A bold move away from unfunded pension model that jeopardises pensioners’ financial security and is a drain on the official kitty.
By Staff Reporter
ISLAMABAD: Khyber-Pakhtunkhwa (KP) has become the first Pakistani federating unit to undertake much-needed pension reforms and establish a Contributory Pension Fund (CPF) for new entrants into civil service come new fiscal year.
The last remaining political stronghold of Imran Khan’s Pakistan Tehreek-e-Insaf (PTI), the province has pushed through the necessary legislation for the institution Contributory Pension, KP’s Finance Minister Taimur Jhagra told Independent Pakistan.
Contributions to the fund – from employees as well as from the government – will start flowing with the onset of the new fiscal year.
“We hope that this Fund will have the contributions of more than PKR 100 billion”, said Jhagra. “It will be in a position to work on the pattern of other funds in line with the international best practice”.
To mitigate the increasing burden of pensions on the provincial kitty, a comprehensive pension reforms strategy has been adopted by the Provincial Cabinet, as part of which a series of legislative amendments have been passed by the Provincial Assembly.
The strategy envisages a series of short- and long-term measures to tackle the problem. One of these has been an increase in the minimum age of voluntary retirement age to 55 years, which has resulted in estimated annual savings of PKR 12 billion.
The Provincial Assembly has approved the Khyber Pakhtunkhwa Civil Servants Pension Rules 2021 to rationalise pension benefits to direct dependents and parents, while also limiting the eligibility of each beneficiary to a single pension, whether self-earned or accrued from a family member. In addition, serving employees will no longer be eligible to draw family pensions.
All these amendments are aimed at reducing the province’s pension burden by eliminating receipt of multiple pensions by individuals. These changes in the family pension rules and restrictions on the dual pensioners will save the government an estimated PKR 12 billion in the coming 10 years.
To support widows and dependents, family pension of a civil servant has been increased from 75 percent to 100 percent of the deceased pensioner’s pension.
Furthermore, the Provincial Assembly has passed an amendment to the Khyber Pakhtunkhwa Civil Servants Act which requires new employees to participate in contributory provident fund.
This initiative ensures the sustainability of retirement benefits for current employees, as well as future recruits. The current approach of utilising the pension fund for pension payments is futile as presently the pensions grow at around 22 percent which is more than double the rate of pension fund growth at 10 percent.
Consequently, the government decided to utilize the pension fund’s annual profits for paying a portion of the yearly pension bill.
Pension is one of the major expenditures for the provincial government, making up around a quarter of the wage bill. Transition towards a contributory provident fund for new recruits is therefore a major step towards ensuring the sustainability of pensionary benefits.
This is a critical step in managing the annual pension liability, which has ballooned to 15 percent of the annual budget based on actual expenditure. Reforms like this should have been undertaken 15 years ago, when such an attempt was aborted.
Unfunded pension systems are relics of the past, and can no longer be sustained. Exhibit A of the unsustainability of the existing system would be how the financial security of Pakistan Railways’ retirees has been jeopardised by the unfunded nature of its pension scheme.
Today, around 150,000 Pakistan Railways pensioners from across the country, from grade 1 to 21, are unable to receive their pensions or GP funds because their pensions were never funded.
The Government of Khyber Pakhtunkhwa has developed a framework in collaboration with the Securities & Exchange Commission of Pakistan (SECP) for the rollout of a contributory provident fund for all new government employees. Participants will contribute 10 percent of basic pay towards their provident fund for the duration of their qualifying service.
This will be matched by 15 percent by the employer – in this case, the government – resulting in a total contribution of 25 percent of basic salary.
The new contributory pension model will have all the features prevalent in international pension systems in developed countries, as well as being tailored to local norms and requirements. Shariah-compliant fund options will be made available to all recruits alongside the conventional fund options.
The participant will have the flexibility of adapting the fund investment allocations based on their individual risk profile, similar to the prevailing pension models worldwide. Upon retirement, participants will be able to choose between receiving the entire benefit as a lump sum payment or allocating some or all of the retirement benefit in a long-term annuity ranging in duration from 20 years to the remaining life of the retiree.
Move to the contributory pension model is one of the major steps towards ensuring the sustainability of pensionary benefits.
The Khyber Pakhtunkhwa province has 700,000 employees with unfunded pensions which is a looming crisis as pension liabilities have reached an unsustainable size and are projected to begin eating into the development budget in the next 3-5 years.
This may lead to the Annual Development Programme being curtailed in order to pay pensioners, eventually threatening the very solvency of the provincial government.
In order to avoid such a scenario, the KP government is transitioning towards contributory pension. This has two advantages: One, it will protect pension for generations to come; and two, it will make regularisation easier.
A worrying trend for the Government of Khyber Pakhtunkhwa as for all governments in Pakistan, is the unsustainable increase in current expenditure, specifically driven by wages and pensions. The growth in salary and pensions is at a pace that is higher than the increase of overall funds available for expenditure.
All future employments recruited after the passage of the Khyber Pakhtunkhwa Civil Servants (Amendment) Act 2022 are required to participate in contributory provident fund.
The pension expense for FY 22-23 is estimated to be PKR 107 billion, including PKR 1 billion for NMAs, with the number of pensioners increasing to around 177,693. Overall, Khyber Pakhtunkhwa has a 4:1 proportion between current employees and retirees.
The wage bill is projected to grow at 16.6 percent in actual terms in 2021-22, while the forecast growth rate for 2022-23 is 24.6 percent. With this trend continuing, salaries and pensions will surpass all provincial receipts in 2027.
Copyright © 2021 Independent Pakistan | All rights reserved
