The way out for the Pensions Bill caught in a spider’s web!

The post mortem and the way forward

Tragic incidents of last week sounded the ‘last post’ for the much-discussed Private Sector Pensions Bill (PSP). This was after much damage had been done to the interests of all stakeholders of society. There is therefore no point in a detailed public post mortem. There are however lots of lessons for all stakeholders to learn and to commit never to allow a repeat performance.

As for businesses, chambers and federations, the key lesson is that looking the other way hoping the problem does not exist or will go away on its own or that someone else will solve it for you is never a solution, especially when the issues at stake impact heavily on close network partners like the employees and the Government, in addition to the private business sector as a whole.

This is not the first time such situations concerning superannuation benefits of private sector employees have been subjected to reform initiatives. In all previous situations the chambers and businesses were equal partners in value adding partners in the reforms process and of course sounding the alarm bells where it was most important and was an area of expertise of the private sector.

In every such instance such value addition and raising red and amber flags identifying risks were done in an open and transparent manner in line with the core value of placing the nation and its people first.

The PSP is now fully caught in the spider’s web and must be rescued before the spiders with their deadly sting come to draw more blood out of the struggling stakeholders. This requires network partnership amongst the Government, professionals, business, trade unions and the media.

Above all they must commit to work together with transparency and integrity, with professionalism in the forefront, placing the longer term sustainable growth and prosperity of all as the core mission and assuring the nation Sri Lanka and its people being the winners in the end.

1. Open intellectual debates

An open intellectual debate amongst the stakeholders must now begin guided by ‘what the Buddha taught’ and based on the twin principles of ‘Sabbadanam dhammadanam jinati’ – “The gift of the truth excels all other truths” – and the Debate of King Milinda by Bikkhu Pesala which reads: “Then the king said, ‘Venerable sir, will you discuss with me again?’ ‘If your majesty will discuss as a scholar, yes; but if you will discuss as a king, no.’ ‘ow is it then that scholars discuss?’ ‘When scholars discuss there is a summing up and an unravelling; one or other is shown to be in error. He admits his mistake, yet he does not become angry.’ ‘Then how is it that kings discuss?’ ‘When a king discusses a matter and advances a point of view, if anyone differs from him on that point he is apt to punish him.’ ‘Well then, it is as a scholar that I will discuss. Let your reverence talk without fear.’”1

2. Begin at the beginning with key definitions of retirement benefit funding

All stake holders to understand and commit to a framework that defines2

“Retirement benefit schemes are arrangements to provide provident fund, superannuation or pension, gratuity, or other benefits to employees on leaving service or retiring or, after an employee’s death, to his or her dependants.

“Defined contribution schemes are retirement benefit schemes under which amounts to be paid as retirement benefits are determined by contributions to a fund together with earnings thereon; e.g Provident Fund, Trust Fund

“Defined benefit schemes are retirement benefit schemes under which amounts to be paid as retirement benefits are determinable usually by reference to employee’s earnings and/or years of service; e.g. Pension Fund.

“Funded (fully or partly) and unfunded schemes i.e. pay-as-you-go is a method of recognising the cost of retirement benefits only at the time payments are made to employees on, or after, their retirement.

“Actuarial valuation is the process used by an actuary to estimate the present value of benefits to be paid under a retirement benefit scheme and the present values of the scheme assets and, sometimes, of future contributions.”

3. Characteristics of a pension scheme

Any pension scheme to have the following key characteristics”

(a)A well designed pension fund must be stable, sustainable, robust and able to meet all commitments in the longer term, even withstanding any sensitivities of extreme variations in key assumptions, under external stress situations and despite even a catastrophic situation

(b)The continuity of resources being an open fund with continuing beneficiary related contributions with no selectivity in the membership and the scheme must provide portability and even possibly a risk selection investment option based on age and other conditions and there must be fair assessed benefit upon surrender or early termination of benefits and be robust to withstand natural ageing patterns and other changes in mortality and morbidity.

