This article first appeared in The Edge Malaysia Weekly on October 28, 2019 - November 3, 2019

EVIDENTLY, the sustainability of the existing public pension system is another mega issue inherited by the Pakatan Harapan government, in addition to the RM1 trillion debt burden.

As at last Tuesday, no less than eight members of parliament had asked for an update from Prime Minister Tun Dr Mahathir Mohamad in the lower house (Dewan Rakyat) on the status of the proposal to implement the improved contractual scheme to replace the permanent and pension scheme for appointments in the public service.

Their concerns may well be similar to those of economists, analysts and public policy researchers who have pondered over the subject of public pension reform. Yet, even those not anxious about finances and sustainability know all too well the significance of the 1.6 million civil servants plus 874,000 pensioners cum beneficiaries, and any wrong move on public pension would be akin to political suicide.

The current administration is understandably treading carefully, even though Mahathir has been relating how the country is now paying for the past government’s largesse to “buy the loyalty of civil servants” by “cutting down on development”.

None is more seasoned in Malaysian politics than the nonagenarian who, in his reply to fellow elected members of parliament on Oct 22, reminded everyone that retirement benefits to civil service retirees is a recognition for contributions to public service and that the benefits are protected and stipulated under Article 147 of the Federal Constitution and administered through the Pension Act 1980 (Act 227) and the Statutory and Local Authorities Pensions Act 1980 (Act 239).

Article 147 (1), which the Public Service Department (JPA) also quotes on its website, reads: “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.”

Mahathir told the lower house on Oct 22, “As such, members of the civil service of pensionable status will continue to receive benefits and pension scheme facilities. However, the government faces challenges to pay for retirement benefits as their numbers increase. For example, retirement benefit expenditure in 2018 increased to RM23.87 billion compared with RM5.86 billion in 2006. This amount is expected to increase every year. Furthermore, the previous government has repeatedly raised the salaries at a relatively high percentage, thus increasing the pension liability,” he said. Put another way, the populist route taken has added to the snowballing of the burden instead of addressing the long-term sustainability of the defined benefit (DB) public pension system.

“To address the issue of rising public pension burden, the government is studying several new mechanisms, which is hoped to not burden the government and also not short-change civil servants who have completed their service (retire),” Mahathir said in Bahasa Malaysia without elaborating on the mechanisms being looked at or when a decision is expected to be made.

On Sept 4, former JPA director-general Borhan Dolah said newly appointed civil servants may no longer receive a pension but would be given an improved contract scheme, possibly starting next year, to reduce the government’s financial burden by up to RM5 billion a year. The move to revamp the public pension scheme is consistent with the decision to reduce the size of the civil service in phases based on need, as recommended by the special Public Service Reform Committee meeting in October last year.

It remains to be seen how the current administration will address the long-overdue public pension reform. Apart from double-digit salary adjustments, an automatic 2% annual pension hike from 2013 sharply raised the pension bill in 2014 and continues to impact future obligations.

Budget 2020, which touched on uplifting the public service, included a one-off special payment of RM500 to civil servants Grade 56 and below, and RM250 for retirees. Special allocations were also made for 14,400 personnel in the Fire and Rescue Department of Malaysia and 70,000 armed forces personnel.

Civil servants who have served at least 15 years and had not been able to utilise all their leave due to exigency of service were also given good news, with the government allowing them to ask for cash in lieu of accumulated leave of up to 75 days — half the maximum accumulation of up to 150 days that can be claimed based on the last drawn salary upon retirement.

Cash in lieu of accumulated leave, better known as GCR (gantian cuti rehat), rose from RM111.1 million in 2009 (1.3% of total pension and retirement obligations) to RM707.15 million in 2018 (3% of total pension and retirement charges), according to the federal government’s audited financial statements.

The RM23.87 billion total pension bill for last year mentioned by Mahathir in parliament is consistent with the audited financial statements and implies a 12-year compound annual growth rate (CAGR) of 13.4% from the RM5.86 billion bill for 2006.

It is worth noting that the Economic and Fiscal Outlook report for 2020 puts the pension or retirement charges bill for 2018 at RM25.177 billion. The reason for the variance is not immediately known. (There is also a variance between the RM5.86 billion for 2006 mentioned by the prime minister and the RM7.008 billion official figure.)

Nonetheless, the variance does not change the general financial trajectory or the narrative on the need to address the sustainability of the public pension system.

In our analysis — including for the Cover Story of Issue 1285, dated Sept 23, on the public pension reform — The Edge had relied on figures from the Ministry of Finance, Department of Statistics Malaysia and Bank Negara Malaysia, and not figures from the financial statements audited by the Auditor General’s Department.

For charts accompanying this story, we append figures compiled from the federal government’s audited financial statements from 2009 to 2018. Based on these audited figures, the total pension bill grew at a nine-year CAGR of 11.68%.

The 2019 and 2020 estimates continue to be from the Economic and Fiscal Outlook and Expenditure Estimate report for 2020.

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