KP launches ambitious effort to transition from traditional pensions to VPS for civil servants

PESHAWAR, November 22: The  Khyber Pakhtunkhwa government successfully transitioned from traditional defined-benefit pensions to a futuristic Voluntary Pension System (VPS) for its civil servants. The new pension system has been launched for those employees who have joined the government service in the province on or after June 7, 2022. It is anticipated that around 33000 civil servants of KP will join the new pension system.

Pension problems 

in the past year, the federal pension bill has increased from Rs 150 billion in 2020 to Rs 480 billion in 2021. Now, very basically, this means that the government or any public sector company for that matter has a pension bill that they need to pay off, and they need to be making money for that. The government’s main source of revenue is taxation, and they must collect enough to pay salaries to their employees as well as pension to retirees. This is their pension liability – the amount of money that a private company—or a city or state or federal government—has to account for in order to make future pension payments. In other words, a pension liability is the difference between the total amount due to retirees and the actual amount of money the company has on hand to make those payments. According to reports from donors, the federal government’s unfunded liability currently stands at around Rs 3 trillion.  

Post the 7th National Finance Commission award, provincial governments’ pension bills have also increased exponentially from Rs 75 billion in 2011 to Rs 500 billion in 2020.  This is clearly an unsustainable path. Studies suggest that with no changes to the existing pension arrangements, the federal pension bill will rise to an alarming level of Rs 750 billionn by 2023. Provinces are likely to face similar challenges. 

This is a very frightening situation which becomes more complicated due to the presence of fiscal pressures from compromised tax collections, losses by state owned enterprises, accumulating circular debt, and other economic hardships faced by Pakistan.  However, the silver-lining is that out of all fiscal challenges that the government faces, this is one that is easier to plug because we have real life examples of how other countries have dealt with the same issues. In the developed world, where life expectancy is much higher and the population is not very young, rising pension liability has been a major issue that has been successfully tackled. 

What do the stakeholders have to say? 

The Chairman of SECP, Akif Saeed, said that the launch of a new pension system is a significant step towards efficient management of the fiscal space, which has been greatly burdened by the growing public pension bill. He emphasized the need to expand the VPS framework's scope to meet the retirement benefits needs of all the departments of the federal and provincial governments. Akif appreciated the KP government for taking the leap and said that this initiative will provide a sense of relief to participants by offering a viable substitute for the government-defined pension regime while at the same time reducing governmental expenditures.

In his key note address, Secretary Finance KP, Mr. Amer Sultan Tareen, praised SECP's role in the smooth implementation of pension reforms in KPK. Tareen highlighted the significant increase in provincial pension expenditure over the past two decades, reaching 132 billion in fiscal year 2023-24, from 878 million in FY 2003-04. This growth, Tareen said, from less than 1% of the total consolidated budget to over 12% in 2023-24, necessitated the launch of a funded, professionally managed contributory pension framework for the provincial government's sustainability.

SECP Commissioner, SCD, Mujtaba Ahmed Lodhi emphasized the need for pension fund managers and trustees to modernize to meet futuristic demands. CEO MUFAP, Mashmooma Z. Majeed, provided an explanation of the investor journey from joining to retirement and post-retirement benefits.

The Khyber Pakhtunkhwa Government has engaged twelve Pension Fund Managers namely ABL Asset Management Company Limited, AL Habib Asset Management Limited, Al Meezan Investment Management Limited, Alfalah Asset Management Limited, Atlas Asset Management Limited, Faysal Asset Management Limited, HBL Asset Management Limited, JS Investments Limited, MCB Investment Management Limited, National Investment Trust Limited, NBP Fund Management Limited and UBL Fund Managers Limited).