Box 4.2.

1: Pension Funds in Pakistan and the financial risks of retirement savings are passed
onto the employees who are themselves responsible for
Pension Funds in the Context of Social Safety Nets their investments and returns.
Social pension systems continue to be relevant to nations
worldwide as they strive to ensure economic stability and In case of public sector too, much of the pension liability
security of their aging populations. Countries grapple remains un- funded. The future monetary obligations are
with adopting a Multi-Pillar Pension System that has taken to be met from future taxation, which places undue
some participant-funded elements but also includes other fiscal burden and responsibility on future generations.
options that allow States to extend effective old-age Age analysis of population suggests growing state
protection in a fiscally responsible manner. pension expenses given the expected increase in the
older age group. These conditions have led to reforms in
Pakistan has been making efforts to strengthen its social the pension system increasingly stressing “funded”
security program to support the vulnerable. At the pension arrangements. Pension system reforms are
federal level, the Benazir Income Support Program focused on extending coverage to funded pension
complemented by smaller programs as the Zakat and systems, which are professionally managed, extend to the
Bait-Ul-Mal programs provide non-contributory social informal sector, and facilitate switching from the existing
protection to alleviate general poverty. While state- employer schemes. While in the public sector, funds have
mandated contributory retirement plans offered by been created at the provincial level to pre-fund the future
employers in the formal sector provide consumption liability.
smoothing to the retired workforce.
Pakistan’s Pension system -Regulatory perspective
The current pension system is considered inadequate as The employer sponsored pension programs (called the
its coverage is confined to the formal sector employees, Occupational Savings Schemes) are a product of Labor
while a large portion of the labor force in Pakistan, either Laws and have been formulated with the core objective
employed in the informal sector (especially the of increasing pension coverage. And FBR only regulates
agriculture sector) or self-employed, remains uncovered. these schemes from a tax standpoint. Underlying
Another major issue is the system’s sustainability. Most different objectives, these regulations failed to address
of the pension schemes in our system are the unfunded the peculiarities of a pension legislation- most
Defined Benefit204 wherein servicing burden lies with importantly safeguarding pension savings by laying out
the employers. criteria to discipline investments in a way that curtail
risks without compromising returns.
The situation has led many employers (specially the
private sector employers) to curtail pension benefits and SECP assumed the role of a Pension regulator with an
switch to the defined contributory system wherein amendment in Securities and Exchange Commission of
employers are liable to only pay out the defined amount Pakistan Act, 1997 in 2003205, which expanded its

204There are two types of pension schemes i) Defined Contribution promised. Even if the investments returns are below par, employer
(DC) and ii) Defined Benefit (DB). In a DC plan, only fixed must pay the promised benefit. An actuary determines the amount
contributions (determined on the basis of the worker’s age, earnings, that shall be contributed to produce the desired benefits taking into
contribution rate, investment return and normal retirement age) are account factors as length of service, level of wages etc. Regular
made into individual accounts of employees by both employer and pension amounts that are paid for the entire life of an employee and
employee. Accumulated retirement amount is paid out by employer medical benefits are defined benefit plans. Unfunded plans refer to
but this amount may be insufficient to cover the remaining life of the those wherein pension assets are less than pension liability/obligation.
covered employee. Hence, the risk of insufficiency of funds in the
future is borne by the employee. In a DB the retirement benefits are 205https://www.secp.gov.pk/document/secp-amendment-act-1997-
known (e.g. they will be provided for the entire period that the for-your-information-and-record/?wpdmdl=17801
employee lives) throughout. Contributions depend on the amount
that will be required to fund the future benefits that the employer has

102 Financial Stability Review 2017

responsibilities to include promotion and regulation of more tightly regulate the pension products sold to
Private Pension Schemes and Funds. Accordingly, the individuals or institutions.
Voluntary Pension Rules were introduced in 2005, which

