Pension calculation formula

EDITORIAL: An office memorandum issued by the Finance Division noted a change in the calculation of emoluments for the purpose of pensions as proposed by the Pay and Pension Commission 2020 as well as abolition of multiple pensions. The new calculation would be on the basis of average of pensionable emoluments drawn during the last 24 months of service prior to retirement; and its applicability would be immediate.

In effect this would lower the pension bill payable by the taxpayers as previously it was the last salary drawn prior to retirement, higher than an average of the last 24 months. However, by precisely how much would the pension bill be reduced has not yet been made public knowledge. It is also not widely known that pensions will be reduced effective this month maybe because the government feared that an announcement may lead to organised resistance by the pensioners.

Pension reforms have been under debate for the past decade for two reasons. First, unlike a sustainable pension fund which envisages employee contributions as well as employer contributions and invests the funds collected to generate profits, in Pakistan pensions are paid for entirely by the taxpayers.

The fact that the bulk of the revenue collected by the Federal Board of Revenue (FBR) is from indirect taxes, whose incidence on the poor is greater than on the rich, annual pension budgeted outlay is supported by the taxpayers. This is not only patently unfair but also lends credence to the widespread perception that current expenditure reflects the elite capture of our annual outlays.

And second, while looking at pensions from the other end of the spectrum the fact that the current year’s budget envisaged raising salaries of government employees from between 20 to 25 percent, a rise higher than the rate of inflation, it is disturbing that the pensioners, many of whom have no other means of income, were not only not given a raise but will henceforth also receive lower pensions than before.

One would hope therefore that the largesse extended to government employees by administrations, no doubt for political considerations, may be seen within a holistic context notably the burden on the taxpayers and the pensioners ability to make ends meet.

In this context, it is relevant to note that the running of civil government was budgeted 839 billion rupees while the employees-related expenses (defence) were budgeted 815 billion rupees – an outlay that merits a revisit. In addition, the government gives plots of land to senior officials at throwaway prices on retirement — a facility that requires a policy change.

Be that as it may, the pension bill is rising exponentially each year with the current budgeted outlay at a little over one trillion rupees – a 19 percent rise from the revised estimates of last year at 821 billion rupees and a 21 percent rise from the budgeted amount of 801 billion rupees.

While as a percentage of the total current budget the pension outlay has remained more or less around 5.7 to 5.8 percent yet what should be a source of concern is the fact that our budgets are increasingly reliant on borrowings - externally and internally – and therefore efforts are required to not only cut all components of the current expenditure barring the Benazir Income Support Programme (BISP) that seeks to disburse cash to the poor and vulnerable.

If this is the sum and not the first step towards pension reforms by the incumbent government then sadly it shows political timidity. What is urgently required is for government employees, comprising 7 percent of the total labour force, to contribute towards their own pensions and not to expect the taxpayers to dish out their pensions of over a trillion rupees tomorrow.

Copyright Business Recorder, 2025