How necessary are pension reforms?

Updated 20 Jul 2020

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About 63pc of all government retirees in Punjab last year were those who opted for early retirement.
About 63pc of all government retirees in Punjab last year were those who opted for early retirement.

IT is too early to predict the final outcome but the recent move by the PTI government to reform the pay and pension regime has further unnerved the already alienated civil servants.

Flustered by the unpredictability of the current set of rulers as the economic situation toughens, some are contemplating to quit while others are evaluating the option of early retirement to secure the promised emoluments before they are lost to abrupt changes in relevant rules.

The head of the government-instituted Pay and Pension Commission, former finance secretary Wajid Rana, and a vocal proponent of civil service reforms, former central bank governor Dr Ishrat Husain, attributed the resentment in the bureaucratic ranks to the confusion propelled by naive or devious elements.

They sounded confident about the direction of the policy reforms. On the issue of pensions, they argue that people are confusing the changes introduced in April in the Directory Retirement Rules with the discussion on the general pension regime.

Civil servants are increasingly seeking early voluntary retirement. About 63pc of all government retirees in Punjab last year were those who opted for early retirement

The changes in the Directory Retirement Rules mandated a performance audit of all civil servants after completion of 20 years of service to ease out tainted record holders. The exercise has already started with 565 officers of Grades 20-22 from three services currently under scrutiny. The scrutiny will be extended to cover federal government employees of all services and ranks.

Mr Rana dismissed speculations on the retirement age, capping the budget for settlements or unilateral withdrawal of benefits such as leave encashment. “The Pay and Pension Commission has yet to complete its deliberations on various issues of terms of reference (TOR) and submit its report to the government,” he emailed his brief response to Dawn after a detailed discussion on the phone.

“The ruckus on the issue of pensions of civil servants is baseless. No one is out to deprive the government retirees of their pensions and other benefits. It is a fact that unfunded pension liabilities are ballooning and will become financially untenable if not contained. In a limited budget, it is already crowding out development. It is, therefore, both logical and desirable for the government to learn from the experiences of other nations and replace the current archaic pay-as-you-go regime with a modern defined contribution pension scheme,” Dr Husain said over the phone.

Talking to Dawn, sources in the federal and provincial finance ministries disclosed that the pension bill at all tiers of government is already equivalent to the wage bill. With new pensioners joining the ranks at a pace many times faster than that of people exiting the pension rolls, it is expected to rise vertically in the years ahead. On average, a person who served in government for 25 years or more draws a pension until they turn 80. After their death, there are at least 13 heirs who can claim family pension, including wife, unmarried daughter, underage children, widowed daughter, divorcee daughter, handicapped child, etc.

The pension bill of the officers of Grades 19-22 is about 25-30 per cent of the total. Currently, there are 27,000 officers against 0.6 million lower-grade federal government employees.

Sharing further details, they said pension liabilities of the defence services are almost triple the size of the pension bill of civil servants because of a variance in retirement rules and the qualifying age of retirement. According to 2020-21 budget documents, the defence pension bill is Rs325 billion against Rs111bn for the civilian side.

Pointing out certain anomalies, people associated with the pension reform process said there were cases in which the pension exceeded an employee’s last drawn salary. Technically, the pension ought to be 70pc of the last drawn basic salary at the time of retirement. But after including the raise gran­ted by successive governments for years before a person retires, it turns out to be 122-140pc of their last drawn basic salary.

Whatever the impression, the government has actually been benevolent towards pensioners. The pay-pension premium of government service vis-a-vis private employment in Pakistan was a whopping 49pc in 2014 against minus-4pc in the United States. It means government employees earn on average about 49pc more than their counterparts in the private sector whereas private-sector employees in the United States earn 4pc more than public servants.

The logical outcome is that civil servants increasingly seek early voluntary retirement. While sources in the federal capital were tight-lipped, the hierarchy in Sindh and Punjab confirmed to Dawn that the trend has picked up pace over the past five years. Of all government retirees in Punjab in 2019, 63pc were those who opted for early retirement. In Sindh, early retirees made up 35pc of the total. One reason is said to be the fear of greater performance scrutiny. But the biggest motivator is the perceived uncertainty about the pension regime.

The pension bill in Pakistan is big but its impression of being overblown is said to be misplaced. The government here might be too controlling but the share of government jobs in the workforce was 7.5pc in 2014, according to the World Bank, against 15pc in China, 21pc in the United Kingdom and 35pc in the United States. The pay and pension bills as a percentage of GDP are also less than those in most countries, a source said.

“I am an insider. I know how the government works. I see nothing changing in the foreseeable future also because it involves making demands on the untouchables. How can the armed forces be left out when we know their pension bill is way more and multiplying faster?

“Besides, the nexus of patronage and corruption is too deeply entrenched to be dislodged by a donor-inspired exercise. How can a retired civil servant or senior servant about to retire be expected to overhaul a system that has served him well?” a cynic commented.

Published in Dawn, The Business and Finance Weekly, July 20th, 2020