ANOMALIES & DISTORTIONS IN PENSION RULES & PRACTICES:
Anomalies
A large number of pension anomalies and distortions exist due to which federal pensioners and widows are not being given their full entitlements. Some of the major anomalies are given below:
1. Denial of Annual Pension Increase on Gross Pension. Despite LHC and Supreme Court Verdicts, the Ministry of Finance through a new policy on Pay and Pension changed the basis of payment of annual increase from Gross to Net Pension in 2001. In clear contravention to the rules, this was applied retrospectively to pensioners who retired before 2001. This resulted in a 50% cut on the increase in pension. In response to a Writ Petition filed by the affectees, Federal Services Tribunal and Lahore High Court decided in favor of pensioners. The government of Pakistan filed an appeal before the Supreme Court which was rejected. PWF also filed a fresh petition in LHC on behalf of 138 members in Oct 2021 which was decided in favor of the petitioners.
Ministry of Finance has hitherto declined to restore the increase in Gross Pension. The PWF is continuing to pursue the case and is filing a fresh petition in Lahore High Court.
2. Ad-hoc Annual Increases Granted in Pension. Six ad-hoc increases are being granted in pension on retirement to all and sundry @ 15% for 2011, 7.5% for 2015 and 10 % each for 2016, 2017, 2018 and 2019. With an accumulative effect of 81% increase, the retiring pension rises 27% above the last drawn pay of a retiree.
Presumably, these ad-hoc increases were availed by these pensioners during their service. As a result; a Major retiring in 2020, with last pay at Rs. 120,000 ends up with a pension of Rs. 152,000, Rs. 32,000 more than the last pay drawn. These increases have led to an unprecedented rise in the pension budget over the last ten years. Ironically, on one hand, the legitimate entitlement of an increase on gross pension for the old retirees has not been restored despite the Supreme Court verdict while on the other, these unjustifiable six ad-hoc increases continue to be granted even though the government cannot bear the impact.
3. Widows Pension. In July 2010, the Ministry of Finance notified a grant of an increase in the Family Pension from 50% to 75% on the Gross or Net pension as the case may be. The Auditor General of Pakistan clarified that the increase will apply to the pension last drawn by the deceased pensioner.
However, the CMA and CMA (OP) continue to calculate widows’ pensions based on an old letter of 1964 resulting in the actual disbursement of approx 62% of the last drawn pension (instead of entitlement of 75%). The validity of instructions contained in the 1964 letter is questionable after the issuance of instruction by the Ministry of Finance in July 2010.
4. Gratuity/Pension for Widows of Shuhada & In-Service Death (ISD) Cases and their Transfer to NOK. Gratuity granted to widows of Shuhada and ISD cases is not restored as a matter of routine. This should be adjusted automatically without waiting for a request/claim from the widow.
5. Transfer of Pension to NOK of Shuhada. Another anomaly is that family pension is not transferred to children of Shuhada and ISD cases as in ordinary family pension.
6. Grant of Usual Increment. The usual increment was granted by the government in the year 2014 to the pensioners. All those who have completed 6 months of service in the year of retirement are eligible for the grant of the usual increment.
Reforms
Pakistan has a distorted version of a legacy pension system that is no longer sustainable since pensions are paid from the revenue collection since no pension fund exists for the federal pensioners. Our pension expenditure is doubling every four years while the annual growth of revenue is lower than 10%. The pension benefits extend beyond the pensioner’s life to his wards which is uniquely exceptional. Most economists believe Pakistan is in the midst of a crisis and pensions blowout in the coming 6-8 years is a possibility. Major pension reforms are, therefore, unavoidable to avert a socio-political crisis and the collapse of our economy.
If both the federal budget and pension expenditure keep on growing at the current rate, by 2050 the pensions would claim 56% of the federal revenue, leaving hardly any money for defense, development, and other essential expenses.
