Pensions 101

The issue of pensions versus TAP is very much in the minds of many people. While I try not to take sides, let me try to outline the history behind both schemes and probably at the same time outline why the move from pensions towards TAP happen. (Technically pension scheme is known as defined benefits or DB and TAP scheme is known as defined contributions or DC).

Pensions were introduced to Brunei with the passing of the Pensions Act (1959) and that of the Public Service Commission Act (1962) which governs the appointment of public officers. Even then not every civil servant is pensionable - for men only those in Division IV and above and for ladies only the unmarried ones and for graduates beginning 1980. (Married non-graduate ladies were appointed on month-to-month unpensionable service).

The pensions were based on the civil servant pensions in UK which first started around 1684. Pensions were introduced - at first in the navy and the armed forces and then the civil service around 1850 - in order to facilitate the retirement of older less efficient workers so as to make way for younger fitter men. The very existence of such schemes then encouraged employers to recruit younger fitter people who would work for many years before drawing their pensions.

As private sector's pay increases and the government introduced a social security system, the government retained the pensions for civil servants, the theory behind it is that the senior civil servants are paid substantially less than their private sector counterparts, and get none of their perks, such as company cars. Their pension really does matter to them.

However when it was introduced to Brunei, there were a number of differences. In 1960s, there were not many people in the civil service so a pension scheme is not a problem. Secondly, the amount of payment was based on three quarters of the last drawn salary which makes it one of the more generous scheme in the world, okay when salaries are low. Thirdly, the amount is paid for a period of 15 years and if the recepient is still alive, then the full pension is paid until he passed away. Fourthly, the private sector pay in Brunei is generally lower than the civil service. Fifth, the civil servants do not have to contribute any amount whatsoever. As Brunei civil service gets bigger, life expectancy increases, salary rises, all these made pension payments grow exponentially larger. At the same time, because of the generosity of the remuneration and pension scheme in the government, nobody wants to join the private sector in Brunei. Something has to be done.

In the 4th National Development Plan (1985-1990), the NDP committee proposed that a workers' fund be established so that workers in the private sector could also enjoy their retirement. But it was not until 1993 that TAP fund was set up. By then, the government position had changed. No longer was a workers' fund for the private sector should be set up but that the pension scheme should also be abolished even though the latter was not in the original NDP plan. TAP was to level the playing ground in terms of retirement so that more Bruneians will be attracted to join the private sector. It was also to encourage fluidity of movement from government to private sector as civil servants will have no pension to lose. TAP 5%+5% rate was supposed to be an introductory rate and was supposed to subsequently rise as people get used to it. However that rate never rose not because the government could not afford it but there were indication that the private sector could not pay any higher contribution for their workers. And so that introductory rate remained until today.

Being a public retirement fund as most retirement funds, TAP's investments tended to be in the more secure risk averse investment unfortunately with relatively lower returns. But despite that, TAP's returns to the members over the last few years have been higher than what one would get putting money in the banks.

And here we are today. We have moved from one extreme to another. Everyone wants the pendulum to move back but the finance position is that it can't. During the first session, the Second Finance Minister's position was the government has to take into account everything including the position of Bruneians in the private sector. Bringing back the same pension scheme would just be solving one problem but the other problems remained.

Comments

justin said…
I don't think that many people are suggesting that the scheme go back to previously unsustainable levels, but that there needs to be a halfway house between the previous pension scheme (unsustainable for the government) and the current TAP (unsustainable for the individual).

It's all very well for the ministry of finance to say "no" and it's all very well for those with qualifications and ability to just up and move out of the government service/country, taking their brains, skills and expertise (what HM has called "asset negara") with them. But the country loses out as a whole.

