A Framework for Occupational Savings Schemes Regulation

1. A Framework for Occupational Savings Schemes Regulation Summary of Recommendations for the Securities and Exchange Commission of Pakistan Jeremy Gadbury on behalf of The International Securities Consultancy Limited Islamabad Wednesday 27th June 2007

2. The SECP’s role Securities and Exchange Commission of Pakistan Act, 1997 as amended by the Finance Act, 2003, as follows: 20 (4) The Commission shall be responsible for the performance of the following … promoting and regulating development of private Pension Scheme and Funds A Framework for Occupational Savings Regulation

3. The SECP’s role Legislation generally expected to include Pension funds and pension arrangements Provident Funds Gratuity Funds and gratuity arrangements in the private sector, and to some degree the public sector. A Framework for Occupational Savings Regulation

4. The Terms of Reference Scope of Work; • Develop a regulatory and supervisory framework for occupational saving schemes. Detailed Tasks: • 1. Assist the SECP in developing a framework for regulation of occupational savings schemes. • 2. Assist and guide the SECP in collating relevant data on occupational savings schemes and, based on international best practices, provide a sequential roadmap for their regulation. • 3. Targeted review of the operational processes of the SECP Pensions Wing and update them with regard to regulation and monitoring of pension funds. Output/Reporting Requirements: • Make detailed recommendations for the tasks detailed above. A Framework for Occupational Savings Regulation

5. A Framework for Occupational Savings Schemes Regulation The legislation Surveys and Statistics Points of concern – and suggested solutions

6. Major features of the Consultancy to date • The Workshop on considering the Regulatory Framework for Occupational Savings Schemes on 25th June, • Organising an internal study of pension and gratuity arrangements of leading Pakistani companies. • Developing the Survey questionnaire of occupational savings arrangements to be sent out to all listed companies in Pakistan. • Designing the style and content of a Report based on the Survey. • Providing advice on the Voluntary Pension System. A Framework for Occupational Savings Regulation

7. The 25th June Workshop Participants Investment Managers Atlas, Arif Habib, JS Abamco Actuaries Nauman Associates, Sidat Hyder Morshed Custodian, Trustees Central Depositary Company Corporate Sector Pakistan International Airlines, Engro Chemical SECP attendees – Pension Wing A Framework for Occupational Savings Regulation

8. The 25th June Workshop Approach SECP has a planned approach of regulation Invited workshop participants • To comment on the approach • To develop ideas related to the approach • To highlight contentious issues • To highlight matters omitted • To discuss the timing of certain measures In a workshop environment A Framework for Occupational Savings Regulation

9. The recommended regulatory approach A Framework for Occupational Savings Regulation

10. Principles behind the Regulation • The idea of a light regulatory touch • Staggered introduction of measures • Compatibility with Voluntary Pension Scheme Rules The preferred route is to focus on • Registration, • Trust structure and • Audit to ensure that pension and provident funds are financially strong and responsibly managed… …and go from there. A Framework for Occupational Savings Regulation

11. Principles behind the Regulation • Establishing a robust system of occupational savings that will add to the social and financial stability of the country. • Enabling employers to develop appropriate employee benefit structures that will assist their own competitive position. • Protecting the interests of the employer. • Protecting the current and future interests of the employee. • Protecting the interests of a pension beneficiary . • Encouraging the development of professional management of occupational savings schemes. A Framework for Occupational Savings Regulation

12. Principles behind the Regulation • To recognise that the pension and provident fund systems are, as far as we can tell, generally well managed. • To build on those strengths. • To make it straightforward for pension and provident funds to continue. • To discover and eliminate any bad practices and misdemeanours. • To recognise it is not only a matter of regulating occupational savings schemes but also the benefits and how they are paid. A Framework for Occupational Savings Regulation

13. Points of interest and concern General points on legislation. • Pension regulation is not pension reform. • But no matter how accommodating it is to well run existing schemes and encouraging to the formation of new arrangements, new regulation will shape the structure of occupational savings in the years to come, and affect the social and economic structure of the country. Unless the law is carefully considered, its impact may be very different to that intended. Even the prospect of compliance with legislation may result in funds closing. A Framework for Occupational Savings Regulation

14. The recommended regulatory approach Code of practice Legislation with Mandatory registration Conditions to apply to registrants Timetable October, November 2007 A Framework for Occupational Savings Regulation

15. The recommended regulatory approach Develop a Code of Practice as to how Occupational Savings Schemes should behave To be introduced prior to legislation and continue afterwards Shows major target features, including • Audit • Schemes should be separate from employer’s books, under trust • Reporting to members • Schemes should be fully funded • Data collection Has no legislative impact but shows future intention A Framework for Occupational Savings Regulation

16. The recommended regulatory approach REGISTRATION TRUST AUDIT SECP CAN INTRODUCE REGULATIONS FOR REGISTRANTS A Framework for Occupational Savings Regulation