Despite a small pension footprint of 3% of the population and pensions around 12% of current expenditure, we are heading towards a serious crisis. In comparison, pension and social protection in European Union account for nearly 34% of current expenditure. In our case, the impact of pension expenditure on yearly revenue is around 11% while in the EU it is below 2%, because, in their case pensions are disbursed out of Contributory Pension Funds instead of Revenue Collections.
The most significant aspect of contributory funded pensions is the growth of the economy. Pension funds accumulate large amounts of resources, providing long-term capital and stability to the stock market (by providing investment capital for industrial enterprises). For example, in the United States investors with over $10 trillion in pension fund assets now own up to 76% of the stock market. If it was not for the pension funds, the US economy would have collapsed in a matter of days, not weeks. It is noteworthy that while in our case pensions are unsustainable liability, for others, pension funds act as a pivot for economic growth.
The Implications of Early Retirement in Armed Forces
The retirement age for soldiers in the armed forces is quite low as fighting echelons require a younger lot. This results in an annuity over excessively longer durations compared to the short contributory span. The problem is addressed through post-retirement placement as a part of constitutional obligation which on one hand, provides the livelihood for the soldiers while on another hand it allows pension contributions to continue over a much longer span. In most cases, contributions towards the pension fund would be for 40-45 years, whereas, pensions would be paid for 20 years or so. This results in adequate annuity and higher retirement benefits. The positive impact of these measures on the economy is very significant as pension funds are invested in assets for generating high revenues.
SUPPLEMENTARY PENSION PLAN FOR THE ARMED FORCES
The Armed Forces Pension Practices
Most countries practice parallel pension plans for annuity and benefits. A centrally managed plan for the annuity for the life of the employee is funded by the State. A Supplementary Pension Plan for retirement benefits, based on employees’ contributions is managed in a decentralized manner.
For example; in the USA, the State contributes 5% of basic salary towards the Military Pension Fund that would disburse annuity through the life of veterans. Thrift Savings Plan (TSP) is the supplementary pension fund based on employees’ contributions (minimum 5% of basic salary) providing retirement benefits. It is outsourced to Black Rock Holdings.
In Turkey, Armed Forces Supplementary Pension Plan (Oyak) was initiated in 1961. It was the country’s first pension fund which is now the largest business enterprise amongst the best pension funds in Europe. The resounding success of Oyak has led to the setting up of similar pension funds in the government and corporate sectors.
The Indian case of pension reforms is very interesting. India had recently adopted OROP (One Rank One Pension) for its armed forces. This is a legacy system funded out of the revenues. Very soon, it was realized that the OROP was not sustainable. Resultantly, India is now in the process of implementing policy reforms that allow soldiers not to engage in combat duties and serve till the age of 60. This will impact around 50% of soldiers and reduce pension liability quite significantly. The majority of soldiers from combat arms are to being provided employments on retirement while their pensions are protected under the OROP scheme.
The Rationale and Prospects of Armed Forces Pension Plan in Pakistan
The pension system in Pakistan is in disarray. The past initiatives aimed at contributory funded pension systems, such as EOBI and Voluntary Pension System (VPS), are performing much below par. The ongoing effort for pension reforms in the shape of the National Pay and Pension Commission (NPPC) is unlikely to address these challenges. It has a restricted mandate and is not reform-oriented. It is at best a damage control exercise that may end up adding to the emerging crisis instead of mitigating it.
The Armed Forces Pension Fund (AFPF) has stronger fundamentals and higher success probability in comparison to federal and provincial plans. Not only the AFPF will address veterans’ vows, more significantly it will contribute to the growth of the national economy. Like Turkey, it can act as a role model for the government and corporate sectors.
AFPF will effectively cater to the post-retirement settlement of veterans. The contributions will be significant providing investment capacity in the reign of $880 mn in the first year and growing at the rate of 10-15% annually. PWF has compiled a study on the post-retirement employment, retirement benefits, and investment potential of AFPF. This can be presented if desired.
