Fixing pay and pensions

If there is one reform that will unlock Pakistan’s from its state of perpetual inertia, it is the transformation of the public sector. While this article is primarily about transforming public sector pay and pensions; this is intertwined with bold, aggressive, and clear-headed civil service reform. And that is necessary not just because of what the public sector can do to support economic growth, but because as it is today, the public sector is a major barrier to reform in the country.

Look at Pakistan’s public sector revenue and expenditure numbers and there is one clear conclusion that will stare you in the face. While the government machinery in most states exists to serve citizens, in Pakistan our 250 million citizens seem to exist to finance the state.

Let me make my case.

Rs 3 trillion is the cost of public sector pays across the country. Rs 1.5 trillion is the national pension bill. Add the pays of all project employees, as well as the workforces at public sector companies and autonomous bodies are included; the total wage bill is closer to Rs 6 trillion. With the salary bill for the military added, we are now talking of a national wage bill of around Rs 7 trillion.

That is Seven Thousand Billion Rupees.

An additional Rs 7.3 trillion is simply the cost of debt servicing that must be paid. So even before we have spent a single rupee on the people of Pakistan who are not government servants, the state has spent over Rs 14 trillion. This figure of 14 trillion already exceeds total national revenue, which equals roughly Rs 13 trillion (Rs 12 trillion collected by the federal government and an additional Rs 1 trillion by the provinces).

This means that even to meet salary and pension expenses, the state needs to borrow up to a trillion rupees. This also means that every single rupee the government spends on anyone but itself is borrowed. Every rupee spent on the ordinary citizen, on you and me; to run schools, hospitals, and universities; to finance the equipment our jawans need to defend our borders; to fund the operational cost for our police forces to keep the law and order; to repair roads; maintain the national electric grid; provide gas; every Rupee of that spend is financed through additional debt. 8 trillion rupees of additional debt, to provide exceptionally poor-quality services to the citizens of Pakistan. 

Think about it. We do not have a single rupee to be able to finance the operating costs of the state.

Clearly, this needs to change. We need to create a public sector where the people we hire are productive and create value; and take decisions that allow citizens and firms in the private sector to create value for the economy. Given the state of the economy the reform should have happened yesterday, but with that not being the case, the best time to start is now.

It is not how many people government employs, it is what they do, or more precisely, what they don’t do

Around 3 million individuals are permanent employees of the Government of Pakistan and the Provincial Governments (500,000 plus in KP; 700,000 in Sindh; 1,000,000 plus in Punjab; 250,000 in Balochistan; and around 600,000 in the Federal Government); if we include project employees and employees in autonomous institutions, we are talking roughly 5 to 6 million in total. Given that the total labour force is around 80 million, even accounting for a 700,000 strong army, the public sector employs less than 10% of the labour force.

In absolute terms, this is small.

But dig deeper, and we find a staggering number of people in roles that should not even exist. Certainly not as permanent employees who will draw a salary for 35 years and a pension for 20. For example, in KP, out of 565,000 permanent employees, you will find that roughly 200,000 employees are taken on as class 4 helpers, drivers, cooks, chowkidars, and in the roles of clerks, stenographers, private secretaries, and so on. By my estimate, this means that we employ well over a million plus people in such roles country wide. Nine out of ten are not needed.

The entire recruitment of lower grade employees has morphed into a patronage-based charade, not just for politicians but for senior and mid-level bureaucrats to try to push friends, relatives, and supporters as a favor. These people are employed not because the state needs them, but because we want to oblige favoured ordinary citizens with jobs. And what results is a public sector where the productivity we get from ten employees may not be the same as five in the private sector; less generous people would say one or two.

The major challenges

The public sector as it is today, creates several challenges. These are financial; we cannot afford the cost of the public sector we have; as well as around capability, accountability, and productivity. There are several problems to solve.

