Money Matters

Getting old

Money Matters
By Mehtab Haider.
Mon, 08, 20

The pay and pension bill is going to haunt Pakistan’s economic managers in years to come, as it is becoming another monster just like circular debt. Some top officials in the Finance Ministry even predict that the pay and pension conditions may be part of the next IMF programme, because the number of public sector employees is increasing, while the number of retiring employees will soon exceed the pension bill. So any proposal to reduce the retiring age will invite that monster earlier than expected.

The pay and pension bill is going to haunt Pakistan’s economic managers in years to come, as it is becoming another monster just like circular debt. Some top officials in the Finance Ministry even predict that the pay and pension conditions may be part of the next IMF programme, because the number of public sector employees is increasing, while the number of retiring employees will soon exceed the pension bill. So any proposal to reduce the retiring age will invite that monster earlier than expected.

The lack of good governance in public sector has become a major problem for Pakistan, despite considerable debates on undertaking civil service reforms; however, no proper actions are taken to move towards the desired objectives.

The Pay and Pension Commission failed to deliver on its assigned task, because its head Abdul Wajid Rana had resigned on lack of clarity regarding the domain of the task between the commission and Institutional Reforms led by Dr Ishrat Hussain. Personal reasons were cited for tendering the resignation, but insiders claimed that the commission was not comfortable in the presence of Institutional Reforms because of duplication of work done by both for achieving the same objectives.

The Pay and Pension Commission was constituted in April 2020. When its head and another member resigned citing personal reasons, insiders believed that they preferred to resign because of lack of clarity despite the Pay and Pension Commission possessed Terms of Reference (ToRs) in writings.

There is no other solution but to reduce the size of the public sector. The government has abolished over 73,000 posts recently that were vacant for a year.

The pension bill is estimated to consume Rs470 billion. A major chunk of it goes to military pension and if the provincial pension bill is accounted then it consumes at least Rs1,000 billion in a year.

The government has been left with no other option but to introduce a contributory pension system. The Pay and Pension Commission was supposed to finalise its report in six months till October 2020. However, when its head resigned, the process was delayed and the government is now in the midst of replacing Rana with a suitable candidate to fulfil this gigantic and important task.

The Planning Commission had approved the Concept Clearance Paper for seeking $75 million loan from the World Bank.

Civil pension expenditure has risen exponentially during the last three decades, which poses a challenge for the government that needs to be addressed.

Other governments facing similar situations have established various pension systems like Defined Contribution Scheme (DCS), thereby, enabling the investments of pension contributions in funds operated under state laws and regulations to cater for future needs.

To analyse the prevailing situation in Pakistan, World Bank had extended technical assistance. The World Bank’s report submitted in December 2019 inter alia recommended an option of Defined Contribution Scheme. The report and in house deliberations provide a starting point.

To proceed into the matter, the Finance Division will formulate a comprehensive pension plan/scheme and complete all necessary steps from inception to launch and operations of pension scheme after completion of the project.

The project aims to achieve particular results, especially to address and reform the pension system in the country. Those reforms would include regulatory framework within the government/or civil service rules and regulations etc such as benefit design, contribution rates, benefit liability age, regulatory framework for investment in funds (adequacy and needs for improvement), and reliable contributor.

It would also focus on registry study of funds market with a view to assess availability of investment opportunities and projected returns, institutional framework and structure of regulatory institutions, inclusion and exclusion policies/or decisions, and based on these policies/or decisions, required rules and regulations for various organisations’ employees and any other aspect necessary to complete the initiative.

The proposed project envisages formulating a comprehensive pension plan/scheme and proposing all necessary steps from inception to launch and operations of pension scheme.

This project will be completed within 24 months starting from July 2020 to June 2022 and the estimated cost will be Rs12.560 billion, including $75 million loan from World Bank (Rs11.963 billion).

Ministry of Finance has submitted a proposal seeking concept clearance for “Pension Reform Project” which is proposed to be funded by a World Bank loan.

The sponsors have not provided any situation analysis to justify the demand of the proposed project. The sponsors may provide existing facts and figures and future forecasting of pension expenditure to justify the demand of the project.

It has been mentioned that the project has been designed on the basis of World Bank’s report, 2019. The sponsors may share the finding of the World Bank report to determine the project need.

The main objective of the proposed project is to prepare a comprehensive pension plan. The activities (ie Rs 50 million for equipment and Rs20 million for local/ foreign training/experts) proposed under the project do not support the project objectives. The sponsors may align the project activities with its objectives. Further sponsors may carry out a study to reform the pension system in the first place instead.

At serial number 7 of the proposal, total cost of the proposed project is reflected as Rs12.560 million (ie Rs12,060 million local and Rs500 million as FEC). Whereas an amount of Rs11,963 million equal to $75.00 million has been mentioned at serial number 8 (ii) as World Bank’s loan. The sponsors may clearly indicate the exact contribution of World Bank and government of Pakistan.

The sponsors may provide terms and conditions of the World Bank loan as well as letter from EAD regarding World Bank’s commitment to finance the proposed project.

It will be funded through foreign exchange component and no exchange rate of dollar has been mentioned which may be indicated on the basis of the prevailing market rate.

The proposal is sketchy as no proper justification has been provided therefore it needs review.

According to the World Bank, the most dramatic ageing worldwide is projected to take place in low and middle-income countries. The World Bank has been involved in pension reform in more than 90 countries and provided financial support for reform to more than 70 countries.

It has 42 active projects across countries spread over all regions. These engagements include lending components in Development Policy Loans (DPLs) in support of major reforms, investment loans to improve administration and a wide range of non-lending technical assistance (NLTA) that relies on several analytical tools such as the Pension Reform Options Simulation Toolkit (PROST) and APEX, a state-based micro-simulation model. The number of reimbursable assistance activities has been growing recently, especially in the Middle East and North Africa Region.


The writer is a staff member