REFORM OF PENSIONS: LESSONS FROM PAKISTAN AND BEYOND

REFORM OF
PENSIONS:
LESSONS FROM
SUCCESSFUL
EXAMPLES IN
PAKISTAN AND
BEYOND

Reform of Pensions:
Lessons from Successful
Examples in Pakistan and Beyond
ABOUT THE WORK
This work has been completed for Foreign Commonwealth and Development Office (FCDO)’s
Sustainable Energy and Economic Development (SEED) Programme in collaboration with Sustainable
Development Policy Institute (SDPI).
Suggested citation: Ahmed, V. Javed, Ahmed, B. Usama, A. Masud, Z. and Farooq, H. (2021) Reform of
Pensions: Lessons from Successful Examples in Pakistan. Sustainable Energy and Economic Development
(SEED) Programme: Islamabad.
Sustainable Energy and Economic Development (SEED) is a six-year programme, funded by the United
Kingdom Foreign, Commonwealth and Development Office (FCDO). This project aims to improve eco-
nomic and urban planning in Khyber Pakhtunkhwa. Sustainable Development Policy Institute (SDPI) is
a national think-tank that has been conducting research on the economy and environment for almost
three decades to support government policies at the national and subnational levels.
SDPI is collaborating with SEED to conduct a series of consultations on public sector pension reform in
Pakistan. There is intent to bring together government officials and independent experts to highlight
fiscal policy challenges presented by the growth in unfunded public sector pension and to evolve re-
form options based on evidence from national and international experiences. The federal and provincial
governments are currently exploring solutions to manage their pension liabilities, and our consultations
and engagements with federal and Khyber Pakhtunkhwa governments under the SEED programme are
intended to inform this process.

Contents
02
Message from the Finance Minister, Government of Khyber Pakhtunkhwa
Acronyms
04
05
Message from Team Leader, SEED
06
Executive Summary
09
12
Introduction
Learning from successful case studies
13
15
17
22
23
26
A. A seat at the table for all stakeholders
B. Consensus on how the cake is to be divided
C. Investment strategies that deliver safe and sound asset growth
D. Proactive and transparent management of risk
E. Well-designed regulatory framework
Conclusions and policy implications for the GoKP
29
References
01

Acronyms
CAGR Compound Annual Growth Rate
CCP Canada Pension Plan
DB Defined Benefit
DBS Defined Benefit Schemes
DC Defined Contribution
DCS Defined Contribution Schemes
EOBI Employees’ Old-Age Benefits Institution
FCDO Foreign Commonwealth and Development Office
GDP Gross Domestic Product
GPIF Government Pension Investment Fund
GPTB Global Pension Transparency Benchmark
GoKP Government of Khyber Pakhtunkhwa
IMF International Monetary Fund
KPFM KP Fund Management
MoITT Ministry of Information Technology and Telecommunication
OECD Organisation for Economic Co-operation and Development
OGDCL Oil and Gas Development Company Limited
PAWG Pension and Annuity Working Group
PAYGO Pay-As-You-Go
PRIMACO Pakistan Real Estate Investment &
Management Company (Pvt.) Limited
PTCL Pakistan Telecommunication Company Limited
PTET Pakistan Telecommunication Employees Trust
SDPI Sustainable Development Policy Institute
SECP Securities and Exchange Commission of Pakistan
SEED Sustainable Energy and Economic Development
SPF Sindh Province Pension Fund
VPS Voluntary Pension Scheme
02

04
Message from Mr. Taimur Saleem
Khan Jhagra, Finance Minister,
Government of Khyber Pakhtunkhwa
T
he Government of Khyber Pakhtunkhwa (GoKP) is com-
mitted to reforms that will address the challenges related
to large unfunded pension liabilities. Khyber Pakhtunkhwa
is the first provincial government across the federation to put in
place a detailed agenda of pensions and worker-benefit reforms
that will secure sustainable returns for current and future employ-
ees of the provincial government.
The Cabinet has approved the introduction of a defined contribu-
tion pension system. This reform offers a win-win scenario as it
will be compulsory for new employees and optional for existing
employees. To lessen the annual pension burden on the public tax-
payer, the Cabinet has also approved measures to use the profits
earned from the pension fund to partially pay for past liabilities.
The Cabinet has also approved amendments in the Khyber Pakhtunkhwa Civil Servants Pension Rules &
Orders 2006. This change will reduce the number of tiers in the pension eligibility hierarchy, bringing it
in line with international best practices. Some further changes to facilitate the pensioners include auto-
mation of the pension payment system and the introduction of a pension system for local government
employees at district and tehsil levels.
The support from SEED and SDPI is critical in the ongoing pension reforms exercise. Our government re-
quires innovative and out-of-box solutions for achieving fiscal sustainability amid constrained provincial
resources. Only such an approach can allow the province to create fiscal space to fund human develop-
ment priorities in line with Prime Minister Imran Khan’s vision of a welfare state. The continued technical
assistance and identification of best practices in reforming the future pensions regime will be important.
The directions pointed out by SEED and SDPI in this policy note will be immensely useful to keep an in-
clusive debate around this subject alive and to move the reform process forward with the consensus of
all stakeholders.

05
Message from
Mr. Omar Mukhtar Khan,
Team Leader, SEED
T
he SEED programme is looking closely at the reform of pub-
lic sector pensions given its critical importance for Pakistan’s
fiscal sustainability. The GoKP, like other provincial govern-
ments and the federal government, has been working to resolve
this issue for some time. Currently, there is room and political will
for serious reform effort in this area within the provincial govern-
ment. In this context, SEED is providing technical assistance to
GoKP’s Finance Department on fiscal and governance reforms
to create more fiscal space in the short and medium terms. This
includes assistance to reduce the current public expenditures on
pensions and finding innovative solutions to decrease the burden
of future pension liabilities. In collaboration with SDPI, SEED is
also creating awareness about threats to fiscal sustainability due
to the burgeoning pension liabilities and shaping public discourse
to create a constituency for reform.
The GoKP has put together a high-powered committee on pension reform and conceived a contributory
scheme which has subsequently been approved by the Cabinet. The new scheme is innovative in that it
does not retreat from the legal obligations of GoKP toward existing employees but offers a more sustain-
able solution in the form of a contributory scheme for new employees. This is a major shift toward fiscal
sustainability.
We believe that there are successful models of pension reform in Pakistan’s public and private sector as
well as in other countries around the world. There is a need to look at how these governments with large
pay and pension liabilities are approaching this challenge on a continuous basis and how they are utilizing
expertise from within and outside of the country.
Against this backdrop, SEED has also organized consultations to shed light on successful examples from
Pakistan and beyond which can be replicated by other public sector organizations. This policy note pres-
ents some relevant findings from successful case studies inside and outside of the country. We sincerely
hope that this effort will help the GoKP make tangible improvements in the system of civil service pension.

