Bill Analysis: Central Provident Fund Bill

This bill has been submitted by the Ministry of Planning, Finance and Industry (MoPFI). Once in force, a new pension scheme will be introduced that will apply to all new civil servants and those with under 10 years of service. Employees with over 10 years’ service can continue receiving benefits from the old pension scheme. Both the employer and the employee will need to make regular contributions to the scheme, and funding will be held in an investment fund called the Central Provident Fund, that will pay out pension benefits on retirement. Technically, a provident fund is just an individual saving account subject to market fluctuations, and its benefit levels are not known until retirement.

This piece will examine weaknesses in the bill.

Military pensions remain beyond civilian oversight

Section 3(d) of the bill states that the new pension system will apply to ministries and organisations; further defined as government ministries, union-level organisations, state-owned economic enterprises and other organisations notified by the MoPFI. However, the law will not affect the Tatmadaw (army).

A similar provision can be found in The Civil Service Personnel Law (2013), which in its definition of ‘Service Personnel’ says ‘although the Defence Service Personnel and members of the Myanmar Police Force are Civil Service Personnel, they shall not apply to the matters of this Law according to the nature of their work and duties’.

This is thought to be related Article 20(b) of the Constitution which says ‘The Defence Services has the right to independently administer and adjudicate all affairs of the armed forces’.

However, whilst the Constitution does give the Tatmadaw the right to independently administer its affairs, this should not remove it from Hluttaw oversight and legislative power. In fact, a ‘Law of Providing Assistance and Care for Disabled Personnel of Defence Services and the Families of Deceased or Fallen Personnel Defence Services’ was passed during the First Hluttaw (in accordance with Article 344 of the Constitution). The law requires the State to arrange garden land and housing for disabled or deceased soldiers’ and their families.

The omission of the Tatmadaw from this bill brings further attention to the weaknesses of parliamentary oversight over military affairs in Myanmar. Currently, social security for the army, including superannuation pension, retiree benefits and health insurance, are not included in any legislation (such as The Defence Services Act, The Civil Service Personnel Law and The Social Security Law). This raises two concerns:

• a) The Hluttaw has had no opportunity to review and scrutinise draft legislation concerning military pensions and benefits, which therefore remain hidden from civilian oversight. We cannot know the scale of future costs of paying for the pensions of retired army personnel, which will need to be paid for with public funds.
• b) The lack of legislation governing military pensions should be cause for concern for army personnel themselves, as it denies them legal guarantees to receive such benefits.

There may be a good case for separately administering military and civil service pensions. Clearly, soldiers can face particular risks to their physical and mental health that may warrant a different kind of protection. However, both civil servants and army personnel should be entitled to equivalent legal protection of their social security benefits, and citizens have a right to know, through parliamentary oversight, the cost of administering such schemes.

If it remains controversial that the pensions and benefits of both military and civil service personnel should be subject to parliamentary scrutiny, the Constitutional Tribunal should be asked to give its interpretation of ‘all affairs of the armed forces’ in Article 20(b).

The Central Provident Fund (CPF) Board

The shift from a defined benefit to a defined contribution scheme (see glossary of terms below), means that future pension payments to retired civil servants will not be funded from general taxation, but from an investment fund – the Central Provident Fund – managed by a government appointed board of directors. The MoPFI must submit its list of proposed members for this board – representatives of government, civil servants and outside experts – to the Union Government. The bill gives no details about how representatives of civil servants and outside experts will be chosen.

Section 9(a) stipulates that the MoPFI will determine the level of pension contribution by the State and civil servants respectively, and ‘when necessary’ the CPF can change these proportions. It is important, therefore, that the civil servant representatives on the CPF board are independent employee representatives. For example, in the UK, the Civil Service Pension Board includes a number of civil service trade union representatives. Since this bill does not prescribe how to choose civil servants’ representatives, there is a risk that they will be selected for their compliance and/or loyalty and will have little incentive to accurately represent government employees’ interests. This could make it difficult to deter decisions that may be harmful to the interests of civil servants.