17. The recommended regulatory approach • Registration with SECP of all pension arrangements, provident funds and gratuity funds, suitably defined, with an exemption category - overseas schemes with local employees. • All registered arrangements to be established under Trust by a target date, with the exceptions - those established by legislation, mostly public sector. • All registered arrangements to be audited by a target date, again with possible exceptions. • SECP to introduce requirements that apply to registrants. A Framework for Occupational Savings Regulation

18. The recommended regulatory approach Existing pension, provident fund, gratuity legislation under Income tax Ordinance and Income tax Rules, part under control of SECP. • Recommended: Responsibilities of Central Board of Revenue to be transferred to SECP, including process of giving approval for tax relief, whether by consolidating tax legislation or giving SECP powers. Existing practice mainly under IAS 19, IAS 26. • Recommended: to be codified and apply to all schemes, not just for those schemes of companies that are listed. A Framework for Occupational Savings Regulation

19. The recommended regulatory approach Legislation: Further measures to be introduced, including • Fully funded pension, gratuity funds, again with exceptions • Annual filing, data collection • Trustee responsibilities and liabilities • Structure for approving corporate trustees • SECP may appoint trustees in certain situations • SECP has power to investigate, prosecute, fine • Winding up provisions and process • Appointment of liquidator • Court may intervene, powers of the court, legal processes • Appeal board on winding up A Framework for Occupational Savings Regulation

20. The recommended regulatory approach Legislation: Further measures to be introduced, including • Independence of solicitors and auditors. • Ability of members to make complaints. • SECP process for investigating complaints and its various other roles. • Restriction on investing in associated companies. • Standards on payment of benefits, and where benefits cannot be paid or are unclaimed. • Standards on making contributions. Code of Practice to be continuously reviewed and updated; elements to become regulations over time. A Framework for Occupational Savings Regulation

21. The recommended regulatory approach Voluntary Pension System Separate category of occupational savings, intention is to add this category into the broader legislation over time. Detail to be as near identical in rules and their application, • Standards on trustees • Standards on recordkeeping • Standards on payment of benefits • Member’s investment choice principles to apply • Broadly same investment rules A Framework for Occupational Savings Regulation

22. The recommended regulatory approach On who will be liable under the legislation. Regulation will require… • Employers – funding requirement on defined benefit • Trusts and trustees – payment of benefits, investment policy • Custodians – holding assets • Investment Managers – breaches, contractual agreements to manage funds …to comply, so it will need to be legislation, with the ability of the SECP to write binding conditions on registrants. A Framework for Occupational Savings Regulation

23. The recommended regulatory approach The roles of the SECP will include • Registration • Annual returns, filing • Monitoring • Industry data collection and publication • Developing regulatory role • Ensuring compliance with legislation, regulations • Handling member, employer complaints and enquiries, with legal power to access information • Investigations • Winding up schemes • Enforcement, prosecutions, fines A Framework for Occupational Savings Regulation

24. A Framework for Occupational Savings Schemes Regulation Surveys and Statistics

25. Surveys and Statistics The need for statistics… • For the SECP to understand what it is to regulate • For monitoring, establishing trends • To know if the regulations are encouraging or discouraging savings structures • For an assessment of penetration of savings markets, their success • For knowing how assets are invested, helping in growth of securities markets • For the industry to develop new products • For employers to be aware of employee benefit trends • For broad policy purposes on social security, pensions …leading to their publication and ease of access. A Framework for Occupational Savings Regulation

26. The July 2007 Survey Part of building up knowledge base, a Survey of the over 600 listed companies in Pakistan. Requests to be sent out before the end of June. Replies to be received within 30 days. Outline Report and Contents already drafted. Report given to respondents, made available on SECP website, target date October 2007. Looking at pension, provident and gratuity arrangements. Recommend that it should be repeated every two years. This would help in the development of capital markets by establishing investment patterns of occupational savings schemes. A forerunner of information to be required under legislation. A Framework for Occupational Savings Regulation

27. The first internal Survey on Occupational Savings Schemes KSE top 100 98 companies, of which • 35 have funded Pension funds: Rps.123 billion, • 24 in surplus, 11 in deficit. • Largest deficit is 36% of assets. • 52 have funded gratuity funds: Rps. 11 billion • 35 in surplus, 15 in deficit. 27 have unfunded gratuities: Rps. 6 billion 77 have Provident Funds A Framework for Occupational Savings Regulation

28. A Framework for Occupational Savings Schemes Regulation Points of concern – and suggested solutions

29. Points of interest and concern Trust structures are recommended, but… • Is 1882 Trusts Act strong enough for a much more progressive occupational savings environment? • Should insurance policies be allowed? • Should an occupational savings scheme be established under an insurance policy? A Framework for Occupational Savings Regulation

30. Points of interest and concern On transferring the effective regulatory responsibilities of the Central Board of Revenue under the Income tax Act and the Income Tax rules to SECP, where their main purpose is to see if tax relief should be granted. • Legislation would be required. • Would the CBR find this acceptable? • How might it be acceptable? • What is involved in a transfer, considering CBR have a number of regional offices? • Would it be staggered? • Would CBR staff move to SECP? • What capacity is needed at SECP to handle this? • Would relevant Income Tax Act and Income Tax Rules would become part of SECP pension legislation. A Framework for Occupational Savings Regulation

