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Pension Funds Scheme: World Bank Opposes "Half-Baked Scheme"

By Javed Mahmood, The Daily Times (Pakistan)

May 7, 2004

The World Bank has asked the ministry of finance not to announce "a half-baked pension funds scheme" for new government employees in the upcoming budget, an official of ministry told Daily Times.

Instead of announcing a premature scheme, the bank has asked the finance ministry to first put in place the required infrastructure, prepare a comprehensive legal framework, engage professionals and then make it public, the official said.

The World Bank is supporting finance ministry officials in preparing a precise mechanism for a pension funds scheme for government employees, to be engaged after June 2004 on regular basis.

"The proposed pension funds scheme for the government employees is still at very infant stage as neither the finance ministry has yet decided the mode of the scheme, nor prepared its basic structure," the official added.

The finance ministry seems determined to announce the pension funds scheme in the coming budget. The officials of the ministry, its actuary wing and the World Bank are working on this scheme.

Three options being considered: He pointed out that at present three options are being discussed regarding pension funds - guaranteed return at retirement, defined contribution and defined return.

He said in guaranteed return the federal government would ensure a certain amount of return at the retirement of its employees.

In the case of defined contribution, the employees would contribute a certain portion of their salary towards pension fund and there would be no determination as to how much amount they would get after retirement.

In the case of defined return there would be a clear indication about the possible amount of return to be offered to the employees soon after retirement. 

The official, however, said that the World Bank and International Monetary Fund officials are supporting the idea of introducing defined contribution mode, linking return with outcome of investment by the funds.

In other words, if the pension fund earns profit on investment, the benefit would be passed on to the pensioners. But in case the fund suffers loss, this too would be passed on to the pensioners. He said that the defined contribution proposal envisages risk and the ministry of finance may not agree to it.

It is also unclear as to who would manage the pension fund and whether the proposed pension regulatory authority would be involved.

The official said that the finance ministry is expected to decide the mode of pension funds at the end of May.

He said that the establishment of infrastructure, legal framework and hiring of experts and professionals might take many months after the announcement of the pension scheme in the coming budget.

The official made it clear that there would be no change in the pension structure of the existing retired government and army officials.

He said the federal government was spending about Rs 33 billion a year on the pension of the existing 1.2 million army and government pensioners. 

A major chunk of pension, more than Rs 24 billion is taken away by nearly one million army pensioners.


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