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Retirement Planning with Voluntary Pension Schemes (VPS) 1.

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Presentation on theme: "Retirement Planning with Voluntary Pension Schemes (VPS) 1."— Presentation transcript:

1 Retirement Planning with Voluntary Pension Schemes (VPS) 1

2 2

3 The Need for Retirement Planning 3

4 4 “ Retirement ” is a phase of life where one’s source of income ceases. While your INCOME stops, your EXPENSES don’t ! A Pension is an income that one will NEED at retirement While we may be compelled to think of “ Retirement ” as a tedious phase of our life – it is in fact a stage marked by: Limited Income Dependency on children Sacrifices & hardships Difficulty in meeting expenses No enjoyment Therefore, we must ‘Plan’ today for a healthy, happy retirement tomorrow 4

5 Changing Social Norms: Children either don’t wish to or are actually unable to support their Parents; Low savings rate; Lack of social security net in Pakistan – Poor health and educational facilities; Very limited retirement benefits only available to formal employment sector; No retirement saving options for self-employed individuals and workers engaged in informal/daily wage activities; Inflationary pressures - Cost of living increasing/ real value of money declining; Changing employment behaviors – Frequent job switching requires employer independent pension saving mechanism; and Budgetary constraints for Government to continue to fund large work force – Government being the largest employer in Pakistan 5 Why need Pension Reforms in Pakistan 5

6 6 Global Pension Statistics DetailsTotal Assets 2013 – USD billion % GDP Australia1,565101% Brazil28413% Canada1,45180% France1696%6% Germany50914% Hong Kong11441% Ireland13059% Japan3,23665% Netherlands1,359170% South Africa23667% Switzerland786122% UK3,263131% USA18,878113% Source: Towers Watson USA & Canada 20,329 Japan 3,236 UK, Netherlands, Germany, Switzerland, France & Ireland 6,216 AUS 1,565 6

7 7 Pension Alternatives in Pakistan To date, private citizens of Pakistan have not had access to any pension saving platform, which would enable them to plan for their retirement in a methodical manner. Provident funds cater to similar needs but provide: Less Investment returns due to lack of active fund management Lack of transparency as mainly managed by the employers Lack of premature accessibility (in most cases) Lack of individualized investment portfolio Generally consumed at the change of the employment Private citizens primarily depend on: Depend on the next generation to support the grey days Yield on property Interest on bank deposits/NSS 7

8 Introducing ‘The Voluntary Pension Scheme’ (VPS) 8

9 9 VPS as a Tool for Effective Retirement Planning The Benefits of VPS in Retirement Planning can be countless…  VPS is a flexible Investment Based Retirement Savings Plan - facilitates individuals to save for retirement in a systematic and disciplined manner;  Managed by experts with professional approach and experience in terms of managing savings and finances;  Participants can define their own Investment Plan through choice of asset allocation based on their Age and Earning Capacity which defines their individual risk tolerance and return expectation;  Investment in VPS grows Tax free;  Contributions in the VPS allows Participants to make tax savings in the current year resulting in additional savings 9

10 10 VPS as a Tool for Effective Retirement Planning  Provides Special Tax benefits, not available in any other Investment vehicle  At Contribution Stage: Annual Tax Credit on up to 20% (or more if one is over 40 yrs.) of your annual taxable income  At Investment Stage: All investment income/gains tax free till retirement  At retirement: Receive 50% of amount lump sum tax free Remaining Balance (or entire balance) can be invested in an annuity plan or an Income Payment Plan. No Tax on receiving monthly income (pensions) post retirement from Approved Income Payment Plan if invested in such Plan for 10 years  Benefits for the Employers – Tax admissible expense for employers for their contribution  Flexible investment allocations that may be changed twice a year  May invest in Lump sum or at regular frequency  No penalty on missing any payment  Conventional and Shariah Compliant Options are available 10