31. Points of interest and concern How do you address the problem of companies seeing regulation, however it is packaged, as a reason to close down occupational savings schemes? A challenge, how do you encourage companies to establish defined contribution pension funds and establishing provident funds? Voluntary Pension System covers pension funds, but you may need a new Master Trust provident fund structure for establishing provident funds for smaller companies. A Framework for Occupational Savings Regulation

32. Points of interest and concern Gratuities : Two types 1. Where gratuity fund is established to save for legal obligation. West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 where employers fifty or more employees are obliged under to pay a gratuity to a leaving employee, at the rate of thirty days wages for every completed year of service, or part of a year in excess of six months. 2. Where provident fund (and now VPS too) replaces this legal obligation and a separate gratuity fund is then established that has different qualifying periods and benefits. And possibly some hybrid versions with both types of members and memberships. A Framework for Occupational Savings Regulation

33. Points of interest and concern Gratuities Recognising gratuity obligation under the West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 – • Do they need to be registered? • Do they need to be funded? How would small employers cope with funding rules? • Are the members adequately protected under the existing laws? • Should the law be revised to include a wider range of employers? Recommend that are not funded but that SECP/Ministry of labour determines who should regulate them. A Framework for Occupational Savings Regulation

34. Points of interest and concern Gratuities For those established as an employee benefit and not subject to West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, Benefit is defined, should follow same path as pension funds and provident funds, and be • Registered • Under trust • Audited with the rest of the legislation to follow. A Framework for Occupational Savings Regulation

35. Points of interest and concern Gratuities – A recommendation For small companies finding they have to establish a trust for either of their gratuity arrangements, this will be expensive and difficult. • Recommend one or more Gratuity Master Trusts be established, possibly under the VPS umbrella • Easy to adhere to for creating a trust • Satisfy existing Income Tax legislation requirements • Assets pooled • Appropriate investment policy • Corporate Trustee As a savings vehicle for a company to cover some of it liabilities A Framework for Occupational Savings Regulation

36. A Recommendation… ALLOWING THE DEVELOPMENT OF PROVIDENT FUND MASTER TRUSTS For employers and employees to join ALLOWING THE DEVELOPMENT OF GRATUITY MASTER TRUSTS for employers to join, for both voluntary and legal obligation arrangements, to allow for partial funding These could be under same umbrella structure as VPS, using same investment pools, or merely add different classes of investor with different rules under an existing VPS structure. A Framework for Occupational Savings Regulation

37. A Recommendation… Under a single umbrella, a single master trust… GRATUITY MASTER TRUST PROVIDENT FUND MASTER TRUST VPS MASTER TRUST • To allow for new types of master trusts for existing and newly established occupational savings schemes to join. • Easier for the SECP to regulate and monitor. • Corporate trustees instead of individual trustees. • Small companies would find it very straightforward. • Takes away the burden of compliance. • Requires regional distribution capability. A Framework for Occupational Savings Regulation

38. Points of interest and concern Public Sector – Government employees Saving systems established under and derived from Ordinances Generally unfunded, payable out of general revenue Provident Fund assets within Government Some legislative requirements should apply… Ability of members to make complaints, SECP investigating complaints, Annual filing, data collection, standards on payment of benefits… A Framework for Occupational Savings Regulation

39. Points of interest and concern Military pensions Generally unfunded, payable out of general revenue Some legislative requirements should apply… Ability of members to make complaints, SECP investigating complaints, Annual filing, data collection, standards on payment of benefits… A Framework for Occupational Savings Regulation

40. Points of interest and concern Government and provincially owned organisations, universities established under charter or equivalent Generally unfunded, payable out of specific revenue Most legislative requirements should apply… Requirement to be funded, provident fund assets separate from employer Ability of members to make complaints, SECP investigating complaints, Annual filing, data collection, standards on payment of benefits, appeals process… A Framework for Occupational Savings Regulation

41. Points of interest and concern On the payment of due benefits • Benefits are properly calculated and recorded. • They are not withheld without good cause. • They are paid on time at a place where the beneficiary can access them. • That the beneficiary can readily appeal to an authoritative body if they are not paid as expected. • SECP should liaise with Ombudsman Offices on pension problems A Framework for Occupational Savings Regulation

42. Points of interest and concern On encouraging interested groups from within the community • Employer groups, such as an Occupational Savings sub committees of a Chamber of Commerce • WEBCOP, Workers Employers Bilateral Council of Pakistan • Employee groups • Actuaries • Accountants • Auditors • Investment Managers • Solicitors A Framework for Occupational Savings Regulation

43. The Social Goal That more people are promised a benefit through working and occupational savings. That someone who is promised a benefit receives that benefit when it is due. That benefits should be fair and affordable. A Framework for Occupational Savings Regulation