Tweaking the universal pension scheme to make it impactful
As with any investment, there should be a personal suitability assessment to check if it meets individual needs. And here is where the scheme is not foolproof
With our socio-economic development, especially the rise in the level of income, there is a growing population with higher living standards than ever before. This middle-class population has access to on-demand healthcare facilities, education, urban living and other services once considered luxury.
Having access to these amenities can be considered as progress towards social development. Though maintaining continued access to these higher living standards requires careful financial planning - we must save during our earning years to sustain us during our retirement years.
Typically, a pension is associated with withdrawal from the workforce (or retirement), and it has many faces- from semi-retirement, old age, and a lack of employment opportunities to disability or ultimately death. Whatever the form is, it comes with a cash flow constraint that was once enjoyed by the person, and that still requires financing.
The implementation of the universal pension scheme by the Bangladesh government has garnered a lot of attention since its official announcement last August. This program aims to provide a much-needed retirement nest egg for its sizable ageing population in the coming years.
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Essentially, participation in this scheme is an investment. As with any investment, there should be a personal suitability assessment to check if it meets individual needs. And here is where the scheme is not foolproof. For example, the pension scheme is less attractive as an investment when compared to commercial alternatives. Furthermore, it does not make provisions for income shocks.
Introducing some additional measures and making a few tweaks can help address these concerns and make the scheme even more robust and attractive.
What the scheme entails
The voluntary program is tailored to meet the cash flow needs in retirement for four demographic groups, including expatriates, private sector employees, self-employed people and low-income individuals.
In the current pension scheme system, each adult participant will contribute a defined amount for a minimum of 10 years and can enrol until they turn 50, though this cut-off age can be relaxed in special circumstances.
The schemes' documents reveal that, in normal circumstances effectively these schemes offer perpetual benefits from the age of 60, with a certainty of due payments to be made to a nominee if the pensioner is deceased before turning 75.
The introduction of this pension scheme is necessary for a number of reasons. Intergenerational dependency is an integral part of our family system. The young depend on the older for financial support and vice versa.
In a monetised world, for an average person, it is not unexpected to experience a cash shortfall during retirement or old age. Generally, individuals are prone to overestimate their income potential and fulfil their immediate needs rather than save for the future.
For example, statistics cited from Siddiqui, Tanseem (2003) in a Bangladesh Bureau of Manpower Employment and Training (BMET) report shows that only a small amount of foreign remittance is saved in a liquid form for future financial needs.
It also shows that .33% of the remittance is used to pay for insurance premiums, and 3.07% is used for savings in a long-term fund. Other important investments include purchasing agricultural land (11.24%), home building (15.02%), investment in a business (4.76%), and sponsoring a family member for overseas migration (likely as a temporary migrant).
Given the socio-cultural norms, it is unlikely that these investments are made in the individual's own account and are mainly invested in the illiquid form of investment.
How it can be improved
When critically evaluating this from a personal financial planning perspective, the features of this scheme are somewhat similar to commercially available products like bank deposit pension schemes (DPS) or insurance policies.
However, from an investor's perspective, the pension scheme may have more drawbacks than commercial products. For example, analysts have shown that the inflation-adjusted return of a comparable bank DPS with a similar maturity can provide a higher return than the pension scheme. Additionally, investment in a private fund provides control over capital and options to reinvest.
Moreover, the scheme seems to lack addressing the risk of income shocks during a participant's income-generating phase - disruptions in regular income that cause financial strains or hardship in maintaining living standards.
Income shocks can occur for various reasons including death, disability, disease, economic cycles, natural calamities or personal reasons.
Lack of coverage against such risks may disrupt continued participation in the scheme and hamper participants' living standards if such events occur.
Currently, the pension scheme only provides return capital with profits if contributions are made for less than 10 years and guaranteed minimum pension benefits till age 75.
In contrast, commercial insurance usually promises the full-face value immediately. This difference can set pension participation behind as separate mortality or morbidity risk coverage will then be needed. This can adversely impact a pension participant's cash flow and render the scheme unattractive.
We should not expect a pension scheme to get everything right at first. However, continual reviews and adjustments can foster wider participation and effective solutions throughout one's financial life.
Therefore, it is highly recommended to embed insurance coverage with a universal pension scheme. The following insurance policies could be incorporated into the fundamental framework of a "universal pension scheme."
Offer a life insurance policy that guarantees the complete nominal value of contributions to designated recipients in the event of the participant's demise during the period of generating income. This measure will serve to safeguard the interests of individuals who rely on others for financial support.
Provide disability insurance that exempts individuals from making contribution payments while they are incapacitated as a result of a medical condition or unforeseen event. This measure will serve to mitigate the economic strain experienced during periods of income volatility.
Integrate a comprehensive medical insurance scheme that encompasses the expenses associated with hospitalisation resulting from various illnesses. This will result in a decrease in out-of-pocket expenditures, thereby affecting one's capacity to make contributions. Propose the integration of a comprehensive critical illness insurance package that offers a one-time payment upon the diagnosis of specific severe medical conditions. This can facilitate the fulfilment of supplementary healthcare expenditures. Moreover, when offered through the UPS, the Bangladesh government's commitment towards Universal Healthcare Coverage by 2030 can be achieved sustainably and at an accelerated pace.
Implement a comprehensive unemployment insurance program that disburses monetary benefits to individuals who experience involuntary job loss within a specified timeframe.
In light of potential financial distress, it is worth contemplating the implementation of measures such as moratorium payments, which would enable the temporary suspension of contributions for a specified period.
Bundling these insurances would help address income shock risks, protect regular savings, and encourage continued participation in the pension scheme by shielding it from disruptive life events. This could make the program more attractive and holistic for addressing individuals' financial protection throughout life.
Dr. Md Arif Hossain Mazumder is an Assistant Professor at Brac Business School, Brac University. Email: arif.mazumder@bracu.ac.bd.
Dr Mohammad Enamul Hoque is an Assistant Professor at Brac Business School, Brac University. Email: enamul.hoque@bracu.ac.bd.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
