PENSION OF GOVERNMENT SERVANTS WITH FOCUS ON INCENTIVES PAY & PENSION COMMITTEE REPORT, 2004 PRESENTED BY BY MR. MUHAMMAD RAZIQ, SENIOR JOINT

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2 PENSION OF GOVERNMENT SERVANTS WITH FOCUS ON INCENTIVES PAY & PENSION COMMITTEE REPORT, 2004 PRESENTED BY BY MR. MUHAMMAD RAZIQ, SENIOR JOINT SECRETARY (REGULATIONS) FINANCE DIVISION GOVERNMENT OF PAKISTAN 2

3 Pension Reforms - Basic Concept Article 38(c) of the Constitution of the Islamic Republic of Pakistan stipulates that - the State shall provide for all persons employed in the service of Pakistan or otherwise, social security by compulsory social insurance or other means. Entitlement for pension & gratuity has been provided in Section 19 of the Civil Servants Act, That Section is reproduced as under:- Pension & Gratuity.- (1) On retirement from service, a civil servant shall be entitled to receive such pension or gratuity as may be prescribed. 3

4 2. The present Pension Scheme was introduced in 1954 in the form of pension-cum-gratuity scheme, 1954 as amended from time to time. Its salient features are 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. If service is less than 30 years, proportionate reduction is made according to the Table Next Page. 4

5 PENSION TABLE COMPLETED YEARS OF QUALIFYING SERVICE SCALE OF PENSION EXPRESSED AS FRACTIONS OF AVERAGE EMOLUMENTS /300 77/300 84/300 91/300 98/ / / / / / /300 5

6 and above 147/ / / / / / / / / /300 6

7 Commutation is restricted to 35% of gross pension whereas the remaining is paid in the form of net pension. Age next Birthday COMMUTATION TABLE No. of Years Purchased Age next Birthday No. of years Purchased

8 COMMUTATION TABLE Age next Birthday No. of Years Purchased Age next Birthday No. of years Purchased

9 2. Gratuity Qualifying service Five years or more but less than 10 years. Gratuity is equal to one month s pay for each completed year of service. In case of in service death/invalidation Gratuity is 1 ½ months pay for each completed year of service. Retirement due to Abolition of a post or replacement by FPSC nominee (Gratuity is 1 month pay for each completed year of service. If service rendered is less than 25 years but more than 10 years). Maximum amount of gratuity = Rs. 1,75,000. 9

10 3. ISSUES: (1) Pakistan s present pension scheme is a Defined Benefit in nature. Pension is determined as a percentage of final salary and length of service. There are no contributions to the scheme and is maintained on an unfunded basis. There is a need to establish a separate National Pension Fund to provide for regulatory frame work. (2) The objective of the scheme is to (i) attract workers to service by offering a reasonable compensation package after retirement and (ii) to assure that on retirement they will not experience any drastic reduction in their monthly income. There is now a strong need for contributions from the Government servants towards their pension. 10

11 (3) The cost of pension has increased sharply from Rs.14.6 billion in to about Rs. 40 billion in year , as more and more workers are retiring and the number of pensioners is rising. Pension spending now consumes more than one tenth of the tax revenues. 11

12 Statistics for the Government Pension Scheme (30 June 2003). (Rs. In millions) Workers Pensioners Number Total Number Total Pension as Federal Government Pay & allowances Pension Expenditure %age of Pay & allow Federal Government (including Rangers & Coast Guards) 221,932 25, ,261 4, % Civil Armed Forces (FC etc) 65,000 3,790 58,500 1, % Sub Total 286,932 29, ,761 5, % Armed Forces Armed Forces Personnel 602,690 47, ,866 30, % Armed Forces Civilians 197,530 9, ,372 2, % Sub Total 800,220 56,593 1,078,238 33, % Civil Pension Scheme 419,462 34, ,633 7, % Military Pension Scheme 667,690 51,207 1,010,366 32, % Grand Total: 1,087,152 85,995 1,284,999 39, % 12

