Is the National Pension Fund financially viable?

Illustration: TBS

The Jatiya Sangsad (JS) passed the National Pension Management Bill 2022 on the 24^th of January, which, after the President's consent, has become the National Pension Management Act (NPMA) 2023. 

This Act fulfills one of the promises made by Bangladesh Awami League (AL) in its 2008 election manifesto: A Charter for Change. Different circles have welcomed the legislation mainly because the NPMA is meant to address the financial security of the country's low-income people in old age. 

Following the passage of NPMA, the government has appointed a National Pension Authority to work out the details of the deposit scheme, to be called the National Pension Fund (NPF). 

This Fund has specific features which question its financial viability. In other words, the NPMA may only achieve its intended vision and mission, if the Fund is financially viable. Thus, the primary objective of this article is to answer the following question: Is NPF financially viable?  

NPF's Financial Viability

Financial Viability refers to a business entity's ability to achieve its operational objectives and fulfill its mission over the long term. Accordingly, NPF's financial viability implies its fiscal capacity to accomplish its mission and vision stated in NPMA 2023. Its idea is to support low-income Bangladeshis in their old age, and its mission is to achieve this objective. 

Details of the program are yet to be chalked out to make such an ex-ante evaluation. Nevertheless, it is possible to form an informed opinion about NPF's financial fate based on the listed features. 

First, except those covered under the government, semi-government and autonomous bodies, all Bangladeshis within the age group 18-50 are eligible to participate in the program. 

Second, participation in the program is voluntary until made mandatory by a gazette notification. Third, the subscriber must regularly contribute for at least ten years to be eligible for benefits. 

Fourth, all participants will be eligible for benefits after the age of 60. Finally, the government will determine the minimum amount of installments, but there is no maximum limit on the number of installments.

Given these features, a Bangladeshi can make a maximum of  504 installments in 42 years and a minimum of 120 installments. The government sources, which many newspapers had highlighted, indicate some rough estimates of the nature of monthly and aggregate benefits obtainable from the program. 

Assuming that a subscriber makes 504 installments and lives up to age 75 to draw benefits from the Fund, their monthly pensions will depend on the installment amount. 

Table 1 below shows monthly and total pensions at three levels of installments. 

Table 1: Installments and Pensions (Taka) per subscriber

The first two columns show monthly amounts deposited and monthly pensions received at various levels of installments. For example, the subscriber will receive  Tk 6,400 monthly pension if she contributes Tk100 continuously for 42 years. In other words, she will receive 64 times more money monthly when her policy matures after 42 years. However, if she can afford Tk 10,000 monthly installments, she will receive six lac and forty-two thousand takas monthly (6,40,000). 

In aggregate terms, this rate of return will be 23 times to be earned over 15 years. A subscriber depositing Tk 100 monthly will invest Tk 50,400 in aggregate. In return, she will receive TK 11,52,000 over 15 years. If she can afford 100 times more monthly installments, i.e., Tk 10,000,  she will receive 11,52,00,000 (eleven crores and fifty-two thousand) over 15 years by investing Tk 50,40,000 (fifty lac and forty thousand) in 42 years.

Calculations in Table 1 have been made for one subscriber only. However, the future governments will be responsible for paying monthly pensions for all those who subscribe to the program. Most importantly, all Bangladeshis aged 18-60 will be automatically eligible to receive pensions from the Fund because subscriptions to it will be mandatory eventually.

Currently, the population of Bangladesh is about 17 crores. The age group 15-64 comprised about 68% of the population in 2021, which is 11.56 crore people. Table 2 shows government pension obligations statistics based on the assumption that ten crore people enroll in the program. 

Table 2: Government's  Pension Obligations (Crore Takas)

Row 2 shows monthly, annual and aggregate government pension obligations if the monthly installment is assumed to be Tk 100. The monthly, yearly and aggregate pension obligations are respectively sixty-four thousand crores, five lac and four thousand crores and one crore, fifteen lac and twenty thousand crore takas. 

Row 3 shows the government obligations for Tk 1000 monthly installments. The government's monthly pension payment obligation will increase from sixty-four thousand crores to six lac and forty thousand crore takas, while its annual pension obligations will jump to 50,40,000 (fifty lac and forty thousand takas). 

This fiscal liability makes the NPF program financially improbable. 

Forty-two years ago, a government made a contract with the people to give them a 64 times higher monthly rate of return in return for a regular contributory deposit scheme. The government in power after 42 years will become responsible for honouring the agreement. The preceding discussion demonstrated that the scheme is not financially fair or rational. This financial feature of the program must be taken into serious consideration because it has severe political and public policy ramifications.

Dr Khandakar Qudrat-I Elahi/ Economist. Illustration: TBS

The author is a former Department of Agricultural Finance faculty at Bangladesh Agricultural University. He lives in Guelph, Ontario, Canada.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.