The cost of Pakistan’s public sector pensions is borne entirely by the government and has witnessed a significant rise in total terms though not in percentage terms and, unlike salary raises, has been, on average, less than the rise in the rate of inflation in recent years.
The budget for 2021-22 allocated 480 billion rupees for pensions - 6.3 percent of the total budgeted current expenditure of 7523 billion rupees; but with revised estimates projecting current expenditure at 8694 billion rupees, pension outlay as a percentage of current expenditure declined to 5.5 percent. The percentage decline in pensions brings little comfort to the treasury as an unprecedented rise in current expenditure has done much damage to domestic economy through: (i) placing the onus of meeting the rise in expenditure on existing tax payers and given nearly 70 percent reliance on indirect taxes whose incidence on the poor is greater relative to the rich it is little wonder that more people are being pushed into poverty; and (ii) rise in borrowing – domestic and external which raises the debt servicing costs each year constricting the ability to slash current expenditure.
Sadly, neither the Khan administration nor the incumbent government policies reflect any out of the box thinking in either implementing pension reforms or slashing current expenditure. Imran Khan during his three year and eight months in power raised current expenditure from 4.3 trillion rupees in 2017-18 to over 7.5 trillion rupees (budgeted) for the outgoing year – a rise of 74 percent while the budget 2022-23 document continues this economically untenable trend projecting total current expenditure as noted above at 8.69 trillion rupees.
The then Finance Minister, Miftah Ismail, in his budget 2022-23 speech on 10 June earmarked 530 billion rupees for pensions for the current year accounting for around 6 percent of GDP. And finding this amount has become ever more challenging given the unsustainable budget deficits for the past three years – a situation likely to be exacerbated by the devastating floods that have inundated one-third of the entire country with more than 30 million classified as flood victims requiring assistance.
To counter this massive unresolved problem, Ismail set up a mere 5 billion-rupee pension fund – seed money dismissed as a sick joke by all those deeply concerned with the growing unsustainability of our pension system; and bafflingly given a host of studies on how to resolve the pension issue that are gathering dust in the relevant ministries, this administration, like its predecessors, appears to be ignoring this particular ticking time bomb. His successor Ishaq Dar is unlikely to support this fund, albeit a very small one, given his past record of attaching even dedicated funds for general expenditure.
In 2016-17, total budgeted pension outlay was 245 billion rupees with current expenditure budgeted at 3843.9 billion rupees which, in percentage terms, was around 6.3 percent, about the same as in 2021-22.
Shehbaz Sharif during his maiden speech as the Prime Minister announced a 10 percent rise in pensions effective 1 April, to ensure that the purchasing power of pensioners is adequate to buy essentials. This was first deferred to the start of next fiscal year, 1 July, while the federal budget downgraded the rise in pensions to 5 percent, a trend followed by Punjab and Sindh, while raising salaries by 15 percent, with more positive political implications but ignoring the fact that that pensions have a lower inflationary impact relative to salary raises. Given the Consumer Price Index of 23.2 percent for September, core inflation of 14.4 percent and Sensitive Price Index for the week ending 29 September of a whopping 30.26 percent year on year increase implies a significant decline in the quality of life of the pensioners if that is their only source of income.
Pensions of civilian and military officials are entirely tax funded and account for no more than around 8 to 9 percent of those who have reached pensionable age in the country. In an article in Pakistan Development Review titled The Pension Bomb and its Possible Solutions (2020) Mahmmood Khalid, Ahmood Khalid, Brig Naseem Faraz (Retd) wrote: “Pakistan practices a legacy pension system where pensioners are paid directly from the revenues as part of the current expenditures. This practice is inherently unsustainable as pension expenditure, growing at around 25 percent, cannot be provided from an economy growing at a significantly lower rate. The pension burden is therefore bound to grow, doubling every four years.”
Equally disconcertingly the authors pointed out that over time pensions are rising as the population ages, which increases medical expenditures, and by forcing inflation indexing to a point pensions may overtake the budgeted outlay on Public Sector Development Programme (PSDP). In the outgoing fiscal year PSDP was slashed to 600 billion rupees, pensions were at 493 billion rupees accounting for 82.1 percent of PSDP outlay (against 80 percent budgeted for the year by the Khan administration). And even more disconcerting is the article’s projection that unless reforms are urgently undertaken the pension budget may well rise to 56 percent of total current expenditure.
As far back as in 2003, Pension Review Working Group recommended a Funded Pension Scheme with the Defined Benefit part to be funded by the state and Defined Contributions by the employees. The Musharraf government did not approve the recommendations due to political as opposed to sound economic considerations. The looming pension threat to the economy was also raised during the tenure of the PPP-led (2008-13) and the PML-N (2013-18) administrations but ignored.
During the Khan tenure, the problem was highlighted and in August 2020 Hafeez Sheikh, Imran Khan’s second finance minister, requested technical input from the World Bank on pension reforms which were then being prepared by Nargis Sethi, Chairperson of the Pay and Pension Commission. Sheikh’s successor Tarin also reportedly directed Sethi to reform pays and pension system over a specified period of time after she apprised him of challenges pertaining to harmonization of pensions. No further progress on this has been reported since.
In a study titled “Reforms of Pensions: Lessons from successful examples in Pakistan and Beyond” commissioned by the Foreign Commonwealth and Development Office’s Sustainable Energy and Economic Development (SEED) Programme in collaboration with Sustainable Development Policy Institute it was noted that all the four provinces had set up pension funds with an allocation from the provincial governments as follows: Khyber Pukhtoonkhwa in 1997-98 (150 million rupees), Sindh in 2003 (1.2 billion rupees), Balochistan allocated 2 billion rupees in 2021-22 (with 17 billion rupee total investment in the fund) and Punjab in 2007 (49.3 billion rupees in 2016-17 to 82.7 in 2020-21).
Sindh has now outsourced the fund management functions to an insurance company with relevant expertise, KPK continues to hold the chief secretary responsible for the fund, Balochistan is seeking technical assistance to expand the fund size while Punjab Fund is managed by a General Manager who must legally have “at least 12 years of experience of management, including at least three years’ experience of investment banking, treasury operations, finance, asset management, fund management or unit trust management and holds a sixteen years equivalent or higher degree.”
The study’s main finding was that “pension funds management should include professionals with relevant experience in investment banking, public finance, risk management, labor economics, among other knowledge domains. Moreover, the management team should also have relevant private sector experience and significant autonomy in decision-making, without excessive interference from the government. The Canadian pension funds are a good example, which have in-house management and human resources, keeping advisory costs low, and focusing on diversified investment opportunities, while the fund plays an involved role as asset owner.” Sounds like a good plan however if one looks at the collapse of the European pension funds, attributed to near zero interest rates for a decade, it is safe to conclude that however wily a fund manager maybe there are some factors that are beyond his/her control.
To conclude, changes in the pension system that would allow for employee contribution is going to be resisted by the existing employees, however without such unpopular reforms Pakistani administrations would be forced to allocate an increasing amount for pensions that would soon become even more financially unsustainable than at present.
Bold reforms that would make the government extremely unpopular with the bureaucracy, which the incumbent government claims it is doing in any case, are the need of the hour.
Copyright Business Recorder, 2022
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