13 FEDERAL GOVERNMENT BUDGET PROVISIONS Estab. Charges Pension (Rs. In Billion) The pension budgets for the fiscal years to are as under: FISCAL YEAR PENSION BUDGET (Rs. in Billion) Rs Rs Rs Rs

14 4. Commutation Issues: More than 40% of pension expenditure each fiscal year is spent on commutation, which only benefit the new retirees (about 6% of total pensioners). Commutation factors are not based on fair assumptions, 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 ages close to retirement age or at 60 years, the factors are lower than the fair values. Higher commutation percentage means lower pension in future, which is not in line with the original objective of preserving the standard of living. 14

15 5. Recommendations: (1) The Pay & Pension committee of 2001 took notice of the issues, and recommended a number of changes to pension scheme. Recommended for new entrants a new (Defined Contributions) DC system. Since then the government has been taking different actions and initiatives to consider and evaluate different proposals for reforms. In 2001, Cabinet decided that a Contributory Pension Scheme be introduced for employees entering the service after a set date. (2) The Actuarial Office took up the challenge of estimating the existing liability on account of pension scheme and proposing different options to reform the pension scheme. 15

16 (3) In 2004, government created a special Pension Reform Working Group (PRWG) to evaluate the different proposals. PRWG submitted report to the Pay & Pension committee in March (4) On the basis of recommendations of the PRWG, studies of the Actuarial Office and the deliberations of the Pay & Pension committee of 2004, the government has now been contemplating to introduce a Defined Benefits (DB) scheme, applicable only to workers joining the service after 30th June,

17 (5) For the existing employees, parametric reforms were proposed keeping the affordability and other factors in view. (6) Implementation of parametric reforms may be relatively simple, with a very little Actuarial input like the Actuarially fair commutation tables, fair early retirement penalties etc. However, for the implementation of Contributory Pension Fund scheme (systemic reforms), significant work needs to be done like basic infrastructure including record keeping, capacity building 17

18 in government and the following arrangements:- i) Institutional arrangements, preparation of legal framework and Rules & Regulations for Contributory Fund Management and record keeping. ii) Contribution level for employees and employer. iii) The investment strategy for managing the Fund. iv) Preparation of parameters with different options. v) Circulation of scheme with different options among stakeholders and other experts for comments and preparation of draft of final scheme. 18

19 (7) The Pay & Pension Committee reviewed the existing pension system keeping in view the recommendations of Actuarial Office and working group on pension reforms. The sub-committee have Recommended following reforms in the existing pension system with the premise that existing pay scales are increased by 40% (The GOP, however, increased the basic pay scales by 15% and also allowed 15% Special Relief Allowance given from and 15% ad-hoc relief given from to continue to be drawn at frozen level as on ):- 19

20 The Committee recommended parametric as well as systemic reforms for pension system in two phases:- First Phase ( ) a. Civil Servants-Existing Employees:- Committee recommended following parametric reforms in the existing pension scheme:- Implementation Status For normal retirement the Accrual rate will be 2.2% for each year of service. The maximum pension will be 70% which will be earned after 32 years of service. The pension will be based on the last drawn pay. The pay being defined as at present. Not implemented as yet. -do- It is already in vogue. 20

21 For employees leaving before the age of 60 years, the accrual rate will be 2.0% and the pension will be actuarially reduced. The Commutation will be allowed up to 30% of the gross pension. As from FY ( ) the annual increase in pensions will be indexed to CPI. The increase being 60% of CPI, subject to maximum increase being 10%. For this purpose the CPI of the immediately preceding calendar year will be used. Not implemented as yet. Allowed upto 35% of the gross pension. Not implemented as yet. -do - 21

22 Armed Forces Existing Employees For normal retirement the Accrual rate will be 2.75% for each year of service. The maximum pension will be 70% which will be earned after 26 years of service. The pension will be based on the last drawn pay. The pay being defined as at present. The Commutation will be allowed up to 30% of the gross pension. Not implemented as yet. -do- Already in vogue. Allowed upto 35% of the gross pension. 22