07
A
ccrued pension liabilities are rapidly in-
creasing, becoming a fiscal burden for
Pakistan as well as the Government of
Khyber Pakhtunkhwa (GoKP). Over the past
seven years, total revenues of the GoKP have
increased by 8.1 per cent, whereas pension
expenditure has grown by 22 per cent per
annum. This trend is bound to squeeze the
space available for development spending. In
response, the GoKP became the first govern-
ment in Pakistan to announce a contributory
pension reform process as part of the 2021–22
budget. The aim of this policy note is to sup-
port GoKP in this reform process by reviewing
successful examples of contributory pension
schemes and transitions from a defined bene-
fits scheme to more fiscally sustainable mod-
els, throughout the world, as well as within
Pakistan. From these examples, five major
lessons can be drawn for GoKP’s reform pro-
cess.
First, for any reform and scheme to succeed, it
must be ensured that the reform process itself
is inclusive, and all relevant stakeholders have
adequate representation in the governance
structures of pension funds -- especially those
that will be most affected by the change. These
include the taxpayers who pay for pension lia-
bilities in the current scheme; the government;
the employees and their associations; and the
pensioners. Throughout this process, trans-
parency is key, as all these stakeholders must
be on board with and aware of the various
aspects of the scheme, including investment
policies and fund performance. This change
process will, however, require continuous ad-
vocacy and outreach so that the risks associat-
ed with rising liabilities can be comprehensive-
ly understood by all stakeholders.
A second crucial aspect for any scheme is
the contribution of the employer and the
employees toward the pensions. The ratios
vary widely worldwide, but for government
schemes, the contribution by employees is
most often matched by the employer. In case
of new DC schemes, it is common practice to
begin with low rates which increase gradual-
ly, as starting off with high rates can discour-
age all stakeholders. In Australia, for instance,
private employer contributions to employee
pensions are set to increase by regular in-
crements where they will rise to 12 per cent
by 2025, from nine per cent in 2002. OGDCL
in Pakistan has similarly taken a phased ap-
proach to their contributory pension reform.
Third, all over the world, pension funds are
moving away from being regular social secu-
rity institutions to dynamic financial entities
with significant income-generating capacity,
stemming from their investments in a wide
range of asset classes. Technical expertise
is, however, necessary to ensure prudent in-
vestments. Therefore, pension funds man-
agement should include professionals with
relevant experience in investment banking,
public finance, risk management, labor eco-
nomics, among other knowledge domains.
Moreover, the management team should
also have relevant private sector experience
and significant autonomy in decision-mak-
ing, without excessive interference from
the government. The Canadian pension
funds are a good example, which have in-
house management and human resources,
keeping advisory costs low, and focusing on
diversified investment opportunities, while
the fund plays an involved role as asset
owner.

08
The KP pension fund must strengthen its
technical capabilities in the same manner.
Alternatively, the execution of the new DCS
scheme could be outsourced to an appro-
priate bank or asset management company
with relevant experience. The KP Pension
Fund, moreover, is currently invested conser-
vatively – as are civil service pension funds
operated by other provincial governments
– in low-risk assets. GoKP should seek to
strengthen fund management capabilities
that would enable a more diversified invest-
ment approach.
There are many specific risks involved in pen-
sion fund management; and for any scheme
to produce desired returns and results, these
risks need to be holistically assessed and duly
managed. These include internal risks, such
as inefficient organizational procedures lead-
ing to losses, as well as risks that are external
to the fund, including potential changes in
the underlying legal framework at a nation-
al or sub-national and regulatory level. Most
successful pension schemes in the world
have robust risk management mechanisms
in place. In Pakistan, the Employees’ Old-Age
Benefits (EOBI) is also a good example, which
has established an independent company to
mitigate the strategic risk arising out of the
increasing stake in real estate for EOBI.
There are several steps that GoKP can consid-
er, to mitigate risks and improve transparen-
cy. A “State of Pensions in KP” report could
be published annually and presented to the
provincial assembly during the budget ses-
sions, which would include actuarial assess-
ments of pension liabilities. Ideally, these
would be undertaken by one of the ‘big-four’
accounting firms, which would be in line with
global best practices.
Last, a well-designed regulatory framework
is essential for efficient functioning of any
pension fund. In Pakistan, the supervisory
authority for private fund managers, pen-
sion funds, and trustees, is the Securities &
Exchange Commission of Pakistan (SECP).
OECD has documented global best practic-
es regarding regulatory principles that are
relevant in Pakistan’s context and can guide
the reform process in KP. At core, sound reg-
ulation requires a strong legal framework
backed by effective institutional structures,
with sufficient autonomy for supervisory
bodies and independence from fund man-
agement.

10
S
EED and SDPI have conducted policy consulta-
tions to discuss pension reforms and identify
successful examples of pension systems with-
in Pakistan and abroad, which can inform planned
pension reforms in KP. The previous policy note
by SEED on the subject of ‘Government Pensions
and Future Fiscal Sustainability’ highlighted the
pressure exerted by pension liabilities on GoKP
and how it endangers its budget sustainability. This
note -- the second in the series -- highlights key les-
sons from successful reforms, policies, and insti-
tutional models that can help reduce fiscal liability
rising from pension obligations.
This effort is expected to help the GoKP design and
rollout a contributory pension reform that would
reduce pension liabilities on the one hand, while
providing an acceptable alternative to workers
and pensioners alike. A wide range of experts from
both public and private sectors -- including officials
from the Ministry of Finance, GoKP’s Finance De-
partment, Employees’ Old-Age Benefits Institu-
tion (EoBI), Securities and Exchange Commission
of Pakistan (SECP), Pakistan Telecommunication
Employees Trust (PTET), Oil and Gas Development
Company Limited (OGDCL), Bank of Punjab, and
the federal government’s Commission on Pay and
Pensions -- have contributed to this effort.
These experts pointed out that Organisation for
Economic Co-operation and Development (OECD)
countries regularly revisit their pension systems
and implement reforms to enhance financial sus-
tainability. Some of the key reforms include increas-
ing the minimum retirement age, increasing taxes
or contribution rates in defined systems, and re-
ducing pension administration costs (OECD, 2015).
The contributory pension system, in which workers
contribute to their pension benefits and their con-
tributions are invested, has been introduced in sev-
eral countries to address fiscal pressures (Arif and
Ahmed, 2010). The returns on invested funds under
contributory schemes also add to overall financial
benefits provided to the pensioners.
Typically, countries with growing fiscal deficits driv-
en by the large size of government (including pen-
sion spending), experience a crowding-out of pub-
lic resources and it becomes difficult to secure fiscal
space for priority spending on development goals
and service delivery (Clements et al. 2014, Ahmed
2017). Therefore, moving toward a progressive fis-
cal policy requires regular assessment of unfunded
pension liabilities. It is because of this unfunded lia-
bility that the IMF often suggests a nominal freeze
of pension expenditure to borrowing governments
(IMF, 2021).
Often, in partially or fully funded pension schemes,
pensions are paid out of a fund established through
contributions from the members as well as income
from assets owned by the fund. On the contrary,
in Pay-As-You-Go (PAYG or PAYGO) schemes, pen-
sions are paid out of current government revenues
(Barr et al. 2006). Fully funded schemes allow for
savings where contributions are prudently invest-
ed in financial assets, while PAYGO schemes are run
by the government through taxes on the current
workforce in the economy to cover the pension
expenditure of the retired generation. Expenditure
on PAYGO schemes, thus, involves wealth transfers
from younger to older generations, which makes
them increasingly troublesome and unsustainable
for contributors and taxpayers (Bongaarts, 2004).
The failure to address fiscal pressures in PAYGO
systems can impose macroeconomic instability.
For example, if the government cannot consis-
tently raise the contribution rates for the present
generation, future generations end up with lower
pensions in real terms.
In Pakistan, the 2017 population census results indi-
cate that the relative and absolute size of the older
population in Pakistan is expected to rise, which
will increase the burden of accrued pension liabil-
ity.
At the sub-national level, in the case of Khyber Pa-
khtunkhwa province, pension expenditures are
increasing at a rapid pace. Table-1 indicates that
the total revenues of the GoKP are projected to
increase by 14.3 percent, but the growth of pen-
sion expenditures is projected to be around 24
percent between 2021-22 and 2023-24. Past data
indicates that salaries and pensions increased by a
Compound Annual Growth Rate (CAGR) of 22 per-
cent and 14.5 percent, respectively, between the
fiscal years 2013-14 and 2019-20, whereas revenue