If I were able to submit a question to the honourable minister - I would ask what his department's plans for coping with the current crisis are. His job isn't to say "no". His job is to give an outline to solve the problem.
Pg Runa said…
I m not that 'confident' about whether the government is going to restore 'pension', 'Baksis', 'naik gaji' or whatever things which draws more money from our national coffers. I m pretty certain 'they' are NOT going to do it! Fine...by me but those ministers should look into how the ordinary 'Rakyat' are going to sustain the ever increasing high cost living in our beloved country! Those kedai kaling (pardon me) or supermarkets are cutting our throat and for that matter the credit cards too! Those ministers should review the 'basic necessities item' list should include MEE MAGGI, INDO MEE and CREDIT CARDS INTEREST; because these are becoming 'basic necessities' needed by ordinary 'Rakyat' like me who earned just enough to have life going! It would be different story for those ministers who earned $40k a month??? air, karan, kereta free!!!
nikkita said…
Salam Mr. BR, thank you for writing this article. It's quite an interesting one, and I take on an academic's view towards this whole matter.

Inevitably, the question of intergenerational fairness in pension provision is raised especially amongst those who were recruited post-1993. These are very serious questions, and is only quieted down by the political-economy and socio-cultural backdrop of the country. There's much to be read from that - and I leave it to the imaginations of your readers.

As the country ages, our demographic landscape will substantially change in the next 50 years and more. The age projection from the UNDESA for example, shows that we'll be looking at 23.8% of our population as those of age 60 years and above in 2050. This is quite a marked increase from what it was in 2000 (only 5.1%). Of course, we always ought to look at these projections with some level of trepidation, for example UN may not have taken into account the large percentage of foreign temporary residents who will not age in the country. However, the figures are extremely indicative of how rapid the country is ageing - and how slow we are in responding to the current issues. It raises considerable questions on whether or not we will be prepared to age in the future.

My whole point here is that whilst we may be fixated towards the pensions issue now, we may be missing out the larger picture. There's a whole array of "impending crises" with relation to social care, health care and insurance; and all these against the scenario of unstable economic diversity (for now), the changing family & household structure, falling fertilities, intergenerational transfers of wealth and care, and longevity & wellbeing.

Not to sound 'glass-half-empty', future shortcomings can surely be addressed. Brunei is just yet to recognise the importance of raising the state-pension age for instance, because in light of increasing lifespans, people will find that retiring at 55 is not really an enticing offer anymore. Not when you're recruited post-1993 or in the private sector, at least. And not when costs of living are this high.

I'm quite optimistic though. There still exists a youth bulge in the Brunei population scenario. Like many other developing countries, it's both a challenge and a "window of opportunity" for Brunei to harness from the energies and intellects of this youthful dividend. And indeed Brunei is. Just look at the amount of investment towards education and the whole revamp of the education system as an example. I think ultimately it is the political will that will change the issue of pension provision; it's a hard bargain to strike though. Whilst we prioritize on investing towards the development of our country, and some sectors are perhaps not willing to relinquish the benefits given/available to them; an increasing wave of workers will find that they're getting the short end of the bargain, and one day (and as usual) will make their voices heard. Mindful that these voices will be a multiplied version of the current pensioner cohorts, our only hope is that the country doesn't stall in responding to the likely crises.

What do you think of the World Bank and the AIG suggestions on the inadequacy of the TAP and the whole issue of consumption smoothing?
Leon said…
I think the real issue raised at the LegCo meeting was on how Bruneians , who generally have no or minimal savings on their own, can manage to sustain a living past their retirement age.

At 5+5%, most would only be able to sustain a living for maybe 3 or 4 years post retirement, after which they would be left with no income whatsoever. What to do?

I think its the responsibility of the Government of the day to ensure that their people can maintain a healthy standard of living, currently and for their future. To swipe aside those concerns because of 'taking into account the private sector' isnt really solving anything. Thats just plain sweeping the problem under the carpet. People are still growing old and under the TAP scheme, they would still be unable to sustain a living beyond the initial first few years upon retirement. The Government has to make the hard choices now. Thats why they're paid so much. But to avoid making those decisions isnt really helping.

Face it, employees are paid poorly in this country. Our standard of living is high but the salaries we pay our employees are low. Not many are able to save.

The choices are either to pay our employees more, so they can do their own savings, or introduce legislation that would force our employers to 'save' for their employees.
Gexton said…
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