23 For premature retirement, as defined, the accrual rate will be 2.5% and the total pension calculated on this basis will be reduced according to the existing rules. As from FY ( ) the annual increase in pensions will be indexed to CPI. The * increase being 60% of CPI, subject to maximum increase * being 10%. For this purpose the CPI of the immediately preceding calendar year will be used. Not implemented as yet. -do - 23

24 Second Phase Commutation Factors to be determined on sound actuarial basis. Gradual reduction of the current accrual rate to 2.0% for Civil Servants and 2.5% for Armed Forces for normal retirements. Pay for pension purposes to include certain allowances to move towards more fairer pensionable pay base. Actuarial Office has just become functional now; that office will consider this. -do- -do- The Actuarial Office will make efforts to collect further data and will submit recommendations after detailed study, on some of the following proposed parametric reforms to be adopted in second phase:- 24

25 Changes in the accrual rate corresponding to any changes in the pension able pay base. Benefits in the form of lump sum to employees leaving service voluntarily after 10/15 years of service before the age of 60 years for Civil Servants. Presently no benefit is payable. Merging of GPF, Group Insurance and Benevolent Fund Systems into one package of retirement benefits System on contributory or non contributory basis. -do- Actuarial Office has just become functional now; that office will consider this. -do- 25

26 New Employees New employees will be covered under a new Defined Contributory Benefit Scheme w.e.f For the new scheme a study will be undertaken by the Actuarial Office to make recommendation about (i) institutional arrangements for legal oversight for Pension Fund Management and for record keeping, (ii) contribution levels for employees and employer and (iii) the investment strategy for managing the Pension Fund. Actuarial Office has just become functional now; that office will consider this. 26

27 What then must we do now? - Main Issues and the decisions required to be taken thereon. Issues Comments of the Regulations Wing A new Actuary is required to be recruited to complete the unfinished work of the Actuarial Office. What would be the salient features of the Defined Contributions Scheme for the employees joining service on or after 1 st July, 2007 (i.e. the Systemic Reforms)? The post has been filled in now. In order to ensure equity and justice, the benefits admissible under the Defined Contributions Scheme must be comparable to the present pension scheme of the Government. The Actuarial Office has estimated that if a contribution equal to 25% of the pay is made and invested and which yields a real interest rate of 3% then the accumulation at the end of service would be enough to generate annuities that would be comparable to 70% of the pensionable pay i.e. it would be just equal to the benefit 27 admissible under the current scheme.

28 3. 4. Who would contribute and at what rate? Whether the government or the employee or the both. Should the government increase the pay of the new employees to cover the cost of contribution and whether simultaneously it would be mandatory to retain the GP Fund Scheme? Normally the sharing of the contribution should be on 50:50 basis. GOP s contribution can be on notional or actual transfer basis. In order to reduce future liability, GOP s contribution should be on actual transfer basis. Principle of justice and equity demands that the pay of the new employees be increased to cover the cost of employee contribution. With the introduction of the Contributory Pension Scheme, the government may consider either abolishing the General Provident Fund scheme or may consider removing the condition of mandatory contribution in the General Provident Fund Scheme. 28

29 5. 6. Would the scheme offer assured or variable returns? Would the pensioners face the risk of getting a low return or suffering a loss? Would the government provide guarantees against the invested funds? Normally the Defined Contribution Schemes do not guarantee any assured returns and the pensioners may get a low return or even suffer a loss but if the funds are well invested, the benefits can increase manifold. The government may not offer the guarantees but may put in place a transparent arrangement of (i) reporting regular investment (ii) portfolio performance updates (iii) choice of portfolios with low risk low return and higher risk higher return (iv) option to choose asset manager and (v) employee represen-tation on the Board of Directors. Alternatively the GOP may consider assuring the all concerned that there would be a 3% real return on investment, but if the fund does better than the ceiling, the government would keep the difference or the government may guarantee a low floor - that the return will not go below say 2.5%, but if the fund does better, the account holder would keep the 29 difference.

