Author: Mrs. Anjum Shahnawaz

KARACHI: State Bank of Pakistan (SBP) has recommended increase in retirement age in order to reduce average coverage period of retirement benefits.

“The increase in level of standard pension age may reduce the average coverage period of retirement benefits,” the SBP said in a report issued on Tuesday.

The pension system follows two eligibility criteria for retirement: the qualifying service of 25 years and the threshold of 60 years of age.

Interestingly, most of the employees in federal, provincial and defense service join their departments in early- to mid-twenties, and complete 25 years of services during their early- to mid-50s and therefore become eligible for early retirement.

It is pertinent to mention here that the retirement age of 60 years is already markedly lower than many other countries, and so the early withdrawal after completion of qualifying service puts further strain on fiscal sustainability of pension expenses.

In this regard, the increase in level of standard pension age may reduce the average coverage period of retirement benefits.

In addition, the delayed retirement age will support in increasing the contribution period once the government opts for a funded system in the subsequent round of reforms.

The government can use one or multiple approaches to reduce the early retirement incentives.

For instance, measures such as restricting early retirement eligibility, reducing the marginal benefits below a threshold retirement age, and marginalizing the disincentive to work can all help achieve this objective.

The SBP also suggested rationalizing the survivorship benefits.

In contrast, rise in family pension due to increased applicable benefits and inclusion of large set of family members has become a major cause of concern in Pakistan.

To address this, the first and foremost reform should be to exclude all family members other than minor children and widows from the list of eligible survivorship beneficiaries.

Any delay in such reform will cause family pension to grow manifold in the coming years due to the probable increase in time span of pension benefits in each individual case.

In the case of widows, the survivorship benefits can be rationalized in accordance with the increasing labor force participation rates of women.

In the last few years, many countries have downsized the survivorship benefits by limiting the adjustment period or by eliminating the mandatory benefits for survivors.

For instance, in Japan, widows (with no children) under the age of 30 were entitled to receive permanent earnings related survivor pension, which were reduced to five years after comprehensive pension reforms in 2007.

Similarly, in Sweden, widows were entitled to receive the flat survivorship benefit, which after reforms was switched by the minimum income guarantee, eligible for a shorter period than the earlier facility.

The SBP said that the computation of commuted benefits involves a particular factor assigned to each year after retirement which determines the advance payment amount for each retiree.

The commutation table laid out by the Ministry of Finance incentivizes early retirement with excessively high commutation factor applied to the younger cohort.

This is in stark contrast to the traditional pattern followed in most other countries.

For example, in the UK, the commutation facility is only offered to retirees after attaining a certain age for different employee groups (48 years in the police department, for example).

Whereas, the Indian pension structure offers minimal variance in commutation factor to different age groups. The growing fiscal burden due to high commutation expenses calls for a restructuring of the commutation mechanism, with rationally designed factors and revision in eligible age profile to make the overall pension structure actuarially fair: the lifetime benefits enjoyed by those who retire early or choose to avail commutation and those who opt out of such facilities.

KARACHI: State Bank of Pakistan (SBP) on Tuesday said that public pension expenditure in Pakistan is on the path to becoming unsustainable.

The central bank prepared a study report on rising expenditures of pension which is worrisome.

“ … limited fiscal space is a major reason why increasing pension spending is worrisome, improvements in the pension framework can substantially help make future payments manageable,” the SBP said.

Eliminating the generous retrospective increments and reducing the list of dependents eligible for pension payments appear as quick and easy-to implement measures.

However, the policy recommendations mentioned in the special section are intended to suggest a general direction.

The concerned authorities must carry out specialized evaluation exercises at their own end and implement the required legislative reforms accordingly.

Finally, it is important to undertake periodic review of implemented reforms in order to ensure long-term sustainability of the pension structure.

The SBP said that in Pakistan the absolute level of old-age income support coverage is on the lower side.

“For instance, the pensions to GDP ratio stands at just 2.2 percent, while the proportion of the population participating in programs that provide old-age contributory pensions, health and/or social security insurance is only 5.9 percent – much lower than the developing economies average of 20.3 percent.”

The old age dependency ratio – the number of people aged 65 and above compared to the number of working age people – is 8.5 percent, and is expected to rise only marginally to 11.2 percent by 2040.

But even with such a low pension coverage in the country, reforms to public pensions have become unavoidable in Pakistan in the face of the worrying acceleration in the associated public sector spending witnessed over the last decade.

“This is principally because public pensions are of an unfunded nature and thus are burdening the already tight fiscal revenue situation.”

Specifically, the pension expenditure at the federal level has risen by a CAGR of 18 percent in Pakistan during FY11-21.

Provincial pension expenditure has also witnessed a similar surge.

Within consolidated pension expenditures, civil pensions (including federal and provincial) constituted 63.2 percent, whereas military pensions made up around 36.8 percent on average during the last 5 years.

The overall pension spending as a share of tax revenue has reached 18.7 percent as of FY20, almost double the level a decade earlier.

“If this proportion continues to grow, it could result in the crowding out of other valuable spending avenues: pension spending as percent of total budgeted expenditures for FY20 exceeded health and education spending on both federal and provincial fronts and is almost half the level of consolidated development expenditures.”

In this regard, International Financial Institutions (IFIs), such as the World Bank and the International Monetary Fund (IMF) have also started flagging the rising pension expenditure as a pressing concern for Pakistan’s debt sustainability.

What is even more concerning is the fact that pension expenditure is expected to rise further going forward, given the increase in both retiree headcount and the lifespan of future retirees. If fiscal revenues continue on their existing trajectory, the rising pace of pension-related spending would become worrying from the sustainability point of view.

According to the World Bank’s projections, civil service pension payments would overtake wage expenditures by 2023 and 2028 in Punjab and Sindh, respectively, and come near to their level in the federal government by around 2050.

Within this context, this special section intends to: (i) describe the existing public sector pensions and benefits system in Pakistan; (ii) highlight major factors that are making pension expenditures unsustainable; and (iii) provide a set of policy recommendations to make the growing postretirement expenditures sustainable going forward.

Here, it is important to mention that structural factors, such as the size of the civil government and the military, the unfunded nature of pensions, and disproportionally high share of non-gazetted employees (95.3 percent of total federal government employees), are all important factors governing the overall level of pension expenditures in the country.

However, these factors are beyond the scope of this section; here, we intend to highlight system-bound aspects that explain the steady rise in these expenditures over the last decade.