Although a late entrant in the country’s financial system, pension funds are making solid progress in capital markets.

The old-age pension system in Pakistan can be divided in two categories: the government-run pension schemes for public sector employees and private pension fund industry for the corporate sector.

Private sector-run pension funds are categorised as Non-Banking Finance Companies (NBFCs) and are governed through Voluntary Pension System Rules 2005.

The regulatory authority for registration, licensing and operational supervision is the Securities and Exchange Commission of Pakistan (SECP).

Together with mutual funds, pension funds are managed by the Asset Management Companies (AMCs).

The table provides a brief overview of the pension fund industry in Pakistan. With annual growth of 39pc, investors’ interest in pension fund industry is rising exponentially.

The launch of Islamic pension fund within the industry has offered a way for investors who want to make faith-based investments.

Another significant development is the sector-wise allocation of pension fund investment, with half the funds invested in non-equity sectors.

However, the number of pension fund managers is still low which can be increased by relaxing the criteria for pension fund establishment.

The Voluntary Pension System Rules 2005 need to be amended to encourage more investors and fund managers to float such funds.

Similarly, government-run pension funds need to be structurally modified to encourage multiple fund managers to manage government pension funds in order to introduce competition and transparency in the market.

In the same manner, government employees can be given an option to choose their own pension fund instead of compulsory deduction and allocation to a specific fund.

There are several challenges being faced by the pension fund industry in Pakistan.

The first challenge is the lack of awareness in the general public and a limited distribution network.

The general state of poor financial education and limited reach of financial markets is hurting growth of the sector. The second challenge is to comply with the strict regulatory requirements for establishing and running such funds.

The fit and proper criteria used by the SECP for granting license, requirement of minimum capital and the regulatory limits for making investments in different sectors is hurting the investment climate in the pension fund sector. Similarly, the lack of trained professionals and absence of training opportunities are affecting the funds’ performance.

These issues can be addressed by a joint effort of all stakeholders: fund managers, investors, regulators, academia and the government.

Fund managers need to create a holistic awareness campaign to attract the retail investors and educate the general public on the benefits of investing in pension funds.

Investors need to be taken into confidence for long term commitment of funds by promising them an attractive rate of return.

Similarly, regulators need to relax the rules for establishing and operating pension funds with a view to support their initial growth.

Meanwhile the academia should introduce courses in various educational programs on the pension fund in specific, and on non-banking financial sector in particular, to prepare a workforce capable of running the operations of pension funds.

Lastly, the government should offer genuine tax concessions to pension fund industry to kick-start its growth and offer regulatory support for its smooth functioning.

Published in Dawn, The Business and Finance Weekly, August 21st, 2017