Management of Pension Liabilities:

The Case of Punjab (Pakistan)

Ali Shehzad

Additional Finance Secretary

Government of the Punjab

PAKISTAN

Pension in Punjab Government

• ‘Defined Benefit’ Pension System with following features:• Civil servant qualifies for pension on completion of 25 years of services

• Rate of pension determined on the basis of length of service

• Maximum gross pension is 70% of the last drawn pay on completing 30 yearsof service

• Option to commute (lumpsum payment as advance based on average lifeexpectancy) upto 35% of the gross pension

• Generous scheme

• The liability arising out of pension is being paid on ‘Pay As you Go’basis

Pension Liability Management – A Brief History• Pension liability management was initiated in Punjab more than a decade

ago

• The reform was introduced under an Asian Development Bank (ADB)funded programme called ‘Punjab Government Efficiency ImprovementProgramme’

• Establishment of ‘Punjab Pension Fund’ to help discharge Government’spension liability (2007)

• Actuarial Studies were conducted for the first time to estimate presentvalue of future pension payments (2007, 2009, 2010 & 2015)

• Fund to make investments to generate income to partially dischargeGovernment’s liability (make pension partially an off-budget item)

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PUNJAB PENSION FUND - GOVERNING STRUTURE

GOVERNING DOCUMENTS

➢ Punjab Pension Fund Act 2007

➢ Punjab Pension Fund Rules 2007

➢ Investment Policy

➢ Trust Deed

COMMITTEES

➢ Management Committee – Comprise of 11 members out of which 5 are from

the private sector including the General Manager. Management Committee is

chaired by the Minister of Finance, GoPb

➢ Investment Sub-Committee – Chaired by the Finance Secretary.

➢ Accounts, Audit/Compliance Sub-Committee – Chaired by the Finance

Secretary.

➢ Human Resource Sub-Committee – Chaired by the Secretary Services S&GAD.

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The Fund was developed as a professional outfit by the Government:

Punjab Pension

Fund Trust

Operational Structure of the Fund (PPF)

Pensions as a Percentage of the Provincial Budget

Rs. 207.6 Billion

16% of Current Exp.

11% of Total Budget

16% of the Current

Expenditure (Rs. 1264 Billion)

Rapid Increase in Annual Pension Payments Rs. in Billion

FY Pension Commutation GratuityFamily

Pension

Medical

Allowance

Medical

Reimbur

sement

Total

Pension

Expense

2010-11 28.730 7.270 0.328 0.003 - 0.063 36.394

2011-12 37.928 11.662 0.432 0.023 0.033 0.032 50.110

2012-13 52.301 14.259 0.457 0.143 0.209 0.034 67.403

2013-14 56.075 18.108 0.230 0.988 0.955 0.036 76.392

2014-15 62.417 19.931 0.111 3.766 2.524 0.050 88.799

2015-16 71.115 27.923 0.064 8.467 6.132 0.058 113.759

2016-17 76.128 37.547 0.017 16.894 10.373 0.063 141.022

2017-18 89.209 47.074 0.014 23.448 13.137 0.060 172.942

CAGR 17.57% 30.58% -36.27% 259.86% 171.22% -0.69% 24.94%

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(Rs. Billion)

Pension liabilities have grown at a Compound Annual Growth Rate(CAGR) of 25.7% since 2007; and 29% since 2010.

Estimation of Pension Liability

PERIOD PENSION LIABILITIES

FY 2007 425.0

FY 2009 597.6

FY 2010 687.7

FY 2015 3,866

FY 2017 4,836

FY 2018 5,265

Projected Pension Liability (30 Years)

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▪ Y-axis: Rs. in Billion (2045: 1800 Billion Rs. = 13.5 Billion USD)▪ For 30 years (2015 – 2045)

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(Rs. in billions)

* The above numbers exclude unrealized capital gains. Market value of Fund’s assets at June 30, 2018is Rs. 53,196 million. Hence the Fund is carrying unrealized capital gain of Rs. 1,850 million at June 30,2018.