11
receipts grew by only 8.1 percent during this pe-
riod. Such a trend is bound to squeeze the space
available to GoKP for development spending.
Table 1 below shows that the GoKP is aware of
this trend and its projections into the future.
However, given these projected figures, the un-
derlying CAGR used to forecast them appears to
be only 7.3 per cent for pension expenditure and
4.6 per cent for total revenues (lower than the
CAGR of 22 per cent for pension bill and 8.1 per
cent for total revenues that was based on a his-
torical trend of the past seven fiscal years). Given
that growth in the pension bill has been underes-
timated by a greater margin than growth in rev-
enues, it may be surmised that the fiscal space
may be shrinking even faster than reflected in
Table 1.
The number of retired employees in Khyber Pakh-
tunkhwa has risen at an annual average growth
rate of seven percent since 2008–09. This has
pushed the number of pensioners to 169,358 at
the end of the fiscal year 2019–20. Out of these, a
little over 1,300 pension cases were initiated over
50 years ago and are still active. Often, there is
popular pressure to regularize ad hoc or part-time
employees (in equivalent scales), which also ends
up adding to post-retirement liabilities (Ahmed
et al. 2021). This growing fiscal pressure is not ex-
pected to diminish in the short term. It will be a
timely effort to look toward examples within the
country and abroad to see how other public sec-
tor entities have successfully dealt with this chal-
lenge.
Table 1: Budgetary position of Khyber Pakhtunkhwa (PKR Million)
Source: Mid Term Budget Estimates for Service Delivery: Output Based Budgeting, 2021-24,
Finance Department, Government of Khyber Pakhtunkhwa
Description 2021-22
2022-23
(Forecast)
2023-24
(Forecast)
CAGR FY22-FY24 (%)
Total revenues 1,118,156 1,156,197 1,278,008 5.3%
Total expenditures 1,118,156 1,201,415 1,332,399 6.0%
Pension 92,076 100,284 113,826 7.3%
Pension as % of total revenues 8.2 8.7 8.9 -

12
2. Learning from
Successful Case Studies

13
This policy note broadly explores the features of
a successful pension model at PTET and the on-
going reforms at OGDCL. Some recent efforts at
EOBI are also included in the narrative. These ex-
amples have been selected to highlight:
i. The transition from defined benefits to a
contributory scheme, as with OGDCL, which took
two key measures, i.e., capping of the salaries and
introduction of defined contributions through
which savings of PKR 186 billion are expected
over 10 years.
ii. Sound investment strategies which have
moved entities toward a fully funded position
against pension liabilities, as with PTET. This has,
overtime, ensured that the pension bill of the
organization remains sustainable and there are
gains for both existing and past employees.
The roles of financial sector entities in the public
sector, for example, the Bank of Punjab and regu-
latory bodies such as SECP, have also been exam-
ined in the context of the overall pension ecosys-
tem. To supplement the arguments here, models
from other countries, particularly from the OECD,
are also referenced. The assessment of these
models will serve as guiding principles for other
public sector entities in Pakistan, particularly for
the civil service pension reform underway in KP.
The narrative is organized around five key ele-
ments relating to the parametric and systemic de-
sign of pension systems: (i) the way stakeholders
are consulted in policy decisions and represented
in governing structures; (ii) the manner in which
the employer and employee contribution is deter-
mined in Defined Contribution Systems; (iii) the
development of investment strategies that de-
liver adequate returns; (iv) the way risks are an-
ticipated and mitigated; and (iv) and regulation.
In each of these elements there are clear lessons
that are relevant for pension reforms in KP and
other jurisdictions in Pakistan.
2.1 A seat at the table for all stakeholders
2.1(1) Mapping and engaging stakeholders
There are four key stakeholders linked to most
strategic pension reforms, who must be engaged,
consulted, and aligned with the reform effort:
retired and active plan members; employer and
employee associations; government; and pension
funds (Strumskis, Balkevičius, 2016). Taxpayers
are also important stakeholders because they
bear the ultimate obligation to maintain sufficient
funding levels (Musalem and Palacios, 2004). Ac-
tive stakeholders’ involvement is important to
address concerns regarding equity, fairness, and
fund sustainability (Sarfati and Ghellab, 2012).
This is why governments around the world man-
age their public pension systems by taking all rele-
vant stakeholders on board, in particular, the pen-
sioners’ associations. This often entails a careful
stakeholder mapping exercise within any public
sector entity wishing to move toward contrib-
utory schemes. Many countries including Chile,
India, Peru, and Sweden have successfully intro-
duced defined contribution schemes where indi-
viduals take partial or full responsibility of their
retirement income by contributing regularly to a
scheme (Mishra, 2016). Pension funds under these
schemes, over time, provide resources for further
investment in the economy (Kidd and Tran, 2018).
2.1(2) Inclusive governance arrangements
The management of the pension fund itself is
governed by inclusive boards and committees
for oversight. The multifaceted investments un-
dertaken by funds in the public space, and their
relationship with the government makes ‘rep-
resentation’ a key ingredient to help navigate
competing interests (Nowacki, 2015). For any
successful change processes, inclusive stakehold-

