Universal pension in digital Bangladesh

Every nation is faced with the challenge of ensuring its citizens achieve income security before retirement. Without adequate retirement income, the elderly fall into poverty and reduce consumption, becoming a drain on the governments and their families. 

Bangladesh needs a comprehensive pension framework to ensure that today's vibrant young population does not become tomorrow's struggling masses.

The government has ambitious targets to achieve high-income status by 2041. A sustainable universal pension system will be a key indicator of Bangladesh's development, but the cost to the economy could very well derail that progress. 

However, done correctly, pensions could deliver a massive boost to the economy and power the next stage in Bangladesh's growth story.

Bangladesh's National Social Security Strategy and the 8th Five Year Plan, have set targets to introduce a universal pension system. However, the government is yet to commit to a tangible policy.

Most pension systems can be categorised as either contributory or non-contributory, and voluntary or mandatory. The fundamental feature is they facilitate long term savings and/or income in retirement, by limiting short-term access. 

Voluntary contributions need to be incentivised through income tax advantages, and in the absence of tax relief, mandatory contributions are in effect an indirect form of taxation. Either way a country's pension system is integral to its fiscal policy.

The first challenge for Bangladesh is that it has one of the lowest tax-to-GDP ratios in South Asia (9.3%), primarily from trade taxes. Earnings from income tax are minimal, among the 4 million current registered taxpayers, only half submit tax returns.

Secondly, apart from the challenge of costly administration, there is the impact of increased costs for businesses, particularly the country's critical export led manufacturing, which still operates on a low wage and low skill business model. Imposition of additional costs currently is not feasible and will have an adverse effect on economic progress.

Therefore, the government must not only ensure a new pension system does not become an impediment to Bangladesh's economic development, but also guarantee a synergistic relationship. 

Recently Bangladesh has witnessed strong sustained growth that will see the nation graduate to the ranks of "developing countries". The Prime Minister Sheikh Hasina has great ambitions for Bangladesh, creating a supportive framework under which the private sector can deliver. 

The Prime Minister's vision of "digital Bangladesh", originally derided, has proven to be a monumental master stroke. Today, Bangladesh has 600,000 IT freelancers and technology exports worth $1 billion annually. 

But perhaps the most salient outcome has been the emergence and exponential growth in mobile financial services (MFS). The success of bKash has been astounding. With over 50 million active users, bKash has made financial inclusion digital.

bKash is already offering value added services through partnerships on its app, from international money transfers, loans, and insurance. Therefore, it is only logical that an MFS framework should facilitate the institutional and administrative capacity to deliver dynamic pensions for Bangladeshis by integrating TINs with digital IDs.

A universal pension system, that provides smoothing of income into retirement, must ultimately extract minimal levels of contributions from employers, employees as well as the self-employed. Implementation, however, should take a cautious approach. 

The first stage should be voluntary, targeting individuals through a combination of front loading the benefits from taxes, whilst deferring liability to pay taxes. The latter stages would see the introduction of mandatory contributions, once economic and fiscal capacity grows.

The government should commit to match a limited amount of pension contributions, for example Tk12,000 per year. The trade-off would be no withdrawals until retirement age i.e., 55, other than for a limited number of exceptional events. 

Pensions should provide flexible income, to include drawdown and secure annuities, as well as ability to pass on funds at death. 

The government could initially fund contributions through borrowing, only funding interest repayments through existing tax revenues. Once outflows commence, there will be increasing tax revenue to cover all liabilities.

If GDP increases by 5% annually, the cumulative liability for interest repayments would increase to 1.10% of GDP by year 30. Thereafter the inflow of taxes from pension withdrawals would cover the state's future liabilities and progressively repay principal. 

Once mandatory contributions are enforced, the government could taper down and cease its own contributions. This presents a fiscally prudent method to invest in universal pension provisions, the wider economy and provide a powerful stimulus to Bangladesh's underdeveloped capital markets. 

State administered pension systems around the world are often costly and inefficient. Bangladesh can develop a digital pension system, through which the government focuses on legislating and regulating pensions, leaving implementation to the private sector. 

Cost of administration will be minimal for the government, whilst ensuring fair and healthy competition between providers will encourage ongoing innovations and efficiencies. Digital delivery will facilitate greater transparency, ensuring checks and balances to protect pension savings and the government's investment in them.

The idea is to create asset-backed retirement, based on individual ownership. A contributions-based pension is the fairest, simplest, and most transparent way, handing over control to the people. 

The people of Bangladesh must be given freedom to grow and manage their wealth. Digital pensions will form part of a digital dashboard, creating a financial ecosystem through which innovative new products will emerge to serve every aspect of a person's finances i.e., loans, mortgages, savings, and insurance. 

Pension funds can accumulate considerable pension assets, increasing the availability of long-term funds which can supply stable investment capital to financial markets. The returns on investment of pension funds are essential for both the state and for individuals. 

In this context, supervision and regulatory systems would receive widespread attention. This will promote sound regulatory systems and policies for financial market development. Pension funds will have to be diversified with appropriate risk profiles that are agreed and reviewed by a pension regulator. 

Bangladesh is soon to graduate from the ranks of least developed countries and will no longer be able to play by the old rules. The economic parameters are changing. Bangladesh must wean its industry away from relying on preferential tariffs for exports and protection at home from imports, moving towards high value and knowledge intensive models. 

The government's borrowing strategy needs to be diversified with greater use of long-term bonds, leveraging its improving credit rating, whilst growing the country's tax base to fund essential investment in infrastructure and human capital. 

Companies need to adapt for growth and switch to greater utilisation of capital markets. A dynamic digital pension system, rather than hindering development, can be the synergy required to propel Bangladesh to a developed nation.

Ashraful Alam is a Wealth Manager with HSBC, London. He can be reached at [email protected]. 

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