Punjab to adopt new pension system, SECP says

ISLAMABAD: The provincial Punjab is considering switching to a voluntary pension system (VPS) for its employees, following the example of Khyber Pakhtunkhwa (KP), to ease the burden on its budget, officials said on Monday.

Senior officials of the Securities Exchange Commission of Pakistan (SECP), the regulator of the country’s capital markets, said the commission had been approached by the Punjab government for help in implementing the VPS, which would replace the existing traditional pension scheme.

The VPS, which was upgraded by the SECP to the level of the employers pension scheme (EPS), allows employers in both public and private sectors to offer fully funded defined contribution pensions to their workers, instead of the unfunded defined benefit pensions that are common in Pakistan. The SECP said the EPS could be rolled out in Punjab from the fiscal year 2024-25, starting in July this year, for all newly hired provincial employees. Khalida Habib, executive director of the Specialized Markets Division, explained that amendments to the regulatory framework now enable employers in both the public and private sectors to offer a diverse array of retirement savings plans, thereby modernizing the pension scheme landscape. However, despite efforts to revamp the pension system, Pakistan continues to grapple with significant pension challenges.

Abdul Rehman Warraich, Commissioner of SECP, underscored the necessity of pension reforms in the country, emphasizing their relevance not only for government employees but also for the private sector. He pointed out that the federal pension bill surged from Rs150 billion in 2020 to Rs480 billion in 2021, with the federal government's unfunded liability presently standing at approximately Rs3 trillion.

Similarly, provincial governments have witnessed exponential increases in pension bills, escalating from Rs75 billion in 2011 to Rs500 billion in 2020. Without reforms, Warriach cautioned that the federal pension bill is projected to soar to Rs750 billion by 2023, with provinces likely facing analogous challenges, as many state entities struggle to meet pension obligations to retired employees.

The structure of the Employer Pension Fund encompasses the definition of "Employer," comprising group companies, holding companies, and Federal/Provincial Governments for all participants employed in their respective owned/controlled institutions/authorities/local governments. Life insurance companies, asset management companies, and registered investment advisors serving as pension fund managers are eligible to offer employer pension funds. Currently, the total assets under the management of pension fund managers exceed Rs61.32 billion.

Significant amendments to the VPS rules aim to modernize Pakistan's pension landscape, allowing employers in both public and private sectors to offer fully funded defined contribution pensions. The reforms depart from traditional pension structures, aiming to alleviate strain on government finances and ensure future pension liabilities are fully funded. These changes align with global best practices, offering flexibility for workers to tailor their investments. Additionally, the reforms expand inclusiveness by allowing non-resident Pakistanis to save for retirement in the country, bringing Pakistan in line with international pension solutions like the 401(k) retirement plans in the USA.