The Khyber Pakhtunkhwa (KP) government has announced plans to transition from its unfunded pension scheme to a funded system by 2045, once all employees hired under the old system retire. This shift follows the province’s move in 2022 to introduce a contributory pension system for new employees, according to a news report.
In its recent budget for the fiscal year 2025-26, the provincial government announced a 10% pay raise for active employees and a 7% increase for retirees. This brings the total pay and pension bill to Rs875 billion—Rs680.39 billion for salaries and Rs194.97 billion for pensions—making up 41% of the total budget of Rs2.12 trillion.
The rising costs of pensions and salaries have created fiscal constraints, limiting funds available for other essential services, including infrastructure projects, school textbooks, and healthcare.
The government has noted that the pension increase for the coming year has been reduced to 7% from the previous year’s 17.5%, aiming to create more fiscal space for development spending.
According to actuarial projections, KP’s accrued pension liability stood at Rs3 trillion as of June 2020, and with the number of employees and pensioners growing, this liability is now estimated to exceed Rs3.5 trillion. The pension expenditure for the current fiscal year is Rs160 billion, expected to rise to Rs193 billion in the upcoming year, further straining the provincial budget.
In response, KP is the first province in Pakistan to implement a transition from an unfunded to a funded pension system. The government introduced a Defined Contribution (DC) scheme for new entrants, enrolling 59,433 employees under the scheme to date.
The provincial government has committed Rs1.5 billion in employer contributions this year, with projections for Rs2.4 billion in the next fiscal year.
Despite the challenges of managing both the old Defined Benefit (DB) and new DC systems during the transition period, the government believes this shift will help manage long-term pension liabilities.
By 2045, the DB scheme will be phased out, and the DC scheme will fully take over, reducing the burden on the provincial exchequer.
Additionally, the KP government is exploring parametric pension reforms to ease the transition. These reforms may adjust key features of the DB scheme, such as retirement age and pension indexation, to reduce fiscal pressure and accelerate the move to a fully funded pension system.
