A Framework for Occupational Savings Schemes Regulation Summary of Recommendations for the Securities and Exchange Commission of Pakistan Jeremy Gadbury

A Framework for Occupational

Savings Schemes Regulation

Summary of Recommendations

for the Securities and Exchange Commission of Pakistan

Jeremy Gadburyon behalf of

The International Securities Consultancy Limited

Islamabad Wednesday 27th June 2007

A Framework for Occupational Savings Regulation

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The SECP’s role

Securities and Exchange Commission of Pakistan Act, 1997 as amended by the Finance Act, 2003, as follows:

20 (4) The Commission shall be responsible for the performance of the following …

promoting and regulating development of private Pension Scheme and Funds


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The SECP’s role

Legislation generally expected to include

Pension funds and pension arrangements

Provident Funds

Gratuity Funds and gratuity arrangements

in the private sector, and to some degree the public sector.


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The Terms of ReferenceScope of Work;• Develop a regulatory and supervisory framework for

occupational saving schemes.Detailed Tasks:• 1. Assist the SECP in developing a framework for regulation

of occupational savings schemes. • 2. Assist and guide the SECP in collating relevant data on

occupational savings schemes and, based on international best practices, provide a sequential roadmap for their regulation.

• 3. Targeted review of the operational processes of the SECP Pensions Wing and update them with regard to regulation and monitoring of pension funds.

Output/Reporting Requirements:• Make detailed recommendations for the tasks detailed above.



The legislation

Surveys and Statistics

Points of concern – and suggested solutions


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Major features of the Consultancy to date

•The Workshop on considering the Regulatory Framework for Occupational Savings Schemes on 25th June, •Organising an internal study of pension and gratuity arrangements of leading Pakistani companies.•Developing the Survey questionnaire of occupational savings arrangements to be sent out to all listed companies in Pakistan.•Designing the style and content of a Report based on the Survey.•Providing advice on the Voluntary Pension System.


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The 25th June Workshop

ParticipantsInvestment Managers

Atlas, Arif Habib, JS AbamcoActuaries

Nauman Associates, Sidat Hyder MorshedCustodian, Trustees

Central Depositary CompanyCorporate Sector

Pakistan International Airlines, Engro Chemical

SECP attendees – Pension Wing


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The 25th June Workshop

Approach

SECP has a planned approach of regulation

Invited workshop participants • To comment on the approach• To develop ideas related to the approach• To highlight contentious issues• To highlight matters omitted• To discuss the timing of certain measures

In a workshop environment


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The recommended regulatory approach


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Principles behind the Regulation• The idea of a light regulatory touch • Staggered introduction of measures• Compatibility with Voluntary Pension Scheme

Rules

The preferred route is to focus on • Registration, • Trust structure and • Audit to ensure that pension and provident funds are

financially strong and responsibly managed… …and go from there.


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Principles behind the Regulation

• Establishing a robust system of occupational savings that will add to the social and financial stability of the country.

• Enabling employers to develop appropriate employee benefit structures that will assist their own competitive position.

• Protecting the interests of the employer.• Protecting the current and future interests of the

employee.• Protecting the interests of a pension beneficiary .• Encouraging the development of professional

management of occupational savings schemes.


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Principles behind the Regulation

• To recognise that the pension and provident fund systems are, as far as we can tell, generally well managed.

• To build on those strengths.• To make it straightforward for pension and provident

funds to continue.• To discover and eliminate any bad practices and

misdemeanours.• To recognise it is not only a matter of regulating

occupational savings schemes but also the benefits and how they are paid.


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Points of interest and concern

General points on legislation.1. Pension regulation is not pension reform.2. But no matter how accommodating it is to well run

existing schemes and encouraging to the formation of new arrangements, new regulation will shape the structure of occupational savings in the years to come, and affect the social and economic structure of the country.

Unless the law is carefully considered, its impact may be very different to that intended. Even the prospect of compliance with legislation may result in funds closing.


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Code of practice Legislation with

Mandatory registrationConditions to apply to registrants

Timetable October, November 2007


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Develop a Code of Practice as to how Occupational Savings Schemes should behave

To be introduced prior to legislation and continue afterwardsShows major target features, including• Audit• Schemes should be separate from employer’s books,

under trust• Reporting to members• Schemes should be fully funded• Data collectionHas no legislative impact but shows future intention


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REGISTRATION

TRUST

AUDIT

SECP CAN INTRODUCE REGULATIONS FOR REGISTRANTS


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1. Registration with SECP of all pension arrangements, provident funds and gratuity funds, suitably defined, with an exemption category - overseas schemes with local employees.