11 11  Coupled with Insurance/ Takaful benefits, to reduce the uncertainty in your life  Allows you to choose your own retirement age (between 60 and 70) or 25 years from the age of first contribution whichever is earlier. You may also revise your retirement age at a later date.  Early Retirement is possible on the unfortunate event of disability. In case of untimely death, the Pension proceeds are transferred to the Nominees  Portable - can easily switch between available Pension Fund Managers at a later stage, and continues if you switch jobs  Plan Continuity – with job switches, your pension scheme is not disbanded VPS as a Tool for Effective Retirement Planning 11

12 How VPS Works (Essential Mechanics) 12

13 Structure of a Voluntary Pension Scheme 13 Equity Sub Fund Debt Sub Fund M.M Sub Fund Voluntary Pension Fund Contribution Allocation Policy Pension Fund Manager Front End Fee (upto 3%) Retirement age b/w 60 -70 or 25 yrs from first contribution, whichever is earlier Before Retirement Disability Before Retirement 50% OR Annuity from Insurance Co./ Another IPP or Lump sum withdrawal Income Payment Plan till 15 years from retirement (tax free if plan is for ten years) OR Tax free redemption Expiry of IPP All withdrawals taxed At last 3 yrs tax rate Deemed retirement Cash withdrawal – 50% tax free (deemed retirement) Transfer amount to survivor’s VPS account Death Before Retirement Management Fee (upto 1.5%)

14 Who can Invest?  All Pakistani National over the age of 18 years and holding a Computerized National Identity Card (CNIC) or a valid National Tax Number (NTN)  All Non-resident Pakistani holding a National Identity Card for Overseas Pakistanis (NICOP) or a National Tax Number (NTN)  All Employer on behalf of their employees 14

15 Option of Transferring Balances from Provident Funds  The participants may bring in their accumulated balances from their existing PF into the VPS without any tax implications  The balances of the PF and the corresponding investment returns may be withdrawn at any stage without any tax liability  Have a single consolidated retirement saving account with complete flexibility of asset allocation 15

16 Sub-Funds VPS is a one-window operation which provides investments in a diversified portfolio of equity securities and fixed income instruments. SECP mandated investment policies govern each asset class. Each VPS has three mandatory sub-funds, under the umbrella. Additional Sub-Funds (non Mandatory/ Not offered by all Pension Fund Managers): SECP has allowed the launching of a Commodity Sub Fund in addition to the above three sub-funds. The Commodity Sub-Fund and any other sub-funds for different asset classes introduced in the future will be optional and offered in addition to the three mandatory sub-funds. Gold Sub-Fund: Invest minimum of 70% in gold or gold futures contracts and minimum of 10% in government bills or government securities with a maturity of less than 90 days. 16

17 Investment Allocations You select one of the following Investment Strategies (to invest in these Mandatory Sub Funds) Allocation Schemes (Investment Strategies) Risk/Return Profile Equity Sub FundDebt Sub FundMoney Market Sub Fund Allocation* High VolatilityHigh 65%20%(Nil) Medium VolatilityModerate35%40%5% Low VolatilityLow10%60%15% Lower VolatilityLower(Nil)40% Life Cycle AllocationAutomatically adjusts your allocation from High Risk assets towards Lower Risk based on your age profile Customized Allocation Varies0-80%20-75%0-60% * Total allocation to be 100% between the sub-funds. 17

18 Benefits at Retirement  You can choose retirement age any time between ages 60 – 70 At Retirement you can:  Withdraw up to 50% as cash tax free  Remaining amount to be used to: Purchase an annuity from a Life Insurance Co (LIC) or Invest in an Approved Income Payment Plan with a Pension Fund Manager  No Tax on receiving monthly income (pensions) post retirement from Approved Income Payment Plan if invested in such Plan for 10 years  Tax deductions for any withdrawals in excess of 50% at retirement  Investor may withdraw total or a part of total accumulated savings any time by paying tax on the average rate for the last three years tax 18

