muhammadraziq

8/6/2019 MuhammadRaziq

http://slidepdf.com/reader/full/muhammadraziq 1/43

11



22

PRESENTATION ON PENSION

REFORMS BY

MR. MUHAMMAD RAZIQ,

SENIOR JOINT SECRETARY

(REGULATIONS) FINANCEDIVISION GOVERNMENT OF

PAKISTAN

PRESENTATION ON PENSIONPRESENTATION ON PENSION

REFORMS BYREFORMS BY

MR. MUHAMMAD RAZIQ,MR. MUHAMMAD RAZIQ,

SENIOR JOINT SECRETARYSENIOR JOINT SECRETARY

(REGULATIONS) FINANCE(REGULATIONS) FINANCEDIVISION GOVERNMENT OFDIVISION GOVERNMENT OF

PAKISTANPAKISTAN



33

Pension Reforms - Basic Concept

Article 38(c) of the Constitution of the Islamic Republic

of Pakistan stipulates that the State shall provide for allpersons employed in the service of Pakistan or otherwise,social security by compulsory social insurance or otherneeds. While the system of compulsory social insurancehas not so far been introduced by the Government for allthe persons employed in the service of Pakistan excepting

the Group Insurance Scheme administered by theEstablishment Division; entitlement for pension & gratuityhas been provided in Section 19 of the Civil Servants Act,1973. That Section is reproduced as under:-

Pension & Gratuity.- (1) On retirement from service, a civilservant shall be entitled to receive such pension orgratuity as may be prescribed.



44

(2) In the event of the death of a civil servant, whetherbefore or after retirement, his family shall be entitled toreceive such pension, or gratuity, or both, as may beprescribed.

(3) No pension shall be admissible to a civil servantwho is dismissed or removed from service for reasonsof discipline, but Government may sanctioncompassionate allowance to such a civil servant, notexceeding two-thirds of the pension or gratuity whichwould have been admissible to him had he been

invalided from service on the date of such dismissal orremoval.



55

(4) If the determination of the amount of pensionor gratuity admissible to a civil servant is delayedbeyond one month of the date of his retirement ordeath, he or his fami ly, as the case may be, shall bepaid provisionally such anticipatory pension orgratuity as may be determined by the prescribedauthority, according to the length of service of the

civil servant w hich qualifies for pension or gratuity;and any over payment consequent on suchprovisional payment shall be adjusted against theamount of pension or gratuity finally determined as

payable to such civil servant or his family.



66

2. The present Pension Scheme was introducedin 1954 in the form of pension-cum-gratuityscheme, 1954 as amended from time to time. I ts

salient features are as under:-

Retiring age 60 years. Voluntary retirement on completion of 25 year

service.Pension rate (70 % of the last pay drawn) on

completion of 30 years service.

I f service is less than 30 years, proportionatereduction is made according to



77

the follow ing table:-

PENSION TABLE

SCALE OF PENSIONEXPRESSED AS FRACTIONS OF

AVERAGE EMOLUMENTS

COMPLETED YEARS OFQUALIFYING SERVICE

140/30020

133/30019

126/30018

119/30017

112/30016

105/30015

98/30014

91/30013

84/30012

77/30011

70/30010



88

210/30030 and above

203/30029196/30028

189/30027

182/30026

175/30025

168/30024

161/30023

154/30022

147/30021



99

Commutation is restricted to 35% of gross pension whereasthe remaining is paid in the form of net pension.

3. BENEVOLENT FUND This is a k ind of a collective welfarefund to which every Federal employee is required under the

Federal Employees Benevolent Fund and Group Insurance Act1969 to pay a monthly subscription at the rate of 2% of pay,subject to a maximum of Rs.155/ -. From the Fund, a monthlygrant is provided for life to :-

a) An employee invalidated out of service on Medical Grounds.

b) His/ her spouse if the employee dies while in service orafter retirement upto the age of 70 years or to other

dependents for 15 years or upto the time the employee wouldhave attained the age of 70 years if he had been alive.



