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Retirement Plan
Hamza Iqbal
Ghulam Memon

- 20131-20131-

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Traditional Approach Model
Estimation of Income immediately before the retirement age (Variable for estimation
includes career path, industry conditions and marital status)
That income is then adjusted by replacement ratio (downward by certain
percentage due to reduction in taxes and work related expenses so that to
determine the amount necessary for cost of living)
Approximate life expectancy (Clients current health and medical history)
Annual living expense in the years of retirement is determined keeping in mind that
these expense increase with inflation i.e. CPI Index
Estimate the amount of fund that need to be save till the year of retirement to meet
required retirement fund. Planners suggest investing in lower risk securities.

Assuming living expense increase by inflation rate after retirement

Expenses are assumed to be a fixed percentage of pre retirement expenses
Investing retirement funds in low return assets
Contingencies like Long term care plan are not taken into an account

Age Banded Model

1. Retiree will live about 30 years in retirement
2. Undergo lifestyle change every 10 years
Steps followed in constructing age banded model

Segregate expenses into categories of taxes, living expenses, health care &


Anticipate expenses of each category in retirement with each category

Adjust category amount to reflect post retirement lifestyle changes after
every 10 year
Extrapolate these post retirement expenses through 30 years of retirement
using appropriate rate of inflation for each category
Present value of post retirement expenses to determine amount sufficient
to fund expenses
Discount these expenses with rate appropriate with risk level or with
amount invested
Add these amounts to know the amount of fund needed at retirement
Calculate the amount of periodic savings to required during working years
to accumulate required retirement fund

Adapting the model to Individual Needs

Adjustment for Income
If fixed income like social security or pension from EOBI is expected then it will be
subtracted before assessing the funding needs. However, if the income is
guaranteed but with default risk then it will also requiring adjustment for default risk
before income netting.
Atypical Cases
Age banding model unlike traditional model take into an account unusual
circumstances e.g. if one partner suffer premature health problem than it allows the
lifestyle change factor to make adjustment.
Point Estimates
Since the planner is dealing with 4 different categories of expenses so the Age
banding model allows him to use range of inflation rate e.g. 6% to 9% where as in
traditional 7% will be applied straight away and the estimation error henceforth
increase by 4 instead of 1.
Micro Management
Age banding is flexible in a manner that you can change the span of time for
reconsideration of expense just as health care cost can be broken down into its
component cost. Such micro management increase the efficacy of the model.

Hurdles for an Organizations to offer Retirement plans

Increase in cost of defined benefits for retirement plan

People are living longer
Investment market conditions are difficult
Cost of health care increasing
Regulation is tightening and state pension has decline

Less predictability in individual career path, family and financial

circumstances and time of retirements

Global Survey Findings by PwC reflects that

1. Death of Defined benefits is the global phenomena due to recessionary

arrangements where the employers feels that Defined benefits have put
them in cash crunch and they seek forward for the closure of defined benefits
to new employees and want to freeze current defined benefits accruals for
existing employees. They wanted their employees to transfer their defined
benefits to defined contribution arrangement. Here the situation demands the
finance department to reduce the risk posed by defined benefits obligations
and HR responsibility to design such Retirement saving structure that save
business cost as well as encourage employees to contribute for their
retirement responsibility.

2. Legacy Defined benefits are seen as huge risk. As when the long term
financing of retirements get due then the companies have to forego
their major activities to finance it and it is increasing so high that
companys liability is the 3rd of their market capitalization.
3. Employers feel that they have the role to play for providing retirement
benefits but they are unsure of what role that should be. Be it to
empower them with knowledge and resources to make their own
decisions, offering flexibility to employees, and / or should protect
employees investment. So in order to cope with all this the MNCs are
adopting the idea of new paternalism.
4. Flexibility is seen as essential. Employee must themselves decide when
and how much they should take the benefit of retirement according to
their career path, family and financial conditions.