The CPF board will manage and grow the fund by making investments, for example by buying treasury bonds or stocks and shares. In order to manage this investment risk – after all, the value of investments can both go up or down depending on their performance and the prevailing economic conditions – it is necessary to appoint experts in finance, economics and investment matters. Experienced hands are also needed to manage excessive management costs and avoid exorbitant transition cost. However, Section 5(a) of the bill, which prescribes the qualifications of outside experts as ‘being the citizen’ may be a significant barrier to getting good quality expertise to manage the fund. Further consideration should be given to how the CPF board may need to attract experienced international experts to supplement government employee and civil service representatives on the board.

Managing conflicts of interest and avoiding corruption

Section 19 of the bill says that members of outside experts on the CPF board of directors have to work full time and not work at organisations with related interests. Moreover, Section 66 requires them to submit a list of their or their family’s property, including finance or business interests, to the MoPFI. Commonly known as a ‘register of interests’, this provision represents good practice for managing conflicts of interest, and acts as a deterrent for potential corruption by decision-makers. A similar provision can be found in The Central Bank of Myanmar Law (2013) concerning the board of directors of the central bank.

In the bill, however, the same requirement does not appear to have been applied to other members of the board, such as the secretary, who is the Director General of Pension Department, or others appointed by the government. It is not clear why government representatives have been exempted from provisions to manage conflicts of interest and this must be reconsidered.

Whether civil servants or not, it is necessary for all decision-makers to be transparent about their interests in order to guard against conflicts of interest that might result in unfair advantages for them, or their family-owned businesses. This lack of transparency about conflicts of interest is a major problem in Myanmar government institutions. Moreover, it is important that such a provision is enshrined in the law and not simply delegated into the departmental rules and regulations of the board members concerned, to ensure there is legal recourse if any wrongdoing is detected.

Transparency, the right to information and data protection

The secretariat can, with the consent of the board of directors, establish an information management system to release details about the CPF, its investments and the balance sheet. However, the bill says the relevant government department or organisation has to be consulted prior to the release of this data. This is against international best practice and open budget standards, which require public information to be open, with the exception of private or personal data which should be protected (such as, for example, the NRC numbers or contribution levels of individual civil servants).

Here, the inclusion of the term ‘except the secret data’ also creates further problems, because it is a vague term that can be interpreted differently. Therefore, the law must stipulate that total contributions of the state and civil servants, investments, profit and loss reports, as well as salaries, costs and benefits of CPF board members, and the audit report, will be open to the public and the assigned sub-committee will regularly release those data. Whilst at the same time being clear what private and personal data must be protected.

Sanctions for failure to contribute

Those joining the CPF will be required to contribute a prescribed portion of their salary, and will need to be in the scheme for at least 15 years to access pension benefits. Section 9(e) says that the MoPFI has yet to determine how to sanction those who fail to contribute. What should be considered here is that the methods to penalise non-contribution must not unduly harm civil servants, many of whom are earning meagre wages and struggling to keep up with daily living expenses.

There are a group of employees in the bill referred to as ‘outside staff’. The bill says that the relevant department has to make the State’s contribution, but if not, ‘outside staff’ must cover both contributions. For noncompliance, a fine will be levied. Here, the expression ‘outside staff’ is vague. Such staff could be represent wildly different groups in service time and salary, for example. For this, the compulsory contribution of such outside staff should be reconsidered. There is also a risk with such vague terminology, that it could be used by government departments to argue that their staff could be classified as ‘outside staff’, in order to avoid paying their contributions.

Downsides to rewarding long service

Traditionally, pensions incentivise loyalty and long service by requiring a long career before accessing the benefits – in this case 15 years. However, given the challenges of improving the capacity of government departments and the lack of innovation and new ideas in Myanmar government ministries, one has to question whether it is good thing to encourage civil servants to stay in the same organisation for an extended period. A government workforce that represents diverse experience gained in the private sector, in international organisations or in charitable foundations, is likely to have more expertise and be more adaptable than a workforce of people who have stayed at the same institution for decades. A scheme that encourages and promotes broader work experiences – perhaps by enabling individuals to voluntarily remain part of the scheme after leaving the civil service – would be far preferable.