14
er representation in pension fund boards allows
for greater ownership of the process and lowers
any future resistance to change. With few excep-
tions, pension fund governing boards are select-
ed by both employers and employees in all OECD
countries. In some countries such as Belgium,
there are formal provisions requiring parity be-
tween employer versus employee representa-
tives among the pension fund’s Board of Direc-
tors. In other countries, worker representatives
may be fewer in number, though a minimum ra-
tio is often prescribed – for example in Brazil, 33
per cent of the supervisory boards must consti-
tute worker representatives.
Canada’s case is often quoted for being success-
ful in consciously building trust across relevant
stakeholders in the public sector pension space.
Canadian government entities have established
capacity for evolving and maintaining a shared
consensus among stakeholders around key pen-
sion policies (World Bank, 2017). Their change
management process ensures that government,
beneficiaries, and the taxpayer groups support
pension policy decisions. The interests of active
members and contributors, retired members,
and dependents and survivors of any pensions
plan participants are fully represented in govern-
ing structures (Mitchell, 2002).
The UK Pension Act, 2004, requires that pension
fund trustees have adequate knowledge and un-
derstanding of available schemes and the way
assets under pension funds are invested. To fa-
cilitate this understanding, the Pensions Regula-
tor -- UK government’s main pension regulatory
body — provides a toolkit on the key elements
of the pension system. There are 11 learning mod-
ules followed by 11 assessments which trustees
are encouraged to undertake. These cover the
types of pension schemes, the role of trustees,
details of Defined Contribution (DC) and Defined
Benefit (DB) schemes (including investments in
both schemes), funding of DB schemes, and all
relevant national pension legislations.
Participants’ knowledge is then tested through
specific roleplaying scenarios where they play
the part of a board member of the trustees and
based on their performance, they may be direct-
ed to undertake technical tutorials on topics such
as risk management and internal controls, default
investment options for DC schemes or recovery
plans for DB schemes. This structured process
ensures that trustees know how to strengthen
trust and working relationships across a wide set
of stakeholders in pension management and re-
form.
2.1(3) Transparency for taxpayers
The government as a stakeholder has an interest
in the performance of the pension plan’s assets
and in the administrative costs of running the
plan. Taxpayers are natural stakeholders of any
pension scheme where the government relies on
current revenue to fully or partially pay for the
pension of retired public servants. Funded pen-
sion schemes reduce the burden of taxpayers as
they only contribute a marginal percentage while
the rest comes from investment earnings and
contribution from employees (NCPERS, 2017).
Sarfati and Ghellab (2012) emphasized that, being
major contributors to the financing of pension,
taxpayers should be able to see sustainable solu-
tions to pension challenges. The transparency of
investment strategies adopted by pension funds
is also critical for taxpayers, making them aware
of any exposure to the possibility of unexpected
losses related to investment including tax mon-
ies in risky assets. In Pakistan, a good example is
that of the Punjab Pension Fund which publishes
regular reports on their website disclosing the
fund’s exposure to different asset classes.

15
Managing Transparency in a Public Pension Fund
2.2. Consensus on how the cake is
to be divided
This section focuses on the contribution that enti-
ties in the public sector deduct from employee re-
munerations toward their pension and retirement
benefits, under pension systems structured as De-
fined Contribution Schemes (DCS). Public sector
entities globally are increasingly transitioning to
DCS – as opposed to Defined Benefits Schemes
(DBS) where the government assumes the sole
responsibility for funding retirement benefits
based on a ‘defined’ formula (Chohan, 2021). Chile
and Mexico recently replaced their public PAYGO
DB schemes with private-funded mandatory DC
schemes and countries such as Estonia, Hungary
and Poland have also introduced similar reforms
(OECD, 2019). In the examples from Pakistan,
PTET has a DC plan for its employees while OGDCL
provides a DB plan for its permanent employees
but plans to introduce DC for new employees.
2.2(1) Contribution arrangements in global
pension systems
In India, the National Pension System is an exam-
ple of a mandatory DC scheme for central gov-
ernment employees which was subsequently ad-
opted by certain state governments. Following a
long period of thorough consultations, the Indi-
an government arrived at a consensus among all
stakeholders on a contribution rate of 10 per cent
deduction from employee salaries – a rate that
would be matched by the government. This agree-
ment was caveated with a provision to revisit this
contribution rate, in future the rate was actually
increased to 14 per cent in 2019, based on a fresh
round of consultation with civil servants. The Indi-
an government therefore, not only ensured that
The Punjab Pension Fund is a corporate body created by the Government of Punjab to discharge its
pension liabilities by generating revenues, under the Punjab Pension Fund Act, 2007, and its corre-
sponding rules. The vision behind this Fund is to work toward achieving a fully-funded model where
pension is no longer a budget expenditure. The World Bank has identified some key failings of pub-
lic pension funds that prevent them from capitalizing on the economies of scale and low marketing
costs. These include a weak governance structure, lack of independence from government interfer-
ence, and a lack of transparency and accountability. The Punjab Pension Fund has been designed to
specifically avoid these problems.
A Management Committee is responsible for the administration of the Fund; the composition of this
Committee is defined in the Punjab Pension Fund Rules. In addition to important government stake-
holders, such as the provincial Minister for Finance and Chief Secretary, it also includes four private
members, who are required to be sector experts in asset management, fund management, account-
ing, or related fields. The Fund ensures transparency by regularly issuing all its reports online, includ-
ing annual trustee reports, bi-annual financial reports prepared by an independent auditor, monthly
fund manager reports, regularly updated financial and economic statistics, and actuarial reports every
few years.
Currently, the Fund has invested in a fairly diversified portfolio of government securities, national sav-
ing scheme, term deposit receipts, debt securities and bank deposits. As of 2021, the Fund’s net assets
grew by 13.59 percent during FY 2020-21, reaching PKR 85.2 billion, with the National Saving Schemes
as the main investment (one-third of the portfolio).

16
employees backed a key design parameter of
their DCS reform, but also retained flexibility so
that policy could respond to future changes in the
fiscal environment. Similarly, in Australia, private
employer contributions to employee pensions are
set to increase by regular increments where they
will rise to 12 per cent by 2025, from nine per cent
in 2002 (OECD, 2015).
In the UK, the prevailing system of citizen pension
is based on the recommendations of a high-pow-
ered three-member Commission appointed by the
Prime Minister in 2002, which included a member
of the House of Lords, a trade unionist and an aca-
demic. This ushered in a new period of “pensions
consensus” among trade unions, the pension in-
dustry and the wider corporate sector. These rec-
ommendations were then implemented through
laws enacted in 2007 and 2008. Today, an indepen-
dent Pension Regulator stipulates the minimum
contribution rates for employers and employees.
Currently, the minimum contribution rate is eight
percent of the staff’s total annual earnings before
tax, with five percent being contributed by the
staff and the rest by the employer. These rates,
as in the Australian case, are gradually being in-
creased over time.
Setting the contribution rate is tricky and may de-
termine the success of the pension scheme, both
in terms of fiscal sustainability and uptake among
employees. GoKP could use benchmarks from the
examples given above, as well as other contribu-
tion arrangements around the globe. For public
pension schemes in the OECD countries, in 2018,
the average total contribution rate was 18.1 per-
cent for the average wage. The share of contribu-
tions for employers and employees was 7.5 per-
cent and 10.6 percent, respectively (OECD, 2019).
Within South Asia, all countries had initially inher-
ited a non-contributory, defined benefit, tax-fund-
ed pension scheme for public sector and govern-
ment employees. Many countries, however, also
have a mandatory, publicly managed contributory
provident fund program for large private sector
firms. In Sri Lanka, for instance, where the elderly
people constitute a significant proportion of the
total population, there is a contributory, publicly
managed provident fund for private sector em-
ployees. Employees are required to contribute
eight percent of wages toward this fund, while
employers contribute 12 percent of employees’
wages into a notional account that is invested al-
most entirely in government securities (Kim and
Bhardwaj, 2011).
In Malaysia, civil servants are covered by a DBS,
while armed forces personnel contribute 10 per
cent of their salaries, against a higher govern-
ment contribution of 15 per cent. Kenya intro-
duced a DCS for civil servants with a contribu-
tion rate of 7.5 per cent of basic monthly pay,
against a higher government contribution of 15
per cent. But employees would start by paying
two per cent in the first year, increasing it to five
and then 7.5 in the second and third years of em-
ployment.
2.2(2) Managing key trade-offs
Pension benefits are proportional to the con-
tribution rates, and therefore, there is always
a trade-off between higher net wages in the
present or higher pension benefits in the future.
Moreover, lower net wages may hurt the com-
petitiveness of the scheme and turn off poten-
tial subscribers, especially if the contribution
rates are high to start with, rather than being
gradually increased over time (OECD, 2019).
Learning from these experiences, Chohan (2021)
points out that the federal government in Paki-
stan, from time to time, has been considering a
contributory pension scheme to handle the ris-
ing pension expenditures of public sector em-
ployees. However, the transition from DB to DC
can only be done gradually by closing DB to new
entrants in public service―a measure which
GoKP has announced as part of the budgetary
reforms in 2021–22. Contribution rates may then
be determined through consultations informed
by technical analysis to determine feasibility.
The rates may start out low and then ramp up
gradually, to remain affordable for employees.