Mapping Pakistan’s Multi-Pillar Social Pension system to the World Bank Model

Table 1
Multipillar Pension Taxonomy- World Bank

Target Group Main Criteria

Pakistan's System of Social
Pension
Lifetime Informal Formal Funding or
Pillar Characteristics Participation
Poor Sector Sector collateral

0 X X x “Basic” or “social pension,” at least social Universal or Budget or general Benazir Income Support
assistance (universal or means tested) residual revenues Program(BISP), Pakistan Bait-ul-Mal

1 X Public pension plan, publicly managed Mandated Contributions with Mandatory State pension ,State-
(defined Mandated Contributions, benefit or some financial mandated registration with EOBI(
notional defined contribution) perhaps with reserves industrial and commercial enterprises
some financial reserves employing more than 5 employees)
2 X Occupational or personal pension plans (fully Mandated Financial assets Occupational Saving Schemes with
Mandated Financial assets funded defined Private sector employers, Workers
benefit or fully funded defined contribution) Welfare Fund(WWF)

3 x X X Occupational or personal pension plans Voluntary Financial assets Voluntary Pension Scheme
(partially or Voluntary Financial assets fully
funded defined benefit or funded defined
contribution)
4 X X X Access to informal support (family), other Voluntary Financial and Pakistan Poverty Alleviation
formal Voluntary Financial and social nonfinancial assets Fund(PPAF), Microfinance
programs (health care), and other individual Institutions
nonfinancial assets financial and nonfinancial
assets (homeownership)

Source: World Bank

Note: Size of x is reflective of the importance of each pillar for each target group in the following increasing order of importance: x, X, X

Parallels can be drawn between the social pension concentration on the first and second pillars so as to
systems in Pakistan to that of the five-pillar model i)provide for effective old age protection in a fiscally
suggested by the World Bank in 2005 (Table B3.5.6). responsible manner, ii) extend coverage to the workforce
The model suggests that ideally in low-income countries, of the informal sector and iii) allow differential amounts
the zero pillar should be the dominant form of of coverage for employees than those available under
protection against old-age risk. But since in many of EOBI .
these countries, both the public and the private sector are
unable to deliver sufficient coverage, the model suggests Features of the VPS
that the third pillar (voluntary pensions) should be VPS is a tax-advantaged defined contribution scheme
promoted with the basic zero pillar confined to under which contributions can be made in lump sum or
providing for the basic needs of the most vulnerable. regularly, to provide regular income during retired life.
The scheme is available to employed/self-employed
Voluntary Pension Scheme in Pakistan individuals wherein besides the employees their
The Voluntary Pension Scheme (VPS) in Pakistan was employers may also contribute to provide regular income
established to move beyond the conventional during their retired life. Tax credit can be availed at the

Financial Stability Review 2017 103

average rate of tax on the amount of actual contribution products, younger individuals can choose
or 20 percent of annual taxable income whichever is riskier/aggressive investments portfolios that are inclined
lower. For those joining at 41 or above an additional towards equity funds and vice versa. Further, in the event
credit of 2 percent is allowed for every year over 41 years that no allocations are chosen by an individual, pension
of age, up to a maximum credit of 30 percent of the fund manager shall allocate preferably to an approved
taxable income of the preceding year. Contributions can lifecycle allocation scheme if available based on the age
be made in lump sum or regularly with annual tax credit and risk profile. A typical lifecycle scheme may look like
of 20% of taxable income. Further, the Contributions this (Table 4):
made by the Participants and/ or their employers (if any),
plus the investment income, are accumulated tax free in Table 4
the Sub-Funds until the Participant retires. A typical Life Cycle Allocation scheme
Equity Debt Money Market
Participants of VPSs can change their Pension Fund Plan
Sub-Fund Sub-Fund Sub-Fund
Manager or the Pension Fund, once a year by giving 21 18-30 years 75% 20% 5%
days prior notice. Further, participants can choose to 31-40 years 70% 25% 5%
change their selected Allocation Scheme, twice a year. 41-50 years 60% 30% 10%
Individuals can choose among the specified allocation 51-60 years 50% 30% 20%
schemes a as per their risk appetite to achieve desired 61 and above 50% 50%
diversification. A pension fund must offer four pension
allocation schemes for three or four sub-funds206 as At retirement, a participant can choose any one of the
following:
tabulated below (Table 2 & 3):

