Pension funds play very crucial role in ensuring social safety nets and security for aging population. These are those financial measures that are structured and designed to provide a stable and reasonable amount of income to individuals during their retirement period. These funds are extracted from employees and sometimes employer account and then invest in diversified portfolio of investment such as stocks, bonds, securities etc. The returns generated from these investments are then given back to the individuals in their retirement period where they can use it for a better living.
Retirement is ideally considered a stage of life where the individual makes a peaceful and pleasurable life by enjoying the beauty of the world without caring and thinking much about the financial resources. Developing countries across the world are considering multi-pillar pension system in order to provide financial security to individuals in their retirement ages. This is all about public servants or government employees as they get a reasonable amount of pensions after their retirement but what about the private sector? Let’s take a close look.
Private job holders are those individuals who play a crucial role in the development and growth of the economy by working for the private companies and firms. With respect to public servants, private servants are more efficient as well as their marginal productivity is more than these government employees and this can also be experienced from the conditions of both the public and private sectors, but yet they have no reasonable amount of financial resources in their retirement period due to which they face serious difficulties regarding their health issues, food, shelter etc.
One can think that there are no plans regarding private pension funds across the country but this is totally wrong due to our financial illiteracy. Private pension funds were first formally introduced in Pakistan in 2007, under the Voluntary Pension System Rules issued in January 2005. VPS allows people to contribute to private pension funds on purely voluntary base and receive benefits in the retirement years. It is a self-voluntary pension savings scheme which is open to all adult Pakistanis registered with tax authorities and having a Computerized National Identity Card (CNIC). Rather than mandated state pension funds and mandated occupational saving schemes, VPS is designed to ensure responsible fiscal management, to expand inclusion to encompass informal sector employees and enable variable coverage levels for workers.
It allows for asset management companies and other insurance companies to be legally licensed and approved by the Security and Exchange Commission of Pakistan (SECP) as pension funds manager. It has a certain limit on the maximum annual contribution for persons above than 41 years old. For those joining the plan at age 41 or older, they can receive an additional 2% credit for each year over 41, up to a maximum of 30% of the taxable income from the previous year.
These contributions can be made on lump sums base or regular base. The fee structure of the VPS system is much lower than normal mutual funds provides incentives for the households. It has the flexibility of individual asset allocation through individual accounts. The individual can diversify their contributions among more than one fund manager and can transfer the account to other fund manager twice a year.
Households have the flexibility of selecting a predefined set of investment portfolios based on their risk tolerance and sense of trust. The pension scheme provides a choice of four allocation schemes including high, medium, low and lower volatility. Each of these schemes provides three or four sub funds. Moreover, life cycle allocations scheme provides more aggressive pension schemes with respect to different age limits. Last but not the least it facilitates individuals both on conventional VPS and Shariah VPS which helps the conservative members in an effective way.
There are certain obstacles in the development of private pension funds including financial illiteracy, limited employer sponsored plans, trust issues, risk aversion, short term financial priorities and underdeveloped financial markets.
The government and private sector should collaborate with each other in order to solve these issues and makes an impact in providing a reasonable amount of income to the private job holders in their retirement age so they make a happy ending.