The federal government has introduced significant reforms to the pension system for public servants at the start of the new year, aiming to streamline processes, enhance transparency, and reduce the financial burden on the national exchequer.
The changes, implemented through an Office Memorandum (OM) issued by the Finance Division on January 1, 2025, are based on the Pay and Pension Commission 2022 recommendations.
These reforms include significant modifications to pension calculation, double-pay restrictions, and a revised methodology for annual increases.
Sources in the finance division believe these measures will save billions of rupees annually and contribute to long-term economic stability.
The Changes
According to the OM, pensions will now be calculated based on the average of pensionable emoluments drawn during the last 24 months of service prior to retirement. This replaces the previous calculation methods, which were less standardized and prone to discrepancies.
Furthermore, senior officials entitled to multiple pensions must now choose one pension to draw. The memorandum specifies:
“Federal government employees who are currently in service and become entitled to a pension will not be eligible to draw that pension while still employed.”
However, in-service employees or pensioners whose spouses are also entitled to a pension may receive their spouse’s pension in addition to their own.
The new policy introduces a “baseline pension” concept, defined as the net pension calculated at the time of retirement, excluding the commuted portion. The OM outlines the following methodology for future increases:
- Annual pension increases will apply to the baseline pension.
- Each increase will be maintained as a separate amount until the federal government authorises any additional pensionary benefits.
- The Pay and Pension Commission will review baseline pensions every three years to ensure adjustments align with economic conditions.
- For existing pensioners, the current pension as of January 1, 2025, will serve as the baseline, including any restored commuted portion.
The OM further restricts high-ranking officials from receiving double pensions, a move aimed at addressing long standing inefficiencies in the pension system. Limiting double pensions is expected to save the national exchequer billions of rupees annually.
The Effects
The reforms aim to bring greater consistency and transparency to the pension system. By standardizing calculations and introducing regular reviews, the government seeks to ensure pensions remain fair and sustainable.
The Pay and Pension Commission will now conduct triennial reviews of the baseline pension to adapt to changing economic circumstances. This is expected to address gaps in the current system and ensure that pension benefits are equitable and aligned with fiscal realities.
While these changes represent a shift from the previous system, the government has positioned them as necessary to stabilize the economy and reduce unsustainable pension liabilities. The Ministry of Finance emphasized that the new policies will create a more robust and equitable pension structure, benefiting public servants and the economy in the long term.
According to the ministry, the reforms will reduce reliance on expensive and unsustainable pension payouts, streamline processes, make the pension system more efficient, and encourage economic stability by reducing financial strain on the national treasury.
The reforms may pose challenges for government employees accustomed to the old system, particularly those relying on multiple pensions or expecting higher annual increments. However, officials believe the changes are essential for addressing systemic flaws and ensuring fiscal sustainability.
The coming months will test the effectiveness of these reforms and their impact on both public servants and the broader economy. As the government works to integrate the new policies, it remains committed to addressing concerns and ensuring the smooth implementation of these measures.
