Experts wary of pension reform

The government has introduced a new pension scheme to cut expenses and bring fiscal discipline. In the first phase, it has been implemented for civil employees only and will be extended to armed forces employees after one year.

However, experts warn that this piecemeal approach may not work, as the reform's success depends on the inclusion of armed forces employees, who account for about 70% of total pension allocations.

The government has been struggling to bring fiscal discipline under the International Monetary Fund (IMF) programme. It has taken various initiatives, such as reducing subsidies, winding up departments, and privatising state-owned entities (SOEs). The objective is to cut expenditures amid the piling up of national debt and introduce a model of sustainability.

There has been much discussion about the fiscal burden of pensions for retired employees, particularly those of the armed forces. The pension burden has been growing by 20% to 30% every year on the national exchequer.

Now, the government has introduced a new pension scheme following the private sector model to reduce the burden. This scheme covers civil and armed forces personnel, along with civilian employees, but judges of the Islamabad High Court and Supreme Court have been excluded. The private sector follows a shared model for pension funds. The government has introduced a contributory model, which will ease the burden on the exchequer but has raised concerns among employees who see it as a risk that does not guarantee their pensions.

Employees will be able to get a pension only if they contribute to the pension fund established by the federal government. This scheme is aimed at controlling Pakistan's ballooning pension bill, which now exceeds Rs1.05 trillion annually.

According to the circular, the new scheme applies to all civil servants of the federal government, including civilians paid from Defence, appointed on or after July 1, 2024. It also covers armed forces personnel recruited on or after that date.

The scheme takes effect from the date of regular appointment, meaning every new entrant after the specified date will automatically be covered under the contributory framework. However, employees appointed before July 1, 2024, and later transferred or absorbed into another government department will remain under the previous defined-benefit pension system.

Under the new rules, employees will contribute 10% of their basic salary to a personal pension fund, while the government will contribute 12%, making a total of 22% of the salary invested monthly.

Eligible fund managers and entities licensed and regulated by the Securities and Exchange Commission of Pakistan (SECP) will manage these contributions to ensure transparency, regulated fund investment and professional oversight. The pension funds will be maintained and tracked through the Accountant General Pakistan Revenues (AGPR) office. Withdrawals before retirement will not be permitted. Upon retirement, employees can withdraw up to 25% of the accumulated fund, with the remainder invested for 20 years or until the retiree turns 80.

The reform comes amid growing fiscal pressure from Pakistan's pension liabilities. For FY 2025-26, the government allocated Rs1.055 trillion for pensions, including Rs742 billion for military retirees and Rs243 billion for civil servants. The finance ministry estimates that moving to a contributory system will gradually reduce long-term liabilities in line with IMF and World Bank-backed structural fiscal reforms. To support the new scheme, the government has set aside Rs10 billion in FY2024-25 and Rs4.3 billion in FY2025-26 under the Federal Pension Fund as seed money for managing contributions and oversight.

While the move ensures long-term fiscal sustainability, it also shifts responsibility to employees, linking future pension benefits to personal contributions and investment performance. Experts say this change will promote financial discipline, portability, and accountability, but will also require robust fund management to safeguard contributors from market risks.

Analysts see the move as an essential fiscal correction. "With pension liabilities growing faster than tax revenue, Pakistan had little choice but to adopt a funded pension model," said an Islamabad-based economist. "This will not yield immediate savings but will prevent the pension bill from doubling again within a decade."

"For the government, it's a relief from unchecked pension growth; for future employees, it's a move toward personalised, investment-based retirement security," another expert said, adding that the scheme's success depends on extending it to armed forces personnel, who account for 70% of total pension expenditures. However, critics argue that such piecemeal adjustments won't solve structural problems. They warn that merely shifting to a contributory scheme without strong institutional safeguards risks failure.

They further note that Pakistan's pension structure suffers from ill-designed benefits, demographic shifts, and weak governance. They add that the new scheme must overcome these structural challenges or risk repeating past failures.