State Employees
In the matter of state It is to mention here that Employees in the service of the state,
statuary bodies, police force, armed forces, railways, local bodies, municipal
committees and other local authorities are exempted from the EOB Act. Similarly they
are exempted in the case of SESSI or PESSI. These employees are governed by their
own law i.e. Military Law in case of Army. They cannot go on strikes or go slow and
cannot go in to Labor Law or Labor appellate court for their concerns. Also their salaries
are determined by National Pay scales.
Funded or Non Funded

In an unfunded plan no assets are set aside and benefits are paid by the
employer or sponsor when they are paid. Pension arrangement by the state
is unfunded arrangements with benefits paid directly from workers
contribution or taxes.
In this view the gratuity is also the unfunded plan as it is made of salary and
the number of service and no contribution in respect of monetary value is
made by an employee.

In a funded arrangement, the employer and also some times the plan
member invested in a fund towards meeting the benefits. The future returns
are not known in advance and so there is no guarantee that given level of
contribution will be enough to meet the benefit.
Under EOBI & SESSI 1% of the amount is contributed by an employer.
Likewise the provident fund is also the funded arrangement as employer
meet the amount being saved by the employee up to certain limit.

Retirement benefit in Pakistan

EOBI is 6% of minimum wage set by the government of Pakistan. Currently Rs.8000/
is taken as minimum wage for EOBI calculation, although minimum wage has been
increased twice since July 2013 and stands at Rs.12, 000/ after budget 2014-2015
that further increased to Rs. 13,000/- in recent budget of 2015-2016. So, 6% of
Rs.8000/ is total contribution. 5% (Rs.400/month) is being paid by employer & 1%
(Rs.80/month) by employee.
The employer gets advantage of paying Employee old age benefit (EOBI) & Sindh
employee social security Institute (SESSI or PESSI) for employees. They can present
EOBI as end of service benefit which employee will get after retirement for life long.
At reaching the age of retirement i.e. 60 in case of men and 55 in case of women
they are entitled to pension that was Rs. 3,000/- till June 2015 and then was raised
to Rs. 5,000/SESSI is 6% of a minimum salary level set by government for Pakistan specifically
for social security purposes, which is currently Rs15,000/= So, 6% of Rs.15,000/ i.e.
Rs. 900/month is paid by employer for all employees earning equal to or less than
Rs.15,000/month. You can give this card to employees as their medical cover.
Prevalent Funds in Pakistan
Three prevalent funds in Pakistan include Gratuity, Pension and Provident Fund.
Government and Armed forces rely more on this retirement plan where if the person
is has to discharge from service due to abolition of post is offered either to take
compensation gratuity or to take another post that may be lower than of previous

one or may be on low salary. Person with the service of 10/25 years or more are
eligible for compensation gratuity or pension.
Invalid pension is offered to employees who came across incapacity to work due to
any physical or mental infirmity. Medical Boards in this regard confirms infirmity.
Retiring pension is when the person is allowed to retire after completing 25 years of
qualifying service. Interest retiree can apply for premature retirement by giving
intimation 3 months earlier which if accepted cannot be reverted.
Superannuation Pension is given to a person who is entitled or compelled to retire at
particular age i.e. 60 years.
It is lump sum amount of money at time of leaving of service based on salary
(highest or the final one) and period of service.
Qualifying Conditions for worker to earn gratuity
1. Meeting Minimum worker requirement
2. Person has to be workmen
3. Minimum qualifying period is 12 month. Subsequently over six month of
service will be considered as 1 year.
Qualifying Events

If a person resign
Termination but not the Dismissal
He is on serving (Not necessarily on duty)
Reaching superannuation age and retires.

Provident Fund
Provident fund is like the saving account that every employer maintain for their
employees if it meets the minimum employees requirement.
It is funded plan where the employee save certain percentage of his salary and
employer pledge to meet the same saving for its employees up to certain limits.