17
2.3 Investment strategies that deliver safe
and sound asset growth
2.3(1) Recent global trends
Globally, public pension funds are being trans-
formed from mere social security institutions to
dynamic financial entities which have significant in-
come-generating capacity. This has helped sustain
increases to the assets-base and dividends from
pension funds. These funds have also become one
of the major investors in global equity and bond
markets. Assets under the management of the 300
largest pension funds in the world grew by eight
percent to around USD 19.5 trillion in 2019. This
trend is bound to grow as the world population ex-
periences higher work and life expectancy.
For example, The Canada Pension Plan Invest-
ment Board is a professional investment body
with a mandate to make investments using Can-
ada Pension Plan assets. Instead of external asset
managers, Canada pension funds have in-house
management and human resources which helps
in: a) lowering advisory costs, b) ensuring contin-
uous search for diversified investment opportuni-
ties; and c) allowing the fund to play an involved
role as the asset owner (World Bank, 2017). Cana-
dian pension funds by strategy have a mix of as-
set classes invested across varied regions which
also helps to minimize at least three main types
of risks: market, concentration, and inflation risks.
Another success story is Australia, featuring a 20-
year pension asset growth of 11.3 percent per an-
num. The critical characteristicsof this success have
been government-mandated pension contribution
by employees, a clearly defined contribution, and
a model where financial institutions pool pension
funds for investment (TAI, 2021). Australia was also
one of the first countries that adopted compulsory
superannuation with emphasis on privately man-
aged defined contributions for increased transpar-
ency (Kingston and Thorp, 2018). Both employers
and employees contribute toward the superannu-
Learning from Change Process at OGDCL
In 2016, reforms were brought in the OGDCL pension framework primarily through two changes that
were aimed at savings of an estimated PKR 186 billion over the next 10 years. These measures includ-
ed: a) capping of the salaries and; b) introducing defined contribution pension schemes for new em-
ployees. OGDCL traditionally offers DB plans for permanent employees. The employees’ pension and
gratuity plan are structured as separate legal entities managed by trustees.
The enterprise manages an approved, funded pension scheme under an independent trust for its
permanent employees who were regularized before 1 January 2016, as a DB plan. The employees reg-
ularized after this date will be entitled to a flexible approach. They will be able to choose from among
a mix of provisions which include gratuity, provident benefit, and a defined contributory plan instead
of the traditional pension benefit (OGDCL, 2020). Under the contributory provident fund option, the
employees will contribute one basic salary toward the provident fund annually and OGDCL will match
their contribution. Investments out of this fund will be made as per rules specified in the Companies
Act, 2017 (OGDCL, 2021).
The OGDCL Board is leading this transition toward a contributory pension setup and they are in touch
with public sector organizations which have previously introduced such reforms – including PTET and
Bank of Punjab – to benefit from their experiences. The Board and the management at OGDCL have
made themselves available to consultations with employees and their associations throughout this
process.

18
ation scheme, which receives returns from invest-
ment earnings.
There are five types of funds -- industry funds, re-
tail funds, public sector funds, corporate funds and
self-managed super funds. In 2021, 55 percent of
the total investment was made in equities, 18 per-
cent in fixed income, 13 percent in property and
infrastructure, 11 percent in cash investment and
three percent was invested in other assets which
include hedge funds and commodities. The Super-
annuation Industry Act 1993 placed trustees in the
central governing position for the prudential oper-
ation and management of superannuation funds
(Jones, 2005).
However, the financial crisis of 2007–08 global-
ly affected pension funds’ assets and investment
outlook. Pension funds in the United States lost
around USD one trillion in assets. The United King-
dom also faced investment losses, while a sharp in-
crease in liabilities was observed in the Netherlands
(Franzen, 2010). After the crisis, pension funds’
investment strategies have now become more
risk-focused, such as investment in alternative as-
set classes, including infrastructure, private equity,
and real estate. Expanding the asset base is neces-
sary to minimize the high volatility risk – especially
risks emerging from equity market exposure.
2.3(2) Pension ecosystem in Pakistan
Within Pakistan, at a sub-national level, Khyber Pa-
khtunkhwa Pension Fund has investments in gov-
ernment bonds, bank deposits, and national sav-
ing certificates. Clearly, this indicates that there is
a lack of asset diversification which keeps returns
low. A clear aversion from investing in equities can
be observed ― a risk which could be avoided if the
fund can draw on expertise which can help distin-
guish between low, medium, and high-risk equities.
Table 2 provides a comparison of select countries
in terms of total assets in retirement savings plans
as percentage of Gross Domestic Product (GDP).
This includes public sector plans. Pakistan ranks
low in comparison to even the peer economies in
terms of assets invested in retirement plans (Table
2). One reason could be the still-nascent market for
pension funds and low rates offered by these funds
(including EOBI) or high service charges billed by
fund managers. Experts have argued that pension
funds are still a relatively new phenomenon for the
working-age population in Pakistan and a ‘demon-
stration effect’ often required for potential partic-
ipants in a fund is missing. This, however, can be
overcome in the medium term through increased
outreach efforts, which could also trigger behav-
ioral change in favor of promoting managed funds.
Table 2: Total assets in retire-
ment savings plans (% of GDP)
Source: OECD (2020)
Country 2009 2019
Denmark 159.4 219.7
Netherlands 108.8 194.4
Iceland 118.6 178.2
Canada 114.5 159.5
Switzerland 126.8 158.7
Maldives 2.0 11.6
Thailand 5.3 7.3
China 0.7 1.9
India 0.2 1.9
Pakistan 0.0 0.1