1. We cannot afford to pay Rs 7 trillion in public sector wages and pensions: 10% of the workforce being employed in the public sector may be small in absolute terms, but when you have a Tax-to-GDP ratio of just over 8%, and your Rs 13 trillion national revenue collection cannot cover debt servicing and wages, then it is indeed time to wake up and smell the coffee. We can’t reverse the past, but we need a different model for the future.
2. Many people get paid too little relative to their market value: Our best talent doesn’t get paid enough. The DMG and PMS officers who work; doctors; top tier academics; all our soldiers and policemen who risk their lives for us daily; IT professionals. In many government jobs, this impacts the quality of recruitment, and in almost all government jobs, it impacts job motivation and satisfaction.
3. But even more people get paid above the market: Almost all lower grade employees get paid significantly more than the market. For example, if a driver earns Rs. 30,000 employed privately, the equivalent pay in the public sector may be over Rs 100,000. But it is not just the lower grade staff. Because of the unified grading system, some professions just get overpaid. Teachers for example who may get paid Rs 60,000 at leading private school chains are likely to make twice that in the public sector. That would not be an issue, until you realize that outcomes in public sector schools are poorer than low-cost private sector schools where teachers don’t even earn a minimum wage. Can we afford to pay 3x the market rate to 1.5 million teachers’ country-wide and still not even get minimally acceptable student outcomes?
4. Everyone wants a government job: Clearly, in a system where you cannot reward great talent, but where you can provide job security to a lot of people for not working too much; public sector jobs will be in demand. Each politician knows this better than anyone, because our hujras, bethaks and offices are deluged with people wanting a little help whenever there is a recruitment opportunity; from that of a chowkidar or a driver, to that of a clerk or a stenographer. The demand for public sector jobs that come with a generous pension plan stunts the entire job market and not just the public sector and sets a very low bar for productivity. This must change.
5. Almost no one works: Of course, if you spend the money you have on jobs where people don’t need to work much, they will be sought after. In my finance department, there was one secretary, two special secretaries, six additional secretaries, sixteen deputy secretaries, and 50 budget officers. Each budget officer was entitled to a senior clerk, a junior clerk, an accountant, a stenographer, and four to five helpers. The finance department consisted of around 500 people. At any time, maybe 50 really did the work. Can we afford wastage at this level?
6. Performance isn’t rewarded: Well, some people do work. In fact, they are brilliant. 20% of the teachers. 20% of the doctors. 10% of the DMG officers. The numbers should be much higher. But why aren’t they? Neither promotion nor financial compensation is tied to results. There is of course a risk that if you work, you will expose yourself to accountability processes. Not working doesn’t have a cost. Working might!
7. No one is punished, no one can be fired: Government processes to hold someone accountable for their misdeeds are so cumbersome, that it is almost impossible to take decisive action against anyone; this makes public sector employment even more attractive for the middle class that requires secure employment but has an impact on drawing talent away from the private sector.
8. The capability challenge: In an army of class 4 employees, clerks, stenographers, and accountants, as well generalist DMG and provincial officers; very few functional or sectoral capabilities are developed. No one is an HR expert. No one is an IT expert. No one is a public finance expert. We need space for functional and sectoral experts if we are to drive change in government thinking.
9. Nothing gets done: Not quite true. But let’s just say that the pace of work is slow. And if you want to create urgency, you must invest your own time, effort, and in doing so create more enemies than friends. Not where you want to be once you realize that your country has been on the verge of default for the last sixteen months.
10. The private sector also pays the price: Of course, with terms of service so generous in some respects, except for a very small upper echelon of the corporate sector, most people in the private sector aspire to government jobs, and the attractiveness of the inertia in the public sector to the average jobseeker creates a nation-wide culture of short-cuts, and of stifling desire for achievement and improvement.

Fixing public sector pay

What can we do to fix the public sector? As in many other areas, we have had studies, reports, and commissions galore. In our government, there were two attempts at doing this holistically through a Pay and Pension commission. The first commission worked too bureaucratically. The second one gave its proposals just as the government changed. Those proposals are now in cold storage again.

The answers are not rocket-science. There are changes in recruitment, training, reward and accountability, promotion criteria, rules of business and several other dimensions that will transform our civil services into a more modern government machinery. More specifically, here are six shifts that will help our wage bill challenge; by reducing it; by moderating increases; or by increasing productivity. They will also go a long way in supporting the overall agenda of civil service reform.

