With the two government-managed pensions, a retiree bags only Rs 6 000 monthly, not enough for a decent standard of living. Bernard Yen says that private pension plans are the answer to this problem.

? Today pensioners get a maximum of Rs 6 000, that is around Rs 3 000 from the non-contributory old age pension and around Rs 3 000 (if they have contributed from a salary of Rs 10 000 or more) from the National Pension Fund. Rs 6 000 is barely enough to-day to rent a decent house. Should we revamp the National Pension Fund which today has Rs 50 billion as invested capital?

First of all, let me point out that you can expect to get a pension of Rs 3 000 from the NPF if your salary is Rs 10 000 or more and if you have contributed for 40 years to its fund. Rs 10 000 is the ceiling, so even if you are earning Rs 50 000, your contribution will be the same as someone earning Rs 10 000. In fact, you will be paid a pension equivalent to one third of your salary limited to the ceiling. If you have contributed for less than 40 years, you will not get one third, you will get less. If your salary is lower than Rs 10 000 you will get less than Rs 3 000 even if you have contributed for 40 years. Someone earning Rs 3 000 would get Rs 1 000 as pension from the NPF.

? Which is ridiculous…

Yes, but one should bear in mind that the NPF was set up with something particular in mind. It was set up with the idea that the private sector will have their pension plans on top of it. In fact, many private companies, the Sugar Industry for one, already had their private pension plans at the time.

The NPF contributory pension was meant to be only an additional help or a facility/obligation for those employers who might not otherwise bother to contribute to any pension plan for their employees.

Now, should we today revamp the NPF to provide a higher pension or should we encourage the development of other, private pension plans (either occupational ones set up by employers or personal ones offered by insurance companies)? It is a philosophical question that people will be asking themselves and they may have their own preferences. In any case, a revamp is usually required in the case of unfunded schemes such as the government old age pension in Mauritius, particularly in the face of an ageing population when you will get fewer people working and contributing and more people being paid a pension. Government-managed pension provisions may be too remote for people to appreciate their value.

This is why I would favour private pension plans. I think that government should give more and more incentive to self employed people and to employers and employees of the private sector to enter into private pension plans to prevent a drastic decline in living standards of those going on pension.

? The lump sum paid by the government system is also ridiculous …

This lump sum is paid by the National Savings Fund, set up in 1994, that is well after the NPF. Only the employers were made to contribute to this fund. They were paying 2.5% of the salary of each of their employees to this fund, but again the salary is capped at the ceiling which is now Rs 10 000. Then the Employment Rights Act which came in 2008 required the employees to contribute 1%, i.e. a maximum of around Rs 100 a month to the fund. People have been talking about ridiculous lump sums because some have obtained a lump sum of only Rs 10 000. This is the case because this plan is new and most employees who have retired lately have contributed for less than 16 years to the plan. But then, even if you contribute for 40 years, you can expect to get a lump sum of Rs 160 000 to which you should add the interest, for your contribution is paid back with interest.

Even then this lump sum would not be very attractive, not as attractive as the one civil servants or those who contribute to a private pension plan can expect to get.

? How much can someone contributing to a private pension plan expect to earn in terms of lump sum ?

It depends which type of private pension plan you are contributing to and also on your salary. But generally, the lump sum amounts to two years’ salary, that is your last salary multiplied by 24. If the last salary you draw prior to your retirement is say Rs 10 000, you can expect to earn Rs 240 000 as lump sum after a full career.

? And what about the pension?

As I said, it depends upon the type of plan you are contributing to. You have the defined benefit plan where everything is defined. You have a formula to calculate the pension you will earn depending on your last salary and the number of years you or your employer have contributed. The sum you contribute is usually a fixed percentage of your salary. The amount your employer will be paying may vary from time to time, depending on the amount being paid out as pension by the plan and the investment returns earned by the fund. In fact, in this type of plan, the pension paid is usually around two thirds of your last salary after a full career. So, if you were earning Rs 10 000, you may expect to earn around Rs 6 000 as pension. You then have the defined contribution type of private pension plan where you and/or your employer contribute fixed percentages of your salary, but the actual pension paid is less predictable because it will depend a lot on how well your contributions are invested and how much the pension provider will charge for converting your fund into a pension at retirement. But whatever be the type of plan, employees are briefed and contributions are usually voluntary on top of any modest minimum required.

? Are there many companies offering private pension plans to their employees?

Yes, around 60 under the Employees Superannuation Fund Act 1954 and hundreds more under the Trust Act or through insurance companies. I was surprised to note this when I came back to Mauritius to work as an actuary in 2000. And you can expect more and more companies to offer private pension plans as they realise the need for them in managing their workforce and caring for them. I also believe that government should revisit the previous decision to effectively slash the tax relief that was given to those individuals contributing to a private pension plan (although, thankfully, employer contributions remain tax deductible).

Interview by Raj JUGERNAUTH
(l’express Weekly – Friday 25th of June 2010)

Raj JUGERNAUTH