19
The number of pension fund and asset manage-
ment companies over the last five years has re-
mained stagnant in Pakistan. However, total net
assets under conventional pension schemes have
increased from PKR 7,302 million to PKR 10,833 mil-
lion between 2016 and 2020 (Table 3).
Shariah-compliant pension schemes have more
total net assets as compared to conventional pen-
sion schemes and their growth is also higher. A
recent study by Naveed et al. (2020) found that Is-
lamic funds have lower risk exposure as compared
with conventional funds, which is why they are
more attractive, in comparison with pension plans,
especially for small-sized subscribers who tend to
be risk averse.
Performance and returns of market-based pension
funds are significantly higher than the real returns
provided to public sector employees under public-
ly managed DB systems. It has been observed that
total net assets under conventional and Shariah
compliant pension schemes have grown signifi-
cantly between 2016 and 2020. Assets under con-
ventional pension schemes grew 48 percent while
Shariah compliant pension schemes observed 73
percent growth during the period. National Bank
of Pakistan’s NAFA pension fund, which is the larg-
est asset management company in Pakistan, has
generated returns of up to 25 percent per annum
since 2010-11 (based on allocation to equity mar-
kets).
Federal and provincial governments have
traditionally invested in government securities,
State Life Corporation, and National Savings
Schemes. This trend may be changing now, tak-
ing into account EOBI’s experience and learning
from successful examples locally and abroad.
2.3(3) Provincial Pension Funds
Provincial governments have dedicated pension
funds to cover employee liabilities. The Sindh
Province Pension Fund (SPF) was created in 2003
to address future pension obligations. The Fund
was created with an initial amount of Rs. 1.2 bil-
lion. Investment decisions are made by the Sindh
Province Pension Board. The accumulated value
of investments of Sindh pension fund has reached
PKR 136,236 million while the profit earned during
2019-20 was PKR 31,524 million. The profit is criti-
Table 3: Pension funds in Pakistan
Source: Mutual Funds Association of Pakistan
Year 2016 2017 2018 2019 2020
Pension funds 17 19 19 19 19
Asset management companies 20 20 19 19 19
Total net assets (PKR million)
Conventional pension schemes 7,302 9,115 9,305 9,181 10,833
Shariah compliant pension
schemes
11,502 16,142 16,833 16,710 19,907

20
cal in enhancing the government’s ability to pay
pensions but is still not enough to keep pace with
the growth in liabilities. The Fund is managed in-
house by the Sindh Fund Management House, a
unit within the provincial Finance Department
which is charged with the management of 17
distinct investment funds of the Government of
Sindh. However, in 2006, the enabling Act for
the Fund was amended to empower the Board
to outsource fund management functions to
an insurance company with relevant expertise,
under Section 3(7). The Board is headed by the
Chief Secretary and the prescribed composition
includes two private members i.e. a member of
the Institute of Chartered Accountants and a rep-
resentative of the Bank in which the fund is main-
tained.
Khyber Pakhtunkhwa’s Pension Fund (Table 4)
was established in 1997–98 with an allocation
of PKR 150 million. The provincial government
has also established the KP Fund Management
(KPFM) unit, which consists of specialists and
support staff to efficiently manage the pension
fund (GoKP, 2021). The current size of the pension
fund (2020–21) is PKR 60 billion; out of this, PKR
23 billion is contributed by the GoKP. As per rules,
the investment of the fund is to be made in banks,
developmental financial institutions, national sav-
ing schemes, or any other profitable scheme. Any
portion of the fund not utilized will be kept in a
scheduled bank which offers maximum profits.
The Chief Secretary is the Chairman of the pen-
sion fund board, while other members include
two provincial secretaries, representatives from
the high court, the stock market and the corpo-
rate sector. Under the enabling Act, the Finance
Department is responsible for providing Secretar-
iat support to the Board, though additional staff
may be appointed by the Board if required.
In Balochistan, Budget 2021-22 allocated PKR two
billion for investment in Balochistan Pension Fund
while the total investment under this fund stood
at PKR 17 billion in 2020–21 (according to the White
Paper on the Budget 2020-2021). A profit of PKR
2.1 billion was also earned during 2019–20. The
government is seeking technical assistance to ex-
pand the size of the fund. Currently, the Finance
Minister is the Chairman of Balochistan Pension
Fund while the Chief Secretary is the Vice Chair-
man. Other members include Additional Chief Sec-
retary of Planning & Development Department,
Secretary of Finance Department, Secretary of
Law Department, Secretary of Services & G.A De-
partment and Additional Secretary of Regulation/
Administration. Currently there are no indepen-
dent or private members.
The Punjab Pension Fund was formed after the
promulgation of the Punjab Pension Fund Act in
2007. The objective is to generate revenue for meet-
ing pension liabilities of the provincial government.
The fund size increased from PKR 49.3 billion in
2016–17 to PKR 82.7 billion in 2020–21. The existing
investment under the fund is made in government
securities, term deposit receipts, national saving
Table 4: Khyber Pakhtunkhwa’s Pension Fund (PKR Billion)
Source: Finance Department, Government of Khyber Pakhtunkhwa
Fiscal Year Opening balance Government equity Profit earned Closing balance
2016-17 31.1 3.0 2.3 36.4
2017-18 36.4 3.5 2.6 42.5
2018-19 42.5 0.0 3.8 46.4
2019-20 46.4 0.3 5.9 55.2

21
scheme, bank deposits, and debt securities. How-
ever, unlike other provinces, the Punjab Pension
Fund is managed by a General Manager who must
legally have “at least 12 years of experience of man-
agement, including at least three years experience
of investment banking, treasury operations, finance,
asset management, fund management or unit trust
management and holds a sixteen years, equivalent or
higher degree”. This General Manager is Secretary
of the Management Committee, the apex govern-
ing body of the Fund which includes four persons to
be appointed from the private sector.
This sizable representation of private sector mem-
bers in the Management Committee and the provi-
sion for recruiting a General Manager with relevant
corporate experience set apart the Punjab model
from other provincial pension funds. Currently,
the core team reporting to the General Manager is
composed entirely of professionals sourced from
the private sector. Generally, provincial pension
funds remain risk averse. For example, Punjab Pen-
sion Fund’s equity portfolio posted a return of 29
percent during the first nine months of FY 2020-21.
Despite this, the fund has a strategy of investing in
short term investments due to overall uncertainty
of interest rates.
For all public pension funds, the liabilities cur-
rently exceed assets and this gap appears to be
growing over time. Access to specialized invest-
ment management skills remains a critical suc-
cess factor. Lessons can be drawn from Japan’s
Pension Investment Fund, which posted record
annual returns through investment in domes-
tic stock and foreign equity. The Fund allows
beneficiaries to choose the asset class in which
they want to invest e.g. only debt, only equity,
or a mix of both, depending upon risk appetite.
Beneficiaries can have frequent conversations
with in-house investment advisors. The invested
pension savings grow tax-free in this fund. And,
since these are invested in long-term assets, the
beneficiaries can enjoy the benefits of long-term
investments inside and outside the country. The
fund shifted part of its portfolio from unprofit-
able domestic bonds to higher-yielding foreign
assets.
Similarly, the Government Pension Fund of Nor-
way is authorized to have a stake in global com-
panies such as Apple, Nestle, and Microsoft while
the fund also has equity investments and invest-
ments across various markets, countries and cur-
rencies to ensure risk diversification.
Evolution of Pakistan Telecommunication Employees Trust
Pakistan Telecommunication Employees Trust (PTET) was established in 1996 vide “Pakistan Telecom-
munication (Re-organization) Act 1996”. The Trust is governed by Pension Rules and Investment Rules
which guide decision-making. Rules are developed and approved in light of the provisions contained
in the Act of 1996. The Trust enjoys the confidence of all stakeholders and is managed by a Board of
Trustees consisting of six members; three nominated by the Federal Government (Ministry of IT) and
three by the Company (PTCL). The Trust functions as an independent body under direct supervision of
the Board of Trustees. The Board can coopt members to enhance inclusion and transparency, and also
has the power to decide the annual pension increment. Actuarial valuation of PTET Pension Fund is
conducted annually by an independent actuary. Based on the valuation results, a contribution is made
by the Company (PTCL), if required. Currently, there are around 40,000 pensioners. PTET started the
pension fund with a nominal amount and at present it has crossed the mark of over PKR 120 billion and
manages its investments in a way that returns are maximized, reducing dependency on contributions.
The major chunk (90 percent) of the investments comprise long-term investments with good return
and minimum risk, i.e., government securities/National Bank of Pakistan. Other investments include
properties and real estate (nine percent) and A-rated scheduled commercial banks for working capital
requirements (one percent). For the past few years, the average return on investments has exceeded
the annual pension bill.

