“improvements required in voluntary pension system regulatory regime” nauman a. cheema actuary
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“Improvements required in Voluntary Pension System
Regulatory Regime”
Nauman A. CheemaActuary
Co-ordinated attempt by SECP and CBR made to introduce Voluntary Pension pillar in Pakistan
Previous attempts did not meet desired success (RAS)
RAS did not fit into overall environment VPS is a step-forward but to what extent? In my opinion, improvements needed to make the
Scheme effectively workable.
INTRODUCTION
IS VOLUNTARY PENSION SCHEME NEEDED?
Certainly Few people covered by retirement
benefits in Pakistan For covered people, amounts are
grossly inadequate.
EXISTING RETIREMENT SCHEMES
Individually purchased Schemes practically non-existent
Employer sponsored Schemes, in some percentage of formal sector, in the shape of Provident Funds Gratuity Schemes Superannuation Funds
Important to view all 3 as part of Pakistan’s existing “Pension System” (apart from EOBI).
MAJOR REASONS FOR NON-EXISTENT INDIVIDUAL
ANUITY/PENSION SCHEMES Short-term “lump-sum” thinking generally prevalent
in the country, accentuated by Government policies Capital gains non-taxable and that too regardless of
holding period (stocks, mutual funds, real estate etc.) Extremely unattractive and irrational tax regime for
annuities, even as compared to insurance Lump-sum withdrawals from life insurance policies
at any age considered tax exempt Labour laws mandate lump-sum schemes Non-tying up with Corporate Pension System
environment
CORPORATE PENSION ENVIRONMENT
Employer paid benefits enjoy extremely tax favoured environment
E, E & E all the way Heavily geared towards tax free lump-sums (PF
receipts are tax exempt on leaving service regardless of age)
Employee money has less favoured T,E,E treatment
Employee money is relatively small in employer schemes – mainly PF’s
ESSENTIALS FOR VPS TO SUCCEED
Needs to enjoy tax treatment at least as favourable as corporate schemes (E,E,E)
Needs to incorporate short term tax incentives
Needs to incentivize lump-sum withdrawals (within limits)
Needs to be able to attract corporate money
VPS SCHEME – INDIVIDUAL, CORPORATE SPONSORED
OR BOTH
Basically for individualsCorporate involvement appears to be an
after thought (changes are required).
IMPROVEMENT AREAS IN EXISTING VPS REGULATORY REGIME
In view of above “essentials” for success, following areas (in my opinion) need to be amended
A. Unfavourable tax treatment on retirement (E,E,T) Installments fully taxable Commutation gray area
Changes required in IT laws
B. Unfavourable tax treatment on death Withdrawals taxable Annuity fully taxable
Changes required in IT laws
C. Unfavourable tax treatment on disability VPS Rules envisaged disability as regular retirement IT laws do not incorporate VPS thinking Disability restrictively defined in VPS Rules
Amendments required in VPS Rules & IT laws ….
IMPROVEMENT AREAS Contd……..
D. No tax relief in case of emergencies OR needs above certain age essential to introduce tax exempt limited withdrawals for
above
Amendments required in VPS Rules & IT laws
E. Tax relief on 25% commutation apparently allowed (gray area) compared to 50% in occupational scheme accumulated tax free withdrawals (including commutation)
upto retirement should be 50%
Changes required in VPS Rules & IT laws
F. Eligibility Criteria
Extremely important to review eligibility criteria in VPS Rules and IT Ordinance and understand differences
VPS RulesEligible Persons are i. Pakistani Nationalsii. Over 18 years of ageiii. Have valid NTNiv. Not employed in any position entitled entitling them to
benefits under any “approved occupational scheme”. Provided contributions can be made if occupational scheme does not entitle to benefits in current year of service.
Eligibility Criteria Contd……..
IT Ordinance
Eligible Person is :
i. an individual Pakistani
ii. has NTN
iii. not entitled to benefits under any other approved employment or
annuity scheme
Eligibility Criteria Contd……..
Areas of difference are :i. 18 years condition waived in IT lawsii. Eligibility criteria made more restrictive by
a. Excluding persons currently or prospectively entitled to benefits under pension scheme of another employer
b. Excluding persons, under all conditions, employed in positions covered by approved pension or annuity schemes
iii. Terminology of “approved occupational scheme” is used in VPS whereas “approved employment pension or gratuity scheme” in IT Ordinance. Is there a difference? Government or Army Schemes?
Eligibility Criteria Contd……..
Areas of difference need to be removed Little rationale for excluding individuals covered in
occupational/employment pension schemes due to :
i. general low and variable levels of occupational pensions
ii. “pensions” provided by other schemes such as Gratuity and PF
NTN condition needs to be removed for corporate money
Amendments required in VPS Rules and IT Laws
ISSUES TO BE ADDRESSED AND CHANGES TO BE MADE FOR
EFFECTIVELY ALLOWING VPS TO ACT AS EMPLOYEE BENEFIT
SCHEME
Some areas that need to be addressed : Total employer contributions to all EBF Limit of Rs.500,000/- employer
contribution on behalf of all employees (?!)
ISSUES TO BE ADDRESSED Contd….
Employer contribution can be currently many times employee’s salary(?!)
How is tax credit determined if employer and employee both contribute to VPS
Taxability of employer contribution to employee above a certain limit
NTN condition will exclude low paid employees (!)
ISSUES TO BE ADDRESSED Contd….
IT eligibility criteria will exclude employees in VPS entitled to benefits under another pension scheme(!)
Retirement age in VPS needs to be made more flexible to conform to employer’s retirement age
Areas of difference between VPS and “Superannuation Fund” need to be analyzed and co-ordinated. Some examples are : Commutation limit Taxability of various benefits Benefits such as early retirement pension cannot be offered
under VPS
Changes required in VPS Rules & IT Ordinance
RISK OF MISSELLINGKey area of concernRisk of misselling increased due to
Only scheme having upfront employee contribution tax credit
General lack of understanding of whole system
Short-term thinking of saver/investor
RISK OF MISSELLING Contd…
As examples, may seem attractive for high-paid individual investor, but is it really in
current largely (capital gains driven) tax free environment?
for PF but is it so after considering full regime of tax, free benefit at all ages, loans etc.?
Huge international scandals, more risk for Pakistan SECP will need to
educate monitor and effectively regulate this risk
SUMMARY First important step taken by SECP
supported by CBR Further changes and refinements
needed to make system more effective in view of i. Prevalent individual related investment
environment
ii. Existing corporate environment
iii. Short-term culture
SUMMARY Contd…
Greater co-ordination between SECP and CBR required for Scheme’s success and increased rationalization
Potential risks need to be monitored and regulated by SECP
VPS needs to move in tandem with investment environments related to individuals and EBF’s
Thank you
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