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The current National Pension and Provident Fund (NPPF) with 65,267 members from the civil service, government corporations and the Armed Forces is looking at major reforms, of which the main one will be how it calculates and pays out pensions to make it equitable and sustainable.
The NPPF Pension and Provident Fund Chief, Tshering Dorji said that at the current rate with no changes the civil service part of the pension could run until 2060 after which it will be at a loss as there would be more pensioners than those contributing.
He also said that current pension pay out system can be made more equitable and along with this it can be made more sustainable.
Currently, for a civil servant, her or his contribution is 11 percent with the government contributing 15 percent coming to a total of 26 percent. The NPPF takes 16 percent into the pension system and 10 percent goes into the PF.
On retirement the civil servant gets the PF amount back in bulk along with the interest accrued.
To calculate the monthly pension, the current formula is the last basic pay multiplied into 40 percent into number of years in service divided by 30 years.
So if a person was last getting Nu 40,000 basic pay and he worked for 30 years then his pension would be around Nu 16,000.
The NPPF as part of wider reforms is suggesting a change in this formula.
Tshering said that in the pension system a person pays a much lower contribution through the person’s professional life, but for those who retire at a senior level their reward is much higher than their contribution.
He said the proposal is instead of calculating the last paid basic salary at the time of retirement the idea is to take an average of the last five years’ basic pay.
This, he said, would be a more equitable and accurate reflection of the person’s contribution.
The other change being suggested is that calculation towards the end divides the amount by 30 years which is the presumed years of service, but he said with civil servants now working beyond 30 years the idea is to increase this number of years as civil servants ordinarily worked to 33 years and beyond. This means that the payout would reduce.
However, to balance this Tshering said that the 40 percent calculation part could be increased.
Tshering also said that a reform during the recent pay hike for civil servants has helped in improving the Pension sustainability. Earlier he said that for those who contributed pension between 10 to 20 years they had the option of taking lump sum payment or joining the pension system.
However, now as per the change during the pay hike one would have to made contribution for 20 years to be eligible for pension.
The NPPF is proposing both structural and parameter reforms. Under structural reforms it will aim and get in more members under NPPF including non civil servants like people from the private sector. The focus would be getting them under the PF scheme.
In terms of parameter reforms apart from the change in formula system above, the NPPF will also make proposals in terms of increasing the retirement age to make the pension more sustainable and also increasing the contribution rate.
The current retirement age is 56 for support and junior staff, 58 for mid level and officers and 60 for executives.
Regardless of the recent debate in Parliament over the retirement age, Tshering pointed out that in the west the retirement age is 65 and there are plans to increase it to 67.
He said for the NPPF if the retirement age increases then it would mean that many more years of active contribution helping the pension fund. However, he said the final decision would be taken by the government.
Tshering said that the life expectancy as been going up for Bhutanese in general and especially so for its members who are the ‘cream of society’ and hence they on an average live even longer. He said a longer life expectancy means even longer pension payouts.
NPPF is also looking at seeing if the PF contribution rate of its members can be increased to have forced savings given a poor saving culture. Tshering citing some positive examples said that DHI companies, RMA and NPPF already have employer and employee contribution at 15 and 15 percent.
He said this would be good for the employee as they would have enough funds while retiring and it would be good for the economy as there would be national savings which can be used.
Tshering said that pension is an inter generation transfer with the idea that the people working today are helping pay the pension of those who have retired, and that those who retire in the future will have a young generation in the future pay for their pension.
He said that the pension system cannot be allowed to fail by around 2060 when the next generation of civil servants retire.
Currently 65,267 pension members pay around 334 mn a month in pension and PF to the NPPF while a monthly payment of Nu 120 mn (54 mn pension and 66 mn PF) is made to 7,787 pensioners. This means that NPPF gets around Nu 4 bn in annual contribution while it has to payout Nu 1.4 bn.
As of June 2020 NPPF has around Nu 40 bn in funds with it. It does not leave this Nu 40 bn idle but invests it in equity shares, government bonds, T-Bills, loans to hydropower projects like Dagachu, fixed deposits in banks, housing loans to its members and also building housing projects.
In the 2019-2020 financial year as of June 2020 it earned Nu 2.4 bn in revenue and minus its expenses of Nu 416 mn it was left with Nu 2.04 bn surplus.
A part of this surplus goes to the interest payment to the PF which was this year is at 7.12 percent and another part goes into the pension fund.
While the civil service pension is slotted to go at a loss from 2060 things could be turned around with the reforms being suggested above.
The sustainability of the pension fund will depend on the changed formula for a pension payout, retirement age, rate of return on its investments, state of the economy and job holders joining NPPF and the inflation rate.
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