Like pension funds for the West, workers funds are for Bangladesh in terms of post-retirement savings. Whereas 186 out of 192 countries provide at least one pension scheme (CPD, 2019), in Bangladesh pensions are not mandatory for the private sector and 61 per cent of the population (Pension Watch) do not/cannot avail pension-contribution schemes or protection. What the labour laws of the land does provide for are: workers' participation and welfare funds mandatorily, and gratuity and provident funds optionally (collectively, "the Funds"), as post-retirement corpus for workers. Workers include all employees other than top management -- this has been clarified by the Supreme Court of Bangladesh. This begs a question: what are these funds being used for?
Subject to certain conditions, income from approved gratuity funds and contributions to provident funds recognized by the National Board of Revenue (NBR) is exempt from taxation. There are fiscal concessions for workers' participation and welfare funds as well. Management of all the Funds is vested in individual boards of trustees of each fund. However, a common theme of investment in the laws relating to the Funds is the direction to invest in government-owned sector/securities. Where the special law itself does directly mention investment in the government-owned sector, this theme is once again cemented by the Trusts Act 1882 (amended 2000) which provides investment preference to government securities and only up to 25 per cent in any security listed with a stock exchange.
Given that Bangladesh is one of world's fastest-growing economies, is it not time to broaden the horizons of investments?
Pension funds around the globe (the global equivalent of our Funds) manage $50 trillion and make up the second-largest group of investors in the world, ranking right after asset- management firms. Such investments, when invested wisely, and of course professionally, aim to multiply the returns to an employee following decades of service, beating inflation, creating nest-eggs. In Bangladesh similar investment strategies for the Funds could potentially beat the simplistic return calculation of '45 days' basic salary for every completed year of service for more than 10 years of service' for gratuity funds. The gratuity calculation was amended and upgraded in 2013 by an amendment to the Labour Act 2006 and by all means has been an improvement, but does this return even beat inflation? Does this give a worker an effective amount of money for the rest of her/his life given the retirement age is 60 years and average life expectancy in Bangladesh is 72/73 years?
As the old English adage goes, 'Money begets money.' Simply put, more investment can result in higher economic growth and the cyclical flow of money can make the particular investor (including small investors) richer than before. This leads us to the most important economic function of the capital market, which is to provide an alternative and cheaper source of funding for budding businesses other than the banking sector while maximizing returns for investors. As noted earlier, pension funds are one of the major sources of liquidity in the global capital markets, and the Funds i.e. workers' participation and welfare funds, provident and gratuity funds are comparable liquidity/investment sources in Bangladesh. Active investment of the Funds, even in part, infers a 'win-win' situation, whereby wise investment by funds' managers can allow the Funds' beneficiaries to enjoy better returns than they would have received by parking it in bank vaults and also on the other hand can allow aspiring entrepreneurs to start or expand their businesses and innovation, especially those trying to solve big problems through scalable and disruptive technology.
Historically, the business fraternity in Bangladesh has complained of a high-interest regime in the banking sector as a deterrent to investment and thereby economic growth. Such views have been concurred by potential foreign investors in Bangladesh too. Although the average interest rates in our country have been reduced considerably in recent years, it is still high compared to global standards. Alongside the high interest rates, the collateral requirements of providing assets more than the value of the loan demanded in addition to the pressure of signing personal guarantees, acts as a strong barrier to new investment by young innovative entrepreneurs. Consequently, this inherent problem hinders the vast potential of the start-up industry's success in Bangladesh.
The authors suggest an obvious and simplistic change by the government, opening up tax-exempted workers' fund investments in alternative investment funds such as venture capital and impact funds as already envisaged in the Bangladesh Securities and Exchange Commission (Alternate Investment) Rules 2015, and in the secondary market on the exchanges, both in equity and in debt. Now is the right time to do so, particularly given that the markers are high for the public securities market for the next few years (HSBC, Market Research 2021). As discussed, funds are not only expected to increase the availability of long-term funds but also induce financial innovation and improve corporate governance. Yet, despite efforts of the regulator, the sustainability and growth of the alternative investment market is yet to properly take off in the last six years with only six funds launched on the market (with a total corpus of Tk 713 crore given the limited liquidity pool.
No sensible entrepreneur will seek funding from the capital markets if the costs of funds are lower in the form of bank loans. High liquidity flows in the capital markets solves this problem and subsequently makes it attractive for businesses to raise capital from there. In developed capital markets such as the Nasdaq or LSE, institutional investment forms the major portion of the investable funds. Furthermore, such funds are termed 'Smart Money' by finance gurus as they have a better track record in generating profits than other participants in the capital markets.
The Smart Money manages the huge liquidity pool created by pension funds in the leading capital markets for a 'win-win' scenario. In Bangladesh, the liquidity pool that lies in the Funds are largely invested in saving tools offered by the banking system or in government treasury bonds. Such a conservative outlook limits the upside of the potential return from the Fund contribution of a worker. Furthermore, the returns of such a conservative investment policy can also result in negative returns for the retired worker in case of stagflation.
Therefore, diversion of the Funds in Bangladesh into alternative investment funds and instruments and into the capital markets can create a huge liquidity support for the potential entrepreneurs, making it more vibrant, and also boost the start-up industry and SMEs.
If professionally engaged licensed fund managers can do this right, hedging risks and returns, this will not only mean more liquidity for the securities market, both public and private, but also potentially 'real' savings returns for the small stakeholders at the back-end of the Funds. Maybe, with such savings at retirement, we would have less need for laws such as the Maintenance of Parents Act 2013 (where children are compelled by law to look after aged parents) and give retired persons the dignity of financial independence.
An even better way to do this would be to focus on investing a small part of Funds not just for risk - return, but on risk - return- impact pegged to Environmental, Social and Governance (ESG) KPIs. In order for Bangladesh to be the next economic miracle, such policies are the need of the hour to maintain our high growth trajectory. The authors understand that handling public money is sensitive, however where capital market-and fund-management legislation is clearly defined and a robust regulator is in place, the public good that could result from higher earnings/savings to retirees while bringing liquidity to the markets outweighs the safety of the status quo.
Anita Ghazi Rahman is an advocate of the Supreme Court, a managing partner at The Legal Circle and an independent director of the Chittagong Stock Exchange. [email protected]
Sameer Ghazi Rahman is a graduate of the London School of Economics (LSE) and SOAS, and a director of academics at Sunshine Grammar School. [email protected]
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