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Voluntary Pension System ‘Features, Issues and Prospects’. Muhammad Afzal NBFC Department Securities and Exchange Commission of Pakistan . SECP Mandate. 2002: Part VIIIA of the Companies Ordinance, 1984 ( Section 282A-282N ) NBFC Rules and Regulations.

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voluntary pension system features issues and prospects

Voluntary Pension System ‘Features, Issues and Prospects’

Muhammad Afzal

NBFC Department

Securities and Exchange Commission of Pakistan

secp mandate
SECP Mandate

2002: Part VIIIA of the Companies Ordinance, 1984 (Section 282A-282N) NBFC Rules and Regulations.

2003: Section 20(4)(V) of SECP Act, 1997:

“Promoting and regulating development of Private Pension Schemes/ Funds”.

2004: VPS was notified as form of Business under section 282A of Companies Ordinance.

2005: The VPS Rules were notified

briefing scheme
Briefing Scheme
  • SECP Mandate
  • Features of VPS - Pension Funds
  • Issues
  • Prospects
other laws
Other Laws

Income Tax Ordinance, 2001 governs any taxation matters concerning VPS.

Insurance Ordinance, 2000: Insurance Ombudsman appointed under section 125 of the Ordinance has the powers to hear and decide any disputes between participants and the pension fund manager.

vps purpose
  • To provide recognized framework for saving and investment by individuals (employed or otherwise) during their working life who wish to have a source of regular income after workable life.
  • Individuals holding NTN, NIC or NICOP are eligible to become participants subject to provisions of tax laws: Income derived from salary and business is relevant.
vps features
VPS Features

VPS is a regulated. The Rules prescribe:-

  • Eligibility criteria for Fund Managers, Trustees and Participants
  • Obligations of Fund Managers and Trustee
  • Minimum contents of constitutive documents
  • Reporting and disclosure requirements
  • Nature of and caps on fees and expenses
  • Rights of Participants
  • Containment conflict of interest
vps features7
VPS Features
  • Options to receive monthly income
  • Nominees are eligible to receive benefits
  • The system is portable
  • Participants are granted tax incentives at:-
    • Contribution stage – subject to limits
    • Distribution stage; and
    • Disbursement stage – partial
equity sub fund
Equity Sub-Fund
  • Listed shares minimum 90% of NAV
  • Stocks with 5 year operational record
  • Per company exposure:
    • Islamic: 10% of NAV
    • Conventional: 05% of NAV Or
    • Paid up capital of a company 10%
  • Companies without operational record:
    • Total: 05% of NAV
    • Per company: 01%
  • Per sector exposure
    • Islamic: 25% of NAV
    • Conventional: 20%
money market sub fund
Money Market Sub-Fund

Investment in short term debt securities with average portfolio duration not exceeding one year

  • GOP Securities: 100%
  • Bank deposits: 100%
  • Per bank exposure: 25%
  • Other securities:-
    • A- and above 20%
    • *Islamic lesser of 7.5% of NAV or Issue

(*rated on not rated)

debt sub fund
Debt Sub-Fund

Investment in debt securities with weighted average duration up to 10 years

Federal Government Securities: 50% Min.

Investment in other securities, lower of:-

  • 5%of NAV or Issue (AA or Above)
  • 3.75%of NAV or 5% of Issue (A to A+)
  • 2.5%of NAV or Issue (BBB to A-)
debt sub fund shariah
Debt Sub-Fund (Shariah)

Shariah compliant debt securities with weighted average duration up to 10 years

  • Federal Government Securities: 50%
  • Bank deposits: 50%
  • Other securities:-
    • Per security: 10%
    • Rating below BBB- total15%
    • Rating below BBB- per security 05% of NAV or 2.5% of Issue
number of pension funds
Number of Pension Funds
  • FOUR AMCs were registered as FMs in 2007
  • All the registered FMs launched PFs in 2007
  • At present, there are SEVEN Pension Funds:-
      • FOUR Islamic
      • THREE Conventional

(Each of the Funds has three sub-funds)

  • Slow Growth
  • Comparative Disadvantage: Terminal Benefit Schemes, MFs, Modarabs, NSS, Bank Deposits
  • Capital Market imperfections
  • New mandate and status of other laws

In 2008SECP mandate extended to regulate private occupational savings schemes

Section 20(4)(W) of SECP Act:

“ promoting and regulating any scheme, fund, arrangement or undertaking (including but not limited to pension, superannuation gratuity and provident funds and schemes) established by or on behalf of companies and state-owned corporations as employers, for entitlement of post employment benefits of their employees.”

actions prospects
Actions / Prospects
  • Survey of OSS No.
  • Listed companies: 575
  • Responded: 355
  • Workforce (approx.) : 404,000
  • Funded Schemes (Rs. in billions)
  • Gratuity: 12
  • GP Fund: 91
  • Pension Schemes 139
  • Total: 242
conflict of interest contained
Conflict of Interest-Contained
  • Trustee to be independent of FMs
  • Services of affiliated brokers not to be used
  • Single broker transactions restricted to 10%
  • Transaction with connected persons prohibited
  • Merger or take over of other funds only with prior approval
  • Auditors to be rotated.
actions prospects19
Actions- Prospects
  • Revision of VPS Rules
  • Rules/ Regulations on OSS
  • Tax Reforms aimed at level playing field for retirement schemes


conflict of interest contained20
Conflict of Interest-Contained
  • Participation in joint accounts prohibited
  • Investment with the purpose of acquiring control or management prohibited
  • FMs to contribute seed capital for three years
actions and plans
Actions And Plans

For promotion of VPS:

A document titled “Participants’ guide to Voluntary Pension System” has been prepared.

Operational and structural issues are being addressed based on feedback from the industry

provident funds investments
Provident Funds Investments
  • Legal framework:
  • Companies Ordinance provides following investment options for PF (section 227):
    • NSS;
    • Deposits with Scheduled Banks;
    • Government Securities;
    • WAPDA Bonds/securities; or
    • In listed securities as may be prescribed by the Commission.
provident funds investments24
Provident Funds Investments

The Commission framed “ The Employees Provident Funds (Investment In Listed Securities) Rules, 1996 which prescribed conditions for investment in listed securities by PF as follows:

  • Total investment in listed securities 10%(1996), 20% (1997) 30% (1998).
  • 1996: Up to 1% of PF in securities of any Company (the condition was withdrawn in 1997).
provident funds investments25
Provident Funds Investments

Investments not to increase 5% of paid up capital of a company

Investment in shares of only such

which have:

  • 5 year operational record
  • 15% or more dividend payment in 3 preceding years consecutively.
provident funds investments26
Provident Funds Investments
  • Investment in Debt securities only if rated ‘BBB’ or above.
  • No investments if defaulted any financing facility
  • The Commission empowered to adjust conditions and impose fine for any defaults
  • 2002: Investment in listed unit trust schemes was also allowed.