Universal Pension Scheme: Has it been thought through?

The Awami League government – following the party's election manifesto in 2008 – has approved the draft of a universal pension scheme (UPS), likely to be effective from the next fiscal year.

The plan would eventually cover all citizens – excluding public servants who are already covered by public pensions – between the ages of 18 to 50, including Bangladeshi expatriates working abroad.

Under the plan, a citizen has to deposit a certain amount of money into the pension fund each month or every three months. The minimum deposit amount will be determined later after the founding of a National Pension Authority.

The National Pension Authority will be in charge of managing investment and risks of the fund. The pension benefits (principal plus interests) will be available to the pensioners every month following their 60th birthday and will continue until death.

How much will the government contribute?

The Minister of Finance AHM Mustafa Kamal initially claimed that the government would somewhat equally match the contributions of the citizens. However, the draft bill only mentioned the government's contributions to low-income individuals.

That is, the government's contribution to the pension fund is likely to be means-tested, where eligibility will depend on the individual's financial condition and income level. It remains unclear whether the government would still contribute to each pension account and match their contribution to pension payments.

This is vastly different from the typical universal "non-means-tested, non-contributory" public pension schemes in countries like New Zealand, Mauritius, Namibia, Botswana, Nepal, Brunei, Kosovo, Samoa, etc. These schemes are publicly financed through tax revenues and provide a certain amount of pension to every senior citizen of the country.

In most developed countries, the employer is obligated to make a certain amount of contribution to the pension fund. In the best of cases, like in Iceland, New Zealand, Denmark etc., the government provides an overarching safety net for their senior citizens through public pensions to ensure even those with low-income jobs or no jobs can lead a modest livelihood once they reach retirement age.

Moreover, there has been no mention of employers' contributions to the pension fund as of now. As far as the draft bill is concerned, the citizens themselves will primarily fund the pension scheme.

Does the government have enough earnings to finance it?

The simple answer would be no, as implied by the potential exclusion of government contribution to the pension fund. That is not to say that it might not come back in the bill's final version. But given the tight fiscal situation of the GoB, it seems highly unlikely.

Moreover, the government's promise to partially contribute to the pension funds for low-income individuals might strain its fiscal budget. The government's primary source of revenue is taxes and the country has one of the lowest tax-to-GDP ratios in the world.

If we look at the countries providing public pension schemes, Nepal has the lowest tax-to-GDP percentage at 19.8%, and Namibia has the highest tax-to-GDP rate at 30.5%. In comparison, Bangladesh's tax-to-GDP ratio has always been significantly lower, hovering around the 8-10% mark. In FY 2020-21, the ratio further decreased to only 7.7% because of changing the base year of GDP calculation.

These findings remain consistent when compared to the top 10 countries with the best pension system in the world, as ranked by the Mercer CFA Institute Global Pension Index 2020. Most of these countries have a public pension plan available to all citizens over retirement, and the public option typically functions like a social security benefit. Taxes fund the public pension plans, and for most of these countries (except for Singapore and Canada), the tax-to-GDP ratio remains well above the 20% mark, much higher than that of Bangladesh.

The price of a low tax-to-GDP ratio

A low tax-to-GDP ratio means that the government has fewer funds to work with, and since tax revenues pay for most of the national budget, Bangladesh also has one of the lowest budget-GDP ratios in the world. And this shortage of funds is reflected in practice as well.

The GoB's constrained fiscal space has already forced it to cut back on other forms of social security. For example, in the budget for FY 2022-23, the share of social security payments decreased to 4.9% of the total budget, down from 5% last year.

The budget for education and technology decreased by a percentage point to 14.7%, while the share of the health care budget remained the same. The allocation for food-friendly programmes and open market operations – which helped the lower and lower-middle-class sustain amid inflationary pressure – was slashed by 10% and 11%, respectively.

Granted that volatile global markets and inflationary pressure forced the GoB to invest more in subsidies (8.4%) and the agricultural sector (3.8%), it is also indicative of the fact that the Ministry of Commerce had to perform quite a lot of fiscal gymnastics simply to allot enough funding to all of the important sectors.

Given these deficiencies, it is unlikely that the government would be able to contribute significantly to a public pensions scheme, even if it is only means-tested and the government contribution is only applicable in the case of low-income individuals.

Why not throw employers into the mix?

Unfortunately, as of now, Bangladesh's draft universal pension scheme does not have any provision to incorporate employers, nor will the government match the contribution of the citizens. This particular aspect might raise some questions regarding the efficacy of the fund.

Firstly, does the government have the efficiency in managing such a large fund of public money especially given the high-interest rates it has promised to the pensioners? Secondly, will the public trust the government agencies – especially those with a history of corruption, mismanagement and misallocation of resources – with their life savings?

The answer to these questions will depend on the commitment of the government to ensure the efficiency of the national pension authority.

But there is more to the story. As mentioned by the Minister of Finance, the pension fund will provide high returns; a 10% interest rate and 6% other benefits. So, should it be worth investing in such a fund, regardless of government or employers' contribution?

Not necessarily. Much like the government savings certificate, it will provide considerably higher returns on investment. But it also requires a longer-term commitment (at least 10 years to be eligible for pension) and allows little freedom as citizens will not be able to withdraw from pension funds before reaching 60, except in the form of loans.

Given the current condition of revenue collection, it is unfair to ask the government to contribute significantly to citizens' pension funds. The government will need to raise the tax-to-GDP ratio significantly to afford the means-tested public contribution to the pension fund.

Doing so would require the modernisation of the NBR, increasing its capacity, rationalising corporate tax rates, implementing existing tax policies to deal with tax avoidance, and separating tax policymaking from tax collection. Most importantly, it requires making influential individuals and entities accountable for tax avoidance.

Another solution might be bringing the employers into the fold and asking them to match the contribution of their employees by some percentage (for example, in the UK, employers have to match their employees' contribution by 60%) to make the universal pension scheme successful.

That being said, it will also likely take a sizable chunk of the pension fund out of the government's hand and into the private market and make the National Pension Authority somewhat redundant. One way to deal with this issue might involve asking the employers to contribute to the national fund. But making them agree to such a plan would require a lot of convincing, to say the least.

All of these begs the question, has the government thought through before committing to a universal pension scheme? 

Not enough. Not yet.

Seikh Rafi Ahmed. Sketch: TBS