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Can we develop a national pension system?

  • Published at 12:05 am June 13th, 2019
Pension
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A future for Bangladesh’s senior citizens

Bangladesh is one of the most densely populated countries in the world, and the eighth-largest by population. The number of people over 60 years of age has been projected to increase from about 9.8 million (6.5% of total population) to 18.1 million (10% of total population) by 2026 and 44.1 million people (20.2% of total population) by 2051 in Bangladesh. 

The average life expectancy of a Bangladeshi is now around 70 years, which will result in an increased dependency ratio and declining potential support ratio. Without adequate savings or contributory pension schemes, most senior citizens will be heavily dependent on society.

Pension is a form of provision of annuities for aged people. First implemented in France in the 19th century, the pension system was introduced in the UK in 1834 and in Germany in 1873. Pension schemes for elderly people in this region were first adopted in 1924, but it was only for the government servants. 

At present, there is no formal pension system in Bangladesh at a national scale, except for only the employees in government service (civil and military). The number of government servants is around 1.4 million, which accounts for only 5% of the total employed population. 

The population in private employment has abysmally small (almost nil) pension coverage. Additionally, workers from the agricultural sector constitute about 50% of the total employment and contribute about 40% share of the total GDP. Despite the size, this sector also does not have a pension system.


Current pension system in Bangladesh

For the public pension, Bangladesh follows the traditional pay-as-you-go (PAYG) pension scheme, which is an unfunded pension system where the government pays its former (retired) employees mainly from budgetary revenue. Current workers contribute to pay current retirees in return for a promise that the future generation will contribute for them. 

However, the funds are not used to accumulate assets to use in paying benefits. The burden relies solely on the tax-payer.


What Bangladesh needs 

Bangladesh needs a national pension system that cuts across sectors. It needs to start early to create access for everyone -- create social security and continue reaping the economic benefits it gains over the next two to three decades to create a sustainable economy based on inclusive growth and development for all. 

The increasing life expectancy, coupled with the gradual disappearance of the extended family system, makes it imperative for Bangladesh to design a robust pension system to avoid impoverishment in old-age and accompanying social distress. Timely and smart policy interventions, when a majority of the Bangladesh population is still young, can help avert an impending pension crisis.


Goals to achieve

The pension system should encourage sufficient pension contributions during employees’ earning lifespan to finance a reasonable standard of living after their retirement. A well-designed pension system should provide a reasonable retirement income to the beneficiaries while being financially sustainable. It also aids investments in infrastructure for the government by accumulating long-term savings.

Our government should take every single employee under appropriate pension schemes as soon as possible to increase social security and to ensure inclusive growth and development for all. 

The rising life expectancy followed by a gradual disappearance of the extended family system, makes it imperative for Bangladesh to design a robust pension system to avoid impoverishment in old-age and the accompanying social distress. Timely and smart policy interventions can help put back an imminent pension crisis, while the larger fraction of our population is still young.


Neighbour watch: National pension system in India

The Pension Fund Regulatory and Development Authority (PFRDA) Act was passed on September 19, 2013, in India to regulate NPS, subscribed by employees of the government of India, state governments, and by employees of private institutions/organizations as well as informal sectors. 

NPS is at present a two-tier system. Tier-1 is for all central and state government employees, private sector employees, and ordinary individuals. In lieu of the former PAYG scheme for government employees, both the government employee and the employer (ie central/state governments) contribute 10% of the salaries as employee’s share and employer’s share respectively, which are deposited in the permanent retirement account of the employee in NPS. 

At present, it is mandatory for all central government and state government employees (barring a handful of state governments) to become members under NPS under tier-I. Enrolment under tier-1 is voluntary for private sector employees and other categories of individuals.

In addition to this tier-1, there is a tier-2 option also available under NPS. Enrolment to tier-2 is voluntary for any individual (including government employees). An individual can contribute any amount towards saving under tier-2 account (which is also linked to the same permanent retirement account). 

However, tier-2 is more flexible as compared to tier-1, and one can withdraw money from the account at any time for meeting exigencies. Withdrawal options for tier-1 are more restrictive and are permitted only on certain conditions.

