World Bank warns Pakistan’s growing pension bill threatens its development priorities

ISLAMABAD: The World Bank (WB) has warned the government of Pakistan that its pension schemes have growing fiscal costs, which, if not constrained, threaten other development priorities of the country.

Finance Ministry sources told The News that the WB report, shared with the government, said that the actuarial projections suggest that these costs, along with growing salary costs, will continue to grow substantially in the coming years crowding out other scarce public expenditure.

The WB report, however, told the government that the authorities could restrain the growth of these costs while also promoting equity and predictability of benefits by measures such as limiting the indexation of benefits and reducing benefits for those who retire early.

The report also projects the future costs of the existing pension scheme and simulates the costs and adequacy of benefits for reform options changing various parameters. The report also explores the costs and benefits of introducing a hybrid contributory defined-contribution scheme for new entrants, which could also serve as a potential platform for pensions for non-government workers.

The WB report, which has been prepared at the request of the finance ministries at the federal level and Punjab and Sindh, used actuarial projections to evaluate the fiscal costs and adequacy of benefits in the civil service retirement schemes. It also evaluates the impact of reforms, which would amend the parameters or qualifying conditions and the effects of introducing a contributory defined-contribution scheme for new entrants.

According to the executive summary of the report, “Fiscal costs of the Punjab and Sindh Civil Service Pension schemes are projected to almost double as a proportion of fiscal revenues by 2060 if pensions increase in line with wages yet could be stabilised at about 15 percent of fiscal revenues if benefit increases were limited to the growth in consumer prices. Limiting benefit adjustments could, therefore, stabilise the finances of civil service pensions.”

The sustainability of both basic salaries and pensions, the report said, are also of considerable concern with the cost of pensions projected to soon overtake basic salaries as a proportion of public expenditures.

Notably, basic salaries and pensions are projected to increase in Punjab from about 25 percent of provincial revenues in 2020 to over 50 percent in 2060 while in Sindh are projected to increase from about 32 percent of revenues in 2020 to about 42 percent in 2060. Civil service compensation and pension benefits will, therefore, crowd out other public expenditure. Moreover, pensions are projected to overtake wages in 2023 in Punjab and in 2028 in Sindh, the report said.

“Although Pakistan provides generous benefits for full career workers of about 122 percent of pre-retirement basic wage, the benefits are likely much less generous when viewed as a proportion of total compensation, the report said, adding, “Only by analysing data on non-wage compensation can the authorities have a fully informed view of the adequacy of benefits and have a basis for fully considering the reform options outlined. The variation in the importance of allowances makes pensions inequitable – adequate for some and likely inadequate for others.”

The report said that the key reasons for the past and expected future growth in expenditure are: (i) substantial increases in real terms in civil servant wages, pension benefits and allowances; (ii) a retroactive Supreme Court decision restoring commuted benefits; and (iii) growth in the civil service headcount.

According to the report, the civil servants’ pension schemes also face important weaknesses in the equity between workers, and predictability of benefits.