2. All registered arrangements to be established under Trust by a target date, with the exceptions - those established by legislation, mostly public sector.

3. All registered arrangements to be audited by a target date, again with possible exceptions.

4. SECP to introduce requirements that apply to registrants.


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Existing pension, provident fund, gratuity legislation under Income tax Ordinance and Income tax Rules, part under control of SECP.

• Recommended: Responsibilities of Central Board of Revenue to be transferred to SECP, including process of giving approval for tax relief, whether by consolidating tax legislation or giving SECP powers.

Existing practice mainly under IAS 19, IAS 26.• Recommended: to be codified and apply to all

schemes, not just for those schemes of companies that are listed.


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The recommended regulatory approachLegislation: Further measures to be introduced, including• Fully funded pension, gratuity funds, again with

exceptions• Annual filing, data collection• Trustee responsibilities and liabilities• Structure for approving corporate trustees• SECP may appoint trustees in certain situations• SECP has power to investigate, prosecute, fine• Winding up provisions and process • Appointment of liquidator• Court may intervene, powers of the court, legal

processes• Appeal board on winding up


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The recommended regulatory approachLegislation: Further measures to be introduced, including• Independence of solicitors and auditors.• Ability of members to make complaints.• SECP process for investigating complaints and its

various other roles.

• Restriction on investing in associated companies.• Standards on payment of benefits, and where benefits

cannot be paid or are unclaimed.• Standards on making contributions.

Code of Practice to be continuously reviewed and updated; elements to become regulations over time.


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The recommended regulatory approachVoluntary Pension System

Separate category of occupational savings, intention is to add this category into the broader legislation over time.

Detail to be as near identical in rules and their application,

• Standards on trustees• Standards on recordkeeping• Standards on payment of benefits• Member’s investment choice principles to apply• Broadly same investment rules


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On who will be liable under the legislation.Regulation will require…

1. Employers – funding requirement on defined benefit2. Trusts and trustees – payment of benefits, investment

policy3. Custodians – holding assets4. Investment Managers – breaches, contractual

agreements to manage funds

…to comply, so it will need to be legislation, with the ability of the SECP to write binding conditions on registrants.


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The recommended regulatory approachThe roles of the SECP will include• Registration• Annual returns, filing• Monitoring• Industry data collection and publication• Developing regulatory role• Ensuring compliance with legislation, regulations• Handling member, employer complaints and enquiries,

with legal power to access information• Investigations• Winding up schemes • Enforcement, prosecutions, fines



Surveys and Statistics


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Surveys and StatisticsThe need for statistics…

• For the SECP to understand what it is to regulate• For monitoring, establishing trends• To know if the regulations are encouraging or

discouraging savings structures• For an assessment of penetration of savings markets,

their success• For knowing how assets are invested, helping in growth

of securities markets• For the industry to develop new products• For employers to be aware of employee benefit trends• For broad policy purposes on social security, pensions

…leading to their publication and ease of access.


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The July 2007 SurveyPart of building up knowledge base, a Survey of the over 600

listed companies in Pakistan.Requests to be sent out before the end of June.Replies to be received within 30 days.Outline Report and Contents already drafted.Report given to respondents, made available on SECP

website, target date October 2007.Looking at pension, provident and gratuity arrangements.Recommend that it should be repeated every two years.This would help in the development of capital markets by

establishing investment patterns of occupational savings schemes.

A forerunner of information to be required under legislation.


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The first internal Survey on Occupational Savings Schemes

KSE top 10098 companies, of which• 35 have funded Pension funds: Rps.123 billion, • 24 in surplus, 11 in deficit. • Largest deficit is 36% of assets.• 52 have funded gratuity funds: Rps. 11 billion• 35 in surplus, 15 in deficit.27 have unfunded gratuities: Rps. 6 billion77 have Provident Funds



Points of concern – and suggested solutions


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Trust structures are recommended, but…

• Is 1882 Trusts Act strong enough for a much more progressive occupational savings environment?

• Should insurance policies be allowed?• Should an occupational savings scheme be established

under an insurance policy?


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Points of interest and concernOn transferring the effective regulatory responsibilities of the

Central Board of Revenue under the Income tax Act and the Income Tax rules to SECP, where their main purpose is to see if tax relief should be granted.

• Legislation would be required.• Would the CBR find this acceptable?• How might it be acceptable?• What is involved in a transfer, considering CBR have a

number of regional offices?• Would it be staggered?• Would CBR staff move to SECP?• What capacity is needed at SECP to handle this?• Would relevant Income Tax Act and Income Tax Rules

would become part of SECP pension legislation.


