Thursday December 02, 2021

Supreme Court verdict casts new light on WB’s alarm on pensions bill

October 10, 2020

ISLAMABAD: The pension figures cited in the note of Justice Qazi Faez Isa, part of the recent judgment announced by the Supreme Court on a CDA land allotment case, sheds further light on the alarming situation conveyed to the finance ministry by the World Bank a few months ago on the burgeoning pension bill of the country.

The World Bank’s findings, exclusively shared by The News on June 7 this year, were based on the civilian element of the pension bill but Justice Isa’s note shows that the figure skyrockets when the total pension bill, both civil and military, is considered.

Referring to the sizeable monthly pension received by retired judges of the superior judiciary, the SC Judge said: “The amount to be spent in the current financial year 2020-2021 on pensions is Rs470,000,000,000 (four hundred and seventy billion rupees). . .”

He added: “The annual cost of pension payments is almost equal to the cost of running the civil government, which is Rs476,589,000,000 (four hundred and seventy-six billion, five hundred and eighty-nine million rupees). The people of Pakistan pay these pensions despite having very little themselves. To serve the nation is a singular honour. When, in addition to receiving pensions, public lands (allotted to judges) are taken it is eminently unfair.”

The World Bank (WB) has recently warned the government of Pakistan that its pension schemes have growing fiscal costs which, if not constrained, threaten the other development priorities of the country. The WB report was based only on the calculations of the civilian part of the pension bill.

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 expenditures.

The WB report, however, advised the government to 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 projected the future costs of the existing pension schemes and simulated the costs and adequacy of benefits for reform options, changing various parameters. The report also explored 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 was prepared at the request of the finance ministries at the federal level as well as of Punjab and Sindh, used actuarial projections to evaluate the fiscal costs and adequacy of benefits in the civil service retirement schemes. It also evaluated 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 stabilized at about 15 percent of fiscal revenues if benefit increases were limited to the growth in consumer prices. Limiting benefit adjustments could therefore stabilize 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% of provincial revenues in 2020 to over 50% in 2060 while in Sindh they are projected to increase from about 32% of revenues in 2020 to about 42% in 2060. Civil service compensation and pension benefits will therefore crowd out other public expenditures. 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% 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 expenditures are: substantial increases in real terms in civil servant wages, pension benefits and allowances; a retroactive Supreme Court decision restoring commuted benefits; and 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.