Funding Strategy for the Pension and General Provident Fund

The Government of Punjab (GoPb) has made a strategy for funding of its Pension and General Provident Fund liabilities (GP Fund). The strategy is part of the Medium Term Budgetary Framework (MTBF) 2009-12 announced by GoPb.

Increasing contingent liabilities have been identified as one of the major causes of concern for Developing Countries. These liabilities, if not managed prudently, can lead to a financial crisis. For Punjab Government, Pension and General Provident Fund are the main contingent liabilities. Accrued pension liability is currently estimated to be around Rs. 598 billion as on 30.06.2009 (Rs. 515 billion as on 30.06.2008) and GP Fund liability is close to Rs. 80 billion as on 30.06.2009 (Rs. 70 billion as on 30.06.2008). These accrued are not only contingent liabilities increasing, but there claim on budgetary resources is also growing more rapidly than revenue resources. These growing expenditures will crowd out resources for other priority expenditures in the future.

                                Estimated Expenditure on Pension and GP Fund                                        (Rs. in Billion)

Year 

Pension

Commutation

GP Fund

Total

2008-09

14.7

4.0

3.7

22.4

2013-14

25.7

9.6

6.8

42.1

2018-19

47.7

19.5

14.6

81.8

2023-24

92.2

38.6

32.0

162.8

2028-29

177.4

72.2

58.1

307.7

2033-34

283.3

60.3

59.3

402.9

2037-38

385.6

60.2

73.1

518.9

                                                                                                                      Source: Actuarial valuation, 2009

In 2003, Government of Punjab created a working group to discuss ways to address the growing Pension and GP Fund costs and liabilities. One of the recommendations given by the working group was to start funding Pension and GP Fund liabilities in line with practices common in the private sector. One of the first steps to initiate the funding approach was the passage of the Punjab Pension Fund Act by the Provincial Assembly in September 2007. Based on the initial actuarial assessment of the pension liabilities, a funding strategy was prepared and presented with the MTBF 2007-09. The primary aim of the strategy was to accumulate enough capital in the Pension Fund, so that the fund would be able to cover approximately 30% of pension expenditure from the financial year 2015-16, thereby creating significant fiscal space for other priority expenditures.

The funding strategy 2007 was divided into two parts. The first part was to build up the Pension Fund size to Rs. 50 billion from 2007 to 2011 and beyond 2011, the Government would set aside funds under a formula linked to basic pay allocations annually for Pension Fund capitalization. It was expected that the size of the fund would be Rs. 100 billion by 2015. The expected budgetary support from Punjab Government Efficiency Improvement Program (PGEIP) was to facilitate the rapid capitalization of the fund over the initial period.

This strategy was, however, difficult to follow due to severe economic crisis and slowdown in resource generation faced by Pakistan and the province during the last two financial years which saw almost all the macroeconomic variables (including fiscal deficit, balance of payments, inflation) worsening. This lead to a decrease in GDP growth from 7% in 2006-7 to around 2% in 2008-9. The deteriorating law and order situation further reduced the cash inflows due to decrease in domestic and foreign investment accompanied by an increase in internal security related expenditures.

In view of the changed circumstances, the Government of the Punjab will only be able to capitalize the Pension Fund by Rs. 6 billion in 2009-10, raising the total contributions in the fund to Rs. 12 billion by September, 2009. This scenario calls for a new and more conservative funding strategy taking into account the current economic environment.

To view the Funding Strategy 2010-39, click here

powered by
Socialbar