The exponential increase in the pension and its burden on the budget is a central concern for the country. IMF has also been demanding to bring in reforms in different sectors to reduce the fiscal deficit. 541.9 billion rupees, which is how much the federal government of Pakistan alone has spent on pensions as of the year 2022. The underlying Civil service pension of Pakistan was adopted from the British Pension Act 1871.
The same was adopted by India after independence but was revised in 2004 when the country introduced contributory schemes. Pakistan also went through some amendments, but the scheme remained to be classified as Pay-As-You-Go where the burden is all on the government. In addition to the Pension Act of 1871 other acts are also in place like Pension-cum gratuity Scheme (1954), the Provisions of Civil Servant Act, 1973, and the Liberalized Pension Rule and Ancillary Instructions, 1977.
As the country is struggling with fiscal deficit now is the time to reduce the burden on the federal government through some reforms. Based on the recommendations of “Pay and Pension Commission 2020” (POP 2020) the finance division has initiated reforms in the pension scheme. Eight major changes are under consideration. Starting from the calculation of gross pension, it is stated that the Pension will no more be granted based on the last pay drawn out than the average pay of last three years will be calculated for gross pension.
This is something already in practice by the Armed Forces. Secondly, those employees interested in early retirement will have to pay a penalty of 3% for each year in between their desired retirement year and the actual retirement year. The step is taken to ensure sustainability of the employees in service.
The yearly increment imposed on pension will be based on the gross or net pension not on the last drawn pension because the exponential increase was causing severe damage to the government’s treasury. The amount of money entitled to third tier of family will be limited to ten years (with exception of lifetime for any special child and 20 years for children of shuhada). This does not include the widows. It is only for the third tier i.e., unmarried, widowed, or divorced daughter. Re-employed individuals will now have to forgo either their pay or pension. They will not be entertained by both.
The government will no longer facilitate the individual with dual pensions. The commutation formula has been changed from 35-65% to 25-75%. The ministry of Defense has however demanded some waiver for armed personals because of the short-term services of soldiers and exceptions for the shuhadas.
Lastly, there will be a shift from defined benefit model to defined contributory model. This is the most important of all. The basic difference between the two is that in defined benefit one gets an already estimated specified amount after retirement. While in the defined contribution both employee and the government contribute to the employee’s retirement account collectively.
The advantage of this scheme is that the employee will contribute some amount from his salary to the government, the government will add on and invest. At the end, the employee will get much more than its contribution. So, it will be a win-win situation for both. But usually, the employee does not show consistency, which is a setback for the whole scheme. Consequently, a thresh-hold is to be fixed if sustainability is the demand.
There are pros and cons to both ways, therefore, there is a need to weigh the comparative advantage of both schemes.
Developing countries like United States has shifted to contributory model years ago. The US introduced a contributory scheme called the “401k Scheme” for the employees. In the decade of 90s, 78% of companies in United Stated did away with the conventional pension plan and went on to 401K plan. And in the last three decades it has been proven as a wealth building tool for the Americans as compared to pension. It has not only helped the government get off the burden financially, but it has increased the employee’s productivity too.
Here it is important to appreciate the KPK government that has already introduced contributory pension scheme.
The burden of pension is not solely on the federal government. The provincial government should also take such steps to bring reform and efficiency in the system.