Wednesday 6 February 2008

The downside of rising life expectancy

6 February, 2008 - It is as yet years away but could most likely happen if measures are not taken. As Bhutanese live longer, with better medical care, the pension plan will reach a stage where the benefits it pays out would be more than the contribution it receives. Cruel as it may sound, rising life expectancy, therefore, does not bode well for the sustainability of the pension system as it exists today.

“We have a “pay as you go” system that suits us now because we have a young population,” said the managing director of the fund, Dupthop Wangchuk. “But it will mature one day so we have to look at ways of making it sustainable.”

Bhutan’s pension plan for civil and corporate employees is a partially funded system where contributions from working PF members support the pensioners. Members contribute eight percent of their salary and employers make an equal contribution. Of this, 10 percent goes to the pension plan and six percent to the provident fund (PF). On retirement, the PF is paid as a lump sum and the pension as a monthly salary till the pensioner dies.

According to pension officials, the present system has a 30-year value and will mature by 2032. Maturity means the first group of people, who were members when the system started, which is little more than 20,000, would all be beneficiaries. When this happens, more will be going out than coming in.

Pension officials said that this was a global trend in many countries, which had the “pay as you go” system. Japan was a classic example where the average life expectancy is 80 years plus and there were more pensioners than contributors to the plan.

A number of reforms had been introduced in these countries to sustain the pension plan. One was to extend the retirement age. For example, the retirement age in the US and Japan is 67 years and in the Nordic countries it is 70 to 72 years.

The other was to increase the contribution rate. “In many developed and rich countries, the contribution is as high as 30 to 40 percent and the retirement benefits are also very good,” said a pension official. “But raising the contribution rate here could affect the take home pay.”

Pension officials say the best option to sustain pension liabilities was a prudent investment policy, that improves returns on the fund. However, it was becoming increasingly difficult for NPPF to find adequate investment avenues in the country, according to the managing director.

“We get about Nu 45 million as contributions every month and we’re not able to invest that fund into areas that give us good returns,” said Dupthop Wangchuk. “We’re looking for investments that give us 7 to 10 percent returns.”

The NPPF has invested its funds in equity holdings in a number of local companies and corporate bodies. It has also financed projects and government loans. Besides that, it also invests in real estate and housing and education loans to its members. Still, as of June 30, 2007, it had Nu 703 million in the banks as short-term deposits, which recently decreased interest rates on short-term deposits from three percent to two percent. “It’s money lying idle,” said the managing director.

In 2002, NPPF did have offshore investments but later withdrew because of ‘bad experience’. The NPPF is looking at making significant investments in the upcoming Dagachu hydropower project in Dagana and the Dungsam cement project in Nganglam.

By Phuntsho Wangdieditor@kuensel.com.bt
http://www.kuenselonline.com/modules.php?name=News&file=article&sid=9823

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