I attended the SCP briefing last week for the private sector. Sitting in front with some of the other BICPA members, I managed to grab a microphone at the beginning of the Q&A Session and ask a few questions:

1. Will the survivorship provisions be extended to cover TAP also?

Until there is firm guidance from TAP on this, I don’t think we can expect this to happen. I feel that extending this provision to TAP would create another safety net for Bruneians, because this will allow TAP savings to be redistributed to inheritors / decendents upon the passing of the TAP member.

2. If SCP members have valid and appropriate savings plans, will they be able to withdraw their SCP savings in a lump sum and re-invest them appropriately?

Answer is simply – No. SCP is designed as an annuity only, and lump sums will not be paid out of SCP.

The Analysis

The SCP is a funded defined contribution scheme. Members pay defined contributions into their accounts until they retire at 60. When they retire they are awarded a life annuity that continues from retirement at 60 until the passing of the member. i.e. you get paid a fixed sum every month until you pass away.

So what does this jargon mean? Well, pension schemes can typically be categorised into either defined contribution schemes, or defined benefit schemes.

Defined contribution schemes are where your contributions into the scheme are known, but the resulting pension received at the end is not known at the outset. Our existing TAP savings fall in this category. The only way that our TAP can grow is through the reinvestment of funds and the “dividends” enjoyed by TAP members (ranging from some 2% – 3% p.a.)

Defined benefits schemes are where your resulting pension received at the end is known at the outset. The old Government pension scheme was similar to this – where your monthly pension was based on your last drawn salary from the Government.

The Bottom Line

The new SCP rules are a significant step towards eradicating poverty in Brunei. Based on a back-of-the-envelope calculation I prepared during the briefing, I can say that unless my calculation is wrong, the “return” [i.e. life annuity / cash paid in to the SCP x 100%] on the SCP for the majority of us working professionals will be quite healthy.

Because the pension monies are matched by our employers (and in some cases, the Government), in effect employees are “doubling their money” through the SCP. On top of this “doubling” effect is the modest dividends which we can expect to be in the 2%-3% range paid on the “doubled” money.

My only thought to all this is that maybe we would like to see more participation of the local financial services industry. Perhaps by way of a PPP-type arrangement (Public-Private-Partnership), where equity and financing is provided by the Government and the Private sector manages and operates the public service. One advantage of this kind of arrangement is to create a different flavour of governance and transparency.

In my mind … we’d set up a PPP vehicle (SCP Sdn Bhd) that is equity and debt funded by the Government. These monies are then invested in a portfolio of investments by the vehicle to generate adequate future returns. Accounts are then opened for SCP members, and just like any online banking service they can check the health of their portfolios online etc. SCP members will have the freedom to select investments depending on their financial risk appetite and investment objectives.

The key advantage would be that governance and independent checks would be mandatory under this kind of arrangement. Audits would have to be conducted at least yearly. Actuaries would have to be engaged to estimate the ballooning of the future pension liabilities. And hiving these assets and future pension obligations into a PPP vehicle (SCP Sdn Bhd) would make it more manageable.

In the UK, they achieve something somewhat similar through their “opt-out” provisions, which creates jobs, market opportunities and develops incentives for private industry.

Further reading:

• World Bank study commissioned by the World Bank on Brunei pensions.
• The SCP rules, per Ministry circular SK 1/2009.
• Brunei Resources on “What is SCP? Part 1” and “What is SCP? Part 2″

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