Pension benefits

We talked about pensions two years ago.

First, we voiced concern that the NPPF pension scheme was sustainable for only 30 years.

Then, we discussed the merits of a defined-contribution plan over the existing defined-benefit plan.

And then, we expressed alarm that the government was interfering in how our pension scheme was being run.

Let’s keep talking about pensions. There’s good news. And there’s bad news.

The good news is that, despite increased competition in the financial sector, NPPF seems to be performing well. In the last year, the membership base has increased by 5.4%, from 40,222 to 42,393 members. Revenue generated increased by 14.57%. And the total fund grew by 18.6% to Nu 8.97 billion.

The good news is also that NPPF’s pension scheme could soon become available for workers in the orgranized private sector.

The bad news is that our pension scheme is become even more defined by benefits. Retirement pension benefits have now been increased to 40% of final salaries. This is bound to make our pension scheme unsustainable, especially after returns on NPPF’s investments start to inevitably drop due to the growing competition in the financial sector.

The bad news is also that some six serving ministers are already drawing pension benefits.

Our ministers collect pensions because they have retired from the civil service. And because they’ve reached the retirement age. They’re entitled to draw pensions. But, as serving ministers, they still have regular incomes. So the very purpose of pensions – i.e., to provide predictable income when income from formal employment is not longer available – seems to be lost.

In a defined-benefit plan, pension rates are based on the salary of a member with little regard to how much that member has contributed.  Such a scheme naturally encourages members to collect their pensions as soon as they reach retirement age, even if they are still formally employed. That’s why our ministers collect their pensions although they have regular salaries. The system encourages them to do so.

In a defined-contribution plan, pension rates are based on the contributions of individual members. So the more a member contributes, the more that member will collect during retirement. Such a scheme would encourage members to make contributions as long as they have regular jobs, so that they enjoy bigger benefits when they no longer have regular jobs.

NPPF knows that defined-benefit plans are not sustainable. The experience of many countries has already demonstrated that.

So NPPF should migrate to a defined-contribution plan. The transition will be difficult. And it will be painful, especially for members who will retire in the next few years. But it is possible, now. Our pension scheme is still young; contributing members outnumber pensioners by a huge margin; and returns on the pension investments have been good. Plus, our government may be willing to chip in to defray some of the immediate costs associated with migrating to the more sustainable defined-contribution plan.

 

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  1. Tashi Dorji P says:

    I support DC for private employees
    In addition there should be legislation on compulsory/mandatory annuitisation of the DC contributions by pvt employees, which is what Britain imposed many years.
    I think all employed workers should receive monthly annuity.
    Post retirement, PRIVATE Employees SHOULD receive monthly annuities like civil servants, armed forces and corporate workers (who receives monthly pensions from their DB contributions)
    Without legislation:
    People will have incentive to take lump-sum cash rather than buy annuities as they face the risk that they may outlive their savings.
    Having legislation on mandatory annuitisation:
    will smoothen consumption of retired citizens and expand business of private pension fund as well

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