Concept Clearance Paper for Pension Reform Project approved

ISLAMABAD: The government has approved Concept Clearance Paper for Pension Reform Project as these reforms will be executed with $75 million loan from the World Bank, official document reveals.

In the wake of ballooning pension bill, the government has decided to introduce contributory pension system once the Pay and Pension Commission submits its final report during the course of next financial year. The high-powered Pay and Pension Commission led by renowned former bureaucrat Abdul Wajid Rana will submit its report in October 2020.

Finance Ministry submitted its Concept Clearance Paper before the Planning Commission’s Central Development Working Party (CDWP) and sought approval of $75 million loan from the World Bank.

The Concept Clearance Paper of Finance Division stated that the civil pension expenditure has been rising exponentially during last three decades, which poses a challenge for government that need to be addressed.

Other governments facing similar situations have established various pension systems like Defined Contribution Scheme (DCS), thereby, enabling the investments of pension contributions in funds operated under state laws and regulations to cater for future needs.

To analyse the prevailing situation in Pakistan, World Bank had extended a technical assistance. The World Bank’s report submitted in December 2019 inter alia recommended an option of Defined Contribution Scheme. The report and in house deliberations provide a starting point.

To proceed with the matter, Finance Division will formulate a comprehensive pension plan/scheme and complete all necessary steps from inception to launch and operations of pension scheme after completion of project.

Objectives and Results Targeted by the Project: The following areas of pension system will be addressed/reformed: Regulatory frame work within the government/or civil service rules and regulations etc. such as Benefit design, Contribution rates, Benefit liability age, Regulatory framework for investment in funds(adequacy and needs for improvement), Reliable contributor.

Registry Study of funds market with a view to assessing availability of investment opportunities and projected returns, Institutional framework and structure of regulatory institutions, Inclusion and exclusion policies/or decisions and based on these policies/or decisions, required rules and regulations for various organisations’ employees and any other aspect necessary to complete the initiative.

Scope of Work: The proposed project envisages to formulate a comprehensive pension plan/scheme and propose all necessary steps from inception to launch and operations of pension scheme.

This project will be completed within 24 months starting from July 2020 to June 2022 and the estimated cost will be Rs12.560 billion including $75 million loan from World Bank (Rs11.963 billion). Ministry of Finance has submitted a proposal seeking concept clearance for “Pension Reform Project” which is proposed to be funded by World Bank loan.

Comments of the Technical Section: The sponsors have not provided any situation analysis to justify the demand of the proposed project. The sponsors may provide existing fact & figure and future forecasting of pension expenditure to justify the demand of the project.

It has been mentioned that the project has been designed on the basis of World Bank’s report, 2019. The sponsors may share the finding of the World Bank report to determine the project need.

The main objective of the proposed project is to prepare a comprehensive pension plan. The activities (i.e. Rs50 million for equipment and Rs20 million for local/foreign training/experts) proposed under the project do not support the project objectives. The sponsors may align the project activities with its objectives. Further sponsors may carry out a study to reform the pension system in first instead.

At serial number 7 of the proposal, total cost of the proposed project is reflected as Rs12.560 million (i.e. Rs12,060 million local and Rs500 million as FEC). Whereas, an amount of Rs11,963 million equal to $75 million has been mentioned at Sr.No. 8 (ii) as World Bank’s loan. The sponsors may clearly indicate the exact contribution of World Bank and government of Pakistan.

The sponsors may provide terms and conditions of the World Bank loan as well as letter from EAD regarding World Bank’s commitment to finance the proposed project. The project will be funded through foreign exchange component and no exchange rate of US$ has been mentioned which may be indicated on the basis of the prevailing market rate.

The proposal is sketchy as no proper justification has been provided therefore need review. According to the WB, the most dramatic ageing worldwide is projected to take place in low and middle-income countries. The World Bank has been involved in pension reform in more than 90 countries and provided financial support for reform to more than 70 countries.

The World Bank has 42 active projects across countries spread over all regions. These engagements include lending components in Development Policy Loans (DPLs) in support of major reforms, investment loans to improve administration and a wide range of non-lending technical assistance (NLTA) that relies on several analytical tools such as the Pension Reform Options Simulation Toolkit (PROST) and APEX, a Stata-based micro-simulation model. The number of reimbursable assistance activities has been growing recently, especially in the Middle East and North Africa Region.