1010

4. GROUP INSURANCE FUND Under th is scheme, alump sum financial relief is provided to the bereavedMember/ Members of the family if the employee dies

during service. Every Federal employee (BPS-16 andabove) is required to pay a monthly subscription@ paisa 35 per thousand of Sum Assured to the Fund.How ever, the contribution on behalf of employees inBasic Pay Scale 1-15 is paid by the Government/employers. As per present pay structure, the minimumamount payable on death of the lowest Gradeemployees is Rs.70,000. The max imum lim it isRs.520,000.



1111

5. Gratuity

Qualifying service – Five years or more but less than10 years.

Gratuity is equal to one month’s pay for eachcompleted year of service.

In case of in service death/ invalidation – Gratuity is 1½ months pay for each completed year of service.

Retirement due to Abolition of a post or replacementby FPSC nominee (Gratu ity is 1 month pay for each

completed year of service. If service rendered is less than25 years but more than 10 years).

Maximum amount of gratuity = Rs. 1,75,000.

6. Family Pension.In case of in-service death, the w idow / eligible family

members get 50% of gross pension plus gratuity equal to25% of gross pension.



1212

In case of death after retirement, w idow/ members of family get 50% of the pension drawn by the deceased.

Family pension is admissible for l ife/ remarriage of thew idow/ marriage of daughter/ marriage of dependentsisters/ 21 year sons..

Dependant disabled/ retarded children get familypension w ithout any age limit.

7. SPECIAL FAMILY PENSION / GRATUITY: In case of death/ disabil ity in course and consequence of governmentduty the family or the employee is allowed additionalpension and gratuity as under:-

Disabil ity Class 'A'/ Death.a) Pension @ 20% of pay subject to a minimum of Rs.500/ - and maximum of Rs.3000/ - p.m.

(Note:- After death it w il l devolve on the w idow)



1313

b) Each child w ith own mother l iving 2½% of paysubject to a minimum of Rs.125/ - and maximum of Rs.250/ - per chi ld.

c) Each child w ithout own mother 5% of pay subject to aminimum of Rs.250/ - and maximum of Rs.300/ - per

child. The pension is admissible to un-marrieddaughters and to sons upto the age of 18.

d) Gratuity equal to six months pay.

Disability Class 'B‘

a) Pension @ 15% of pay subject to a maximum of Rs.2500/ - and minimum of Rs.375/ -.

b) Each ch ild wi th own mother liv ing 2.5% of paysubject to a maximum of Rs.125/ - and minimumRs.250/ - per chi ld.



1414

c) Each child w ithout own mother 4% of pay subject

to a maximum of Rs.400/ - and minimum of Rs.200/ -per child.

Disability Class 'C'

Pension @ 15% of pay subject to a maximum of Rs.2500/ - and minimum of Rs.375/ -.

8. HEALTH FACILITY AT GOVERNMENT EXPENSE

EXTENDED TO RETIRED GOVERNMENT SERVANTS.

Retired government servants are entitled to medicaltreatment (both indoor and outdoor) at government

expense at par w ith the facil ity available to the servinggovernment servants. They are also allowed facility of reimbursement of medical charges.



1515

9. GENERAL PROVIDENT FUND SCHEME ON

CONTRIBUTORY BASIS. Government servants arerequired to contribute to General Prov ident Fund onprescribed rates. Against their credit in the fund, theyhave the facility to get an advance refundable in

installments from their pay. Facil ity of a nonrefundable advance to the extent of 80% of theirbalance in the fund is also available to them onattaining the age of 45 years and 100% on attaining

the age of 50 and 55 years. The balance amount at thetime of his retirement is paid to him alongw ith anyinterest accrued thereon. How ever, an option isavailable to a government servant as to whether he

wants to receive interest on the amount contributed byhim or not. In case he opts not to receive interest, he isgiven the facility of interest free housebuilding/ conveyance advances.



1616

10. ISSUES: (1) Pak istan’s present pension scheme for its

public servants is a Defined Benefit in nature. Pension isdetermined as a percentage of final salary and length of service. There are no contributions to the scheme and ismaintained on an unfunded basis that is presently there isno Pension Fund. The expenditure is exclusively financedby the Government of Pakistan by obtaining a provision inthe yearly budget for th is purpose. There is a need toestablish a separate National Pension Fund to provide forregulatory frame work.

