The news item in this newspaper that the Government of Pakistan is seeking actuarial support on the matter of pension liability of the retired government employees and employees of government owned institutions prompted me to apprise the public at large about this important matter of public finance. I had been a caretaker finance minister of Sindh and dealt with this issue in depth in that capacity. As the former President of Institute of Chartered Accountants Pakistan (ICAP) it is my responsibility to place the facts before people.
Post-retirement benefit is an integral part of human resource management. My grandfather retired in 1963 and received pension until his death in 1985. The pension amount was reasonable for his modest living. This is the continuation of an excellent system introduced by the British colonial government in the sub-continent. Post-retirement benefits become even more relevant in Pakistan on account of lack of state provided facilities for education, health, mass transit and housing. In this respect we are a ‘failed nation’. I wonder about the knowledge and observation of some educated people who propagate abrogation of the state’s role in these important segments of public life. I am sure that they are not fully aware about the role of National Health Service (NHS) in the UK or Obamacare in the USA, the countries they generally admire. The Muslim philosopher Imam Jafer Sadiq had famously said that ‘any society where financial status is taken into account for entry in an educational institution, a hospital or a temple or mosque is not worth living. That should be destroyed.’
In Pakistan, two kinds of retirement benefits generally are prevalent. One is a contributory provident fund equal to one month salary and a pension for life for self and spouse equal to around 60 to 70 percent of last drawn salary. The pension is revised over time according to revision of scales of government servants. The system is working and should be continued at all cost. A very large number of lower and middle class people survive on government pension. State is responsible for them. They should be provided more than what is being provided. This is the payment from ‘BaitUl Mal’ as prescribed in Islam. The only difference is that language is not Arabic. There is no need for issuing any ‘fatwa’ on this matter; Every civilized society rests on the same.
The problem lies in accounting and funding. Governments everywhere, except a very few countries like New Zealand, operate on ‘cash’ accounting. Under this system pension of former employees is an ‘expense’ for the year. There is no accrual. This is not something exceptional in Pakistan. As per my knowledge almost all the countries including the USA and the UK also operate on cash basis and there is generally no concept of funding of pension liability. My son who did Masters in Actuarial Sciences informed me that pension liability is the most important economic subject of the UK government on account of ageing population. They have failed in looking for the solution. The primary question there is very unsentimental. Present working population paying taxes argue that their taxes cannot be used for the benefit of retired people. Their argument is valid and if we analyse deep down then we will see that this was the reason of collapse of the Greek economy. One of the main reasons of ‘Brexit’ is also this thought as the EU countries’ system is different from the UK. This is a philosophical question. The question is whether my tax should be used for payment for my father’s pension. The only real solution is early deaths in general. COVID-19 may be viewed as divine intervention towards a solution as ageing population had crippled many developed economies.
In Pakistan where there is and has been excess employment in government sector the problem is really acute. I know for a fact that in Pakistan Railways if pension payments are excluded from expenditure then results will be fundamentally different. This is almost true in many other cases.
It is a good step that government is having an actuarial valuation of the pension liability of the state. This amount will be huge. It is my prediction as an accountant after consulting an actuary that there is no way, at least in the following 20 years to even consider the possibility of funding of already accrued liability for retired employees.
In this respect it is important to identify the correct and modern practices in relation to pension payments. The simple logic behind the same is that either the employee or the employer or both should keep aside a sum during employment of that person for the payment of pensioner in other words it should be funded on an ongoing basis as a future liability. That amount can be determined using the science of probability, generally called actuarial practice.
Notwithstanding any other discussion on the subject it is my concerned opinion that Pakistan’s government will never be able to fund the past liability. There had been an attempt for the same in provincial governments and there is a World Bank programme for funding of pension. The amount is insignificant in relation to accrued actuarial liability. In this situation my suggestions for the government are:
Determine the actuarial liability to let the people of Pakistan understand the handicaps of government financing;
That in case of organizations like Railways, Post Office, Pak PWD, WAPDA, Armed Forces and others the amount for pension be separated from their operational years for the current year so that there is correct and appropriate determination of financial performance of those institutions. In the budget documents for 2019 some identification was made for armed forces. Same should be done for others; and
Lastly there should be an immediate reform of public sector employment that with effect from July 1, 2021 there will be no retirement benefit by way of pension unless that organization maintains a funded pension scheme. This law will be applicable only for those who are employed after July 1, 2021.
It is very discouraging to note that there is inordinate delay in the government’s financial reforms especially on the matter of this important issue. When governments of developed countries with over 20 percent tax to GDP ratios are worried about pension liability of their employees Pakistan with less than 10 percent ratio is highly complacent. The world thereafter is relevant however there has to be a provision for retired people in this world. I am aware of a proposal to enhance retirement age to 62 only for the reason that certain institutions do not have sufficient money for payment of commutation of pension which is the part of present package. Pakistan’s state needs serious financial re-engineering. At the moment it is not a ‘going concern’ in accounting terms. This status can be changed with planning for a better future. This is the job of planning not finance.
Copyright Business Recorder, 2021
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