… contributions will no longer be enough to pay benefits

Yangchen C Rinzin 

With about Nu 28.5 billion in accrued liability in the pension scheme as of June 2019, the pension fund scheme of the National Pension and Provident Fund (NPPF) poses a substantial amount of sustainability risk.

This is according to the NPPF’s recently published annual report.

Retirement schemes under the NPPF consists of the pension scheme and the provident fund (PF) made available to civil servants, employees of State-Owned Enterprises (SOEs), and the armed forces.

Factors like changing demography, especially the increasing life expectancy of pensioners, the exclusivity or occupational design of the schemes and elements of cross-subsidisation are identified as the critical factors affecting the pension sustainability.

With timely intervention in reviewing pension policies, officials say, the fund is at sustainability risk.

NPPF’s investment director Leki Wangmo said that as the country’s investment in the health sector has increased life expectancy where people live longer, pension has to be also paid for a longer period, impacting the scheme’s sustainability.

The life expectancy as of 2019 is 71.58 years.

“Although it’s a universal problem of pension schemes globally, it can avert problems through dynamic adjustment mechanisms, which unfortunately is not being done in Bhutan,” Leki Wangmo said. “Globally as life expectancy increase, countries increase their retirement age to reduce the number of years in retirement.”

She added that an increase in the retirement age would not have an immediate impact on pension sustainability, but would have a positive effect on enhancing pension sustainability.

NPPF member pays a different amount due to different salaries based on their career for the scheme. The benefit is drawn based on the last basic pay at the end of their career.

“As per NPPF’s experience, the total accumulated amount together with an investment return of a member is enough to pay only 4-5 years of the pension benefit,” Leki Wangmo said. “After which any pension payment comes from the accumulated fund.”

The NPPF has, today, more contributing members than retired members, which is around 12 percent of the total membership. Today, after adjusting for all payments, balance cash from contribution is invested. “All the past investments also yield returns, which are again reinvested, leading to growth in the total fund size. This has given a very rosy picture of NPPF as a rich organisation,” the director said.

PAYG system

The official explained that the current pension scheme is designed as a Pay As You Go (PAYG) system, which means benefits are mostly paid from the contributions received from members.

With young membership profile, contribution is more than the benefit payable today. “However, as population age and the current young members reach retirement age, the pension fund will start experiencing the opposite where contributions will no longer be enough to pay benefits,” Leki Wangmo said.

NPPF is concerned that without intervention and when the liquidation of investment occurs, the  pension fund will be completely depleted at one point of time.

As per the NPPF, the PAYG system is an intergenerational equity issue mainly resulting from the subsidisation of the older generation by the younger generation.

The director stressed that when the fund is depleted, a group of people will not receive the promised benefits, although they have made their contribution. “This is because their fund has already been used to pay benefits to the older group before them.”

State guarantee

The annual report also stated that generating a sustainable return rate from investments continues to remain a challenge because of lack of investment avenues, the nascency of the financial market, and restrictive investment mandates.

“In the absence of proper legal framework under which NPPF function, there is no clarity on the state guarantee of the pension liability yet,” the report stated.

Elsewhere in the world where occupational pension schemes are in existence, firm regulations require such schemes to maintain funding levels.

This means every pension scheme must assess their pension liabilities and keep assets that correspond with such projected liabilities.

The current pension scheme is an occupational scheme while PAYG scheme is like a national scheme and there is  no clarity on the whole range of issues in the country.

“There is also no clarity on how the contingent liability that will arise from the PAYG scheme will be handled in the absence of any regulatory framework,” Leki Wangmo said.

The official added that an occupational pension scheme that caters to only one section of the population guaranteed by public finance has inherent equity issues, which in the long run will come under public scrutiny.

With no clarity on which policy on NPPF functions and NPPF being regulated as an SOE, the report stated that it poses the challenge of building a pension scheme and fund management.

Although the Pension Act or legal framework would give legal status, Leki Wangmo said that it is crucial to differentiate between the pension fund and NPPF as an organisation. “But more than giving legal status to NPPF, it has become important to explore the legal framework for the pension fund/scheme.”

NPPF was established in July 2002 following an executive order issued by the then Lhengye Zhungtshog, but is regulated like an SOE under the finance ministry.

NPPF received Nu 4,033.47 million as monthly pension and provident fund contribution from about 65,414 members in 2019-2020 financial year.

NPPF paid Nu 605.63M as a monthly pension payment.