(2) The objective of the scheme is to (i) attract workers toservice by offering a reasonable compensation packageafter retirement and (ii) to assure that on retirement they

w ill not experience any drastic reduction in their monthlyincome. While this objective is welfare-oriented, there isnow a strong need for contributions from the Governmentservants tow ards their pension, because the resources of

the country are not abundant



1717

to entirely finance the expenditure on account of government pensions from the national budget. Thisis a collective Welfare Fund to w hich everyGovernment servant should now pay a monthly

subscription.

(3) The cost of pension has increased sharply fromRs.14.6 bil l ion in 1993-94 to about Rs. 40 bil l ion inyear 2002-03, as more and more w orkers are retiringand the number of pensioners is rising. According tofigures in year 2003, there were two pensioners forevery three workers than workers. Pension spendingnow consumes more than one tenth of the taxrevenues.



1818

Vital Statistics for the Government Pension Scheme as of 30 June2003. Please see also increasing pension cost for the year 1993-2004.

(Rs. In millions)

45.8%39,4211,284,99985,9951,087,152Grand Total:

62.5%32,0001,010,366

51,207667,690Military Pension Scheme

21.3%7,421274,633

34,788419,462Civil Pension Scheme

59.1%33,4531,078,238

56,593800,220Sub Total

29.8%2,730126,372

9,176197,530 Armed Forces – Civil ians

64.8%30,723951,866

47,417602,690 Armed Forces – Personnel

Armed Forces

20.3%5,967206,761

29,402286,932Sub Total

33.7%1,27658,500

3,79065,000Civil Armed Forces (FC etc)

18.3%4,691148,261

25,612221,932Federal Government (including Rangers

& Coast Guards)

% age of Pay& allow

PensionExpenditure

Pay & al lowanc

es

Federal Government

Pension asTotalNumberTotalNumber

PensionersWorkers



1919

Further, there are inequities inherent in the current system;the important ones are briefly discussed below:

(4) Certain allowances are not counted towards thecalculation of pension such as House Rent allowance,conveyance, utilit ies etc. A target benefit of 70% of pensionable pay comes to about 45% of take home pay. The

cost of pension could have been much higher if theseallowances were counted in the calculations of Pension.

(5) The Government servants who get retirement at early

ages continue to receive pension for a long time rangingfrom 40 to 60 years and become a source of burden on thenational exchequer on long term basis. Currently there is noadjustment in pension for workers who retire early to take

care of the fact that pension will be paid for a longer timeperiod than those w ho retire at superannuation. Furtherpension is paid on completing a minimum of 25 years of service. A w orker w ho quits the service after 25 years getssubstantial pension, while if he leaves service before



2020

completing 25 years of service, say at 24 years, he is denied

any pension benefits. There is a need to prescribe a minimumage, say 50 years, before which pensions may be earned butnot received. Such pensioners may be given an option eitherto receive gratuity at the time of their retirement equal to one

month’s pay for each completed year of service or receivepension after they attain the age of 50 years.

(6) The increase in pension is allowed to make up for theincrease in cost of living; it is given on an ad hoc basis. There

is no commitment on the part of government for pensionindexation, no regular reviews are carried out and there is noformula to determine the scale of increase. These ad-hocincreases and the current indexation policy have led to

inequity among old and new pensioners. Further the practiceto wait for a few years and then announce the pensionincrease works against the pensioners. Resultantly, theirvalue of pension has deteriorated over time, especially for old



2121

pensioners (retirees prior to 1994).

From 1973 todate the Government had, increasedpension on 17 occasions and gave indexation in pensionon four occasions mainly to old pensioners, who hadretired at a very low gross pension which have not been

able to stop erosion in the income levels of the oldpensioners.

(7) The disparity has further increased ow ing to theperiodical revision of pay scales alongw ith ad-hocincreases in pension drawn. In order to make up thisgap between the rate of pension admissible to the oldand new pensioners, increases were given in the past

which were based more on perception than analysis andhad little or no correlation w ith the changes in the payscales. The result was that disparity in both gross andnet pensions continued to rise.



2222

While it is a desirable objective to completely

eliminate disparity among pensioners of the samerank, it is not possible to do so at one go because of the complexity of the task and financial implicationsinvolved.

