Pension Fund

Our favourable fiscal position will also enable us to set up a Pension Fund for public officers. Currently, pensions for them are paid out of Government's annual operating expenditure.

Pension payments to retired public officers are protected under the Constitution. Pensions constitute a charge on the Consolidated Fund, which means that pension obligations must be honoured regardless of the Government's budgetary position or the state of the economy. This is rightly so. Civil servants and military officers who have served the nation faithfully should not spend their retirement in fear that the Government may not have the money to pay for their pensions when times are bad.

Total annual pensions expenditure currently amounts to some $390 million. As a percentage of GDP, it is expected to remain steady over the medium term at approximately 0.4%.

Although the annual payment is not large, the current funding arrangement is unsatisfactory for a variety of reasons.

Firstly, the Constitutional protection afforded to pensioners under this arrangement is good only so long as there are funds available in the general purpose Consolidated Fund to pay the pensions. The present arrangement does not recognise pensions as a sizeable future liability, and hence there are no dedicated funds set aside for this purpose.

The present arrangement also understates the manpower cost of the civil service. It requires future taxpayers to pay for the services rendered by the present generation of civil servants and military personnel. This is fine so long as the economy continues to do well and future taxpayers do not mind additional taxes. Should there be a downturn, they will find it a painful burden to bear.

It is prudent therefore for Government to recognise pensions as a future liability and to make provision for it explicitly. This is simply good housekeeping practice. We do so for other explicit liabilities. For example, every year a substantial amount is provided in the Estimates for Sinking Fund contributions. For FY94, the amount is $2.6 billion. These Sinking Fund contributions have to be made by law for the redemption of maturing loan stocks issued to CPF Board by Government. We should similarly start making provision for future pension liabilities. We should do so now when revenues are strong.

Government will therefore introduce legislation later this year to set up a Pension Fund. Part of Government's reserves will be transferred to the Pension Fund to provide for the past service pension liabilities of pensioners and serving officers. On-going service pension liabilities will be funded by an annual budgetary contribution, estimated at approximately 17% of pensionable emoluments. A Pension Fund with dedicated assets to back pension liabilities will be a solid assurance to pensionable public officers that their pensions will continue to be paid. At the same time, future taxpayers will be relieved of the burden of paying for services rendered by current and past public officers.

I will now turn to the FY94 Expenditure Estimates.