30 7. 8. What type of governance arrangement would be put in place for the investment of all contributions into individual pension accounts? Would the pension be portable can the employee take the scheme elsewhere if he leaves the federal government employment earlier? A Pension Authority may be established with a clear mandate to oversee either the only government pension scheme or the entire pension sector. If this is not considered feasible a lean organization that relies on AGPR for contribution record, and asset management entities may be established which may cover only the pension of the Federal Government employees. Normally, there should be no objection to it but these features may be fine tuned around the basic model that will emerge from the above decisions. 30

31 9. Would the above guarantees /arrangements of the government make the scheme successful. The government may only ensure that the pension accumulation is used to purchase an annuity and for this purpose may strengthen the insurance and annuity sector and the SECP may draw up a long to medium term plan in consultation with the Ministry of Finance. Once this is done, the government should have no further liability. 31

32 WHAT IS PAY? (Bounty of the State) 32

33 Pay as wages earned for the labour put in for the service to the State 33

34 COMPRESSION RATIO Article 38(e) of the Constitution mandates the state to reduce the disparity in the income level. In respect of Government servants, the above ratio has gradually been reduced to the present 1:10 through pay revisions in 1977, 1983, 1987, 1991,

35 Compression ratio of top and bottom Basic Pay Scales Period Mean Emoluments of Secretary - Peon Ratio Rs.4000 Rs : Rs.3000 Rs : Rs.3450 Rs : 23 35

36 The Ratio was : 1). 2). During Caliphate of Hazrat Umar ( AD) between the lowest and highest military personnel In UK : 25 1 : 11 3). In West Germany : 10 4). In Japan : 17 5). In India : 19 36

37 Sr.No. STANDARD SALARY PACKAGE FOR GOVERNMENT SERVANTS: FIXED PAY ALL INCLUSIVE Basic Pay Scale, 2005 Mean Of BPS Private Sector Pay Package Total Public Sector s Pay Package

38 Conveyance BPS-21 Rs.30,000/- Allowance BPS-22 Rs.30,000/- = For Motor Car = For Motor Car House Ceiling BPS-21 Rs.30,000/- BPS-22 Rs.40,000/- = For House Ceiling = For House Ceiling 38

39 39 SUMMARY OF STATEMENT SHOWING AVERAGE SALARY OF GOVERNMENT SERVANTS BPS

40 BPS

41 STATEMENT OF INCREASES IN PAY Sl.No. Date Increase Remarks % (BS 1-22) Adhoc Relief Rs.200/- (BS 1-22) Dearness Allowance % to 39% (BS 1-22) Revision of Pay Scales Rs.100/- (BS 1-16) Adhoc Relief Rs.100/- (BS 1-16) Addl. Adhoc Relief Rs.50/- (BS 1-22) Aata Allowance % (BS 1-22) Revision of Pay Scales % (BS 1-22) Cost of Living Allowance Rs.300/- (BS 1-16) Adhoc Relief Rs.300/- (BS 17-22) Increase in Orderly Allow % (BS 1-16) 20% (BS 17-22) Special Additional Allowance Rs.100/- (BS 1-16) Adhoc Relief 41

42 Sl.No. Date Increase Remarks ( ) An extra salary subject to maximumof Rs.2000/- (BS 1-16) One time dispensation on Eid occasion % (BS 1-16) 60% (BS 17-22) Revision of Pay Scales % (BS 1-22) Special Relief Allowance % (BS 1-22) Adhoc Relief % (BS 1-22) Revision of Pay Scales % (BS 1-22) Dearness Allowance 1. The ad-hoc increases allowed from time to time before were abolished on subsequent revision of Pay Scales. 2. The allowance at Sl.No.10 is intact at frozen level as on The allowances at S.Nos.14 & 15 have been frozen at the level as on in consequence of the revision of Pay Scales w.e.f Overall increase in pay given w.e.f ranges from 22% to 30%. Increase given in House Rent Allowance is 134%, increase given in Medical Allowance and Conveyance Allowance is 100%. The rates of 14 other allowances also increased substantially. 42