Rs. in Billions

* As on 30th June, 2018

Beginning fund size -

Add: Contribution during the period 27.8

Less: Transfer to Reserve Pension Fund (1.8)

Add: Profit during the period 25.7

Less: Expenses during the period (0.3)

Ending fund size 51.3

PPF Fund Size

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(Rs. Billion)

▪ The funded status of PPF is only 1% as of June 30, 2018.

▪ * Assumptions:▪ Annual Increase in Pensionable Salaries: 9%

▪ Annual Increase in Pensions: 8%

▪ New Hiring: 1% of the number of employees every year

Pension Liability & Funded Status of Punjab Pension Fund

Period Pension Fund

(a)

Pension

Liabilities

(b)

Funded Status

of PPF

(a)/(b)

FY 2007 0.0 425.0 0.00%

FY 2009 3.5 597.6 0.59%

FY 2010 12.1 687.7 1.76%

FY 2015 35.3 3,866 0.91%

FY 2017 49.3 4,836 1.02%

FY 2018 53.2 5,265 * 1.01%

Pension Liability Management – Challenges

• Shift to Contractual Mode of Appointment (to reduce pension liabilities)• Higher salaries to make up for the loss

• Regularization of contract employees to get political mileage

• Establishment of Punjab Pension Fund

• Actual situation:• No allocations• Insufficient Releases / Disbursements

• Capitalization Policy• No policy till 2018• Cabinet’s decision: Rs. 20 Billion per annum• Strategy: bring funding status to reach 16.7% by FY 2038-39 (in next 20 years)

Peculiarities• Family Pension

• Widow > Minor children > Unmarried Daughter > Married Divorced Daughter• ~ 30-50 years after death of the pensioner

• Financial Assistance for Death in Service• Lump Sum• Other benefits• Creation of an OSD Post

• Pensionable salary paid as if the person was still alive (till the age of retirement)• Not reflected as pension• Increases the Pension Liability in the long run

• Provident Fund:• Contributory Scheme• Being deducted but not being invested

Issues of Fund Management in Punjab

• Investment Management Infrastructure• Conducive• Productive

• No central fund management institution

• Punjab Pension Fund – a statutory body

• Other Funds:• General Provident Investment Fund*• Viability Gap Fund (PPP Regime)• Sustainability Fund• Pension Funds for Autonomous Bodies

• Ultimate Liability on the Govt.• Lack of investment expertise• Note: Pensions of Autonomous Bodies / SOEs / Local Govts are not being reflected in the current pension figures

• Legal Mandate• PPF does not have the legal mandate to manage other funds• PPF not under the SECP regime• Scalability• Customized Cashflow Requirements

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PGPIF - FUND SIZE

• The Fund has started its operations on 22nd June, 2018. A

summary of changes in fund size since then is given in the

following table:

22nd June – 30th June 2018

Beginning fund size 5,879

Add: Income during the period 8

Less: Expenses during the period -

Ending fund size 5,887

Rs. Millions

Lessons Learnt

• Cognizance of the burgeoning pension liability of Punjab Government

• The reform required Government to capitalize funds in addition topayment of pensions

• The successive Governments, however, did not capitalize the funds asplanned

• Size of the Fund, as percent of Pension liability, has remained verysmall

• In short, the required objectives have not really been achieved sinceestablishment of the Fund

Way Forward• Switching to a ‘Defined Contribution’ system (with prospective effect)

• Political Cost• Increased fiscal burden in the short-run

• Giving legislative cover to Funding Policy (Commitment Device)• Declare it as ‘Charged Expenditure’

• Conduct an Actuarial Assessment• Election Year 2018• PROST (?)

• Parametric Reforms (?)• Only prospective effect• Legal Challenges (Cannot roll back benefits)

• Transfer monthly contributions to PGPIF for investments

Q & A