Social security: Dar sets up committee to restructure EOBI
Pension administrator insists it cannot afford higher pension payouts
Finance Minister Ishaq Dar chairing a meeting on EOBI on Thursday. PHOTO: PID
ISLAMABAD:
The government has set up a committee to restructure the Employees Old-Age Benefit Institution (EOBI) after having realised that merely decreeing an increase in pensions for retirees was not sufficient to implement the decision.
In June 2013, the government announced that it would increase pensions of retirees insured by EOBI from Rs3,600 to Rs5,000 per month. In June 2014, the government once again announced that the pensions would be increased, this time to Rs6,000 per month. However, at no point over the previous 18 months did it occur to the government to assess the ability of EOBI to actually pay out higher pensions. EOBI has been unable to increase pensions from Rs3,600 a month, a level last set in July 2012.
Actuarial assessments of EOBI conducted last year have suggested that the Rs240 billion fund would begin running severe deficits and run out of funds within six years if the pension were increased while retaining the current structure. Finance Minister Ishaq Dar set up the committee on Thursday after meeting with EOBI executives to discuss the matter. State Bank of Pakistan Deputy Governor Saeed Ahmad – a close confidant of Dar – will chair the committee, which will include representatives of EOBI, the Securities and Exchange Commission of Pakistan, the finance ministry and the Ministry of Human Resources Development.
However, the parameters of the committee seem to suggest that it may be looking at the wrong metrics, since one of its core jobs will be to look at the feasibility of federal financial assistance, especially in light of the fact that the EOBI is now legally a provincial matter after the 18th Amendment to the Constitution. Sindh, the only province with a large pool of finance professionals, has already set up its own chapter of the EOBI.
At the heart of EOBI’s problem is its structure. The EOBI is effectively structured like a life-insurance policy and is open to any employee of a company that participates in it, usually formal sector private companies as well as some state-owned companies. Like most other countries that have such social security nets, EOBI relies on monthly contributions by every employee enrolled in the system.
However, unlike other countries where the monthly contribution is determined by the level of income and is effectively treated as a tax, the EOBI is more like a premium and linked only to the minimum wage. Employers pay 5% of the minimum wage, whereas employees pay another 1% of the minimum wage. Thus, regardless of income level, every employee and their employer is contributing only Rs480 per month per employee.
The system works currently because there are far fewer retirees than there are workers, but will likely face severe strains once the number of retirees increases.
EOBI management has resisted implementing the higher pension, despite the EOBI Board of Trustees approving the higher amounts, insisting that the federal government pick up the extra expense of the pension. The EOBI Act of 1976 allows for the federal government’s contribution into the EOBI funds. The Act was amended in 1998 during Prime Minister Nawaz Sharif’s second term, when the contribution was changed to “token money”, currently set at a paltry Rs100,000 per annum.
Even at Rs3,600 a month, EOBI’s finances are somewhat strained, according to an official at the human resource development ministry. One of the proposals is to increase the contribution to a higher percentage of the minimum wage. However, there appears to be no consideration of following the example of other countries – such as the United States and Britain – and linking the contribution amount to income levels, which would continue rising with inflation.
Published in The Express Tribune, January 2nd, 2015.
The government has set up a committee to restructure the Employees Old-Age Benefit Institution (EOBI) after having realised that merely decreeing an increase in pensions for retirees was not sufficient to implement the decision.
In June 2013, the government announced that it would increase pensions of retirees insured by EOBI from Rs3,600 to Rs5,000 per month. In June 2014, the government once again announced that the pensions would be increased, this time to Rs6,000 per month. However, at no point over the previous 18 months did it occur to the government to assess the ability of EOBI to actually pay out higher pensions. EOBI has been unable to increase pensions from Rs3,600 a month, a level last set in July 2012.
Actuarial assessments of EOBI conducted last year have suggested that the Rs240 billion fund would begin running severe deficits and run out of funds within six years if the pension were increased while retaining the current structure. Finance Minister Ishaq Dar set up the committee on Thursday after meeting with EOBI executives to discuss the matter. State Bank of Pakistan Deputy Governor Saeed Ahmad – a close confidant of Dar – will chair the committee, which will include representatives of EOBI, the Securities and Exchange Commission of Pakistan, the finance ministry and the Ministry of Human Resources Development.
However, the parameters of the committee seem to suggest that it may be looking at the wrong metrics, since one of its core jobs will be to look at the feasibility of federal financial assistance, especially in light of the fact that the EOBI is now legally a provincial matter after the 18th Amendment to the Constitution. Sindh, the only province with a large pool of finance professionals, has already set up its own chapter of the EOBI.
At the heart of EOBI’s problem is its structure. The EOBI is effectively structured like a life-insurance policy and is open to any employee of a company that participates in it, usually formal sector private companies as well as some state-owned companies. Like most other countries that have such social security nets, EOBI relies on monthly contributions by every employee enrolled in the system.
However, unlike other countries where the monthly contribution is determined by the level of income and is effectively treated as a tax, the EOBI is more like a premium and linked only to the minimum wage. Employers pay 5% of the minimum wage, whereas employees pay another 1% of the minimum wage. Thus, regardless of income level, every employee and their employer is contributing only Rs480 per month per employee.
The system works currently because there are far fewer retirees than there are workers, but will likely face severe strains once the number of retirees increases.
EOBI management has resisted implementing the higher pension, despite the EOBI Board of Trustees approving the higher amounts, insisting that the federal government pick up the extra expense of the pension. The EOBI Act of 1976 allows for the federal government’s contribution into the EOBI funds. The Act was amended in 1998 during Prime Minister Nawaz Sharif’s second term, when the contribution was changed to “token money”, currently set at a paltry Rs100,000 per annum.
Even at Rs3,600 a month, EOBI’s finances are somewhat strained, according to an official at the human resource development ministry. One of the proposals is to increase the contribution to a higher percentage of the minimum wage. However, there appears to be no consideration of following the example of other countries – such as the United States and Britain – and linking the contribution amount to income levels, which would continue rising with inflation.
Published in The Express Tribune, January 2nd, 2015.