Labor Law for schemes

The relevant laws governing gratuity in private sector are:

West Pakistan Industrial and Commercial Establishments (Standing Orders) Ordinance,


Payment of Wages Act, 1936

Factories Act, 1934

Shops and Establishments Ordinance, 1969

Labour Laws Amendments Ordinance, 1972 made payment of gratuity a legal obligation.
In accordance with section 1(4) of the Standing Orders Ordinance, 1968, every commercial
establishment (employing 20 or more workers) and industrial establishment (employing 50 or more
workers) are required to pay gratuity to a worker once he/she has met the minimum criteria. The
table below shows all the organizations liable to pay gratuity to their workers.

In Provident Fund no more than 30 per cent can be invested in stocks

(and only in companies with a 5-year record of dividends, so no IPOs)
and no more than 50 per cent in a mutual fund
Employees and Employer point of View
Employee Point of view
Being an employee of Toyota Central Motors, I am proud HR Executive of this
company being the fact that this company is doing at its level best for employees.
Toyota Central Motors is the largest 3s dealership company with the best benefits
and opportunities for employees that no other dealership company offer for its
employees. TCM has registered all its employees in EOBI where they are entitled to
pension after they reach their superannuation date. Also Toyota Central Motors is
the Industrial and Commercial Establishment having more than 20 employees and it
therefore required by the law to registered its employees to SESSI as well. Under
SESSI the employees can have the facilities of Medical, Maternity Fund, and
disablement fund etc.
Toyota Central Motors Management being so generous and by feeling its
responsibility for their employees offer the facilities of Health Insurance where
they are reimbursed for their in-patient bill and out-patient bills are also covered to
some extent being the most affected ones who need more facilities like these.
Employees are offered lunch and two time tea at very subsidized rate of not more
than 350 per employee per month. Other benefits include encashment of 15
days leaves and Gratuity after 3 years of service at the rate of 1 Gross per year
and Bonus on Eid ul fitar and Eid ul Azha.
Employees can take loan on zero interest bases from their limit of gratuity that
they have to return on very low installments depending on the instructions of their
immediate head of Departments. Also Employees can avail the benefit of taking

their Salary in Advance after the 15th of every month so in order provide them with
the stability to meet their unforeseen expenditures.

Employer Point of view

As discussed with Mr. Shaukat Qureshi (Sr. HR Executive) we were told that under
EOBI the TCM bear even the contribution of their employees and pay in full of total
6% to EOBI that is Rs. 480/- as the minimum pay still applied by all establishment is
Rs. 8,000/-. Similarly the contribution of Rs. 900 is paid for the both employer and
employees (6% of Rs. 15,000/-) in SESSI. We were told that Management of TCM
give high regards and care for their employees training and development based on
their performance and appraisal management. The events like Dream Car, Loyalty
Cards are organized annually where the employee of the year is introduced and
considerable amount prize is given to them. Such events also provide others the
hope to do the best in subsequent year.
TCM offered their employees the Health Insurance facilities for which they have
contract with M/s TPL Direct Insurance Company (Pvt.) Limited Company. They told
us that they have three categories where the rate of deduction is different for their
married or non married employees. Under this Health Insurance plan they are
covered for in-patient hospitalization expenses up to the limit of Rs. 500,000/- for
Category A employees, limit of Rs. 300,000/- for Category B employees, where as in
case of Category C employees that includes mostly the workmen the limit of
150,000/- is set plus the Rs. 50,000/- facility of out-patient expenses are also
Two Bonuses on Eid ul Fitr and Eid ul Azha are given to all employees irrespective of
their performance. The 1 Gross Salary is given on Eid ul Fitar where as 1.5 Basis
Salary is given on Eid ul Azha.
We also have had discussion with them on the Gratuity or Provident to which they
told us that they do not have provident fund but they have gratuity the formula to
which is that they divide the gross salary of an employee by 26 working days
multiply it with 30 days which then multiplied to 3 at the time you became eligible
for gratuity. The employees can take the facility of loan on zero interest based on
this gratuity balance.
TCM allowed total of 24 leaves balance to its employees where the 9 leaves includes
casual or sick leaves etc and other 15 days leaves can be encashed at the end of
year. The maternity leave of 40 days is allowed to women employee.