Finance ministry recommends overhaul of pension system

The Ministry of Finance has put forth a series of sweeping changes in a proposal aimed at reforming the pension system for retired public sector employees. While exempting defense and armed forces personnel from these alterations, the recommendations include a shift in the basis for calculating pension, a reduction in the commutation formula, and changes in the duration of pension entitlement for certain categories of retirees.

Under the proposed changes, the calculation of pension would be based on the average of the last three years' drawn salary, departing from the current practice that considers the last drawn pay. The commutation formula, which determines the lump sum upfront amount at the time of retirement, would see a reduction to 25 percent, with 75 percent to be paid in monthly installments in subsequent years. This marks a shift from the existing formula of 35 percent at retirement and 65 percent in subsequent years.

Furthermore, the pension duration for specific categories of retirees, such as unmarried, divorced, and widow daughters, would be restricted to 10 years, as opposed to the current lifetime entitlement. However, exemptions would be available for Shuhada families, extending to 20 years, and for disabled sons and daughters, who would receive lifetime pension benefits.

In an effort to make pension adjustments more responsive to economic conditions, the proposal suggests that any increase in pension would be indexed with the Consumer Price Index (CPI), with a maximum allowable increase of 10 percent per annum. Early retirement would be discouraged, and a penalty ranging from three percent to ten percent would be applicable to retiring individuals.

While the reforms have not been officially implemented, the proposal could signal significant changes in the pension landscape for public sector employees in Pakistan. It is noteworthy that under the proposed reforms, individuals re-employed in the public sector would need to choose between salary and pension benefits, and the government would no longer authorize both simultaneously.

The changes in pension calculation would transition to a defined contributory model, with expenses no longer borne by the government. Federal government employees would be entitled to a gross pension based on 70 percent of average pensionable emoluments drawn during the last 36 months of service before retirement. The option for early retirement, after 25 years of service, would carry a penalty of a three percent reduction in gross pension per year until reaching the age of superannuation.

Additionally, family pension entitlements would be limited to a maximum of 10 years after the death or disqualification of a spouse, with the Shuhada Pension extending to 20 years. For disabled or special children of pensioners, family pension benefits would be granted for the lifetime of such children.

The proposal also introduces the option for federal government employees to commute up to 25 percent of their gross pension at the time of retirement, subject to terms and conditions set by the government.