(8) One method suggested by a number of servicegroups and individuals for equalizing pensions is toadopt a "one rank -one pension" scheme irrespective

of the date of retirement and last pay draw n. I thowever is not advisable to adopt it across the boardfor all pensioners. Firstly the concept of rank cannotbe clearly defined in the ex isting complexadministrative system as there are a large number of pay scales and designations. Furthermore pension isappropriately a function of the pay drawn and number



2323

of years of service rendered and it is not justifiable that the

same pension be allowed to two officers who retired atdifferent rates of pay after having put in varying years of service in Government. This is a very vital issue, which needsimmediate attention of Government of Pak istan. The logical

method for equalizing pensions is a complex formula whichinvolves the notional fix ation of pay, of old pensioners, in thecurrent pay scale and then adopting the same formula forcalculating their pensions afresh on the same basis as forserving employees who are due for retirement. This would

bring the past and present pensioners on a common platformand all can then be treated on an equal footing. Thisprocedure would, how ever, require the availability of recordsof all old retirees and it w ould take considerable time for

revision of the old cases. The most daunting reason how everis the financial implication involved which would be verysubstantial.



2424

9. Commutation Issues:

More than 40% of pension expenditure each fiscal yearis spent on commutation, which only benefit the newretirees (about 6% of total pensioners).

Commutation factors are not based on fairassumpt ions, and ignore, for instance, the time value of money. Further the factors benefit early ages, which

are much higher than the fair values; however, at agesclose to retirement age or at 60 years, the factors arelower than the fair values.

Higher commutation percentage means lower pensionin future, which is not in l ines w ith the originalobjective of preserving the standard of living.



2525

10. Recommendations: (1) The Pay & Pension committeeof 2001 took notice of the above issues, and

recommended a number of changes to pension scheme /rules that were subsequently implemented. It alsorecommended that for new entrants a new (DefinedContributions) DC system should be considered. Since

then the government has been taking different actionsand initiatives to appropriately consider and evaluatedifferent proposals for reforms. In year 2002, Cabinetdecided that a Contributory Pension Scheme be

introduced for employees entering the service after a setdate.

(2) In the light of the Cabinet decision and as part of acomprehensive reform to improve financial management

in the country the Federal government established an Actuarial Office (AO) under the M inistry of Finance (MoF)tow ards the end of 2002. The AO took up the challenge of estimating the ex isting liability on account of pension

schemes and proposing different options to reform thepension scheme.



2626

(3) In 2004, government created a special Pension ReformWorking Group (PRWG) to evaluate the different

proposals and to develop recommendations for reformingthe pension system in the country, w ith members fromthe M inistries, Actuarial Office. PRWG submitted report tothe Pay & Pension committee in March 2005.

(4) On the basis of recommendations of the PRWG, studiesof the Actuarial Office and the deliberations of the Pay & Pension committee of 2004, the government has now

been contemplating to introduce a Defined Contributions(DC) scheme, applicable only to workers joining theservice after 1st July 2006.

(5) To introduce the Contributory Pension Fund Scheme forthe new entrants, Actuarial Office has submitted reports /made presentations, from time to time, evaluating variousPension Reform Options, along w ith the cost projections.



2727

(6) To reform the existing Pension Scheme for the existingemployees, parametric reforms w ere proposed alongwith

the rationale for each parameter and cost projections. TheGovernment of Pakistan considered theserecommendations at the time of the finalization of theBudget proposals for the FY 2005-06 and keeping the

affordability and other factors in view only reduced thecommutation percentage by 5% .

(7) Decisions on the proposed options in regard to newentrants have yet to be taken. In case any changes in the

proposed options are to be made, fresh pension costprojections w ill have to be prepared.

(8) Implementation of parametric reforms may berelatively simple, w ith a very little Actuarial input like the

Actuarially fair commutation tables, fair early retirementpenalties etc. How ever, for the implementation of Contributory Pension Fund scheme (systemic reforms),significant work needs to be done like basic



2828

infrastructure including record keeping, capacity building

in government and the follow ing arrangements:-

i ) Inst itut ional arrangements, preparat ion of legalframework and Rules & Regulations for Contributory

Fund Management and record keeping.

i i) Contr ibut ion level for employees and employer.

ii i) The investment strategy for managing the Fund.

iv) Preparation of parameters w ith different options.

v) Circulation of scheme w ith different options among

stakeholders and other experts for comments andpreparation of draft of final scheme.