PENSIONS REFORMS
A large number of pension anomalies and distortions exist due to which federal pensioners and widows are not being given their full entitlements. Some of the major anomalies are given below:
1. Denial of Annual Pension Increase on Gross Pension. Despite LHC and Supreme Court Verdicts, the Ministry of Finance through a new policy on Pay and Pension changed the basis of payment of annual increase from Gross to Net Pension in 2001. In clear contravention to the rules, this was applied retrospectively to pensioners who retired before 2001. This resulted in a 50% cut on the increase in pension. In response to a Writ Petition filed by the affectees, Federal Services Tribunal and Lahore High Court decided in favor of pensioners. The government of Pakistan filed an appeal before the Supreme Court which was rejected. PWF also filed a fresh petition in LHC on behalf of 138 members in Oct 2021 which was decided in favor of the petitioners.
Ministry of Finance has hitherto declined to restore the increase in Gross Pension. The PWF is continuing to pursue the case and is filing a fresh petition in Lahore High Court.
2. Ad-hoc Annual Increases Granted in Pension. Six ad-hoc increases are being granted in pension on retirement to all and sundry @ 15% for 2011, 7.5% for 2015 and 10 % each for 2016, 2017, 2018 and 2019. With an accumulative effect of 81% increase, the retiring pension rises 27% above the last drawn pay of a retiree.
Presumably, these ad-hoc increases were availed by these pensioners during their service. As a result; a Major retiring in 2020, with last pay at Rs. 120,000 ends up with a pension of Rs. 152,000, Rs. 32,000 more than the last pay drawn. These increases have led to an unprecedented rise in the pension budget over the last ten years. Ironically, on one hand, the legitimate entitlement of an increase on gross pension for the old retirees has not been restored despite the Supreme Court verdict while on the other, these unjustifiable six ad-hoc increases continue to be granted even though the government cannot bear the impact.
3. Widows Pension. In July 2010, the Ministry of Finance notified a grant of an increase in the Family Pension from 50% to 75% on the Gross or Net pension as the case may be. The Auditor General of Pakistan clarified that the increase will apply to the pension last drawn by the deceased pensioner.
However, the CMA and CMA (OP) continue to calculate widows’ pensions based on an old letter of 1964 resulting in the actual disbursement of approx 62% of the last drawn pension (instead of entitlement of 75%). The validity of instructions contained in the 1964 letter is questionable after the issuance of instruction by the Ministry of Finance in July 2010.
4. Gratuity/Pension for Widows of Shuhada & In-Service Death (ISD) Cases and their Transfer to NOK. Gratuity granted to widows of Shuhada and ISD cases is not restored as a matter of routine. This should be adjusted automatically without waiting for a request/claim from the widow.
5. Transfer of Pension to NOK of Shuhada. Another anomaly is that family pension is not transferred to children of Shuhada and ISD cases as in ordinary family pension.
6. Grant of Usual Increment. The usual increment was granted by the government in the year 2014 to the pensioners. All those who have completed 6 months of service in the year of retirement are eligible for the grant of the usual increment.
Pakistan has a distorted version of a legacy pension system that is no longer sustainable since pensions are paid from the revenue collection since no pension fund exists for the federal pensioners. Our pension expenditure is doubling every four years while the annual growth of revenue is lower than 10%. The pension benefits extend beyond the pensioner’s life to his wards which is uniquely exceptional. Most economists believe Pakistan is in the midst of a crisis and pensions blowout in the coming 6-8 years is a possibility. Major pension reforms are, therefore, unavoidable to avert a socio-political crisis and the collapse of our economy.
If both the federal budget and pension expenditure keep on growing at the current rate, by 2050 the pensions would claim 56% of the federal revenue, leaving hardly any money for defense, development, and other essential expenses.
