Pension funds have long been associated with mandatory schemes such as superannuation and provident funds that are regulated under law. Of course there are also the voluntary pension schemes aimed at the self-employed and those wanting to make additional savings.
The birth of Pakistan’s voluntary pension investment scheme came about in 2005 when the Securities and Exchange Commission of Pakistan proposed rules to govern this investment. This brought about an amendment to the Finance Act 2005, allowing asset management houses in the country to launch pension funds to provide additional retirement income.
By 2007 four pension funds had been launched, including both conventional and Islamic. Today, a total of six asset management houses currently offer conventional and Islamic pension funds. According to regulators, the average returns of these funds have been around 21% annually.
Muhammad Abdul Samad, the chief investment officer of Atlas Asset Management, highlights the other benefit of the fund — the 20% tax credit given to investors. However, there is a penalty should there be a withdrawal. “The money has to be kept in the fund until retirement but it can be withdrawn subject to a tax payment depending upon the tax rate at that point in time,” he explains.
In terms of management style, Abdul Samad says a pension fund is no different from a mutual fund but the issue arises in the investment ceiling. He feels that pension funds benefit from this as there is a restriction when investing in banks or counterparties or in equity stocks.
“For example in a mutual fund, there is a 10% restriction on a single investment but with pension funds, fund managers are only allowed a 5% ceiling. This encourages fund managers to further diversify their portfolios, thus reducing the risk impact of the fund,” he notes.
Despite the encouraging performance of the pension funds in Pakistan, they have not managed to attract retail investors. The total combined assets under management for Islamic pension funds for the three asset classes – equity, debt and money market – offered in Pakistan currently stand at PKR1170.75 billion (US$12.91 million) as at the 29th February. Aside from Al Meezan Investment Management, which currently has a combined total fund size of PKR536 million (US$5.9 million) for its Islamic pension funds, the five other asset management companies have only mustered a combined total figure of slightly above PKR100 million (US$1.1 million).
The mutual fund industry has seen exponential growth over the last few years. Data recently released revealed that there was a 37% growth in the seven-month period beginning July last year. As mutual funds continue to outperform, pension funds may soon have their day in the sun with adequate investor education and continued regulatory support. After all, investors will be the eventual beneficiaries in their golden years. — RW