2929

(9) In this connection, the Pay & Pension Committee

constituted a sub-committee w ith representativesfrom Actuarial Office, Finance Division and PrivateSector. The sub-committee reviewed the existingpension system keeping in view the recommendationsof Actuarial Office and work ing group on pensionreforms. The sub-committee have recommended(these recommendations are part of the Pay & Pension Committee report) follow ing reforms in theexisting pension system both for civil and ArmedForces personnel to be implemented in tw o phasesw ith the premise that ex isting pay scales areincreased by 40% (The GOP, however, increased thebasic pay scales by 15% and also allowed 15%Special Relief Allowance given from 01-07-2003 and15% ad-hoc relief given from 01-07-2004 to continueto be drawn at frozen level as on 30-06-2005):-



3030

i. I. First Phase (2005-06

a. Civil Servants-Ex isting Employees:- The recommendations of the Pay & Pension Committee given for the first phase and commentsthereon are given as under:-

Recommendations Comments

Proposal is supported -Since the existing

accrual rate is 2.33 peryear, its reduct ion to2.2 per year w ill cause areasonable amount of

savings.

For normal retirementthe Accrual rate will be 2.2for each year of service.



3131

Supported.

Supported.

Supported. The reductionpercentage will be 3.5% foreach year less than the age

of 60 years from the age atearly retirement, subject tothe maximum reductionpercentage being 50%. This

means that an employee

The maximum pension

wil l be 70% which wil l beearned after 32 years of service.

The pension w ill be basedon the last drawn pay. Thepay being defined as atpresent.

For employees leavingbefore the age of 60 years, theaccrual rate will be 2.0% and

the pension will be actuariallyreduced.



3232

retiring at the age 50 yearsafter completing 25 years ofservice, will get his grosspension based on the accrualrate of 2.0% per annum,reduced by 35% (Age 60

minus age 50 is 10 years andthis multiplied by 3.5% givesreduction factor as 35%).

The Government of Pakistanhas already reduced it from40% to 35%. Furtherreduction not recommended.

Recommended. Therepresentatives from the

The Commutation will beallowed up to 30% of the grosspension.

As from FY (2006-07) theannual increase in pensions



3333

World Bank have alsosupported it.

These may be examined by thenew Actuary as and whenappointed.

will be indexed to CPI. Theincrease being 60% of CPI,subject to maximum increasebeing 10%. For this purposethe CPI of the immediatelypreceding calendar year will

be used.

ii.Second Phase

The Actuarial Office willmake efforts to collect furtherdata and will submitrecommendations afterdetailed study, on some of thefollowing proposedparametric reforms to be



3434

adopted in second phase:-

Commutation Factors tobe determined on soundactuarial basis.

Gradual reduction of thecurrent accrual rate to2.0% for Civil Servants and

2.5% for Armed Forces fornormal retirements.

Pay for pension purposes

to include certainallowances to movetowards more fairerpensionable pay base.



3535

Changes in the accrual ratecorresponding to any changesin the pension able pay base.

Benefits in the form of lump

sum to employees leavingservice voluntarily after 10/15years of service before theage of 60 years for CivilServants. Presently no benefit

is payable.

Merging of GPF, Group

Insurance and Benevolent

Fund Systems into onepackage of retirement benefits

System on contributory or

non contributory basis.



3636

New Employees

New employees w ill be covered under anew Defined Contributory Benefit Scheme

w.e.f. 01-07-2006. For the new scheme astudy is to be undertaken by the ActuarialOffice to make recommendation about (i)

institutional arrangements for legaloversight for Pension Fund Managementand for record keeping, (ii) contribution

levels for employees and employer; and(iii) the investment strategy for managingthe Pension Fund.



3737

What then must we do now? - Main Issues and the decisionsrequired to be taken thereon.

