Dr Dhiman Chowdhury :
Among the various pension schemes, contributory pension for private sector workers and employees is the most common around the world. This scheme can be voluntary or mandatory by the government. In a competitive economy it is usually voluntary and in noncompetitive economies it is mandatory. An employer normally would not give pension to its workers if the labor market is noncompetitive. In such countries, government intervenes and makes laws for private sector pension mandatory for employers. Under the schemes employees contribute a certain percentage typically 5% to 10% of their monthly salaries and employers also contribute either the same amount or a bigger amount.
State cannot afford generous pension. States are becoming vulnerable to the rising pension liabilities (defined benefit) and could not support these financial burdens almost everywhere in the world. On the other hand the individual responsibility for old-age pension is strengthened (defined contribution). The idea of reforms in state pension sprang from weak social and cultural values, breaking up of extended family system, increasing old age group and lower fertility rate, and the skeptical view towards the ability of the state to honor its promises.
Defined benefit pension has decreased in USA private sector which now covers 18% of labor force compared to 35% in early 1990s whereas defined contribution pension in the private sector has increased from 8% to 31% during 1980 to 2008. Similar trend happened in UK also. Percentage of new employees joining in a defined benefit pension declined from 67% in 2002 to 11% in 2008. Mandatory contributory private pension. Contributory pension in formal private sector is mandatory by government everywhere in South Asia in India, Malaysia, Thailand, Philippines, Indonesia, Sri Lanka, Vietnam, Pakistan and Nepal but except in Bangladesh.
Employees and employers contribute in various schemes. Government contributes when there is shortage in the fund in some countries like Vietnam, Philippines and Pakistan. The schemes cover monthly pension, health and other life insurance benefits. All these schemes are tax favored, that is, for employers the expenses are tax deductible and for employees the receipts are tax exempt.
Different names. Social security, pension, provident fund, retirement benefits are usually the same with little difference. Social security is a broader concept because it includes monthly pension, health and other life insurance. When it is pension and retirement benefits it only means monthly old-age retirement benefits.
This word is usually common in the government sector. When it is provident fund it means a forced savings fund financed by both employers and employees. Nowadays all these are contributory from both the employers and employees. In USA, social security is financed by employee and employer payroll tax called Federal Insurance Contribution Act (FICA) tax. In addition to these there is gratuity, a lump sum amount, given by the employer, usually half to one month’s salary for each year of a minimum service.
But when provident fund is contributory then this gratuity is deducted from the provident fund. In developed countries there are voluntary schemes in the private sector in addition to the State sponsored social security but in the developing countries voluntary schemes are rare when there are government mandatory contributory pension or provident fund schemes.
Regulatory authority. Private pension is regulated initially by the government where market has serious flaws. A government agency like the central bank can work as a clearing house and can provide functions such as transaction settlement, account administration and recordkeeping.
The private pension may also be integrated with the national pension system (NPS). India has a pension fund regulatory and development authority (PFRDA). The subscriber will be given a unique permanent retirement account number (PRAN). The PRAN can be used from any location in India. There are points of presence (POPs) who will act as collection point including public and private banks, financial institutions, Post Office for opening the pension accounts. Employees can change their employers but still maintain his pension account with a central pension administration system or the NPS. In Philippines, a tripartite social security commission composing of government, employer and employee representatives is responsible for general management, supervision, and regulation of the program.
South Asia and Bangladesh. Philippines have Social Security System (SSS) under Social Security Act 1954 which provides monthly pension when employees contributed for 10 or more years. Private sector employees, household workers and self-employed persons earning at least 1000 Pesos a month contribute 3.33% of gross monthly earnings and employers contribute 7.07%. Self-employed contributes 10.4%.
Indonesia’ government regulation in 2015 requires mandatory contributory provident fund where all employers pay 3.7% and employees pay 2% of monthly salary. In Thailand old age pension is a pay-as-you-go pension scheme that is financed by both the employer and the employee.
Participation in the scheme is mandatory for private sector employees. The employer and the employee each pay a contribution rate of 3% of gross salary, up to a contribution assessment ceiling of THB 15,000. The government adds an additional 1%. In India Employees Provident Fund and Miscellaneous Provision Act 1952 requires 12% contribution from employers and employers each.
This Act is applicable in all factories and establishments with 20 or more employees but for employees who earn INR15000 or less. All moneys of the fund are deposited in the Reserve Bank of India or such other scheduled banks approved by the central government. In Sri Lanka there is a national Employee Trust Fund Act 1980 for both private and public sector employees where only employers contribute 3% of the total earnings of the employee.
ETF benefits cover life insurance, medical, children scholarship. Mandatory contributory Employee Provident Fund Act 1958 is contributory collecting 8% of employees’ earnings from employees and 12% from employers. Pakistan’s Employees’ Old-Age Benefits Act 1976 requires employers to pay 6% and employees to pay 1% of minimum salary (PKR13000 in Islamabad) in all establishments with 5 or more workers, whether contractual or regular or employed during past 12 months. Minimum pension is PKR3600 per month. Currently 1.5 million individuals get pension in 33000 establishments.
Vietnam has access to social security and retirement pensions. Employees in the formal sector contribute 8% and all employers contribute 18% of salary plus government subsidies when necessary. As of 2015, mandatory pension covered 12.3 million contributors which are 20% of labor force.
In Nepal, social security tax @1% is charged on the first NR250000 of personal income (payroll tax) beginning 2009-10. The benefits are available for 2.7% of population between the age of 15 and 60 years working in the formal sector. Labor Rules, Section 26 provide for 10% deduction from employees’ salary and equal amount from employers to provident fund.
In Bangladesh there is no government regulated pension or provident fund in the private sector by the Labor Law 2006, nor by the Provident Fund Act 1925. Some established private institutions particularly in the urban areas provide contributory provident fund for there are international and ILO standards on provident fund (Social Security-Minimum Standards Convention 1952, No. 102). However, in the Bangladesh Labor Law 2006, there is provision for gratuity of 45 days’ salary last drawn for each year of service of 12 or more years. This gratuity is a lump sum grant and much smaller than provident fund. Also since gratuity is not contributory, employers have additional scopes for being noncompliant.
(Dr Dhiman Chowdhury, Professor of Accounting, Dhaka University [email protected])