19 Benefits of investing through VPS For Employers Defined Contribution (no liability on company the than the contribution amount, no need for actuarial valuations, no need for funding for the future unknown liability. - the world is moving away from DB to DC schemes); Professional Investment Management (no additional responsibility of investment management) Transparency (Well regulated & monitored by SECP) Choice of allocation schemes left to employee An additional employment incentive for employees without any strings attached No responsibility or work post retirement (in pension schemes the hassle of making monthly pension payments remains) Tax admissible, just like salary expenses or contributions to the PF For employees/ self employed individuals Personalized investments Freedom of choice of allocation schemes according to individual risk aptitudes Portable (Can be transferred with change in employment) Can continue to contribute for as long as desired Savings being accumulated to maintain pre-retirement standard of living Diversified investment portfolio 50% lump sum at retirement to meet immediate liquidity needs Remaining amount received as monthly installments over the remaining life period May withdraw earlier by paying tax 19

20 Voluntary Pension Schemes vis-à-vis other retirement schemes 20

21 Gratuity/Pension vs. VPS 21 Gratuity/Pension (Defined Benefit Plans) VPS (Defined Contribution Plan) 1Terminal benefit on last pay (to be funded out of every years current budget) No additional liability other than contributions by employer 2Employer takes investment risksInvestment risk on employees 3Periodical actuarial calculation determines employer’s liability and require regular funding Known costs to employer 4Participants can only collect the benefits defined in the scheme Participants entitled to all investment returns

22 VPS vs. Provident Fund 22 ComponentsProvident FundVoluntary Pension Scheme Purpose Both provide employees or dependants with income after retirement Both are based on Defined Contribution (DC) Benefit Lump sum on resignationLump sum plus regular pension payments after retirement Discipline High chance of beneficiary spending this money immediately The VPS structure promotes disciplined savings and spending after retirement while allowing withdrawal of accumulated cash (50%) to meet immediate needs Tax Rebate Not Available (Employers contribution over and above100,000 is subject to tax, more than 16% income distributions are subject to tax) Very attractive Tax rebate (upto 20% of the total taxable income which results in tax saving up to 20%) Portability Not allowedContinues to contribute even in case of termination of employment. Also Can easily transfer from one pension fund manager to another (at no front end load) Selection of Pension Fund Manager NilChoice amongst various pension managers and Conventional and Shariah Pension Schemes Death and Disability Savings/ Investments go to Nominees Savings/ investments go to Nominees, who then have the options that were available to the deceased In case of disability, benefits available at retirement become applicable. Some plans are also supplemented with Free Insurance /Takaful Covers

23 VPS vs. Provident Fund (cont..) 23 ComponentsProvident FundVoluntary Pension Scheme Asset Allocation Flexibility No control over your investmentsDesired asset allocation as per risk profile & investment horizon. Shariah Compliant Investment option AbsentAvailable Account Balance Information Frequency AnnualUpdated statement available daily on-line

24 Pension Funds in Pakistan 24

25 Comparison of AUMs Conventional Vs Shariah Compliant Pension Funds Assets Under Management as on 31st Dec 2014 (in mn) Conventional Pension Funds Rs. 4,102 Shariah Compliant Pension Funds Rs. 5,894 25

26 Shariah Compliant Fund Managers Pension Fund NamesAssets Under Management (As on 31 st Dec 2014) in mn Al Meezan Investment Management Limited Meezan Tahafuz Pension Fund Rs.3,409.73 ABL Asset Management Company Limited ABL Islamic Pension Fund Rs.98.32 Atlas Asset Management Limited Atlas Pension Islamic Fund Rs.570.00 HBL Asset Management Limited HBL Islamic Pension Fund Rs. 254.17 JS Investments LimitedJS Islamic Pension Savings Fund Rs. 223.40 MCB-Arif Habib Savings and Investments Limited Pakistan Islamic Pension Fund Rs. 367.05 NBP Fullerton Asset Management Limited NAFA Islamic Pension Fund Rs. 222.80 UBL Fund Managers LimitedAl Ameen Islamic Retirement Savings Fund (Formerly: UBL Islamic Retirement Saving Fund ) Rs. 749.00 TOTAL Rs. 5,894 Pension Fund Managers In Pakistan 26

