Pensions: The Next Big Crisis

Pakistan among its many other problems also has a pension problem, which no one is talking about yet.  Pensioners often face delays in receipt of pensions as institutions seldom have adequate liquidity to make necessary payments.  Most pension plans in Pakistan are grossly underfunded, while the Federal Government largely relies on the annual budget to make allocations for both military and civil pensions.

For the current fiscal year (2018-19), an amount of PKR 342 billion has been allocated for military and civil pensions.  If we add pensions for Pakistan Railways, which is estimated to be roughly PKR 35 billion, pension payments which can directly be linked to the budget amount to more than PKR 376 billion.

Although pension for employees for Pakistan Railways isn’t directly accounted for in the budget but considering how significant transfers are made by the Federal Government to Pakistan Railways every year, the pension bill for Pakistan Railways is effectively being borne by the sovereign.  It is to be noted that pension bill for Pakistan Railways is as high as its current salary bill, thereby acting as a major drag on its financial sustainability without any sovereign support.

Pension for different departments over successive years

Military pensions constitute about 69 percent of pension payments in 2018-19, while Civil pensions make up 22 percent of total pension payments, with the remainder being attributed to Pakistan Railways.

Over the last nine years, average growth every year in pension bill has been around 18 percent – growing at a much faster rate than wages, as well as GDP. It is alarming to note that pension expenses now make up around 9 percent of total current expenditure as stated in the annual budget for 2018-19, increasing from 4.6 percent of total current expenditure in 2010-11.  A significant increase clearly demonstrates that pension payments are taking up an increasing share of the fiscal pie, at a time when it is getting increasingly difficult to rein in fiscal deficit.

At the rate at which pension payments are increasing, it would only be a few years before they make up a fifth of total budget, encroaching on fiscal space for development and other social expenditures, like health and education.

Pensions pay an extremely important role in expanding and maintaining a social net.  Hundreds of thousands of households are beneficiaries of pensions, with beneficiaries primarily being patrons who have spent their life serving the country and its institutions.  Any cut to pension payments would significantly affect welfare of its beneficiaries, who run into millions.

The annual budget cannot continue funding increasing pension payments for an infinite horizon, and it is essential that necessary steps are taken to make pension payments more self-sustaining, while gradually reducing its reliance on the annual budget.

There is a serious dearth of long-term capital in the country, which is extremely important for funding infrastructure projects which have a long-term horizon.  Pension capital is that long-term source of capital which has largely remained untapped by successive governments.  Mandating a compulsory deduction from monthly salary, and pooling the same in dedicated pension funds such that they are managed professionally, would not only ensure that pension payment of current workforce can be funded by a dedicated pool of capital, but also provide a long-term source of capital.

Mandatory deductions are done currently as well, but the same may not necessarily be invested for long-term growth.  Pakistan already has one of the lowest savings rate in the region – a shift from consumption to investment-driven growth necessitates savings.

The government, being the largest pension payer in the country must take the initiative for the creation of pension funds for various departments, and institutions, such that regular contributions to such funds can accumulate over the years, eventually leading to self-sustenance in pension payments.  A regulatory framework in the form of Provident Fund Rules, as well as Voluntary Pension Schemes, which can be managed by Pension Fund Managers registered with the Securities Exchange Commission of Pakistan (SECP) is already in place. What’s missing is a coherent strategy to gradually move away from reliance on the annual budget and creation of pension funds with a long-term horizon.

Pension payments have not yet attained status of a crisis, but if the trend of the last ten years is mimicked over the next ten years, then we may have a crisis at hand where the share of pension payments in the budget increases to unsustainable levels, encroaching on space for development, and other social projects.  It is imperative that necessary policy prescriptions are put in place to ensure that a potential pension crisis can be averted.

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Ammar Habib Khan

Ammar Habib Khan

Ammar Habib Khan has a Masters in Macroeconomic Policy, he is a Risk Manager & Energy Economist by Profession