1. Dismantle Universal Pay Scales (UPS): The belief that many in the public sector have, that we need to somehow equalize public sector pays, is wrong. Today, all permanent employees are mapped on a single Universal Pay Scale between Grades 1-22 (BPS 1-22). The Basic Pay for all employees in one grade is within the same band, and the compensation structure is then distorted by a deluge of allowances that make the UPS meaningless anyway, as well as making employee pay structure very difficult to understand. In KP, we counted 106 allowances in the pay structure!

The UPS also implies that DMG and PMS officers, doctors, teachers, engineers in the same grade have the same market value. They don’t. A doctor has a very different market value to an engineer, a DMG officer to a high school teacher to a bank CEO, and a rocket scientist or a computer programmer have skill sets that are even rarer. We just can’t treat different professions the same.

The UPS also results in a vicious cycle where provincial employees compare their pay structure to federal employees and vice versa, and financial managers spend the entire fiscal year trying to parry requests for increase in allowances and to manage strike after strike by powerful employee unions, by doling out money they don’t have, to too many employees, in increments that will never satisfy the needs of employees regardless.

The answer: dismantle the UPS and the BPS 1-22 system so that pay in provinces is decoupled from the centre and from each other, as well as from department to department, so that everyone can make their own decisions. Each department would keep the UPS until devising a pay scale in line with their budget and the market value of their professions. In the medium term, this would make pay much more in line with the market for all professions and allow for hiring good talent from the market.

2. Move towards Pay-for-Performance: To compensate for the low basic pay of government officers, a deluge of allowances is added to basic pay. Some are substantial. For example, DMG and PMS officers get an executive allowance (150% of basic pay); doctors and engineers also get similar allowances in KP.

The allowance structure needs to be simplified and redone. Executive allowances, as well as functional top-ups to the basic salary can be converted into a performance-based variable allowance. The introduction of this could be in phases, but one can start with the Secretaries who are Heads of Department. One way of making this effective would be to force-rank peer groups on a six-monthly or annual basis. Every department could then roll out their own performance-based pay structure.

This change, done correctly, would mean that increased bonuses could incentivize or reward improved work outcomes by employees. In a system with no real means of reward, that could be transformative.

3. Reimagine employee benefits: If there weren’t such resistance to change, government employees could get a much better benefits package than they do currently, at no additional cost, or in cases, saving significant amounts of money.

Housing: Less than 1% of public sector employees are provided with housing. The rest get a meagre housing allowance. Ironically, senior officials with their own accommodation get a bigger “housing subsidy” than the “house rent allowance” provided to employees renting from the market. A revised allowance structure would have a market-based House Rental Allowance that would be revised upwards every three years based on a market survey. All employees could be eligible for a low interest loan to purchase land and build their own house or apartment. The government would exit from the business of building housing for their employees. If any housing projects are really required, these would be done as Public-Private-Partnerships (PPPs).

Vehicle Monetization: Similarly, there are around 20,000 vehicles in the possession of the KP government, and probably around 150,000 with governments across Pakistan. In KP alone, over Rs 2 billion a year is wasted on procuring new vehicles; up to another Rs 1 bln on maintenance; close to Rs 10 bln on fuel; this despite a so-called ban on the purchase of vehicles. The Punjab government recently procured vehicles worth Rs 2 billion for senior officials in one go. All this money could be put to better use, and a revised car monetization policy would minimize vehicles procured by the government (only to be done in departments such as the police that require pool cars); and all government servants could have access to a vehicle lease-to-own scheme as happens in large corporations. Lower grade employees could lease motorcycles. As a one off, the sale of vehicles to respective owners could generate over Rs 20 bln in KP alone, and between Rs 100 bln and Rs 200 bln nationally, while significantly reducing recurrent cost.