22
2.4. Proactive and transparent
management of risk
2.4(1) Global Risk Management Practice
The transparency of pension fund structures and
policies are vital, strengthen trust in the overall
management of lifelong savings of retirees. The
Global Pension Transparency Benchmark (GPTB)
was recently launched which is the world’s first
global standard for pension disclosure. GPTB fo-
cuses on the transparency and quality of public
disclosure and examines four key factors includ-
ing governance and organization, performance,
costs and responsible investing.
Generally, risk management practice in pension
funds and life insurance companies is quite similar
(Franzen, 2010). For example, the pensions super-
visory authority in Australia requires the trustees
to devise a transparent risk management frame-
work which explains how relevant risks are man-
aged and monitored. This information is regularly
disseminated to all stakeholders. The Dutch Na-
tional Bank in 2006 initiated an integrated meth-
od for examining risks for all financial institutions
known as the Financial Institutions Risk Analysis
Method. Under this model, the Bank takes into
account its assessment of solvency and com-
bines it with an evaluation of the pension enti-
ty, quality of the risk management procedures in
place and the risks to which it is exposed (Stew-
art, 2010).
Generally, a low- to medium-risk governance
structure is preferred by beneficiaries as this en-
sures the predictability of future benefit. Still,
there are various types of risks (Table 5) that
are associated with pension funds management
which need to be considered during the design
of a DC system. As the pension fund involves in-
vestment over a long period, the most significant
risk is related to maintaining the ability to pur-
chase prudent assets and investments over ex-
tended durations.
Table 5: Type of Risks Associated with Pensions Fund Management
Source: International Organization for Pension Survivors, 2012
Type of risk Description
Governance risk
The failure in the valuation of risk assessment by the board and management of
the entity and its overall approach.
Liquidity risk
The risk arises due to the inability of the organization to meet its payment obliga-
tions, or do so with significant costs, when they are due.
Operational risk
The risk of losses resulting from inefficient procedures and people within an or-
ganization or service provider.
Credit risk
The risk of default by the borrowers and transactional counterparties as well as
the loss of value of assets due to deterioration in credit quality.
Insurance risk
The risk refers to the underwriting risk or risk that arises due to the absence of
insurance cover for funds when needed.
Strategic risk
The risk associated with an entity’s business model and how it wants to position
itself strategically, particularly with respect to where it wants to invest funds in
the longer term
External risk
Includes the risk linked with potential changes in the underlying legal framework
at a national or sub-national and regulatory level.

23
2.4(2) Risk Management Practice in Pakistan: The
Case of EOBI
In the case of Pakistan, recently, EOBI has come un-
der increased scrutiny with beneficiaries demand-
ing urgent reforms. The scheme is operated under
the Employees’ Old-Age Benefits Act, 1976, and
covers those working in industrial and commercial
establishments having five or more employees. Ef-
forts are being made to include informal workers in
the pension net.
EOBI provides four types of benefits -- old-age pen-
sion, survivor’s pension, invalidity pension, and old
age grant. EOBI has registered a fully owned com-
pany with SECP under the name of Pakistan Real
Estate Investment & Management Company (Pvt.)
Limited (PRIMACO). The company handles the real
estate projects such as office buildings, hotels,
housing schemes, shopping malls, hotels, and com-
mercial entertainment ventures like children’s play-
land, complexes etc. All the projects are funded by
EOBI, and they are initiated, planned, executed and
monitored by Pakistan Real Estate Investment &
Management Company (Pvt.) Limited (PRIMACO).
The establishment of an independent company mit-
igates strategic risk arising out of EOBI’s increasing
stake in real estate. The aim behind this investment
is to maximize return through a well-managed real
estate portfolio.
The governance risks facing EOBI funds could be
further minimized. While EOBI has partnered with
Bank Alfalah for pension disbursements, invest-
ment management remains an in-house function
and the Board of Trustees is dominated by ex-of-
ficio government representatives. Currently, the
fund is managed through 50 per cent contribution
while the rest comes from investments. However,
the rate of investment and return may have to be
improved as there are eight million registered pen-
sioners with EOBI and around 400,000 are active
pensioners. This would help address the insurance
risk. The minimum pension of PKR 8,500 has been
termed low by beneficiaries in view of relatively
high levels of inflation in recent months. The burden
on EOBI is also set to increase as the government
expects the institution to cover informal workers
and overseas (or returning) Pakistanis in the near
future.
2.5. Well-designed regulatory framework
2.5(1) Regulation of Pensions Schemes in Pakistan
SECP in Pakistan monitors private fund managers,
pension funds, and trustees. These can be found
in both the public and private sector. Several pub-
lic-sector entities are now also investing in private
pension funds to enjoy competitive returns. An
authorized pension fund is a fund authorized by
the SECP and managed by a pension fund manag-
er registered with the SECP under the Voluntary
Pension System Rules, 2005 (“the VPS Rules”). A
pension fund manager, registered with SECP, can
offer pension services to public and private organi-
zations. Asset Management Company and trustee
are the key players of VPS. The three subtypes of
VPS include equity sub-fund, debt sub-fund, and
money market sub-fund. The SECP has also creat-
ed a Pension and Annuity Working Group (PAWG)
to develop the pension and annuity market in Paki-
stan and provide a roadmap for growth of pension
funds.
2.5(2) Global ‘Best Practice’ for Regulation Pension
Funds
The Canadian pension model discussed above has
implemented exemplary independent governance
of public pension entities (World Bank, 2017). Only
limited legal and regulatory provisions apply to
the Canada Pension Plan (CPP) and unlike private
pension plans, it pays no filing and administrative
fees. The contributions are invested by CPP admin-
istrators in funds they choose autonomously and
due to the large membership, CPP has a diversified
set of contributors and payees (Yahya and Menuz,
2018). This example among others is also discussed
in OECD (2016) which outlines the ten core princi-
ples for private pension regulations (Table 6).
Independence is an important aspect of CCP which
implies that the organization can take their deci-
sions regarding investments without any political

