The Punjab government is considering a review of its funding strategy for capitalisation of the provincial pension fund created eight years ago for meeting, though only partially, its future pension liability.
This was in view of a whopping surge in its accrued pension liability in the recent years, officials confirmed to Dawn last week.
Punjab’s accrued pension liability has grown by 4.6 times in five years from Rs688bn at the end of FY10 to an estimated Rs3.18tn at the close of FY15, with the provincial government’s annual pension expenditure jumping from less than 10pc to above 15pc as a ratio of its current spending.
The size of annual provincial pension payout has more than trebled from Rs36bn in FY11 to Rs112bn in FY16, and is estimated to surge to Rs128bn during this fiscal year
The provincial government has made a net contribution of Rs21bn to the Punjab Pension Fund created in 2008. It has set aside Rs8bn — double the amount it had contributed to the fund last fiscal — in the budget for the current financial year for funding the PPF.
So far the government is focused only on building up the pension fund, which was created under the PPF Act, 2007 to ‘generate revenues for the discharge of pension liabilities’ of the province, without taking anything out of it. The PPF managers told this writer that the net assets of the fund had grown to Rs40.24bn, including unrealised gains of Rs2.04bn, by the end of the last financial year.
“The fund size is too small to contribute to the rapidly rising annual provincial pension payout,” a PPF official said on condition of anonymity. The fund’s assets have grown at an accumulative annual rate of 14.27pc, well above the benchmark growth rate that is fixed 3pc above headline CPI (consumer price inflation) rate.
The size of annual provincial pension payout has more than trebled from Rs36bn in FY11 to Rs112bn in FY16, and is estimated to surge to Rs128bn during the present fiscal year.
Actuarial valuations of Punjab’s potential liability show that it has grown at a much faster pace during 2011/2015 than during 2007/2010 when it swelled by just 1.6 times from Rs425bn to Rs688bn. The rate of growth in the contingent pension liability of the province is estimated to be even slower than that before 2007 when the first actuarial valuation was carried out under a donor-funded pension reforms programme.
The official data indicates the number of active provincial employees has risen by 13,010 to 951,521 and pensioners by 28,035 to 465,030 between FY11 and FY15. The accrued liability for active employees has grown 4.5 times to Rs1.83tn and for pensioners 4.7 times to Rs1.35tn.
The budget documents for FY17 list a number of factors — changes in pension benefits and economic assumptions, as well as policy of continuing pension increases to future new pensioners — responsible for the rapid growth in the provincial pension liability estimates.
For example, the documents say both the pensionable salary and pension of the provincial government employees have increased at an accumulated annual rate of 12pc against an assumed growth of 9-11pc and 4-8pc, respectively.
Further, the provincial government has converted more than 96,500 contract jobs into regular, pensionable jobs (with over 173.700 employees still working as contract employees). The increase in the rate of family pension from 50pc to 70pc of gross and net pension and minimum monthly pension from Rs2000 to Rs3000 and minimum monthly family pension from Rs1000 to Rs2250 from July 1, 2010 has added significantly to the accrued liability.
The documents argue that the changes in economic assumptions — primarily the reduction in differential between the discount rate and future pension increase rate from 4pc to 2pc — and in demographic assumptions — almost a third of new retirees are below the superannuation (that is, 60 years) — had spiked the pension burden of the province by Rs760bn.
Moreover, the impact of increasing future net pensions by 72pc has expanded the liability by another Rs666bn.
The PPF follows a conservative, cautious investment strategy with 68pc of its funds invested either in PIBs (Pakistan Investment Bonds) or national saving schemes. The rest of the funds have been invested in bank term deposits and TFCs (term finance certificates), making returns on its investments heavily dependent on fluctuations in the interest rates.
The Fund executives agree that they have been pursuing a ‘cautious investment approach’ at the expense of higher returns. But, they argue, the fund had shown remarkable results over the last eight years by growing the fund assets at annual rate of more than 14pc. It earned profits of Rs3.6bn during the last fiscal year in spite of a low interest rate environment.
“The government-owned funds usually have low tolerance for market volatility and avoid taking risks,” contended an executive, adding that the fund’s investment policy was formulated according to the government’s guidelines. “If it allows us, we will start making high-return but risky investments and may also expand in the international market.”
Published in Dawn, Business & Finance weekly, July 25th, 2016
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