Medical Coverage: Similarly, the very poor medical allowance given to government employees (Rs 1500 to Rs 5000) in no way provides any meaningful medical cover. At zero cost, this can be replaced by high end medical insurance, a top up to the existing Sehat Card. To finance this in KP, the Rs 15 billion spent on the medical allowance would be more than enough. The top-up medical insurance programme would have a one-time opt-out for employees, but it is highly unlikely anyone smart would take such an option. The new allowance would increase coverage from the basic Rs. 10 lakhs per family, to options of Rs 25 lakhs, Rs 50 lakhs, Rs 75 lakhs and Rs 1 crore per year per family. The programme would have medicine and OPD coverage on co-payment. Once rolled out, it could be scaled up as a top-up insurance programme that is offered to the public as well. The top-up insurance, because it would be funded, would also help to make the Sehat Card sustainable in the longer term. The work on this has all been done in KP, and the programme can be implemented immediately after the elections. 

4. Embrace Contractual Employment and Outsourcing. Why does everyone in government need to be a permanent employee? They don’t. The job of government is to provide service to citizens, not to be an employment factory for those with a sifarish. Contractual employment and the outsourcing of services allows for the government to bring in talent on demand, as well as to allow the private sector to execute services that cannot be run well under the traditional public sector.

Very few positions require permanent employees; certainly not as many as we think. We need nowhere near the number of new clerks, accountants, stenographers, computer operators, assistants, helpers, telephone operators, or watchmen that are employed every year by the state, for 35 years, and then given a pension for another twenty.

Many functions in government can be outsourced. Chunks of the health and education system can be run in an outsourced manner. The hiring of doctors through the public service commission needs to be complemented by contract hiring of doctors (already done in KP); alternatively, staff can be provided by a third-party provider; rules for hiring in autonomous entities can be made more akin to the private sector.

And government departments need to be able to hire top tier talent from the market where it is needed; again, a blueprint for this exists in the way consulting talent was hired on performance-based contracts in KP Finance Department’s Internal Support Unit.

5. Everything else: Even if all of the above is put in motion, we will need ways to ensure how every person paid through the public exchequer provides productive service to the state and its citizens. We may need to think of retraining hundreds of thousands of people, given they are already employed. We may need to consider voluntary golden handshake programmes. Rules to dispose of staff not needed or required will need to be made more practical. The culture of regularization of employees must be stopped.

A leaner, more accountable government is a better government. During the early days of COVID, we realized that the government worked faster and more effectively with just 5% of the workforce coming to office. What does that tell you?

There are other things that could be done.

Many quotas can be stopped; the employee son quota for example. The 4-day workweek could be a real option for the 80% of staff not required at the office every day. Work-from-home rules could save on fuel and electricity costs. More drastically, I would even seriously be in favor of allowing redundant employees to just stay at home and get a basic salary (no allowances), and not turn up to work. Why not? The system doesn’t need them, and it can’t fire them. Their turning up to office incurs cost and increases the risk of corruption. Think of the amount of rent-seeking that would stop as a result. And think of the state of our public sector if what I said is true.

Why hasn’t all of this been done, given the number of attempts to reform Pakistan’s civil service. Well, almost certainly because reform efforts have always been in the hands of the civil service themselves, and as they say, turkeys don’t vote for Christmas. We don’t have time though, and if Pakistan is to seriously embark on reform that strengthens its economy, civil service reform – and that includes public sector pay – will have to be at the top of the list. And it will have to be politician led.

Fixing the Pension Challenge

Pensions are the other big part of the wage bill. I have publicly spoken a lot about pensions, because pensions are a critical issue to resolve, and looking back over the last five years, I am proud to say that KP is the one government in Pakistan, federal or provincial, that has done real reform in this area. Our story on pensions, one of the most explosive reform areas to touch anywhere in the world, proves that real reform in Pakistan is possible. All that is needed is a will, some grit, thick skin, and a plan.

The cost of pensions nationally will be over Rs 1.5 trillion this year. Our pension bill is guaranteed to grow at 22-25% per year for the next 35 years, since we know almost exactly how many people will retire each year. The cost of inaction can be calculated from the fact that just 20 years ago, cumulative national pension payments were around Rs. 25 billion. Pensions have risen 50x in just 20 years! They double roughly every 4 years!