24
interference or pressure from external actors. An-
other lesson that can be drawn is the quality of the
technical human resource involved in management
and at the board level. Overtime, this has led to in-
creased strengthening of trust in the credibility of
the fund, among all stakeholders.
Table 6: Principles for Pension Regulations
General principles
Core principles Description
Conditions
for effective
regulation
Pension systems are required to have clear and well-defined objectives and
repeated monitoring of these objectives which include coverage, adequacy,
sustainability, security, and efficiency. A sound regulatory and supervisory
system for pensions, an effective legal framework and a strong institutional
and financial market infrastructure for pensions should be in place to support
these objectives.
Establishment of
pension plans,
pension funds, and
pension entities
Any pension entity should be governed by a comprehensive and clear set of
rules, which encompass financial, managerial, legal, and technical aspects of
the entity. The legal requirements, moreover, should ensure that the pension
fund assets are distinct from any other entity, and that the ownership of the
financial institution or other entities that manage the pension funds/assets are
transparent.
Governance
The governance structure of all pension entities should provide a conducive
environment for smooth processing, regular feedback, and prudent decisions.
The responsibilities in the governance structure should be appropriately divid-
ed between the operational and supervisory aspects, with strong channels of
communication for and accountability of those handling these responsibilities.
Investment and
risk management
Investment by pension entities should be managed in accordance with the
unique features of the pension and plan and account for market and institu-
tional environment, the investment horizon, risk-return objectives of the plan,
and the long-term nature of saving for retirement and of eventual liabilities in
all investment decisions.
Plan design,
pension benefit,
disclosure and
redress
Different stakeholders influence the pension plan design, which, in turn,
influences the competency of the plan in attaining its income objectives, the
protection mechanisms required to preserve these, and the scope and nature
of rights of members and beneficiaries. A regular, independent assessment of
the pension plan design is required. The plan beneficiaries should have access
to all necessary information and an effective platform for reporting grievanc-
es.
Supervision
Supervision of pension entities and funds is important to protect the interests
of beneficiaries and should ensure legal and financial soundness of all deci-
sions. For this purpose, the supervisory authorities must be given adequate
funds and regulatory powers.

25
Source: OECD (2016)
Principles Specific to Occupational Plans
Occupational
pension plan
liabilities, funding
rules, winding up,
and insurance
For occupational plans that are not fully funded, there should be minimum
funding rules or other methods to ensure sufficient funding of liabilities.
Appropriate and transparent methods for valuations of assets and liabilities
should be used. The winding-up procedure should also be such that it protects
the beneficiaries in cases of employers’ insolvency or other such instances.
Access, vesting,
and portability
of occupational
pension plans
Regulations should ensure fair treatment of employers so that they may have
non-discriminatory access to occupational pension plans and should protect
vested rights and entitlements of all stakeholders. The nature of the pension
plan and its portability should protect employee’s right to job mobility.
Principles Specific to Personal Pension Plans
Funding of
personal pension
plans, wind-up and
insolvency
Benefits depend upon contributions paid into the plan in personal plans. The
financial risk of promises from the pension plan or pension entity in the form
of a deferred annuity or a guaranteed rate of return is borne by the plan
provider or pension entity. In case of insolvency of a pension fund or pension
entity, regulations should establish the provisions of guaranteed levels of pro-
tection for the assets and entitlements accumulated by plan members.
Equaltreatment,
businessconduct,
competitionand
portabilityofpersonal
pensionplans
Pension funds and pension entities, their external service providers and au-
thorized agents and other intermediaries operating in the personal pensions
market should protect the interest of plan members and uphold financial
consumer protection.

26
3. Conclusions and Policy
Implications for the GoKP

27
T
his report is based on a review of the suc-
cessful examples of pension reform and the
hallmarks of successful pension systems
within and outside Pakistan. The main objective
was to inform a contributory pension reform pro-
cess that has been announced by the GoKP in the
budget 2021-22 and is now in the design phase,
with technical support from SEED. There are five
key lessons that may be drawn from this survey
of domestic and international experiences which
hold particular relevance for the reform in KP, as
well as similar efforts underway in other provinc-
es and at the federal level in Pakistan.
1. There are several stakeholder groups
that must be taken on board through due con-
sultations for any pension reform effort to be
successful: pensioners, employees and their as-
sociations, and the government. Taxpayers are
also important, especially in the context of DB
schemes, where they pay for the entire pension
bill. Adequate reporting and disclosures con-
cerning investment policies and fund balances,
among other performance indicators, is one way
of maintaining transparency for taxpayers, which
is carried out by the Punjab Pension Fund. These
stakeholders should also ideally be represented
in governance structures.
It is important to revisit current representation of
stakeholders in pension boards and committees
and allow for wider and inclusive participation
in the change process. Such a change process at
provincial and sub-province level will require con-
tinuous advocacy and outreach so that the risks
associated with rising liabilities and the benefits
of DC can be comprehensively explained.
2. The shares of employers and employ-
ees toward pension contributions differ widely
across countries and where governments are
employers, they tend to match or exceed the
contribution of their employees. For nascent
DC schemes, it is prudent to start low and then
ramp up gradually to acclimatize employees.
The Indian government began with an employee
contribution of 10 per cent of their monthly sala-
ries when the scheme was initially introduced in
2004, (which was matched by the government),
gradually increasing this figure to 14 per cent in
2019. OGDCL in Pakistan has similarly taken a
phased approach to their contributory pension
reform.
3. Pension funds which invest in a diverse
range of asset classes – debt, equity, money mar-
kets, real estate, etc. – generally tend to perform
better in terms of returns, though this requires
access to advanced expertise in specialized in-
vestment management knowledge domains i.e.
professionals including actuaries, public finance
specialists, project management specialists, stra-
tegic risk managers, and labour economists, so
that best possible growth of pension funds and
disbursements to beneficiaries is ensured. Pen-
sion fund governance structures should ideally
include individuals from the corporate sector
and management teams should be resourced
with professionals with relevant private sector
experience. The Punjab Pension Fund has recruit-
ed such a team, under an empowered General
Manager and this arrangement is backed by the
enabling law. The Canadian example shows that
it also helps if the fund is kept at an arm’s length
from the government and exercises a fair degree
of autonomy.
The KP Pension Fund, like those of other prov-
inces, has invested conservatively and in low-
risk assets. As a first step, GoKP should consider
strengthening the Khyber Pakhtunkhwa Fund
Management Unit’s technical capabilities which
may allow adopting a diversified asset and in-
vestment mix to achieve higher returns.

28
Alternatively, fund management of the planned
DCS could be outsourced to an appropriate bank
or asset management company with the rele-
vant experience.
4. Proactive risk management requires a
comprehensive assessment of a wide range of
risk types that are germane to pension fund man-
agement. For instance, lack of adequate private
sector representation on management boards
is a type of governance risk, while unpredictable
changes in the legal regime represents an exter-
nal risk which must be anticipated and respon-
sive mitigation strategies adopted. EOBI may
be facing liquidity risks given upcoming plans
for expanding coverage to informal employers
and workers, which would require appropriate
measures to boost returns on investment. Almost
all successful models discussed above are aided
by a prudent regulatory framework at the nation-
al level.
GoKP should consider annual actuarial assess-
ments of pension liabilities on a regular basis,
ideally undertaken by one of the big-four ac-
counting firms which have the knowledge and
experience to institutionalize some of the best
practices explained in this policy note. This as-
sessment should become part of an annual
‘State of Pensions in KP’ report to be presented
and discussed in the KP Assembly, ideally as part
of the budget.
5. Pension funds require independent reg-
ulation. SECP plays this role in Pakistan. OECD
has documented global best practices regarding
regulatory principles that are relevant in Paki-
stan’s context.

30
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The Policy Note is prepared by SEED - Sustainable Energy and Economic
Development Programme in collaboration with its strategic partner, Sustainable
Development Policy Institute (SDPI). SEED is funded by United Kingdom's Foreign,
Commonwealth and Development Office (FCDO). The programme is implemented
by Adam Smith International in close collaboration with the Government of Khyber
Pakhtunkhwa.

REFORM OF PENSIONS: LESSONS FROM PAKISTAN AND BEYOND

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