(c)A pension fund must support covered persons for life, under situations of disability and debility and must provide an annuity for the spouse also for life and all minor children an annuity generally up to at least 21 years but preferably 25 years and all covered persons must have clarity of benefits and schemes procedures to claim and receive benefits

(d)All products issued by a pension fund must be actuarial tested and certified by independent actuaries for solvency and stability and must have adequate in built reserves for all possible risk situations

(e)Pension fund investments must be professionally managed with international best practices, within an acceptable code of ethics and must yield at least positive to inflation levels of annual yields and preferably even be able to build a contingency reserve within the fund over and beyond annually actuarially determined minimum fund reserve

(f)Under no circumstances should there be any misrepresentation of benefits and claims

(g)Mangers of a pension fund must act with trustee obligations, without conflicts of interests and must not unjustly enrich themselves and all charges/benefits must be transparent

4. The pension scheme check off

Unless the Government and all other engaged stakeholders can demonstrate the seven characteristics noted in 3 above, following an open and transparent debate supported by independent professionals and actuaries so certifying the proposed scheme, a pension scheme should not be launched.

5. Learning lessons from global experiences

During the planned debate the stakeholders must examine global experiences, case studies and consequential impact on the economy of the nations and the impact on the stakeholders with unfunded and underfunded and hastily introduced defined pension benefit schemes and recognise as a consequence that:

(a)A growing challenge for many nations is population ageing. As birth rates drop and life expectancy increases an ever-larger portion of the population is elderly. This leaves fewer workers for each retired person. In almost all developed countries this means that government and public sector pensions could collapse their economies unless pension systems are reformed or taxes are increased.

(b)Another growing challenge is the recent trend of states and businesses to have unfunded or underfunded pension benefit schemes, some of which managed by businesses have become insolvent and unable to meet liabilities and some state schemes being reformed by extending the retirement age and changes of the planned befit structures

(c)Global and local financial and economic collapses leaving pension funds and their investments bases shaken and even made insolvent

(d)Management lack of transparency, good governance and even frauds, deceit and conflicts of interest shaking the fundamental structures of pension funds, especially those only partly funded.

6. Socio cultural issues of employees in Sri Lanka

Any superannuation scheme initiated must be fully aligned to the longer term needs and expectations of all Sri Lankan employees. As a specific risk mitigation measure, due care should be taken not to introduce any superannuation scheme that does not meet beneficiary led socio – economic needs and expectations. The scheme on offer must recognise specifically;

(a)Varying retirement ages of males and females

(b)Long term and short terms and seasonal workers needs and expectations

(c)Male and female separate needs and expectations

(d)The needs and expectations of youth and elderly

(e)Work patterns and special needs of significant segments of workers

(f)Beneficiaries wanting to buy land and build houses during working life as well as use up funds for children’s education, back up for medical emergencies, dowry for children and

(g)Inherent cultural practice and desire to leave a capital in legacy for family ( not wanting to amortise capital and receive an annuity that extinguishes the original capital base)

7. Alternate options and strategies

Having duly recognised the debating points of leaning from global experiences and locally applicable socio – cultural needs and expectations it is essential that the debate must next extend to evaluate any available alternate options and strategies.

As a part of this option review the other available options to enhance and enrich employee superannuation that does not negatively impinge on the risks identified from a global and local scan referred to in 5 and 6 above should inter alia bring the debating stakeholders to the following;

(a)Increase the employee and employer contributions to the Provident fund by 2% each and leave other terms covering EPF/ETF and gratuity as presently operated and no new pension fund

(b)Allow at the discretion of the employees to buy an annuity from Government and/or private pensions funds on retirement out of the proceeds from the Provident Fund release

(c)Allow at the discretion of the employees to buy during employment pension products offered by the Government and/or private pensions funds out of the proceeds the Provident Fund contributions

8. Conclusion

May the first four principles that assured the success of the Licchavi’s as taught by the Buddha3 guide the next phase of rescue of the PSP from the spider’s web by the stakeholders:

(a)They held frequent public meetings of their tribe which they all attended

(b)They met together to make their decisions and carried out their undertakings in concord

(c)They upheld tradition and honoured their pledges

(d)They respected and supported their elders.

(The writer is a former Chairman of the Ceylon Chamber of Commerce.)

Footnotes:

  1 http://www.buddhanet.net/pdf_file/milinda.pdf

2 http://www.icai.org/resource_file/283accounting_standards_as15newa.pdf

3 http://what-buddha-said.net/library/DPPN/l/licchavi.htm