Under the NPS, individual savings are pooled into a pension fund, which is invested by PFRDA-regulated professional fund managers as per the approved investment guidelines in the diversified portfolios comprising of government bonds, bills, corporate debentures, and equities. 

Individuals are given the freedom to choose the percentage allocation of their corpus across various asset classes and can also choose their fund managers. Auto-choice options are also available where allocations across asset classes are done based on the age profile of the employee.

These contributions would grow and accumulate over the years, depending on the returns earned on the investment made. At the time of normal exit from NPS, the subscribers are required to use a part of the accumulated amount under tier-1 to purchase an annuity from a PFRDA empanelled life insurance company. 

The remaining portion can be withdrawn as a lump-sum amount, if they choose to do so. Corpus under tier-2 account can be withdrawn either as lump sum or can be used to purchase annuities depending upon individual preference.

National Pension System (NPS) is a defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens.


Basic architecture of the national pension system

NPS is based on personal retirement accounts (PRAs) created for individual members that include all central and state government employees, private sector employees, professionals, and even those belonging to the unorganized sector. NPS accumulates savings into subscriber’s PRA while he is working and uses the accumulations at retirement to procure an annuity from Annuity Service Providers (ASPs) who are empanelled with NPS. 

NPS architecture consists of NPS Trust which is entrusted with safeguarding subscribers’ interests; a central record-keeping agency (CRA) which maintains the data and records; point of presence (POP) and aggregators as collection and distribution arms; competing pension fund managers for generating and maximizing returns on investments of subscribers, a custodian to take care of the assets purchased by the fund managers, and a trustee bank to manage the banking operations. 

Funds are managed by professional fund managers from public and private sectors with proven track records and as per the PFRDA-approved investment guidelines.

The schematic diagram about the institutional framework of NPS is given below:

The advantages of joining a national pension system

NPS offers the flexibility of choosing from a range of investment options. It also gives the option to choose the pension fund manager (PFM) who will plan their investment growth in a reasonable manner. In addition, one can alter their investment as well as their fund manager on certain regulatory restrictions. 

However, the returns completely depend on the market. The process of opening an account under NPS is also very simple. It provides a unique permanent retirement account number (PRAN) which remains with the subscriber for his whole life. The arrangements NPS provides are hassle-free for the subscribers. It provides seamless portability across jobs and also across locations. Regulated by PFRDA, NPS has transparent investment norms. It gets regular monitoring and performance review of fund managers by NPS Trust.


Way forward

The Bangladesh government must enrol a contributory and fully-funded pension system, in view of the emerging demographic transition and the growing burden of pension liabilities. A universal pension system covering both private and public sectors following neighbouring India’s contributory NPS with the intention to reduce risk related to future financing can be a desired way forward. 

In the process, the government will create a huge pension fund which can be invested in long-term financial instruments to support infrastructural projects and a broader social protection strategy.

Most major economies of the world are targeting a level of pension adequacy, which ensures that senior citizens meet a basic standard of living. If we look at the World Bank recommended a multi-pillar system for the provision of old age income security comprising:

Pillar 0: A basic pension from public finances that may be universal or means-tested

Pillar 1: A mandated public pension plan that is publicly managed with contributions and, in some cases, financial reserves

Pillar 2: Mandated and fully-funded occupational or personal pension plans with financial assets

Pillar 3: Voluntary and fully-funded occupational or personal pension plans with financial assets

Pillar 4: This is a non-financial pillar that includes the broader context of social policy such as family support, access to health care, and housing etc

The key challenge in Bangladesh is to address the needs for the first pillar in the short run to create a universal security net for senior citizens by developing a national pension system and to incorporate the rest of the pillars gradually.

Considering the consequences of the growing number of elderly population on socio-economic development, the government should evolve a national pension system that will cover the entire formal sector of the country. 

It should be then introduced to the informal sector progressively to bring all the elderly population under the system so that they do not have to worry about social security and they can live with self-respect and dignity. 

Mamun Rashid is a partner at PwC Bangladesh. The article is an excerpt from a concept paper.