The Bhutanese Leading the way.
One of the big challenges for the National Pension and Provident Fund (NPPF) is that it will start making losses from 2060 onwards with more people drawing pension than contributing to it.
With the main aim of making the scheme more sustainable the NPPF has been working with a Malaysian consultant firm looking at various option of reforms. Added to this is also a review of all SOEs including Financial Institution as part of the transformation exercise.
One of the early recommendations of the consultant was to do away with the pension system altogether by calculating the number of years and paying off its members. The pension scheme has around 68,000 members and 9,000 pensioners.
This would mean the NPPF liquidating all its investments, shares, bonds and loans and even then it would be short by around Nu 30 billion which the government would have to inject in to close the scheme.
The NPPF CEO Dorji Penjor said that if at all, they make significant changes to the current pension system to close the funding deficit gap, the burden on the government would increase as it may require injection of huge funds.
“The NPPF management feels, attempt should not be made at this moment when the country is reeling under economic problems caused by COVID 19 Pandemic. The question of pension fund becoming unsustainable is in the future, not today or in the next 5 to 10 years. Therefore, we have time to think of a solution to address the unsustainability issue but not necessarily at this juncture when the economy is struggling to regain its normalcy,” said the CEO.
With major changes looking unlikely the NPPF is looking at proposing smaller and incremental changes.
“Therefore, it is important for us to improve further with little bit of changes in some variables, say for example, lengthening of vesting period, changing pensionable age or making it voluntary to name few in view of increased average life expectancy of people of Bhutan,” said the CEO.
Currently once civil servants hit 20 years in service then they enter the pension system and so there has been a growing trend of civil servants resigning before this period to collect their benefits in bulk.
The CEO said the proposal within the NPPF management is to increase this to 25 years so that civil servants until then have the option to collect the amount in bulk without entering the pension system.
Another related proposal is to introduce a voluntary system where a young civil servant or public servant entering the system can opt to choose a system where he or she will never enter the pension system but they can collect the bulk amount whenever they resign or retire even after 25 years.
The other idea is to increase the pensionable age. The RCSC has already helped in this matter by increasing the retirement agent of civil servants. Executives who retired at 60 now can retire at 63, professional and management category who retired at 58 now have till 60, SS1 to SS4 who retired at 58 get till 59 and S-5 to S-1 and operational category who retired at 56 years now get a year more till 57.
NPPF benefits as it will not have to pay pensions till civil servants retire.
The issue of addressing the 20-year issue is important for the RCSC in the sense that there are more numbers of people resigning before that to collect the amount in bulk in recent times than those joining the pension system.
In the July 2021- June 2022 financial year a total of 3,637 public servants left the NPPF system of which 3,129 members left before completing the 20 years and collected Nu 1.970 bn.
Only 508 left due to retirement, death, resignation and termination after 20 years and collected Nu 624 mn.
This is significant increase from the July 2020-June 2021 financial year when a total of 1,710 public servants left the NPPF system of which 1,298 members left before completing the 20 years and collected Nu 900 mn.
Only 412 left due to retirement, death, resignation and termination after 20 years and collected Nu 333 mn.
It is also clear that the Australia Rush has contributed hugely to people leaving before 20 years.
The NPPF data shows that in 2018 – 2019, about 27% of total members who left the service, comprised of members who had served up to 5 years or less only. This significantly increased to 62% in 2021-2022.
The NPPF said this data shows that fearing twenty is not the sole reason for resigning as if it is so, then people would rather resign when their service is about to hit 20 years.
The data showing higher pulling out of money from NPPF is also in line with civil servants and public servants rushing to Australia as they can use the money for air fare, fees and initial living expenses.
In 4 years’, time (1 July 2019-30 June 2022), 8,762 NPPF members left. The number of members who exited in 2021-2022, increased by 124% to 3,637 as compared to 2018-2019.
Similarly, NPPF has disbursed payment amounting to Nu 2.59 billion in 2021 to 22, which is an increase of Nu 1.81 billion (or 231%) from that of payment made in 2018-2019.
The NPPF CEO said that if people really took a long term view then it is far better for people to enter the pension system than take the bulk amount before hitting 20.
He said that only a very few people who are good at business do well with the amount in Bhutan, but the majority could very well end up blowing the money and having nothing for retirement.
He said financially, it makes sense for people to opt for entering pension as there is something after retirement and even if one dies then half that amount will go to the wife and kids under 18 will get Nu 1,200 each per month.
Another NPPF official said that earlier before NPPF was created, under RICBL civil servants could withdraw the amount in full and they usually ended up spending or blowing the money and would approach His Majesty The Fourth King for Kidu.
The official said that it was then His Majesty The Fourth King issued a Royal Edict in 1998 commanding RCSC to review the post-retirement benefits scheme and propose an appropriate retirement plan with enhanced benefits to adequately support the livelihood of civil servants on their retirement leading to the creation of the NPPF.
This is an interesting article highlighting the challenges faced by the National Pension and Provident Fund (NPPF). It’s understandable that they are exploring various options to make the scheme more sustainable, considering the projected increase in the number of pensioners compared to contributors. The suggestion of doing away with the pension system altogether and paying off its members based on the number of years is an intriguing concept, although it seems to come with a significant financial burden for the government. It’s wise to consider the timing of such reforms, especially in light of the economic difficulties caused by the COVID-19 pandemic. Perhaps implementing smaller, incremental changes could be a more feasible approach in the current circumstances. It will be interesting to see how the NPPF addresses the funding deficit gap and ensures the long-term sustainability of the pension scheme.