The assets of the Punjab Pension Fund (PPF) are estimated to grow to Rs84.7 billion at the end of the present fiscal year of 2020-21. The government, according to the provincial budget documents, has contributed Rs38.1bn into the fund in 13 years while the remaining Rs46.6bn has been earned through its investments.

The budget documents show the fund has earned a ‘reasonable’ real rate of return of 4.26 per cent per annum since its inception in 2008-09, illustrating the success of its investment strategy. “The investment strategy followed (by the PPF) over the years has worked well. The Pension Fund continues to earn an attractive real rate of return because of its high yielding portfolio of federal government debt like Pakistan Investment Bonds, Term Finance Certificates and National Saving Schemes. The fund’s equity portfolio has also posted a healthy return of 28.8pc during the outgoing financial year,” the documents say.

Between 2011 and 2019, government employee salaries have increased by a compound annual growth rate of 13.2pc and pensions by 11.5pc compared to 6.2pc growth in inflation

The Punjab Pension Fund was created to invest funds set aside by the provincial government for meeting its future pension liability. Its funding ratio (market value of assets/present value of accrued pension liabilities) is estimated at 1.3pc at the end of the fiscal year 2021.

“The funding ratio is extremely low. A combination of higher pension contributions into the pension fund and rationalisation of pension benefits is necessary to increase the funding ratio. For this, a concerted effort is being made in collaboration with the federal government and other federating units,” the budget documents say.

The history of government contributions into the fund shows that the capitalisation of the fund by the government has been quite erratic and fluctuated between nothing to a little above Rs5bn a year barring 2009-10 — the second year of its creation — when the government had invested Rs9bn into it. The PTI government in the province has invested Rs10.3bn in the first two years of its rule between 2018 and 2020.

The Punjab government has a Defined-Benefit Pension Scheme for its permanent employees, which is being managed on a ‘pay-as-you-go’ basis, that is, pension payment during a financial year is made out of that year’s revenues regardless of the time of accrual of the liability.

Pension is the second largest expense of the provincial government and has been growing at a very high rate in recent years. The provincial pension expense has grown at a compound annual growth rate (CAGR) of 23pc from Rs36.4bn in 2010-11 to Rs250.7bn in the outgoing fiscal. In comparison, the provincial revenues have increased at a CAGR of just 11pc. Consequently, the pension expense to revenue has increased from 6.75pc in 2010-11 to 16.25pc in 2019-20 with the pension liability becoming a major source of fiscal risk for the government.

In other words, the pension bill rose from 9.8pc of the provincial current expenditure in 2013-14 to 16.7pc in 2020-21. This is despite the fact that the overall current expenditure of the government has gone up by 16.2pc, slightly slower than its pension liabilities. The pension was 6.7pc of the province’s revenue receipts in 2010-11 and 14pc in 2018-19.

“Considering the sharply increasing burden of pension expenditure, the government is considering various options for reforming the pension scheme,” according to the budget 2021-22. The government had in July 2020 changed the minimum voluntary retirement age (MVRA) and pension rules for the provincial government employees to save a cumulative pension expenditure of Rs59.1bn over a three-year period spanning over July 2020 and June 2023. After the changes, the minimum voluntary retirement age has been increased to 55 years or 25 years of service, whichever is later.

The government fears that if its pension expenditure continues to grow in this fashion it will constrain fiscal space for other current and development expenditure in future. Between 2011 and 2019, the salaries of the government employees have increased by a compound annual growth rate of 13.2pc and pensions by 11.5pc compared to 6.2pc growth in inflation. “An annual increase in salary and pension without regard to inflation may lead to unmanageable pension expenditure and liabilities. Potential reforms to the pension scheme should include a policy to ensure that annual increase in pension should not be higher than the annual inflation rate,” the documents argue.

Published in Dawn, The Business and Finance Weekly, June 28th, 2021