious about
launching a pension scheme for the private sector, that is doable and
also marketable.
The writer was a former ETF Chairman |