Pension Scheme Says It All

Less response to national pension scheme Hints governance situation is poor and grim.

It has been more than two years since the govt introduced the Universal Pension Scheme, being the 5th country in the subcontinent. However, the former govt did it as a desperate measure to get funds from the people. I also questioned such measure as in this part of the world govt lacks clarity in spending public money and widespread abuse of public fund management is pretty common here (see " Do We Need Social Security Program? " June 16,2022, and "Universal Pension Bill: Could It Really Take Off?" January 27,2023). Less spontaneous response to pension scheme says how people greeted it. Only 300000+ people subscribed to it, generating a total of Tk 1.57 billion.

The scheme is based on three acts: the Pension Fund Management Act 2023, the Pension Fund Regulations Act 2024 and the Pension Fund Investment Act 2024. The Pension Fund Investment Act says that the fund cannot be invested abroad. It should be invested in treasury bonds, securities with AAA rating, any public project undertaken by the govt ,FDR and mutual funds. Apart from govt securities, investment in other assets should not cross 25% of the fund. For govt securities, there is no limit on investment.

This investment in public projects is a spirit killer. Here cost and benefit analysis of public projects are done to convince the policy makers and public and to hide the true cost of the projects, resulting in more taxes and cut in benefits. Why should one be interested in contributing to projects that will literally generate little or no returns?

Only secured assets for investments are treasury bonds and mutual funds. The scope for growing the Pension Fund is limited. Like provident fund of a private company, bigger and larger pension fund means more people can take loans from the fund to cater to their need for building a home,augmenting income, financing higher education of children, financing treatment etc.

Pension Fund will grow more if it is allowed to invest abroad in the commodity markets in London,Dubai and Singapore. At the same time it should be allowed to finance investment projects of the NRBs. For instance, if migrant Bangladeshi or NRBs get credit to open a restaurant, a barber shop, purchase a taxi or start a grocery , it would augment his income and become a genuine source of returns for the pension fund.

By the same token, at home,if we have two /three govt-backed home-credit institutions who will finance real estate projects undertaken by companies floated through public private partnership, then lower income group would be able to purchase apartments at affordable [price]. And they will become a great source of investment for the pension fund.

Not only that if SMEs and startups are financed through SME bonds and startup bonds then pension fund may get other areas to invest.

Quintessential is who is managing the fund. If we hire investment banker, hedge fund manager from abroad then these foreign nationals will take good care of it. Prior to that we need to fix the macroeconomic environment. For that the Monetary Policy Committee of the central bank should be led by professional foreign macroeconomist who can advice the govt what steps have to be taken and what not.

Given the governance situation in the country, running too many social security programs and pension scheme sounds like luxury. Introducing new technology and spending public money will serve little if governance situation, which depends on practice and habits, does not improve dramatically. The apt example is the launching of voter ID card with photo that later became the national ID card. Bangladesh was the first country in the subcontinent to launch such a project in 2007 to bring transparency in pubic spending. Then British foreign state minister David Miliband even took part in the event with much fanfare. Unfortunately, we saw rigged elections and misappropriation of public money in spite of the presence of such cards. Abuse of social benefits of freedom fighter is another example. Only when the proper NID based database was launched ,many fraud freedom fighters got caught. The same NID is used by private mobile phone operators to sell SIM without any trouble. It is the intention and application that matters.

Bangladesh was the first country in the subcontinent to launch NID with photo and 5th in terms of launching the pension scheme. This kind of new things did little help to ease the burden of ordinary people. Dilapidated condition of the governance turns these things into a mockery instead reducing people's woes.

Universal Pension Scheme: Some Concerns

Pension scheme starts its journey Participants are yet to turn up in many. Past experience with savings certificate May hamper pension fund's target.

Universal Pension Scheme has started to get lukewarm response. So far around 8000 people registered for the scheme. The scheme has four categories: Probash(aimed at NRB and migrant workers),Progoti (aimed at private sector employees), Somota(aimed at underprivileged people who are not subscribed to any of the social security programs) and Surokkha.

