The Financial Express

DC Scheme: Answer to private sector’s pension conundrum

DC Scheme: Answer to private sector’s pension conundrum

One of the key reasons why public sector employment is widely sought after in Bangladesh is the security such jobs provide. Much like the other South Asian peers, the government of Bangladesh provides a defined benefit (DB)-based non-contributory pension scheme for its civil servants, funded through tax revenue.

The private sector employees who make up the majority of the workforce are only offered a gratuity during retirement – leaving them out of the provision of pension or provident fund schemes. Even though the government has been pondering over introducing a pension scheme for private sector employees since 2015, no such plans have been materialised till date.

This raises the question: will a retirement plan that requires the employee to set aside their income have a more favourable outcome?

Unlike a DB plan, a defined contribution (DC) plan requires the employees to contribute towards their retirement scheme, where the employers may or may not chip in a portion. Due to the rising costs of DB plans, most employers worldwide are downsizing or completely cutting down such schemes and moving towards DC plans. A glowing example of such a programme is the iconic 401 (k) plan of the United States. The 401 (k) is a retirement account plan offered by US employers to their employees. The amounts that the employees contribute to the accounts are often matched by the employers’ contribution, sometimes with the help of automated payroll softwares.

According to joint research by CPD and Oxfam in 2019, more than 40 per cent of the Bangladeshis aged above 65 years do not receive any pension schemes. With only 7.6 per cent of the aged population receiving government retirement pension and about 10 per cent receiving some form of gratuity from the private sector, the remaining majority of 39.9 per cent receive means-based old age allowance (OAA). Since these are mostly defined benefit plans, it is natural that they are not universally implemented in a lower-income country with a tax-GDP ratio of below 10 per cent and lax regulations.
It is believed that the ILO’s multi-pillar-based pension model could be used as a guiding tool to set up schemes in Bangladesh. The 1925 Provident Funds Act (PFA) is the guideline that the government follows for the current provident fund.

However, the PFA does not state anything for private sector employees who receive gratuity or provident funds from their office after retirement. In its research, the CPD suggested forming an autonomous pension office operating under the Ministry of Finance. Although the research organisation urged the execution of a Universal Pensions System, this will still be extremely crucial to regulate and develop an initial Pillar I pension system under the ILO classifications, making it a Bangladeshi version of the 401(k).

This pension system will not be inclusive of those in the informal sector, but this could still be a much important start in the right direction. The employees and employers could jointly contribute to a ‘Pay As You Go’ (PAYG) DC model with withdrawals that can be either tax-deferred or tax-exempt. To approve the tax deductions and incentives, coordination with the National Board of Revenue (NBR) will be essential under Income Tax Ordinance 1995.

The major problem, however, lies in investing the contributions in this scheme. Bangladesh is yet to have an established market for trading in bonds, severely constricting the areas where the employees' paychecks can be invested. The Bangladesh economy is still heavily dependent on the banking sector, which is riddled with its own afflictions of non-performing loans and corruption.

Moreover, the demand for mutual funds (MF) is severely weak in Bangladesh, with the MF-GDP ratio standing at a mere 0.53 per cent, which is the lowest among emerging economies. Media reports show, investors lack confidence in mutual funds due to fund managers' lack of transparency and accountability and so fund managers fail to liquidate funds within deadlines.

Besides, 401(k) funds are often not accepted by many American Muslims. This is a problem that could have been solved by expanding the Islamic financing market. The government of Bangladesh had been mulling over introduction of Sukuk (Islamic bonds), which will be a big step forward in this direction.

Bangladesh still has a long way to go to inaugurate a retirement scheme reminiscent of the archetypal 401(k). Creation of an autonomous office to oversee this along with inter-departmental coordination will be crucial to ensure success of such a plan. The government must take initiatives to diversify the financial sector towards bonds and mutual funds, moving away from immense dependency merely on the banking sector.


Chowdhury Nabila Tasnim is a sophomore at the University of Dhaka.

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