Calling the pension bill a time bomb is a constant refrain of Pakistani economists. But the deadly device is designed to go off at a preset time — quite unlike our national pension bill, which is mounting at an accelerating pace and may explode without much notice.

The federal government has set aside Rs530 billion for pensions in 2022-23, slightly higher than the revised allocation of Rs525bn for the outgoing fiscal year.

More importantly, the finance minister indicated in his budget speech that the federal government is going to set up a “pension fund” with the expected first-year allocation of Rs10bn. At the same time, the government has withdrawn the income tax credit that individuals received by putting their savings in pension funds run by asset management companies.

Speaking to Dawn, Alpha Capital Ltd CEO Azfer Naseem said the new pension fund will be set up along the lines of similar pools of money established by the provinces in recent years. “They’re putting in the seed capital now. Hopefully, they’ll keep building up the fund until its profits are big enough to make pension payments on a sustainable basis. It’s just a start,” he said.

The practice of pensioners receiving money directly from government revenues as part of current expenditures is inherently unsustainable

The latest allocation is equal to 0.7 per cent of GDP. It constitutes 6.1pc of the federal government’s total current expenditures for 2022-23. Does it really make sense to call it a ticking bomb?

“Yes, it does. People retiring now will have higher pensions versus those who retired earlier. The additions to the pensioners’ roll are taking place at a faster pace than deletions,” he said.

The pay-as-you-go system with defined benefits currently in place is resulting in increased unfunded liabilities for the government.

According to a recent research paper by Mahmood Khalid, Naseem Faraz and Muhammad Ashraf published in Pakistan Development Review, the practice of pensioners receiving money directly from government revenues as part of current expenditures is “inherently unsustainable”. The pension expenditure — which is doubling every four years — cannot be sustained by an economy that’s growing at a significantly lower rate.

An ageing population, increased medical expenditures and forced inflation indexing will continue to put pressure on the pension bill, they said, noting that it’ll constitute as much as 56pc of current expenditures by 2050.

In a phone interview with Dawn, Magnus Investments Ltd CEO Nadeem Jeddy said the media has inadvertently been downplaying the risks of the rising pension bill by focusing solely on the federal component of the total liabilities.

The crisis is a lot scarier when looked at holistically. He said total federal and provincial public-sector pensions amounted to Rs995bn in 2020-21, with the share of Punjab’s civil service pensions alone standing at Rs251bn.

“It’s unsustainable by all means. Salaries are going up, life expectancy is rising and the population is ageing. Without reforms, we’re heading for a disaster,” said Mr Jeddy.

He also asked the media to stop blaming the military pensions alone for the bloating of the overall bill. In 2020-21, the last year for which final figures are available, military pensions amounted to Rs359bn out of the consolidated allocations of Rs995bn.

Mr Jeddy welcomed the government’s latest decision to withdraw the income tax credit that individuals received for investing in voluntary pension schemes (VPS) run by asset management firms.

“It was the absolutely right thing to do. Vested interests pushed for it, but it’s been a failed scheme. The structure of VPS is bad for individuals for multiple reasons,” he said. One, the model is costly; and two, investors have a say in its management, which leads to recklessness and poor decisions, he said.

“Rich corporate executives shouldn’t be allowed to invest millions in pension funds and walk away with massive tax savings. It makes no sense,” he said.

Nineteen pension funds operated in Pakistan with assets under management of Rs38.1bn at the end of June 2021, as per the latest annual report of the Mutual Funds Association of Pakistan. In Mr Jeddy’s view, a better option for the government would be to start a superannuation fund with tontine features — meaning the government should make monthly contributions on behalf of its employees to a fund that’ll eventually pay lifelong income but won’t allow any withdrawals. The employees’ benefits in the fund will grow on the back of monthly contributions, investment returns and mortality credits or residual balances of decedents that are transferred to survivors instead of heirs, he said.

Published in Dawn, The Business and Finance Weekly, June 13th, 2022