Pensions: commonly used terms to define pensions, based on how contributions are made, or how the money is held/invested

DEFINITION BASED ON CONTRIBUTION

Defined benefit scheme: A pension plan providing a definite benefit formula for calculating benefit amounts, such as a flat amount per year of service or a percentage of salary, or a percentage of salary times years of service. In the public sector, employees are often required to make a routine contribution from their salary to join such a scheme.

Defined contribution scheme: Essentially a savings and investment plan whereby the employee and employer both make contributions. This money is often held in a fund that is invested for a return, either managed by the state or a private sector pension provider. Because pension benefits paid after retirement depend on the performance of these investments, there is no guaranteed fixed level of pension.

DEFINITION BASED ON FUNDING

Funded pensions: Here, the level of retirement benefits is based on the actual contributions made by the employer and employee during the employee’s working life. The level of benefit after retirement can go up or down, depending on the performance of the investments made.

Unfunded pensions: Pensions where the funding for retirement benefits does not exist as ‘fund’, but in the form of an obligation or promise, by the employer (usually the state, as in some countries the private sector is not legally allowed to operate unfunded schemes). In the public sector, this means that retirement benefits are paid for from general taxation.

Historically, government pensions have tended to be unfunded, defined benefit schemes. Originally intended to encourage older, less able workers to retire and attract a younger workforce, they have come to be seen in many countries as one of the additional benefits of a government job, where salaries are typically lower than in the private sector. A long-term commitment to a good pension plan is also helpful for governments in securing the loyalty of their employees.

However, with increases in life expectancy, in many countries the cost of maintaining such pensions has grown to epic proportions and is forcing governments to take drastic action by raising taxes, cutting services, and/or raising the retirement age, just to be able to pay retired civil servants their pensions. Many governments are therefore now switching to funded, defined contribution schemes, where the taxpayer liability problem is solved by investing ‘real money’ for retirement. This needs to be balanced, however, with the associated investment risk. Evidence from a number of developing countries who have made this switch, without putting in place the capacity to manage such risks, suggests the transition can often be even more costly for the public purse. In a time of economic turbulence pension funds may not always perform well, and prudent and informed management of such funds, underpinned by high standards of governance and public/parliamentary oversight, is essential.

Conclusions

The above article looks at some of the detailed problems with this bill. Overall, however, it is not clear what over-arching rationale and evidence-base has led the government to conclude that a switch to a defined contribution scheme is the correct course. Government’s thinking and evidence remain hidden from view.

Examples from across the world have seen a number of countries reverse earlier decisions to switch to defined contribution schemes, and others, such as Malaysia and Singapore, are facing significant exposure to investment failures, excessive management costs, and limited adequacy of benefits, limited pooling of risks and exorbitant transition costs.

As with most new legislation, there has been a disturbing lack of consultation and engagement with the public or financial experts on the design of this scheme, which would have been an opportunity to explore risks and opportunities of the various approaches in a measured and evidence-based manner. Instead, we (once again) have a hastily drawn up bill that will have a marked impact on many civil servants and the potential to severely harm the state of the our public finances, that appears not to have been the subject of any serious consultation or technical cost-benefit analysis.

Finally, managing a pension scheme and a related investment fund is a complex undertaking, requiring a great deal of specialist expertise and robust governance arrangements. The fact that this bill is silent on how the current Social Security Board social protection scheme will integrated with the new pension scheme, is one example that casts significant doubt over whether government can deal with such cross-ministerial complexity and financial management. One has to question, do civil servants and the public have the confidence in our government’s’ financial management capacity to take on such an undertaking at the present time? Given the risks are so great, if the answer is ‘no’, this bill should be halted.