THE Punjab government has finally drafted a law for creating a Pension Fund in order to generate revenues outside the provincial budget for meeting its ever expanding pension liabilities.
The proposed law, the Punjab Pension Fund Act 2006, is expected to be shortly presented before the provincial cabinet approval. Finance department officials anticipate that the draft law will be passed by the assembly before the year is out.
Work on the draft law began at the start of the last fiscal year. It has been developed as part of the Punjab government’s financial reforms agenda under the Punjab Resource Management Programme (PRMP). The Asian Development Bank (ADB) has provided $500 million for the five-year programme launched in 2003 to restructure the provincial finances.
As part of its financial reforms agenda, the province has used the low priced funds obtained from the ADB under the PRMP (as well as from the World Bank for other projects and programmes) to trim its expensive federal loan portfolio under its Debt Management Strategy.
Punjab has already reduced its federal loan stockpile by Rs17.454 billion in the last two years, creating a “fiscal space” to divert the savings to developing economic and social infrastructure.
While the provincial finance managers were glad to curtail the expensive loan liability, the expansion in the size of pension payouts on account of its liability pension every year— continuously adding burden to the province’s fiscal resources—, has remained a major worry. The payments made by the province to discharge its pension liability jacked up to Rs11 billion in the budgetary estimates for 2006-07 from Rs2.48 billion in 1993-94, showing an average annual growth of 10 per cent.
In addition to the rising financial burden on the provincial resources, the fast growing GP Fund was yet another factor perturbing the financial managers. It may be noticed that interest payments made by the province on GP Fund have grown from a paltry Rs590 million in 1991 to Rs4 billion in 2007—increasing 6.77 times.
Besides, the increased interest payments on GP Fund, the provincial finance department says that payments made from it will overtake receipts and disbursements from the Fund in 2009-10.The payments are estimated to rise to Rs10.616 billion as against receipts of Rs7.851 billion.
The situation creates fear that the provincial government may eventually have to pay the liability from its own pocket. It has been estimated that after 2016, the government will need to put additional resources to the tune of Rs65 billion into the GP Fund if it is not capitalised.
It is stated that the increase in the burden on the provincial resources on account of pension and GP Fund liabilities will offset the impact of the government efforts to reduce its expensive federal debt with low cost loans from the multilateral donors for creating fiscal space for social sector and infrastructure.
In this backdrop, the government decided to capitalise its pension fund and make it an off-budget item. “The idea was to establish an independent fund, capitalise it through budgetary allocations for building a resource base that is large enough to generate sufficient returns through profitable investments and foot the pension bill without putting any burden on the provincial exchequer,” senior Punjab finance department officials say.
“Once the proposed fund is established, pension will be made an off-budget item.” “Once the fund becomes operational,” says a PRMP official, “the province will undertake project to capitalise GP Fund on the same pattern.”
They say the legal framework to govern the pension fund has been formulated in order to help facilitate the government in investing for the purpose of “generating additional resources” outside the budget for fulfilling its pension liabilities.
“Without a proper law governing the operation of the Pension Fund, the government can not take out the money from the Public Account of the province and invest in any profitable venture,” officials say.
The government placed a sum of Rs2 billion in the province’s Public Account in the financial year 2005-06 for the capitalisation of the fund. “Another Rs12 billion have been allocated for the same purpose for the current fiscal. The funds will be transferred after the passage of the draft law by the assembly,” officials maintain.
The proposed law also provides for the creation of Reserve Fund in the Public Account of the province, to which allocations in future for the pension fund will be transferred from the Provincial Consolidated Fund.
The pension fund to be created under the proposed law would be managed by the Punjab Pension Fund Management Committee, which will be chaired by the incumbent provincial chief secretary. It will have the secretaries of the Planning & Development Board (P&D), finance, law and S&GAD departments as its official members. Four persons from the private sector will be nominated on the committee by the provincial government. It will also appoint a general manager, who would also be its member/secretary for three years.
The management committee will formulate an investment policy, establish standards as well as procedures for investment from the Reserve Fund, transfer profits generated through investment to the Reserve Fund, and, if necessary, propose new rules.
To be on the safe side, the draft law places certain limits on the investment to be made. It prohibits making any investment for a period of more than three years or in any foreign market or firm, except with the prior approval of the government.
The provincial government is, however, yet to decide as to whether it wants to outsource the management of investments to be made from the Reserve Fund or manage the same internally. “The government has not made any decision in this regard.
Once the law is passed and rules framed, the decision in respect of outsourcing or the internal management of investments will be taken,” the officials say. They, nevertheless, say the “Fund will be managed in a very professional manner”, and the ADB will be also asked to provide its technical assistance.
“We (the government) shall take every precaution that the money is invested very prudently and profitably so that the objective of establishing the fund is achieved,” officials say.
They strongly hold that the successful capitalisation of the fund (and later on of GP Fund) is critical for the financial health of the government.
“We need to plug the bleeding of our resources because the province is far more dependent on federal transfers than others, and has little margin to enhance its tax resource. The successful capitalisation of pension, and later on of the GP Fund, will give the province large fiscal space for increasing its development spending,” say the officials.
They say, Punjab has been receiving greater funds from Islamabad under the National Finance Commission (NFC) in the last few years because of higher economic growth and improved tax collection, which is helping it absorb and finance its pension and GP Fund liabilities without impacting much on its development programmes.
But if these are not capitalised right now, their increasing burden will leave little or no room for the provincial government to simultaneously discharge these liabilities as well as maintain the current level of spending on economic and social infrastructure.
THE Punjab government has finally drafted a law for creating a Pension Fund in order to generate revenues outside the provincial budget for meeting its ever expanding pension liabilities.
