The pension emergency

Despite the Supreme Court’s recent decision to give relief to the National Bank pensioners, their fate remains unclear, as they await the review petition to be heard. The decision is expected to cost Rs47+ billion to the bank, eating away 30-40% of its equity. The issue pertains to original terms offered to the pensioners in 1977 by the federal government, which were subsequently changed in 1999 through a unilateral move by the bank. What is ironic is that most of these decisions costing billions were made without any actuarial evaluation or forecasting and much of these liabilities were unfunded.

What’s happening with the bank’s pensioners is just the tip of the iceberg. The pace at which the government’s own pension liabilities have been ballooning, may lead to many such unilateral changes in the government’s pension terms and conditions and consequent litigation that may go on for years.

In the last nine years, the federal government’s pension expenditure has grown five times from Rs50 billion in 2008-09 to Rs248 billion in 2017-18. During the same period, the size of the budget grew from Rs2 trillion to Rs5.1 trillion. This means that while the size of the budget grew by 11% per annum during the last nine years, the pension payments grew by 20%, making pension expenditure 5% of the total budget (as compared to 2.5% in 2008). If this trend continues at the same pace, the pension expenditure by 2050 would account for 56% of the overall federal budget. This of course is not possible and hence the next few years are likely to witness some drastic and controversial decisions in this respect.

Even more alarmingly, these figures only pertain to the federal government. Provincial liabilities are over and above these. Punjab undertook the actuarial assessment of its liabilities in 2015 and estimated its unfunded accrued pension liability at Rs3.8 trillion. Moreover, in the next 30 years, Punjab’s annual pension payment of Rs107 billion would swell to Rs2.2 trillion per year claiming 25% of the provincial expenditure. It is therefore important to take immediate notice of this pension emergency or else, this exponentially increasing liability would soon become unsustainable.

So what is causing this rapid increase? Unfunded pension liabilities and absence of any contribution by pensioners remain the biggest reasons behind this phenomenon, with annual budgetary provisions picking the pension bill. The increasing average life expectancy of population also has a role to play, which rose from merely 61 years in 1993 to 66+ in 2015. Furthermore, a continuous increase in size of the government and increased number of retirees keep on adding to this burgeoning liability. Over the years, government gave multiple increases in pension to adjust for inflationary pressure however, these increments were given without any prescribed policy and were mostly ad hoc without any indexation for pension scales.

Lastly, comes the issue of ghost or unverified pensioners. A few years ago, a senior National Bank executive revealed that there might be as many as 600,000 ghost pensioners only on the federal government’s pension roll. While Punjab has been using a digital system for pension payments, other provinces are still using manual systems and there the number of ghost pensioners may be more.

The government of K-P, realising the magnitude of this issue, has recently embarked on digitising its pensioner records and other related reforms, aiming to reduce the number of pensioners by about 30,000. Similarly, Punjab also formed the Punjab Pension Fund a few years ago to fund its pension liabilities, but the province’s accrued pension liabilities remain 108 times the size of the fund.

Such measures at best are only likely to provide temporary relief and not a sustainable solution. It is high time that the government realised this impending pension emergency and took a more structured approach to address it.

Published in The Express Tribune, April 3^rd, 2018.

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