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How do you address the problem of companies seeing regulation, however it is packaged, as a reason to close down occupational savings schemes?

A challenge, how do you encourage companies to establish defined contribution pension funds and establishing provident funds?

Voluntary Pension System covers pension funds, but you may need a new Master Trust provident fund structure for establishing provident funds for smaller companies.


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Gratuities : Two types 1. Where gratuity fund is established to save for legal

obligation.West Pakistan Industrial and Commercial Employment (Standing Orders)

Ordinance, 1968 where employers fifty or more employees are obliged under to pay a gratuity to a leaving employee, at the rate of thirty days wages for every completed year of service, or part of a year in excess of six months.

2. Where provident fund (and now VPS too) replaces this legal obligation and a separate gratuity fund is then established that has different qualifying periods and benefits.

And possibly some hybrid versions with both types of members and memberships.


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Points of interest and concernGratuities

Recognising gratuity obligation under the West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 –

• Do they need to be registered?

• Do they need to be funded? How would small employers cope with funding rules?

• Are the members adequately protected under the existing laws?

• Should the law be revised to include a wider range of employers?

Recommend that are not funded but that SECP/Ministry of labour determines who should regulate them.


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Gratuities

For those established as an employee benefit and not subject to West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968,

Benefit is defined, should follow same path as pension funds and provident funds, and be

• Registered• Under trust• Audited

with the rest of the legislation to follow.


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Gratuities – A recommendationFor small companies finding they have to establish a trust

for either of their gratuity arrangements, this will be expensive and difficult.

• Recommend one or more Gratuity Master Trusts be established, possibly under the VPS umbrella

• Easy to adhere to for creating a trust • Satisfy existing Income Tax legislation requirements• Assets pooled• Appropriate investment policy• Corporate TrusteeAs a savings vehicle for a company to cover some of it

liabilities


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A Recommendation…

ALLOWING THE DEVELOPMENT OF PROVIDENT FUND MASTER TRUSTS

For employers and employees to join

ALLOWING THE DEVELOPMENT OF GRATUITY MASTER TRUSTS

for employers to join, for both voluntary and legal obligation arrangements, to allow for partial funding

These could be under same umbrella structure as VPS, using same investment pools, or merely add different classes of investor with different rules under an existing VPS structure.


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A Recommendation…

GRATUITY MASTER TRUST

PROVIDENT FUND

MASTER TRUST

•To allow for new types of master trusts for existing and newly established occupational savings schemes to join.•Easier for the SECP to regulate and monitor.•Corporate trustees instead of individual trustees.•Small companies would find it very straightforward.•Takes away the burden of compliance.•Requires regional distribution capability.

VPS MASTER TRUST

Under a single umbrella, a single master trust…


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Public Sector – Government employeesSaving systems established under and derived from

OrdinancesGenerally unfunded, payable out of general revenueProvident Fund assets within Government

Some legislative requirements should apply… Ability of members to make complaints, SECP investigating complaints, Annual filing, data collection, standards on payment of benefits…


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Military pensions

Generally unfunded, payable out of general revenue

Some legislative requirements should apply… Ability of members to make complaints, SECP investigating complaints, Annual filing, data collection, standards on payment of benefits…


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Government and provincially owned organisations, universities established under charter or equivalent

Generally unfunded, payable out of specific revenue

Most legislative requirements should apply… Requirement to be funded, provident fund assets separate

from employer

Ability of members to make complaints, SECP investigating complaints, Annual filing, data collection, standards on payment of benefits, appeals process…


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On the payment of due benefits• Benefits are properly calculated and recorded.• They are not withheld without good cause.• They are paid on time at a place where the beneficiary

can access them.• That the beneficiary can readily appeal to an authoritative

body if they are not paid as expected.

• SECP should liaise with Ombudsman Offices on pension problems


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On encouraging interested groups from within the community• Employer groups, such as an Occupational Savings sub

committees of a Chamber of Commerce• WEBCOP, Workers Employers Bilateral Council of Pakistan• Employee groups• Actuaries• Accountants• Auditors • Investment Managers• Solicitors


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The Social Goal

That more people are promised a benefit through working and occupational savings.

That someone who is promised a benefit receives that benefit when it is due.

That benefits should be fair and affordable.

Documents

A Framework for Occupational Savings Schemes Regulation Summary of Recommendations for the Securities and Exchange Commission of Pakistan Jeremy Gadbury