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Pension scheme needs reform

NPPF annual report cautions that pension scheme will not sustain without reforms

NPPF: The National Pension and Provident Fund’s (NPPF) can sustain its civil pension scheme only until 2042, and the armed forces pension scheme until 2039, if reforms are not undertaken.

This was deduced from the funded ratio, a measure of pension system’s unfunded liabilities against its assets.  In other words, for a pension fund to be sustainable, the rate of contributions should be adequate to meet the current service cost and payment of benefits.

A 100 percent funded ratio means that a system has sufficient assets to pay all benefits earned by all its members.

In its annual report, NPPF reflected that its funded ratio currently stands at 50 percent for the civil pension plan and 35 percent for armed forces pension plan.

An NPPF official requesting anonymity said the pension fund was sustainable, but there could be distortion in the cash flow, meaning there would be a mismatch in fund inflow and outflow.

“Improving the funded ratios to 100 percent will require enormous funding by the government, which do not look viable at this juncture,” the report stated.

The changing population demography is another aspect that is affecting the funded ratio.  The official said that the population demography was such that more people would exit the pension scheme in the same span of time with lesser people joining the scheme.

This again means that rate of contributions towards the pension system would experience a sluggish growth, while payments would speed up.

In the last fiscal year 3,436 new members joined the scheme, while 1,583 members exited from the scheme, but this trend is bound to reverse, considering the demography.

The population projection made by the National Statistical Bureau (NSB) reveals that declining fertility and consistent increase in life expectancy would result in doubling the number of older persons or people nearing retirement age by 2030.

In absolute terms, it is projected to increase from 29,745 persons in 2005 to 58,110 persons by 2030.

However, with the average age of the pension members currently at about 34 years, the increase in pension expenses is limited when growth in number civil servants is contained.  Today, most of the members are in the age bracket of 25-35 years. About seven percent of the total population is NPPF members.

While officials said NPPF was striving to maintain the funded ratio at least at the current level, it would be a challenge if there were further ad-hoc increases in civil service pay scales.

This is because, when more funds are lying idle, the institution’s liabilities increase, albeit enhancement of cash flow in the short term.  But in long run, it will worsen the funded ratio, the report stated.

“It must be recognised that ad-hoc increases in salary scales have huge detrimental effects on the long-term sustainability of the pension plan,” the report stated.

The official said that a National Pension Policy is in its draft stage. “Once the policy comes in place, then an Act will to be proposed,” he said.

Meanwhile, it is estimated that the annual contributions to pension and provident fund accounts constitute about 5.22 percent of gross domestic saving.

It is also said that pension income represents about 1.29 percent of household income.

The membership of the pension plan continued to increase with the civil service growing by about three percent during the fiscal year 2013-14.

As on 30 June 2014, there were 418 employers (agencies and organisations) and 50,728 members registered with NPPF.

Payments to pensioners from both the civil and armed forces amounted to Nu 203M in the last fiscal year, an increase of 28 percent over the previous year.

During the same time Nu143.5M was paid as provident fund benefits to members leaving the civil and armed forces.

By Tshering Dorji

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