Despite a small pension footprint of 3% of the population and pensions around 12% of current expenditure, we are heading towards a serious crisis. In comparison, pension and social protection in European Union account for nearly 34% of current expenditure. In our case, the impact of pension expenditure on yearly revenue is around 11% while in the EU it is below 2%, because, in their case pensions are disbursed out of Contributory Pension Funds instead of Revenue Collections.
The most significant aspect of contributory funded pensions is the growth of the economy. Pension funds accumulate large amounts of resources, providing long-term capital and stability to the stock market (by providing investment capital for industrial enterprises). For example, in the United States investors with over $10 trillion in pension fund assets now own up to 76% of the stock market. If it was not for the pension funds, the US economy would have collapsed in a matter of days, not weeks. It is noteworthy that while in our case pensions are unsustainable liability, for others, pension funds act as a pivot for economic growth.
The Implications of Early Retirement in Armed Forces
The retirement age for soldiers in the armed forces is quite low as fighting echelons require a younger lot. This results in an annuity over excessively longer durations compared to the short contributory span. The problem is addressed through post-retirement placement as a part of constitutional obligation which on one hand, provides the livelihood for the soldiers while on another hand it allows pension contributions to continue over a much longer span. In most cases, contributions towards the pension fund would be for 40-45 years, whereas, pensions would be paid for 20 years or so. This results in adequate annuity and higher retirement benefits. The positive impact of these measures on the economy is very significant as pension funds are invested in assets for generating high revenues.
SUPPLEMENTARY PENSION PLAN FOR THE ARMED FORCES
The Armed Forces Pension Practices
Most countries practice parallel pension plans for annuity and benefits. A centrally managed plan for the annuity for the life of the employee is funded by the State. A Supplementary Pension Plan for retirement benefits, based on employees’ contributions is managed in a decentralized manner.
For example; in the USA, the State contributes 5% of basic salary towards the Military Pension Fund that would disburse annuity through the life of veterans. Thrift Savings Plan (TSP) is the supplementary pension fund based on employees’ contributions (minimum 5% of basic salary) providing retirement benefits. It is outsourced to Black Rock Holdings.
In Turkey, Armed Forces Supplementary Pension Plan (Oyak) was initiated in 1961. It was the country’s first pension fund which is now the largest business enterprise amongst the best pension funds in Europe. The resounding success of Oyak has led to the setting up of similar pension funds in the government and corporate sectors.
The Indian case of pension reforms is very interesting. India had recently adopted OROP (One Rank One Pension) for its armed forces. This is a legacy system funded out of the revenues. Very soon, it was realized that the OROP was not sustainable. Resultantly, India is now in the process of implementing policy reforms that allow soldiers not to engage in combat duties and serve till the age of 60. This will impact around 50% of soldiers and reduce pension liability quite significantly. The majority of soldiers from combat arms are to being provided employments on retirement while their pensions are protected under the OROP scheme.
The Rationale and Prospects of Armed Forces Pension Plan in Pakistan
The pension system in Pakistan is in disarray. The past initiatives aimed at contributory funded pension systems, such as EOBI and Voluntary Pension System (VPS), are performing much below par. The ongoing effort for pension reforms in the shape of the National Pay and Pension Commission (NPPC) is unlikely to address these challenges. It has a restricted mandate and is not reform-oriented. It is at best a damage control exercise that may end up adding to the emerging crisis instead of mitigating it.
The Armed Forces Pension Fund (AFPF) has stronger fundamentals and higher success probability in comparison to federal and provincial plans. Not only the AFPF will address veterans’ vows, more significantly it will contribute to the growth of the national economy. Like Turkey, it can act as a role model for the government and corporate sectors.
AFPF will effectively cater to the post-retirement settlement of veterans. The contributions will be significant providing investment capacity in the reign of $880 mn in the first year and growing at the rate of 10-15% annually. PWF has compiled a study on the post-retirement employment, retirement benefits, and investment potential of AFPF. This can be presented if desired.