Govt reforms pension system to curb Rs1 trillion bill

The federal government has introduced major reforms to Pakistan’s pension system, targeting reductions in the Rs1 trillion pension bill—the fourth-largest budget expense after debt servicing, defense, and development. These reforms are aimed at ensuring long-term fiscal sustainability.

Three notifications issued by the Ministry of Finance on Wednesday outlined the changes, including the abolition of multiple pensions, recalibration of pension calculations, and limits on future increases. 

The reforms, effective from January 1, 2025, will affect both civil and armed forces personnel. However, current retirees will only be impacted in cases of multiple pensions.

Under the new rules, pensions will be calculated based on the average salary of the last 24 months of service instead of the last drawn salary. This adjustment aims to reduce the financial burden on the state.

In a significant shift, individuals entitled to multiple pensions will now only be allowed to opt for one. However, in-service or pensioner spouses will retain eligibility to draw their spouse’s pension alongside their own.

The reforms also alter how pension increases are calculated. Any future increases will now be applied separately to the “baseline pension,” defined as the gross pension minus any commuted portion. 

The baseline pension will be reviewed every three years by the Pay and Pension Committee.

The Ministry of Finance emphasized that the reforms align with the 2020 recommendations of the Pay and Pension Commission (PPC). 

These changes are expected to significantly reduce the pension burden over the next decade, addressing a growing expense that saw a 24% increase in this fiscal year alone. The military’s share accounts for 66% of the pension budget.

Further, the government has already discontinued the traditional pension scheme for civilian employees hired after July 1, 2024, replacing it with a contributory pension system. The same will apply to armed forces personnel from July 2025.

The contributory pension system introduces a fund-based approach where employees contribute to their retirement savings, reducing future liabilities on the state. A Rs10 billion pension fund has already been established for this purpose.

The notifications also outline penalties for early retirements, particularly in the armed forces and civil armed forces. 

Employees opting for voluntary retirement before completing prescribed service will face pension reductions of up to 20%, depending on the remaining years until superannuation.