43 STATEMENT SHOWING SALARY INCREASES FROM 1994 ONWARDS S.No Date Increase Descriptions Status Annexes % (BS 1-22) Revision of Pay Scales Regular A % (BS 1-22) Cost of Living Allowance Adhoc B Rs.300/-(BS 1-16) Adhoc Relief Adhoc C % (BS 1-16) 20% (BS 17-22) Special Addl. Allowance Adhoc D Rs.100/-(BS 1-16) Adhoc Relief Adhoc E % (BS 1-16) 60% (BS 17-22) Revision of Pay Scales Regular F % (BS 1-22) Special Relief Allowance Adhoc G %(BS 1-22) Adhoc Relief Adhoc H % (BS 1-22) Revision of Pay Scales Regular/ Current I 43

44 1. The ad-hoc increases at Serial Nos. 2, 3 and 5 were discontinued subsequent to revision of Pay Scales. 2. The ad-hoc relief at Sr.No.4 was frozen at the level drawn as on and is being paid so far at that level. The ad-hoc relief at Sl.No.7 and 8 was frozen at the level drawn as on and is being paid so far at that level. 3. Overall increase in pay given w.e.f ranges from 22% to 30%. Increase in usual allowances given from , in House Rent Allowance is 134% and in Medical Allowance and Conveyance Allowance is 100%. 44

45 STATEMENT SHOWING DEARNESS INCREASE IN PENSION SANCTIONED TO CIVIL SERVANTS OF THE FEDERAL GOVERNMENT SINCE Date Ad-hoc increase as indicated below : AMOUNT OF PENSION INCREASE ADHOC (a) Not exceeding Rs.50/- (b) Exceeding Rs.50/- but not exceeding Rs.100/- (c) Exceeding Rs.100/- but not exceeding Rs.500/- 20% subject to a minimum of Rs.5/- 15% subject to a minimum of Rs.10/- 15% subject to a maximum of Rs.30/- with marginal adjustments for pensions upto Rs.530/ % Dearness increase on gross pension (not more than Rs.700/- p.m.) subject to a maximum of Rs.35/- p.m. 45

46 % Special dearness increase on gross pension subject to a maximum of Rs.100/- p.m % Additional dearness increase on gross pension subject to a maximum of Rs.25/- p.m Special ad-hoc increase at the following rates to those retired upto :- Those having Increase Retired in NPS (Rs. p.m.)

47 % upto a maximum of Rs.200/-p.m. to those retired upto % upto a maximum of Rs.200/-p.m. to those retired upto % upto a maximum of Rs.200/-p.m. to those retired upto % of pension upto Rs.1500/- p.m. 10% of pension above Rs.1500/- p.m. to those retired upto Additional 4.5% of pension upto Rs.1500/- p.m. and 3.5% of pension above Rs.1500/- p.m. to those retired upto % of pension to those retired upto

48 (i) Rs.7% of pension to those retired upto (ii) Gross pension of a retired government servant (irrespective of date of retirement) was fixed at not less than Rs.300/- p.m Ad-hoc 5% of pension to pensioners who retired upto Increase in pension :- 32% for pensioners retired prior to % for pensioners retired during to Increase in pension:- 15% to pensioners retired upto % to pensioners retired between to % to pensioners retired between to

49 % increase on pension to those who retired in BPS 1 to Increase in pension at the following rates:- INCREASE IN PENSION (i) Pensioners in BPS % (ii) Pensioners in BPS 17 & above 20% Increase in net pension at the following rates:- INCREASE IN NET PENSION (i) Pensioners who retired prior to the 15% introduction of 1991 Basic Pay Scales. (ii) Pensioners who retired prior to the 10% introduction of 1994 Basic Pay Scales But on or after the introduction of 1991 Pay Scales. (iii) Pensioners who retired on or after 5% the introduction of 1994 Basic Pay Scales and upto the date of introduction of revised Basic Pay Scales i.e

50 % Increase in pension being drawn Increase in pension at the following rates:- INCREASE IN PENSION (i) Pensioners who retired prior to revised 16% Basic Pay Scales of (ii) Pensioners who retired/retire in revised 08% Pay Scales of 1994 and onwards % increase in pension being drawn (i) Pensioners who retired prior to % (ii) Pensioners who retied on or after % 50

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