Unlike most countries, pensions in Pakistan are unfunded with terminal benefits defined (called Defined Benefit). Most countries have moved from unfunded to funded pensions and introduced Defined Contribution (DC) pension programmes. India did this in 2004 under a World Bank project; the same project in Pakistan failed, and the result is the Rs 1.5 trillion pension bill that must be funded through the budget.

Remember, without reform, within a decade, most pensioners will not be getting a pension. We simply won’t have the money. The reform actions listed below may be the only way to make the pension bill sustainable, and the good news is that much of it has been executed successfully in KP.

1. Introduce a contributory pension programme for new employees: It took a lot of work, but this has now been rolled out for all new employees in KP. The government contributes 12% and employees contribute 10%, and it applies to new government employees hired since July 1, 2022. The scheme is managed by third party providers, although in the longer term, the government can set up a pension management firm, provided it can get the right capacity.
2. Change the pension hierarchy: There are famously 13 tiers of pension beneficiaries in our pension rules. This seems to include everyone from the pensioner’s widow, children, parents, brothers, sisters, and even grandchildren! In KP, these have been reduced so that sensibly, only the pensioner’s widow, children and parents are entitled to benefit from the pension to a retired employee after his or her death. The federal government has recently followed suit, and other provincial governments should follow.
3. Increase the early retirement age: The minimum early retirement age remains 45 in all provinces except KP and Punjab, where it has been increased to 55. This should also be done across the board, including in the federal government. This alone reduces the pension bill by Rs 20 billion annually in KP.
4. Streamline the Pension Rules: The spirit of the original Defined Benefit Pension Plan was simple. You get 70% of your last drawn pay. Over time, this rule has been bent. Many of the violations have also been fixed in KP. For example, all governments, through an illegal notification, were allowing employees to draw up to 120% or 130% of their basic drawn pay as their first pension. This has been reversed. Many employees were drawing double pensions (one for themselves and one for a relative), or a pay and a pension; These practices have been stopped through changes in rules. Additionally, the original way last drawn pay was defined was as the average of the last 3 years; it is now the pay drawn in the last month. This also needs to be reverted to the original definition, which is a fairer representation of the base pay on which a pension should be based.
5. Introduce a pension tax to cover Defined Benefit employees: Even with all the above pension reforms made, the real challenge is how to finance the unfunded pensions of employees on the Defined Benefit Programme. Remember that without a financing mechanism, the pension bill will grow for the next 35 years, even if all new employees are transitioned to a contributory pension programme. There are not too many solutions. One way is a pension tax deduction from employee pay, increasing progressively, so that the defined benefit programme is funded in a pay-as-you-go manner, with working employees helping finance the pensions of those that have left. In KP, a deduction of about 5% of pay is already applied as a pension tax for officers drawing executive pay. But given Pakistan’s tax shortfall, there is no justification for any employee who expects to draw a pension, to not pay a pension tax.
6. Transitioning existing employees: Important as part of the overall pension strategy is to create pathways for existing employees. This will require both compensating and creating a transition pathway for early career employees; initiating golden handshake programmes; and making the existing pension programme more cost effective so that employees pay for it, and hence the cost benefit of the two programmes is equalized; and that most employees therefore are switching to the funded pension programme.
7. Increase retirement age: Finally, a short-term relief measure may be to allow an increase in the retirement age from 60 to 63 or 65 years, which will create a window of a few years in which the pension bill will not be added to.

Ultimately, as important as it is, Pakistan will not create the fiscal space it needs by just reforming pay and pensions. It will still need to raise significantly greater revenue. Tax-to-GDP will need to increase. Savings in other areas such as procurement and the development budget will still need to be found.

But reforming pay and pensions will achieve four major objectives. First, it will help to create a more responsive and delivery oriented public sector that can help transform Pakistan. Second, it will and must stop the addition of more fat to an already bloated public sector system. Third, the pensions challenge alone, because it is unfunded, can sink our fiscal equation in the coming years, and resolving it will finance one of our most complex challenges. And finally, if we can reform pay and pensions, as political an issue as one can face in government, it will mean that we don’t need to shy away from any reform at all.

 This article is Part II in the series titled: There is an IMF standby agreement, but what next?