This article first appeared in The Edge Malaysia Weekly on July 17, 2023 - July 23, 2023
AS it turns out, a 2013 amendment to the Pensions Act 1980 that gave an automatic 2% annual increment to a civil service pension cheque was deemed less favourable to civil service pensioners and thus struck out as “unconstitutional” by the Federal Court.
That, without the legal jargon, is because the five-member bench decided on June 27 that over time, pensioners would have gotten more money if their pension cheque was adjusted together with the prevailing civil service salary scale as per the old (pre-2013) scheme versus the guaranteed 2% annual increment under the 2013 amendment.
The proof? Putrajaya will soon be paying a “Special Appreciation for Pensioners (PKKP)” — basically, compensation for the shortfall between pension payments already paid (as per the 2013 amendment) and the amount actually due to pensioners (following the old pre-2013 scheme) now that the 2013 amendment has been struck out.
There should not be immediate panic on how the 2023 budget deficit could be hit. The backdated PKKP amount, while not immediately known, should be well covered by Kumpulan Wang Persaraan (Diperbadankan) (KWAP), whose fund size stood at RM153.82 billion in 2020 and was reported to exceed RM175 billion in April 2023, if the need arises. If KWAP is tapped to help foot the public pension bill, it would not be the first time the federal government has done so.
As for the slightly bigger pension cheques for July to December this year, Prime Minister Datuk Seri Anwar Ibrahim told reporters on July 13 that the financial implication of RM1.3 billion is not an additional allocation and had been accounted for in Budget 2023.
In any case, the RM1.3 billion is about 4.2% of the RM31.08 billion budgeted as civil service pension in the revised RM386.14 billion Budget 2023, which reported a fiscal deficit of RM93.94 billion or 5% of gross domestic product. The 2023 budgeted amount for civil service pension is 1% lower than the revised estimate of RM31.4 billion for 2022 but 12.7% above the RM27.6 billion actually incurred in 2021.
A testament that the 2% annual increment (which was struck out) was not that bad a deal to begin with, is the incremental bill for Putrajaya for six months’ worth of additional pension payment only works out to RM1.3 billion — RM216.67 million a month for the government for the rest of this year.
That is comparable to the RM1.5 billion that it would cost the government to give the special RM100 salary increment to all civil servants in grades 11 to 56 from January this year — which pensioners should also benefit from, now that their pension tracks the prevailing civil service salary scale. The civil service is about 1.6 million in total.
The government also did not say how much extra each pensioner stands to receive a month. Simplistically, the RM1.3 billion from July to December 2023 works out to roughly RM271 a month, on average, for each civil service pensioner, last reported to be around 800,000 persons.
For the record, this change came about because the Federal Court reinstated the original section 3 of the Pensions Adjustment Act 1980, a decision sought by former Wisma Putra staff member, Aminah Ahmad, and 56 retired civil servants, who had filed a lawsuit against the Public Service Department (JPA) as they thought amendments to section 3(2) of the Pensions Adjustment (Amendment) Act passed in 2013 violated the protection accorded to civil service pensioners under Article 147 of the Federal Constitution.
What is clear from the Federal Court’s decision is that retirement benefits to civil service retirees are protected and stipulated under Article 147 of the Federal Constitution and administered through the Pensions Act 1980 [Act 227] and the Statutory and Local Authorities Pensions Act 1980 [Act 239].
“The law applicable to any pension, gratuity or other like allowance granted to a member of any of the public services, or to his widow, children, dependant or personal representatives, shall be that in force on the relevant day or any later law not less favourable to the person to whom the award is made,” reads Article 147(1), which JPA quotes on its website. This was why the Federal Court had deemed the 2013 amendment “unconstitutional”, leading to the need for backdated payments to pensioners.
The current administration would be able to cite this case when talking about public pension reform to counter any fearmongering. Success would prove it has stronger political will and greater political clout than its predecessors.
The need to reform the current defined benefit (DB) public pension system — where the burden of saving for retirement is entirely borne by the federal government and not civil servants — for long-term sustainability of public finances was last brought up in September 2019 by former prime minister Tun Dr Mahathir Mohamad, who at the time said the government was studying several mechanisms that it hoped would reduce the government’s burden while not shortchanging civil servants and retirees.
At the time, former JPA director-general Borhan Dolah had said newly appointed civil servants may no longer be pensionable, possibly from 2020, but be given an improved contract scheme to reduce the government’s financial burden by up to RM5 billion a year.
To date, Putrajaya has yet to specify a cut-off date on which new civil service recruits will no longer be pensionable but come under the defined contribution (DC) system and save for their own retirement as a member of the Employees Provident Fund (EPF) like other private sector wage earners who, along with their employers, have to make monthly statutory contributions under Malaysian law.
EPF members should know that their rights, including the ability to withdraw their money from the EPF at age 55, too are protected by law.
At a virtual briefing on July 11 to clarify confusion over plans to halt lump sum withdrawals, EPF chief strategy officer Nurhisham Hussein confirmed that an amendment to the EPF Act 1991 would have to be tabled in parliament before it can go ahead with its proposal to no longer allow lump sum withdrawals for future members born in the year 2010 and later (see “Make EPF Account 3 an opt-in, not an opt-out option”). Those born in the year 2010 would be aged 13 this year, and not counted by the Department of Statistics as part of the working population aged 15 to 64.
It remains to be seen if the current administration would also finally set a cut-off date to change the public pension’s DB system to a DC system that would be less burdensome on public finances. Making changes that involve existing civil servants who have attained pensionable status is not impossible but would be more complicated than setting a cut-off date for those who are not yet in the civil service. KWAP itself has conducted extensive research on the matter.
Mathematically, there is certainly a need to gain enough political clout to execute the necessary reforms before change is forced upon Putrajaya.
The fact that emoluments, civil service pension as well as debt service charges have been growing at a much faster rate than federal government revenue in the past 10 years is a big part of why operating expenses have taken up at least 99% of federal government revenue every year in the past decade.
The pensions and emoluments bill alone is poised to exceed 100% of federal government revenue by 2055 from 42% of revenue currently, if they continue growing at the same trajectory as in the past 10 years, The Edge’s back-of-the-envelope calculations show.
If debt service charges were included alongside emoluments and pension, the tally could exceed 100% of federal government revenue by 2040 from 58% of revenue currently if the expenses and revenue continue to grow at the trajectory in the past decade.
That would leave even less money for development expenditure, given that the government still needs to foot other expenses. What is certain is the longer overdue reforms are delayed, the bigger the issue at hand would become. It is best to bite the bullet when there is still breathing room.
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