27 Pension Fund Managers In Pakistan Conventional Pension Fund Managers Pension Fund NamesAssets Under Management (As on 31 st Dec 2014) in mn ABL Asset Management Company Limited ABL Pension Fund Rs. 106.58 Atlas Asset Management LimitedAtlas Pension Fund Rs. 602.00 HBL Asset Management LimitedHBL Pension Fund Rs. 345.95 JS Investments LimitedJS Pension Savings Fund Rs. 420.40 MCB-Arif Habib Savings and Investments Limited Pakistan Pension Fund Rs. 684.46 NBP Fullerton Asset Management Limited NAFA Pension Fund Rs. 535.00 UBL Fund Managers LimitedUBL Retirement Saving Fund Rs.1,408.00 TOTAL Rs. 4,102 27

28 Market Share of Pension Fund Managers 28

29 Assets Under Management of VPS Fund Managers (in Millions) as on 31 st Dec 2014 Al Meezan Investment Management LimitedRs.3,409.73 UBL Fund Managers LimitedRs.2,157.00 Atlas Asset Management LimitedRs.1,172.00 MCB-Arif Habib Savings and Investments LimitedRs.1,051.51 NBP Fullerton Asset Management LimitedRs. 757.80 JS Investments Limited Rs. 643.80 HBL Asset Management LimitedRs. 600.12 ABL Asset Management Company Limited Rs. 204.89 TOTAL Rs. 9,996 Market Share of Pension Fund Managers 29

30 Industry snapshot 30

31 Industry Overview (Shariah Compliant) 31 AUMs (PKR millions) as on June 30th 2008200920102011201220132014HY 15 Islamic Pension 466 530 729 903 1,640 2,9574,912 5,894 E: Weight of Equity sub-fund; D: Weight of Debt sub-fund; M: Weight of Money Market sub-fund Shariah Compliant VPS Return 2008200920102011201220132014HY 15 Equity sub-fund0.13%-15.23%23.13%34.76%19.14%52.72%35.97%16.94% Debt sub-fund7.89%9.91%8.86%9.65%8.99%8.05%8.01%4.26% Money Market sub-fund7.54%9.16%6.78%9.03%9.88%7.54%7.36%4.51% Shariah Compliant VPS Weighted Average Return of Allocation Schemes (%) 20082009201020112012 20132014HY 15 High Volatility 1.68%-6.20%20.27%29.74%17.11%43.79%30.38% 14.95% (E:80%, D:20%, M,0%) Medium Volatility 3.98% -2.73% 15.78% 22.14% 14.15% 30.34% 21.93% 11.04% (E:50%, D:40%, M,10%) Low Volatility 6.29%4.77%11.40%14.58%11.15%16.91%13.51% 7.10% (E:20%, D:65%, M,15%) Lower Volatility 7.72%9.53%7.82%9.34%9.43%7.80%7.69% 4.58% (E:0%, D:50%, M,50%)

32 Industry Overview (Conventional) 32 AUMs (PKR millions) as on June 30th 2008200920102011201220132014HY15 Pension 305 349 571 655 1,101 1,8653,263 4,165 E: Weight of Equity sub-fund; D: Weight of Debt sub-fund; M: Weight of Money Market sub-fund Conventional VPS Return 2008200920102011201220132014HY 15 Equity sub-fund-4.41%-26.78%20.32%36.45%15.87%60.16%42.44% 27.80% Debt sub-fund3.55%12.67%7.64%10.69%10.47%48.00%7.23% 19.27% Money Market sub- fund6.27%10.00%3.45%10.94%10.11%8.75%7.32% 7.76% Commodity-Fund** 4.64% -5.47% ** The commodity sub funds were launched in July 2013 and currently there are only two commodity sub funds Conventional VPS Weighted Average Return of Allocation Schemes (%) 2008200920102011201220132014HY 15 High Volatility -2.82%-18.89%17.79%23.30%14.79%57.73%35.40% 26.07% (E:80%, D:20%, M,0%) Medium Volatility -0.16%-7.32%13.56%18.59%13.13%50.16%24.85%22.34% (E:50%, D:40%, M,10%) Low Volatility 2.37%4.38%9.55%13.88%11.49%44.54%14.29%19.16% (E:20%, D:65%, M,15%) Lower Volatility 4.91%11.33%5.55%10.81%10.29%28.37%7.28%13.51% (E:0%, D:50%, M,50%)

33 Thank You 33

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