Can the Punjab’s scheme for setting up an independent pension fund and injecting into it Rs100 billion by 2016 through annual budgetary allocations for building up a resource base large enough to earn returns sufficient for pension payouts?. Can the province reduce fiscal squeeze on account of growing pension costs, create room for priority development expenditure and develop financially viable pension system that provides adequate retirement incomes?

Some are doubtful of the sustainability of the scheme – unless the government decides to raise the capital it proposes to inject in the fund to Rs250-300 billion. These doubts were voiced at a workshop organised last week by the Punjab Resource Management Programme (PRMP), which has been overseeing financial and governance reforms since 2003, in the third week of this month.

The workshop’s objective was to share the ongoing pension system reforms with the stakeholders and to discuss proposals to generate ideas and establish concerns for finalising future interventions.. It was part of a marathon three-day series of workshops organised to facilitate a Fact Finding Mission from the Asian Development Bank (ADB)-- here since mid-July--- to consult stakeholders, and to assess the impact of the financial and governance restructuring in Punjab under its $400 million programme during the last four years and develop second phase of reforms..

The province expects to obtain a low-cost financial assistance in the range of $700-1,000 million from the ADB spread over a period of three to five years to undertake second phase of fiscal and governance reforms. The exact amount of the loan is yet to be firmed up in accordance with the province’s needs for foreign funds, say the officials. .

The four areas that the government proposes to focus on during the next phase of reforms include massive restructuring of the public pension system, reform of provincial and district civil services, removal of irritants in the private sector’s growth and development of a medium-term expenditure framework (MTEF).

Restructuring of the public pension system, is just one part of the wide-ranging financial reforms being implemented for the last four years. It, however, is considered the ‘most crucial’ of the financial reforms because the ever- growing size of the pension payouts has the potential to quickly eat into the fiscal space created for priority development spending through reduction in expensive federal debt and improvements in the provincial fiscal system.

Punjab’s existing pension system, like elsewhere in the country, is fraught with issues such as, the absence of reliable documentation and data on the existing and the future pensioners and the total extent of liability, presence of ghost pensioners, and exclusion of genuine pensioners.

Pension obligations are non-contributory and the system covers around 800,000 government employees and an estimated 200,000 pensioners. The pension liabilities are paid from the province’s current revenue account because there is no funding of these payments and there are no investments to pay for them.

According to an initial estimate presented at the workshop, the Punjab government’s pension liability stood at around Rs190 billion as of June 30, 2007.

The pension obligations of the government remain a burden on its revenues and continue to squeeze fiscal space for infrastructure and social sector.

Hence the provincial government got the pension fund law passed from the legislature in March this year. The new law paves the way for the government to set up an independent pension fund to generate revenues to meet its pension liabilities outside the provincial budget.

The provincial government plans to capitalise the pension fund to the tune of Rs100 billion by 2016 so that it earns returns sufficient to pay out the pension liabilities. By the end of last fiscal year, the government had set aside Rs12 billion.

Once the fund is fully capitalised and made operational, the provincial finance managers hope that ‘it will be able to make pension an off-budget item..

But Nauman A. Cheema, an actuary by profession, feels that the establishment of an independent pension fund with a resource base of Rs100 billion and making an average 10 per cent returns per annum cannot foot the government’s pension bill.

“It is being assumed that the Rs100 billion pension fund will generate an average annual return of about 10 per cent or Rs10 billion by 2016, which should be sufficient for the pension payouts after 2016. It is a big assumption,” Cheema pointed out in his presentation on the” Issues in evaluating and managing the Punjab government’s pension liability.”

He pointed out that the approximate cash outflows in case of existing pensioners are expected to grow to Rs14.2 billion by 2017. If the increase in the cash outgrows, he maintains, owing to the active employees,( who are also added to those on account of existing pensioners) the total cash flow is projected to grow to Rs30.8 billion by 2017.

His analysis is based on the assumptions that the current strength of active employees in Punjab is about 800,000, the average pensionable salary increase is eight per cent and the rate of pension indexation is four per cent.

This simply means that the pension fund would be making even less than one-third of the amount needed by the provincial government for meeting its pension obligations in 2017 what to talk of the following years.

The returns to be generated from the Rs100 billion pension fund, Cheema said, will not be sufficient to pay out reduced liabilities if the assumptions are changed and the pensionable salary increases by five per cent rather than eight per cent and pension indexation rate is nil instead of four per cent.

Cheema warned that the capital will be eaten up quickly in case the government maintains the current target of Rs100 billion and the funding target is not raised to Rs250-300 billion. Hence, he said, it is difficult to imagine pension expense as an off-budget item owing to continuously increasing cost.