• Friday, September 19, 2014

Universally accessible pension system

Mohammad Towhidul Islam

THE fear of losing his pension was one of the two concerns that led Krishnadayal not to reveal the identity of his adopted son in Rabindranath Tagore's Gora. Krishnadayal's concern for his hard-saved pension was not atypical among the elderly people of Bengal since in many cases it was the only source of earning for ageing educated parents in those days.In fact, his concern is timeless.To get rid of the concern, pension offers indispensable financial assistance to people in the post-employment period of their life. To magnify the importance of pension, Thomas Piketty even claimed that “[a]long with access to education and health, public pensions constitute the third social revolution ….” (Thomas Piketty, Capital in the Twenty First Century, 2014, HUP).
Though our elderly people are concerned about their savings and pensions, our pension system does not attract much attention from policy makers. In 1997, the Asian Development Bank (ADB) report on Bangladesh pension system concluded that the pension sector in Bangladesh was “in a nascent stage of development with a weak regulatory and operational framework.” The neglect in development and renovation of the old pension system is due to our ignorance about gaining the benefits that a modern, professionally run pension fund can offer to our economy and society. The country's limited economic and institutional capacity is also a hurdle in exploitation of pension benefits.
Our fossilised regulatory framework for pension system dates back to 1871 when the Indian Pension Act was passed to give native employees of the British government pension upon their retirement. This Act was carefully crafted to fit with the peculiar situation of British India. It provided no system at all for the people in general nor ever intended to form the basis for a modern pension system. But unfortunately, our whole pension system is built upon the foundation it provided and all subsequent laws were passed without even feeling the necessity to review its operational merits in a changing society.
Traditionally, the pension system of many developed countries is divided into three pillars: public pensions, occupational pensions and individual pensions. As a shift from this categorisation, the World Bank proposed a different pension system also named as 'three pillars' in its 1994 report Averting the Old Age Crisis. The three pillars include mandatory publicly managed pillar, mandatory privately managed pillar and voluntary pillar. One of the fascinating features of this system is that it applies equally to public and private sector employees.
The first pillar of this multi-pillar system is an anti-poverty pillar which is financed by the government from tax revenue, and its benefit goes directly to the people with low income and little assets. This pillar is aimed at achieving redistributive and reinsurance goal at the lowest cost. However, the plausibility of such a fund may raise a debate in Bangladesh where a vast majority of people will seemingly be eligible for this scheme, which would require the government to build a preposterously big fund.
The second pillar is the most important among the three, and it prompts most controversies too. It is also a mandatory pillar but unlike first pillar it is fully funded and privately managed, though extensive government regulation is also present. This pillar assumes a 'capitalised system' in which the contributions of the participants are invested, preferably in financial market, to get a higher rate of return and to replace the pay-as-you-go system. But Thomas Piketty warns that the return on capital is too volatile in real world scenario. (See his illuminating discussion in Capital in the 21st Century, pp. 487-90). Also, one might question the possibility of better performance of such a privately managed fund in a country where scarcity of skilled fund managers is apparent, and orchestrated market booms and crashes are easily possible. The World Bank report, however, vaguely addressed this issue by presuming that “extensive regulatory capacity” can or may “keep the investment companies financially sound.”The third is more of a supplementary savings pillar voluntarily participated by those who want to save more for their unforeseeable future. Self-employed people also can contribute in this fund. The World Bank report prescribes that the multi-pillar system “should have better-targeted redistributions, more productive savings, and lower social costs.” Creating three different pillars for pension is like putting apples in different baskets to reduce the risk in an uncertain world.
To face the uncertain world challenge, Bangladesh has already secured some certainty by providing a limited 'safety net' fund, a pension fund system predominantly for public sector employees. However, no voluntary pension fund as such exists in Bangladesh to offer more choices as mentioned above covering private and informal sectors. The Constitution of Bangladesh contains fundamental responsibilities encompassing economic, social and cultural rights. Amongst them, Article 15(d) has made it a fundamental responsibility of the State to secure citizen's“right to social security.” But with a rudimentary pension system that already exists and extends its service only to a limited class of employees, it is not possible to ensure social security.


To establish social security, the fundamental responsibility provisions of the Constitution and the traditional wisdom can be taken into consideration.  Traditional wisdom tells us that a pension is “the fortune of those who have no fortune.” In a country where most people live in poverty, a capacious pension system is needed to give them the blessings of “fortune.” Further, in considering the essentiality of pension, Article 15(d) of the Constitution can be interpreted to cover pension as a basic human right. This can help introduce compulsory private pension funds by assimilating largely utilitarian commercial funds management with the philosophical foundations underlying human rights law. Given this, the State can design and ensure a pension system universally accessible to every citizen, and based on traditional wisdom and human rights.

The writer is Associate Professor, Department of Law, University of Dhaka.

Published: 12:00 am Thursday, July 10, 2014

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