Table 2  Encash up to fifty per cent of the amount

Three Sub-Fund allocation schemes allowed to Pension Funds accumulated in Pension Account tax free and
Money Market
remaining by paying tax as per Income Tax
Allocation Scheme Equity Sub-Fund Debt Sub-Fund
Sub-Fund Ordinance 2001.
High Volatility Min 65% Min 20% -  Purchase i) an Approved Annuity Plan from a
Medium Volatility Min 35% Min 40% Min 10% Life Insurance Company that pays regular
Low Volatility Min 10% Min 60% Min 15%
income; or ii) an Income Payment Plan with
Lower Volatility - Min 40% Min 40%
Source: SECP
Pension Fund Managers for monthly
installments for fifteen years. This option is
Table 3 more suited for those willing to take some risk
Four Sub-Fund allocation schemes allowed to Pension Funds to earn incremental returns.
Equity Debt Sub- Money Market Commodity
Allocation Scheme
Sub-Fund Fund Sub-Fund Sub-Fund Performance and trends in Pension Funds
High Volatility Min 40% Min 20% - Max 25%
Medium Volatility Min 20% Min 40% Min 10% Max 15%
Pension funds have steadily been increasing with ten
Low Volatility Min 05% Min 60% Min 15% Max 05% pension fund managers managing 19 funds. In CY17, the
Lower Volatility - Min 40% Min 40% - pension funds’ AUMs stood at PKR 24.1 billion with
Source: SECP investor accounts of 27,725. Islamic fund were the
dominating category with PKR 15.2 billion assets.
Besides this, some pension funds can also offer other
allocation schemes as lifecycle products. Under these

Besides the equity, income and money market sub-funds, the

206 invest in only commodity future contracts that are traded at the
commodity sub-fund was introduced in a pension fund under circular PMEX and are cash-settled futures (except gold which can be
No. 6 of 2013 dated May 09, 2013. This commodity sub-fund shall invested in a deliverable future contract).

104 Financial Stability Review 2017

Age analysis of the participants reveals that in terms of Figure 2
number around 34 percent of the participants are in the Investor composition of mutual funds
middle age bracket (31-40 years) which is an encouraging Provident/Pension funds' investments in mutual funds is more than
sign (Figure 1). In terms of amount, the total amount double the size of VPS
(PKR billion)
invested by the 51-60 year category dominates (43.4
Others Fund of Funds
percent of total AUMs) suggesting build-up over time. Associated Companies Public Limited Co.
Provident & Pension Funds Banking & Financial Institutions
Comparison of retirement funds’ investments in mutual Individuals
funds with the size of VPS reveals that retirements funds 800
prefer investments in mutual funds rather than their 700
specialized product available for old-age security i.e. VPS. 600
The size of the VPS is almost a third of the 500

provident/pension funds’ investments in mutual funds 400

(Figure 2). This is probably due to difficult 300

administrative burden for employers to manage an 200

individualized pension plan for an employee. Until 100

employers take the initiative to invest their retirement 0

FY12 FY13 FY14 FY15 FY16 FY17
funds in VPS, or employees make the choice of opting
for putting their employment fund contribution under
Source:MUFAP
the VPS, growth of this segment will remain subdued.
Figure 1
Age-wise analysis of Pension Fund Investors
Islamic products are more popular with pension funds
(Number)
<30 Conventional <30 Islamic 31-40 Conventional
31-40 Islamic 41-50 Conventional 41-50 Islamic
51-60 Conventional 51-60 Islamic >60 Conventional
3,500

3,000

2,500

2,000

1,500

1,000

500

0
FY12 FY13 FY14 FY15 FY16

Source:MUFAP

Financial Stability Review 2017 105