The Government of Bangladesh (GoB) is mulling the introduction of pensions for private sector employees. This will be a novelty for the country and a significant step. The field of pensions is intricate and highly regulated. Policy makers need to thrash out the issues in full public view. Two forms of retirement plans are prevalent in the West: defined benefit (DB) and defined contributions (DC). We still don't know which type GoB has opted for. Lot rides on this decision.
Retired government employees in Bangladesh get their monthly pensions from the exchequer on a pay-as-you-go (pay-go) basis. This is like a DB plan as the beneficiaries receive guaranteed pensions based on their number of years of service as well as their last drawn salaries. In contrast, benefits for private sector employees are generated from the earnings of portfolio investments (plan assets). A sprawling bureaucracy in Bangladesh and their handsome emoluments present legitimate questions of equity and fairness in the process of fiscal policy-making.
Many companies in the West are phasing out their DB plans because costs have proved to be prohibitive. Instead they have decided to go for DC plans to the consternation of employees. A number of DB plans are woefully underfunded. The responsibility for investment risk and returns lie solely with DC plan participants. They have to have an active part in choosing their portfolio. One byproduct is that participants will make an effort to be financially literate.
The pension superstructure needs five legs to stand on: appropriate laws and regulations, a regulatory body, well-functioning debt and capital markets, accounting rules and actuaries. Additionally, income-tax rules have to accord with pension legislation.
An exemplar in terms of legislation is the Employee Retirement Income Security Act, better known by its acronym ERISA. ERISA, a complicated piece of legislation, came into being in 1974 in the United States. A timely step, ERISA put retirees' minds at ease through various provisions in the Act which are considered strict but appropriate.
Retirement benefits may include health and disability coverage known also as employee welfare. The biggest retirement benefit is of course pensions. ERISA covers a whole range of issues including participants, registering retirement plans, administration of the funds, vesting, and record-keeping. The responsibility of fiduciaries has been clearly laid out - a real achievement. A fiduciary is one who is supposed to act in the best interest of plan beneficiaries. For example, a court-appointed guardian of a minor has a fiduciary relationship with his ward.
ERISA has teeth because three powerful US government bodies work in concert. The Internal Revenue Service (IRS) offers guidance on vesting, participation and funding and the Pension Benefit Guaranty Corp (PBGC, also created in 1974) is back-stop for a failing plan. The Department of Labour enforces ERISA. The Federal Accounting Standards Board (FASB) provides guidance on reporting and disclosure.
Observers lament the absence of a bond market in Bangladesh. GoB should tap the debt capital market instead of foreign borrowing for financing large projects. This way GoB can at least avoid dollar appreciation. Without a vibrant bond market pension funds will be forced to fish in shallow waters.
It is incumbent on the government to issue a white paper before taking a momentous decision. In the public interest the pension industry has to be monitored very closely, otherwise there is a danger it will skid and lose its footing like the banking industry.
Raihan Amin is
Educator & Trainer