Too many pensions, not enough money

Published October 22, 2018
.— Dawn
.— Dawn

PUNJAB’S pension payments are growing rapidly, eating into the provincial financial resources available for development and posing a major challenge for the fledgling PTI government.

The expected provincial pension cost, according to actuarial valuations, is estimated to have spiked 4.6 times from Rs687.7 billion in 2010 to Rs3.2 trillion in 2015. Punjab Finance Minister Makhdum Hashim Jawan Bakht told a post-budget interaction with newspersons last week that the present actuarial value of the liability is estimated to be a whopping Rs5.5tr.

In line with growing pension liability, the annual provincial pension payments also rose from Rs25.5bn in 2010 to Rs172.9bn last fiscal year. The pension payments, budgeted in the present financial year, are estimated at Rs208bn or almost equal to the total provincial tax of Rs206.7bn collected last year and 87pc of the development budget of Rs238bn for the current fiscal.

Indeed, pension payments are the second largest non-development expenditure after the province’s salary bill.

‘Pension liabilities are growing at a much higher rate than provincial revenues and are increasingly restricting fiscal space available for development. The previous government has done nothing to manage this growing liability. We will,’ says Punjab’s finance minister

The annual pension payments size as a percentage of the provincial revenue expenditure has grown exponentially from 9.8pc to 16.9pc in eight years. Similarly, it has almost doubled as a percent of provincial revenue receipts from 6.8pc to 12.3pc.

According to budget documents, Punjab’s pension expenditure has surged by a hefty average rate of 24.9pc compared with an increase of 15.6pc in revenue expenditure and 14.6pc rise in revenue receipts between 2011 and 2018.

In 2015, Punjab had 465,000 pensioners against 951,500 in-service employees.

As per documents, the actuarial valuation in 2015 was done assuming that the annual provincial pensionable salary bill would increase by nine per cent and pension payments by eight per cent. But these assumptions no longer hold as in the last 14 years both the pensionable salary bill and pension expenditure has spiked by an average 12pc.

“…certain other policy changes, court decisions, employee behaviour and increasing life expectancy have contributed to rapid growth in pension liabilities in recent years,” says the government report on pension liabilities and contained in the White Paper for 2018/2019.

Factors responsible for the steep rise in pension expenditure and expected cost of the liability include increase in the rate of family pension from 50pc to 70pc of gross and net pension and upward revision in minimum pension from Rs2000 to Rs3000 per month from July 2010.

Additionally, a growing early retirement trend — a third of new retirees are aged below 60 years — in recent years, the policy of increasing net pension by 72pc at the time the first pension is calculated by treating ad hoc allowances as part of pensionable income at the time of retirement, and restoration of commutation of portion of gross pension.

Based on the benefits promised by the present pension scheme, the government estimates that it “needs to contribute 60.7pc of its pensionable salary bill in an investment fund in order to meet the future pension payments attributable to the services rendered by the (provincial government) employees during that year.”

The provincial government had set up a pension fund in the mid 2000s as part of pension reforms to manage its future pension payments. The value of the fund was estimated at Rs51.3bn at the end of the last year, which includes Rs26bn invested in it by the government and Rs25.3bn profits earned by it.

Realising the challenges posed by the rapidly increasing annual pension payments and long-term liability, the PTI government appears to have put the revamp of the pension system on its priority agenda.

“…The government plans to pursue a multidimensional strategy that will rationalise present pension benefits and systematically make investments for future pension payments,” the minister had told a group of journalists a couple of week before.

“The pension liabilities are growing at a much higher rate than provincial revenues and are increasingly restricting fiscal space available for development. The previous government has done nothing to manage this growing liability on the provincial finances. We will,” he said.

“A well funded pension scheme not only attracts new talent but also helps government stimulate growth in the province by investing in profitable and secure businesses, land and infrastructure projects in the province.”

Published in Dawn, The Business and Finance Weekly, October 22nd, 2018

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