Addressing the pension liability

Last week I wrote an article about ballooning pension liabilities of the government and estimated that if both the federal budget and pension expenditure keep on growing at the current rate, by 2050 the pensions would claim 56% of the federal budget, leaving hardly any money for defence, development and other heads. It is, however, important to explore how this crisis can be averted.

First and foremost, it is critical to accurately ascertain the government’s accrued pension liabilities. The way to do this is to commission actuarial assessment of these liabilities. Punjab is the only province that has done this and its unfunded accrued pension liability stood at Rs3.8 trillion in 2015. It spent Rs112 billion on pensions in 2015-16, which puts its accrued liabilities at 34 times its annual pension expenditure. If that is taken as a rough indicator and considering that the federal government and the four provinces together have budgeted for Rs565 billion in 2017-18 for pension payments, the overall accrued pension liability of the federal and provincial governments can be as much as Rs19 trillion. There is, however, a need to immediately commission actuarial assessment studies, something that the government has long shied away from, to assess and forecast these liabilities accurately.

The second and even more important step is to freeze these liabilities at their current level and change the structure of future pension schemes for all new government entrants. How should this new scheme be structured?

The existing structure being a defined-benefit plan, calculates pension by a set formula based on final salary and length of service. Moreover, it is non-contributory, ie, without any contribution or deduction from salary and pay-as-you-go (funded by budget). The new pension scheme should be based on partial contribution by employees, through deduction from salaries during their employment years, similar to the current provident fund structure. The government should invest any remaining amount every year to keep the scheme fully funded. Ideally, this arrangement should be bound by legislation so that the government cannot siphon off these funds for other purposes. These funds should then be invested across a range of assets through a well-managed pension fund from which monthly payments could be drawn for future pension.

Besides being fully funded, the structure of the new pension scheme should be changed from ‘defined benefit’ to a ‘defined contribution plan’, under which a fixed sum is invested and then becomes available at retirement age. Furthermore, the existing rules allowing family pension at 50% of the gross pension for the pensioner’s widow and then in case of widow’s death for the sons until the age of 21 years or the eldest unmarried daughter till her marriage or death need to be looked at objectively. These provisions could continue the pension liabilities for a person, for up to 70-80 years after his retirement.

Thirdly, the government should put an immediate stop to ghost pensioners and leakages by making use of relevant technology. It is estimated that 90% of existing pensioners of the federal and provincial governments receive their pensions through a manual pension payment order system, while the rest of 10% through a computerised Direct Credit System (DCS). There is a need to extend DCS for all pensioners, immediately validate and update credentials of all pensioners through collaboration with NADRA records and use biometric devices for proof-of-life verification.

There is a need to formulate a well thought-out , articulating future direction on issues of pension structure simplification, pension management and sustainability, equitable pension structure and indexation for pension increase. Without a timely action, the fiscal burden of pension payments, owing to rising average age and increasing government size, will soon become unbearable.

Published in The Express Tribune, April 10^th, 2018.

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