Employees to co-invest as government introduces new pension scheme

The federal government has implemented a new Contributory Pension Fund Scheme as the employees will now contribute 10 per cent of their salaries toward their pensions, making them eligible to receive a 12 per cent contribution from the national exchequer.

The Federal Government Defined Contribution (FGDC) Pension Fund Scheme Rules 2024 have been issued by the Finance Ministry’s Regulation Department under the Public Finance Management Act, 2019. The new scheme will be regulated in accordance with the Voluntary Pension System Rules, 2005, and the Non-Banking Finance Companies and Notified Entities Regulations, 2008.

The rules replace the earlier directive issued in August 2024, which had set the government’s contribution at 20 per cent.

On August 20, 2024, the Finance Ministry had initially announced the introduction of a contributory pension scheme for newly recruited civil servants and armed forces personnel. Under the revised system, civil employees recruited on or after July 1, 2024, including those in civil defense, will be covered, while implementation for armed forces personnel is expected from July 1, 2025, pending formal approval.

To support the new pension structure, the government has allocated Rs10 billion for the 2024–25 budget and Rs4.3 billion for 2025–26.

Sources revealed that the scheme was introduced on the recommendation of the International Monetary Fund (IMF) and the World Bank to address the rising pension liabilities, which the government has termed a serious fiscal risk. The reform will not affect current employees but aims to slow the growth of future pension expenditures.

According to government estimates, federal pension spending is projected to reach Rs1.05 trillion in 2024–25, up 29 per cent from Rs821 billion in 2023–24. Pension liabilities for the armed forces are expected to rise 32 per cent, reaching Rs742 billion in 2025–26 compared to Rs563 billion in 2023–24.

For civil servants, pension allocations have increased by 6.6 per cent to Rs243 billion in the current fiscal year from Rs228 billion last year, reflecting modest savings due to the reforms.

Under the new rules, only authorized pension fund managers will manage the fund. The government, as an employer, will deposit 12 per cent of an employee’s pensionable salary through the Accountant General’s Office, which will also monitor record-keeping and fund transfers.

Employees’ 10 per cent contributions will be automatically deducted from their salaries, and both employee and employer contributions will be transferred to the Employer Pension Fund before salary disbursement.

Employees will not be allowed to withdraw pension funds before retirement. Upon retirement, they may withdraw up to 25 per cent of their accumulated savings, while the remaining amount will stay invested under the Voluntary Pension System Rules, 2002, until they complete 20 years of investment or reach the age of 80, whichever comes first.

Employee payslips will now include detailed pension contribution information, listing both the employee’s and employer’s shares along with the total accumulated balance. The Finance Ministry will allocate an annual budget for the government’s share and sign contracts only with pension fund managers that support electronic fund transfers. The agreements will also require insurance coverage in cases of death or disability, to be provided through the designated fund managers.

To supervise the scheme’s implementation, the Finance Ministry will establish a Non-Banking Finance Company (NBFC), which will initially operate in an interim capacity until formally constituted. Pension benefits in cases of retirement, resignation, dismissal, or early retirement will be determined according to government regulations.

The Contributory Pension Fund Scheme marks a major shift from the traditional defined-benefit model to a defined-contribution system, aiming to enhance financial sustainability and ensure long-term retirement security for future public sector employees.