Pakistan’s budget documents rarely make for gripping reading, but one number stands out in stark relief: more than one trillion rupees will be spent on pensions this year. A decade ago, the figure was a fraction of that. Today, pensions are on course to become one of the largest drains on the federal purse, rivaling even development spending. The promise of lifelong benefits to every civil servant and soldier who retires has swelled into a fiscal liability too heavy to sustain.
This summer, under pressure from international lenders and confronted by its own arithmetic, the government has begun to rewrite the rules. The newly notified Federal Government Defined Contribution Pension Fund Scheme will replace the traditional system for fresh entrants. Instead of an open-ended commitment by the state, pensions will now be tied to actual contributions from both employee and employer. New civil servants will put aside ten percent of their pensionable pay, matched by a twelve percent contribution from the exchequer. Over time, their retirement security will depend not on unfunded promises but on the balance that accrues in their pension accounts.
For existing employees, nothing changes. Their defined benefits remain intact. The reform is prospective only, designed to slow the growth of future liabilities. In reality, this is less a solution than a damage-control strategy. Pension bills have been rising at nearly thirty percent over two years, and much of this is driven by the armed forces. Military pensions alone are projected to reach 742 billion rupees in 2025–26, up by almost one third from just two years ago. Civilian pensions, though smaller, add another 243 billion rupees to the tally.
The blunt truth is that Pakistan has left the matter far too late. For years, economists warned that pensions were becoming a silent fiscal time bomb. Unlike salaries or subsidies, pensions are not discretionary; they are legally owed and politically untouchable. They accumulate relentlessly as each cohort of employees retires and lives longer. Attempts to rationalise or merge civilian and military pension heads have repeatedly run into resistance. Governments preferred to postpone reform, borrowing more to meet obligations and hoping growth would someday outpace costs. That hope has not materialised.
The numbers tell the story. In 2023–24, the federal government spent 821 billion rupees on pensions. In the space of two years, the allocation has ballooned to more than a trillion. That is a larger increase than the entire annual budget for higher education, and one that eats into the fiscal space for health, infrastructure, or energy reforms. The burden is now crowding out the very investments that could expand the economy and generate revenues to pay for obligations.
The new contributory scheme is therefore as much a signal as a financial instrument. It signals that the government has finally accepted pensions as a structural problem rather than a footnote. It signals to lenders such as the World Bank that Pakistan is willing to align with global practice, where defined benefit schemes have long been replaced by contribution-based systems. And it signals to future employees that retirement will not be a gift of the state but the result of disciplined savings.
Still, the scheme is only a first step. It covers only new civil entrants from July 2024 and armed forces personnel from July 2025, with implementation for the latter still pending. That means the bulk of today’s workforce, which will retire over the next three decades, remains under the old unfunded system. The immediate fiscal savings are therefore negligible. For now, the pension bill will continue its upward climb, driven by the retirements of those already in service.
This lag is unavoidable but it makes swiftness in execution all the more vital. Any delays in operationalising the new system, or loopholes that allow carve-outs and exemptions, will erode credibility. The architecture of the scheme is complex: contributions will be transferred electronically through the Accountant General’s office to designated employer pension funds. Authorised pension fund managers will be responsible for investment, record-keeping, and insurance coverage. Employees will see their contributions and balances listed on salary slips. Withdrawals will be restricted, with only a quarter of the balance accessible at retirement and the rest locked into long-term savings. All of this requires robust systems, coordination across institutions, and oversight mechanisms that Pakistan’s bureaucracy has historically struggled to enforce.
The government has promised to set up a dedicated non-banking finance company to supervise the scheme. In the interim, the Ministry of Finance itself will stand in as regulator. Whether this interim arrangement becomes yet another open-ended stopgap remains to be seen. Success will hinge on building institutional capacity to manage funds transparently, publish returns, and prevent leakages. The slightest scandal could sink confidence in the system and give ammunition to those who oppose reform altogether.
The politics of pensions is also treacherous. For employees, the shift represents a trade-off: certainty of future state payouts is replaced with investment risk. While the government contribution is sizable, the change will inevitably be seen as a dilution of benefits. That makes communication essential. If new entrants perceive the system as unfair or poorly managed, morale within the civil service could suffer. If armed forces personnel resist, reform could stall altogether.
For all its challenges, the move represents overdue recognition of a simple truth: Pakistan cannot afford to carry the pension promises of the past into the future. The system is already consuming resources that the country desperately needs for growth and public services. Without reform, the state would eventually be forced into even harsher measures, such as cutting pensions outright or resorting to unsustainable borrowing. Both would be politically and socially destabilising.
The test now is not whether reform has begun, but whether it can be sustained and expanded. The defined contribution scheme must be implemented with discipline, free of exemptions, and monitored with transparency. It will not by itself resolve the trillion-rupee problem, but it could prevent tomorrow’s burden from becoming even heavier than today’s.
Pakistan’s pension reckoning has been delayed for decades. The bills are due, the arithmetic is unforgiving, and the margin for postponement has run out. What happens over the next few years will determine whether reform becomes a genuine turning point or just another entry in the long ledger of half-measures.
