AFTER years of bureaucratic resistance, the ECC has finally approved changes to the federal government’s pension system to reduce the rapidly growing burden of pension costs on the budget.

The reforms alter the formula to calculate gross pension, penalise voluntary retirements, change the method for future pension increases, adjust family pension entitlements, eliminate multiple pensions, establish a pension fund, and initiate other measures to introduce savings in the federal pension system.

The introduction of the contributory pension scheme for the new civilian employees and military personnel is perhaps the most significant reform being rolled out. A report suggests that the government has deferred pension cuts for existing pensioners and employees due to questions over its “legal mandate”, which might have resulted in “substantial savings”. The new pension rules will come into force for civilian employees from the next fiscal year and for military personnel the year after.

Many of the changes had already been announced in this year’s budget but remained unimplemented. The draft changes in pension rules are in line with recommendations of the Pay and Pension Commission of 2020 regarding amendments to the pension scheme for existing pensioners and employees to curtail future increases in annual pension costs “without compromising on the government’s pension philosophy”.

Successive governments have been struggling since the 1990s to strike a balance between ensuring financial sustainability of pension liabilities and providing an adequate income in retirement to public sector employees. With the annual pension bill becoming the fourth-largest budget expense following interest payments, defence costs and development spending, reforms are unavoidable, especially with the ongoing economic crisis adding urgency to the need for fiscal consolidation.

The question is whether the measures are enough to slash the annual pension liabilities of existing pensioners, or those who will retire and join the rollover in the next 30-40 years.

As the annual federal pension budget is estimated to rise to more than Rs1tr for both existing military and civilian pensioners next fiscal year, the ‘reforms’ are likely to yield only Rs4bn, or 0.4pc of pension liabilities, in savings in the first year according to some officials quoted in a media report.

Some estimates indicate that the consolidated federal and provincial pension bill would grow at 22-25pc a year for the next 35 years unless serious reforms are implemented. The cost of inaction has been enormous; the national pension bill has risen 50 times during the last 20 years. The liability doubles roughly every four years.

If vested interests continue to stall meaningful changes, the government may not be left with enough money for most pensioners or social and economic development in the next 10 years. One hopes that the issue is revisited and stronger reforms are introduced to reduce burden on the state.

Published in Dawn, June 29th, 2024