In order to ensure equity and justice, thebenefits admissible under the DefinedContributions Scheme must becomparable to the present pensionscheme of the Government. The ActuarialOffice has estimated that if a contributionequal to 25% of the pay is made andinvested and which yields a real interest

rate of 3% then the accumulation at theend of service would be enough togenerate annuities that would becomparable to 70% of the pensionablepay i.e. it w ould be just equal to thebenefit admissible under the current

scheme.

What would be the salientfeatures of the DefinedContributions Scheme for theemployees joining service on orafter 1st July, 2006 – ( i.e. theSystemic Reforms)?

2.

For the New Employees:

The post has been advertised to recruit asuitable person.

A new Actuary is required to berecruited to complete theunfinished work of the

Actuarial Office.

1.

Comments of the Regulations WingIssues



3838

The principle of justice and equitydemands that the pay of the newemployees be increased to cover

the cost of employee contribution.With the introduction of theContributory Pension Scheme, thegovernment may consider eitherabolishing the General Provident

Fund scheme or may considerremoving the condition of mandatory contribution in theGeneral Provident Fund Scheme.

Should the governmentincrease the pay of thenew employees to cover

the cost of contributionand whethersimultaneously it wouldbe mandatory to retainthe GP Fund Scheme?

4.

Normally the sharing of thecontribution should be on 50:50

basis. GOP’s contribution can be onnotional or actual transfer basis. Inorder to reduce future liability,GOP’s contr ibut ion should be onactual transfer basis.

Who would contributeand at what rate?

Whether thegovernment or theemployee or the both.

3.



3939

The government may not offer theguarantees but may put in place atransparent arrangement of (i) reportingregular investment (ii) portfolio perfor-mance updates (i ii) choice of portfol ioswith low risk low return and higher risk higher return (iv) option to choose asset

manager and (v) employee represen-tat ion on the Board of D irectors.

Alternatively the GOP may considerassuring the all concerned that therewould be a 3% real return on investment,but if the fund does better than the

ceiling, the government would keep thedifference or the government mayguarantee a low f loor - that the returnw il l not go below say 2.5% , but if thefund does better, the account holder

would keep the difference.

Would the governmentprovide guarantees againstthe invested funds?

6.

Normally the Defined ContributionSchemes do not guarantee any assuredreturns and the pensioners may get a lowreturn or even suffer a loss but if thefunds are well invested, the benefits canincrease manifold.

Would the scheme offerassured or variable returns?

Would the pensioners facethe risk of getting a lowreturn or suffering a loss?

5.



4040

Normally, there should be noobjection to it but thesefeatures may be fine tuned

around the basic model thatw ill emerge from the abovedecisions.

Would the pension beportable – can theemployee take the scheme

elsewhere if he leaves thefederal governmentemployment earlier?

8.

A Pension Authority may beestablished w ith a clear

mandate to oversee either theonly government pensionscheme or the entire pensionsector. If this is not consideredfeasible a lean organizationthat relies on AGPR forcontribution record, and assetmanagement entities may beestablished which may cover

only the pension of the FederalGovernment employees.

What type of governancearrangement w ould be put

in place for the investmentof all contributions intoindividual pensionaccounts?

7.



4141

The government may only ensurethat the pension accumulation isused to purchase an annuity andfor this purpose may strengthenthe insurance and annuity sectorand the SECP may draw up a longto medium term plan inconsultation w ith the M inistry of Finance in this regard. Once this

is done, the government shouldhave no further liability.

Would the aboveguarantees / arrangementsof the government makethe scheme successful.

9.

Parametric Reforms Package for the existing employees:



4242

Parametric Reforms Package for the existing employees:The current commutation table, which encourage younger

employees to get pension on higher rate may be madeactuarially fair and the concept of pension adjustmentmay be introduced for early retirees. Indexation of pension may be introduced and balanced by the follow ing

provisions:-(a) Reduce the level of commutation to 25% which would

ultimately help to protect the pensioners life style andregulate the trend of consumption after retirement

through higher annuity payments.

(b) Service required for full pension be increased from 30 to32 years.

(c) Some system of gratuity for service between 10 to 24years may be introduced so that the people who have lostinterest from government service do not hang on til l 25years just to earn pension.



4343

Thank You…

muhammadraziq

Documents