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Rise in pension expenditure has the SBP worried

This increased expenditure is attributed to a rise in life expectancy which extends the pension support duration and low investment returns which then causes a reduction in funding, according to the SBP report.

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In its first quarterly report of the fiscal year 2021, the State Bank of Pakistan (SBP) revealed that the last decade has seen an increase in the public sector’s pension expenditure. Federal and Provincial pension expenditure has increased to approximately 18 percent. In the last five years, military pensions constituted 35.8 percent while civil pensions, both federal and provincial made up 63.2 percent of the total pension expenditure.

This increased expenditure is attributed to a rise in life expectancy which extends the pension support duration and low investment returns which then causes a reduction in funding, according to the SBP report.

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“Pension spending as a percentage of total budgeted expenditures for FY20 exceeded health and education spending on both federal and provincial fronts and is almost half the level of consolidated development expenditures,” the report added further. 

According to the SBP, the world’s leading financial institutions like the International Monetary Fund and the World Bank have expressed their concerns over the rising pension expenditure and its implication for Pakistan’s debt sustainability.

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Civil service pension expenditure would surpass wage expenditure by 2023 and 2028 in Punjab and Sindh respectively and reach the federal government’s level by 2050, the World Bank predicts.

“It is important to mention that structural factors, such as the size of the civil government and the military, the unfunded nature of pensions, and the disproportionally high share of non-gazetted employees (95.3pc of total federal government employees), are all important factors governing the overall level of pension expenditures in the country,” the SBP report maintained.

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In recent years, Pakistan has seen an increase in the early retirement of government employees. “As of January 2019, the month for which the latest data is available, more than 60pc of all new retirees in Punjab were below the age of sixty, and the ratio was 67pc for employees retiring from grade 16 and lower,” reports Dawn.

Since 2013, the number of government retirees has increased by 25 percent; however, the pension expense has increased by 432 percent from Rs 55 billion to Rs 238 billion. The total pension liabilities of the federal and provincial governments in 2019 claimed a quarter of revenues collected by FBR.

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Family pension in Punjab saw an increase from Rs. 3.5 billion in the fiscal year 2011 to Rs. 28.6 billion in the fiscal year 2019. In Sindh, it went up to Rs. 16.7 billion in the fiscal year 2018. The SBP attributes the rise in family pension to the burdened economy.

“It is pertinent to mention here that the retirement age of 60 years is already markedly lower than many other countries,” the report said. Delayed retirement would pave way for a longer contribution period, it added.

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