Punjab’s Pension Expenditure is Growing Faster Than Its Revenues and Inflation

The rapid growth of pension payments in Punjab has turned into a nuisance for the provincial government and poses a serious challenge to the financial resources available for development in the province.

The magnitude of the problem has been highlighted in a document prepared by the Punjab Pension Fund, an investment arm of the Government of Punjab.

Civil servants and other government employees get pensions as an end-of-service benefit and it is administered as a ‘defined benefit’ scheme, meaning the “benefit’ is defined. However, the source of funding or contribution is not defined. Pension payments are made on a ‘pay-as-you-go’ basis, which means that the payments come from the regular government budget and not from any investment/pension fund.

Moreover, the pension schemes across the various tiers of government tend to adopt decisions of the federal government on related matters. This has resulted in huge fiscal challenges for some organizations where there are revenue shortfalls. There are even some ‘discontinued’ entities that are being run only to manage pensions of retirees.

There is no separate legislation to govern the matters pertaining to pension-related benefits. However, there are some rules and a series of executive orders to govern entitlements and procedures. This has created room for several reform-related initiatives still ‘undone’ when challenged.

Main Pools of Pensioners

The armed forces, the federal government, pre-partition legacy entities, local governments, municipal services and other entities — not having their own revenue sources — and provinces can be categorized among the main pool of pensioners.

Conundrum for Provinces

The provinces represent the largest collective number of employees and pensioners and face the most serious pension-related fiscal challenges. According to the document, pension-related disbursements accounted for 4 percent of the provincial revenues in 2004-05. The share of these disbursements rose to a massive 15 percent in 2021.

According to estimates, these disbursements will rise to 18 percent of revenues by 2030, 22 percent of revenues by 2040 and 27 percent of revenues by 2060 at the current pace and under the current policy regime.

Punjab’s Pension Expenditure

Punjab’s pension expenditures are growing faster than revenues. The details of Punjab’s pension expenditure during the last eleven years is given below:

Year Annual Pension
(Rupees in billion)
General Revenue
(Rupees in billion)
Pension Expense as %age of Revenue Current Expenditures

(Non-Development)
(Rupees in billion)

Pension Expense as a %age of Current Expenditure
FY10-11 36.4 539.0 6.7 370.0 9.8
FY11-12 50.1 606.0 8.3 444.0 11.3
FY12-13 67.4 703.0 9.6 534.0 12.6
FY13-14 76.4 815.0 9.4 569.0 13.4
FY14-15 88.8 902.0 9.8 670.0 13.3
FY15-16 113.8 1108.0 10.3 730.0 15.6
FY16-17 141.0 1405.0 10.0 900.0 15.7
FY17-18 172.9 1387.0 12.5 961.0 18.0
FY18-19 205.2 1426.0 14.4 1129.0 18.2
FY19-20 233.1 1477.9 15.8 1258.0 18.5
FY20-21 255.7 1712.7 14.9 1314.9 19.4

 

The figures of projected pension expenditure of Punjab are equally worrying:

Year Commutation*
(Rupees in billion)
Annual Pension
(Rupees in billion)
Total Pension Payments
(Rupees in billion)
Projected Revenue**
(Rupees in billion)
Pension Expense as a %age of Revenue
FY21-22 46.9 247.8 294.7 1884.0 15.6
FY22-23 51.9 280.9 332.9 2072.4 16.1
FY23-24 60.2 318.8 379.0 2279.6 16.6
FY24-25 67.3 360.8 428.1 2507.6 17.1
FY25-26 70.7 406.3 477.0 2758.4 17.3
FY26-27 74.1 455.4 529.5 3034.2 17.5
FY27-28 86.3 511.1 597.4 3337.6 17.9
FY28-29 85.3 570.0 655.3 3671.4 17.8
FY29-30 80.3 635.2 715.5 4038.5 17.7
* Commutation is a lump-sum upfront payment of a part of future pensions.
** It has been assumed that long-term growth in government revenue would not be less than 10 percent per annum from FY2021-22 onwards. Revenue estimates of the Punjab government are used for FY21-22.

 

Growing Burden on Government

The data also shows that the increase in pension has been much higher than the Consumer Price Index (CPI).

Year Annual Pension
(Rupees in billion)
CPI (YoY) percent Pension Increase %
FY10-11 36.4 13.1 15.0
FY11-12 50.1 11.3 15.0
FY12-13 67.4 5.9 20.0
FY13-14 76.4 8.2 10.0
FY14-15 88.8 3.2 10.0
FY15-16 113.8 3.2 7.5
FY16-17 141.0 3.9 10.0
FY17-18 172.9 5.2 10.0
FY18-19 205.2 8.0 10.0
FY19-20 233.1 8.6 10.0
FY20-21 255.7 9.7 N/A
Annual Growth   6.6 8.8

 

It is pertinent to mention here that certain other increases beyond the above standard increases have also been given from time to time. The increases have been in the form of minimum pension increases and extra increases to those pensioners beyond a certain age threshold.

Pension Benefit is Much Longer than Service

Since 2015, ‘widowed and divorced daughter’ has been included in the definition of ‘unmarried daughter’ for the purpose of family pension. This extends the family pension benefit by at least 10 years even by the most conservative estimates. The actuarial assumptions for the pension benefits extended to single pensioners show that the estimated average pension duration stands at 42-years.

Early Retirements

The trend of early retirements in Punjab has increased significantly in recent years. Early retirees as a percentage of total retirees stood at 8.26 percent in 1971-80. The estimated figure for the duration 2019-21 now stands at 60.0 percent.

Retirement Trends

The number of pensioners as a percentage of active employees is also showing a rapidly increasing trend. In 1970 pensioners as a percentage of employees stood at 1.66%, the figure stood at 49.65 percent in 2019 and is expected to surge to 56.65 percent by 2030. This trend shows that going forward, recurring monthly pension expenditure will consume the bulk of total end of service/retirement-related expenditure.

Reforms Needed

The document presents a number of reforms to control the growing burden of pension disbursements. The recommendations include controlling early retirements, reduction in commutation rate from 35 percent to 25 percent, limiting family pension to spouse and children up to the age of 21 years, a policy framework to link pension increases with a certain percentage of inflation and a review of retirement age of employees among others. The document also highlights the need for a greater variety of investment products to cater to the needs of pension funds.



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