Govt to save Rs1.7tr through pension reduction

Finance ministry estimates pension budget will go down from Rs4.8tr to Rs3.1tr in 10 years

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ISLAMABAD:

The government's decision to reduce pension benefits of retired civil servants and armed forces personnel is projected to slash the bill by Rs1.7 trillion over the next decade – a sum that is equal to the cost of building a new rail track from Peshawar to Karachi.

The Ministry of Finance has estimated that the reduction in pension benefits will reduce the pension budget from the projected Rs4.8 trillion to Rs3.1 trillion in 10 years. The reduction is Rs1.7 trillion, or 36%. On average, the pension bill will fall Rs170 billion per annum.

In the first year, the positive fiscal impact is estimated at Rs83 billion, which in fiscal year 2034-35 is projected to increase to Rs1.7 trillion.

There has been a sharp rise in pension budget in the last decade due to an increase in the number of people retiring. Another major reason for the increase was the commutation of pension, as retired employees have the right to take seven and a half years of pension in advance at the rate of 35% of the pension.

The Ministry of Finance this week issued three separate notifications to discontinue multiple pensions, reducing the first take-home pension and lowering the base for determining the future increase.

It also ended the annual compounding of pension and any increase would be treated separately from the base pension, in a concept that is similar to the ad hoc salary increase that is not made part of the basic salary to avoid compounding.

For the current fiscal year, the total pension budget is Rs1.04 trillion, of which Rs169 billion is meant for paying commutations to the retired people. The 35% commutation has been protected. In fiscal year 2014, the pension budget was Rs204 billion, which increased 404% in the past decade to over Rs1 trillion this year.

Instead of taking pension on the basis of last drawn salary, the new pensioner will now get pension based on average salary of the last two years. Two pensions by one person have been discontinued.

The changes have taken effect from January 1 and are applicable to both retired civil and military personnel. Many serving federal government employees, who are taking salary and pension, will also be affected by the changes. But the people getting one pension from the budget and one outside of the budget – like the Employees Old-Age Benefits Institution (EOBI) or World Bank pensioners – will still be getting both the benefits.

For the current fiscal year, the government has allocated Rs1.04 trillion in the budget for paying pensions, of which Rs662 billion has been allocated for military personnel. There is an increase of 24% in the pension bill compared to last year.

The finance ministry said that on average there was a 16% increase in pension budget in the past one decade. At this ratio, the bill would have grown to Rs4.8 trillion by the year 2035. Now, after the reduction in benefits, the bill is projected to decrease 36% in the next 10 years.

After debt servicing, defence and development, the pension is the fourth largest expenditure in the budget. Without cutting the benefits, the government would have needed Rs10 trillion in assets to earn enough money to fund the pensioners. In the revised scenario, the value of assets needed is estimated at Rs7 trillion by the actuaries, according to the finance ministry.

The government has not reduced those benefits that are legally protected and made changes in a manner that can withstand any scrutiny by courts and at the same time arrest the growing trajectory, said a senior finance ministry official. Now, pensions will be calculated on the basis of the average pensionable emoluments drawn during the last 24 months of service prior to retirement. The new instructions are applicable to the people retiring from January 1.

Earlier, the pension was decided based on the last drawn salary. This one change will result in savings of Rs16 billion in the next fiscal year.

The gross pension of the new pensioner has been reduced by 2% because of the changing methods to determine the first pension, officials said.

It has also been decided that the annual increase in pension will be given on the basis of 80% of the last two years' average inflation rate but based on a new calculation formula that excludes commutation and any new increase in pension.

The government has already notified the abolition of unlimited pension benefits for the families of deceased employees and limited those till 10 years after the death in case of an ordinary family pension. In case of special family pensions, the benefits will be available for 25 years.