Participant has to contribute for at least 10 years to avail the pension benefit. Though the program has been launched under the banner of “Social Protection Scheme”,cash-strapped govt's desperate search for financing the budget deficit has also come under scanner. Back in January this year in a piece titled “Universal Pension Bill: Could It Really Take Off?” and in February in another piece titled “Premature Social Security Program” I argued why the scheme is premature. Sharing parts of it aagain:

But the program is introduced at a moment when government is facing liquidity crisis. In addition ,budget deficit keeps growing. In 2020,budget deficit was 4.9% of GDP. In 2022,it reached 6.2%. To finance deficit govt borrowed both from internal and external sources. Government borrowing from banks was 2.25% in 2022. Meanwhile, our debt to GDP ratio was around 12% in 2022¹.So in the election year,universal pension program aims to draw voter attention and to bring vital money into the banking system. In developed countries, pension funds are huge. As such funds lie in the banking system for a prolonged time, govt is hoping to use the fund to finance development projects by borrowing from the banks. One member of the Parliament quite rightly laid bare govt intention,saying that people would not be fooled by trusting again this government who emptied the banks. As the deficits get widened,our output will be lower. Our major markets across the globe are in recession. So savings will be lower in the long run. Thus government’s plan to raise savings through pension fund may not go as smoothly as it conceived at the initial stage.

Household’s ability to spend will deteriorate further in the wake of inflation, loss of income and further fall of Taka in the future. So, how many of the people outside institutional job market will participate in this program is a matter of serious scrutiny.²

People’s experience with national savings certificate is not good. Inflation made them net loser at the end of the day. Sloppy management of the economy is also to blame. So pension scheme may not create the enthusiasm among people.

It is interesting that govt has not fixed yet the amount it will pay to the pensioners but fixed the contribution amount. It somehow calls into question cash-strapped government’s intention.

Earlier govt planned to float Bangla Bond/sovereign bond in the London Stock Exchange.Corona threw cold water into it. Govt earlier also instructed quasi-state and independent organizations to disclose funds at their disposal.Interestingly, many quasi-state organizations like BPC withdrew their funds from some problem ridden banks, weakening further portfolios of the banks. This indicates the level of confidence people and organizations have on govt.

Govt is pretty determined to emulate the West except its accountability and moral standard . Govt earlier had changed Bank ownership act(later fixed to unlock IMF credit) citing example of the USA where family members own a bank and many banks with one brunch. But in the USA fraud like Bernie Madoff spends rest of his life in jail. This example has yet to be emulated here. ³

Govt is mulling to invest the money initially into treasury bill and bond. Apart from that a fund management committee will explore ways for secure investment⁴. However, as mentioned earlier, people’s experience with savings certificate is not good. Govt changes its condition at its whim. Moreover, lack of accountability promotes misuse of resources. I have been using teletalk,a state-backed cellphone operator, for a long time as it is cheap compared to other operators. I have fallen victim of uncarried data and lost bonus points that I purchased through my hard-earned money. I lodged complaints to respective authority with no avail. If this lost and uncarried data fell to wrong hand/were misused ,then this was a tremendous loss to state resources and might be used to detrimental activities. Recently, absence of regulatory grip on volatile consumer market and series of scams in public infrastructure projects expose that public money is not being used wisely and appropriately. ⁴

Pension scheme is indeed a good and laudable move. But it is still a premature concept in the context of Bangladesh where governance is in tatters and ruling regime seldom thinks about welfare of the depositors. When a regime is pretty sure about its assumption of and exit from power, it bothers little about ordinary depositors’ interest and at the end of the day the country and economy pay the the cost.³

Notes And References

1. Bangladesh Bank
2. “Universal Pension Bill: Could It Really Take Off?”,Rezaul Hoque,January 27,2023.https://hoquestake.blogspot.com.For more read at https://hoquestake.blogspot.com/2023/01/universal-pension-bill-could-it-really.html?m=1
3. “Premature Social Security Program”,Rezaul Hoque,February 27,2023. https://hoquestake.blogspot.com.For more read at https://hoquestake.blogspot.com/2023/02/premature-pension-scheme.html?m=1
4. ”Biniyog Hobey Treasury Bill Ebong Bondey(Investment In Treasury Bill And Bond)”,Daily Prothom Alo(P-11),August 30,2023.