Mandatory contribution, no indexation, non-negotiable pillars of genuine pension reform

Finance Secretary Benjamin E. Diokno on Wednesday asserted that any proposed reforms in the pension system for military and uniformed personnel (MUP) must directly and squarely address the substantial budgetary implications stemming from indexation and the absence of personnel contributions.

Secretary Diokno has firmly stood behind the economic team’s proposals on the MUP pension reform system. Among these proposals are the following:

-Mandatory 5 percent contribution of active personnel on year 1-3, 7 percent on year 4-6, and 9 percent starting year 7 onwards, while new entrants will immediately contribute 9 percent. The contributions are based on the personnel’s monthly base and longevity pay;

-Government counterpart contributions to meet the 21 percent total pension premium; and

-Removal of indexation for active personnel and new entrants.

The Finance Secretary agreed with the indexation for current pensioners to ensure the non-diminution of their benefits. But for the active personnel and new entrants, their future pension will be adjusted according to economic conditions and financial viability of the proposed pension fund. The pension benefits will be reviewed annually for a possible increase of up to 1.5 percent every year.

“The pensioners and the active personnel have different needs. It is therefore necessary to ensure that the pension and wages have different bases for adjustment. Removing automatic indexation of pension to the current wages gives us flexibility to respond to the unique needs of the pensioners and the active personnel,” Secretary Diokno explained.

From 2018, pension commitments have consistently exceeded the budget for maintenance and other operating expenses (MOOE), and capital outlay (CO) of the military and uniformed services. This predicament weakened the ability of the government to effectively meet the needs for military modernization, according to the Finance Secretary.

Secretary Diokno expressed his concerns on proposals to continue with indexation. Allowing indexation to continue will be unsustainable, which, coupled with guaranteed increases, will further expand the deficit.

According to the Department of Budget and Management, a guaranteed 3 percent annual salary increase for 10 years with full indexation of pension benefits will require PHP 11.8 billion in 2024, PHP 24.5 billion in 2025, PHP 38.1 billion in 2026, increasing up to PHP 165 billion in 2033. Without new revenues, the National Government will be forced to borrow to finance these increases in benefits.

“It will not qualify as a reform if indexation will continue and the active members will not contribute. We have to reduce the fiscal impact of the MUP’s pension program and the contribution of active members will greatly help in managing that,” the Finance Secretary emphasized.

Aside from the termination of indexation and mandatory contribution of active personnel and new entrants, the economic team also proposes to standardize the benefits of MUPs to include maximum regular pension of 90 percent of base and longevity pay, separation pay, and similar benefits under optional retirement which the pensioners will receive immediately upon retirement. All new entrants in the uniformed services shall also be retired at actual rank.