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KARACHI: The State Bank of Pakistan (SBP) has called for parametric and systemic reforms to deal with rising public pension expenditure in the country. The SBP in its quarterly report “The State of Pakistan’s Economy” has added a Special Section “Public Pension Expenditures in Pakistan - The Need for Reforms”. The special section has made the case that public pension expenditure in Pakistan is on the path to becoming unsustainable. The reforms to public pensions become unavoidable in Pakistan in the face of the worrying acceleration in the associated public sector spending, the SBP said.

According to the SBP, Public sector pension expenditure in Pakistan has risen rapidly over the past decade due to ad-hoc and retrospective increments in pensions announced by the government, commutation and restoration facilities offered to pensioners, early retirements, generous survivorship benefits and resultantly, a high replacement rate. Therefore, reforms are principally needed 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 Compound Annual Growth Rate (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.

According to SBP, 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.

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, the SBP mentioned.

While limited fiscal space is a major reason, the increasing pension spending is worrisome and SBP believed that improvements in the pension framework can substantially help make future payments manageable. Eliminating the generous retrospective increments and reducing the list of dependents eligible for pension payments appear as quick and easy-to implement measures.

The SBP suggested Parametric Reforms and Systemic Reforms to deal with rising pension spending.

In the present Pay As You Go (PAYG) system of Pakistan, the pension obligations are made when they come due. With limited fiscal space, Pakistan may not afford the immediate switching from PAYG to a funded system, since the latter will require the government to make exclusive contributions along with the existing pension payments.

Instead, parametric reforms may be introduced initially to rationalize the cost and incentive structure of pension system and improve the fiscal sustainability of future expenses. Later, the government could consider adopting the comprehensive framework of funded pension system. The following are some parametric reforms that helped in addressing pension related challenges in a number of countries including India, Chile, and the UK, and may also prove helpful in the case of Pakistan.

In addition, the concerned authorities must carry out specialized evaluation exercises at their own end and implement the required legislative reforms accordingly. It is also important to undertake periodic review of implemented reforms in order to ensure long-term sustainability of the pension structure.

Under the Systemic Reforms, once the features of current pension structure are successfully streamlined through sufficient parametric restructuring, the next step would be the adoption of a comprehensive systemic reform to ensure fiscal sustainability of pension liabilities in the long-run.

In this process, the current non-contributed, defined-benefit and pay-asyou-go pension scheme would need to be gradually phased out and replaced with a contributory and funded structure in which the benefits are closely linked with the value of pre-retirement contributions.

In recent decades, many countries in the EU, Latin America and Asia have adopted various systemic reforms focused on reducing the public pension expenditure by switching to pre-funded-defined contribution schemes.

The report mentioned that due to the systemic reforms a number of EU countries including Bulgaria, Estonia, Lithuania, Latvia, and Sweden etc. experienced a downward projection in future pension expenditures, with survivorship benefits also projected to decline.

Copyright Business Recorder, 2021