Zafar Iqbal
Pakistan has taken a decisive yet delicate step in reshaping how it manages public pensions. By reducing its contribution to employees’ pension benefits from 20 percent to 12 percent of their pensionable pay under the new defined contributory pension scheme, the federal government has chosen a path of long-term fiscal responsibility. Employees will continue contributing 10 percent of their pay, ensuring shared responsibility between the state and its workforce.
The move may seem harsh to many federal employees, who fear its impact on their post-retirement security. Yet it is an unavoidable correction. Pakistan’s pension liabilities have spiraled beyond affordability. Without reform, they threaten to suffocate fiscal space for essential spending — from education to infrastructure. The government’s step, though unpopular, is economically rational and fiscally vital.
Follow Republic Policy on YouTube
Under the previous defined-benefit scheme, the entire pension burden rested on the budget — a model no longer sustainable in a country struggling with high debt, deficits, and growing social expenditure. The new contributory model marks the most consequential shift in decades, aligning Pakistan’s pension management with global best practices. It aims to ensure the financial security of retirees without jeopardizing the country’s macroeconomic stability.
Importantly, the new system also includes mandatory insurance for death and disability, providing a safety net for employees’ families. This protection adds moral weight to a reform that otherwise risks being seen as austerity-driven. The scheme applies to all federal civil employees hired on or after July 1, 2024, and military personnel recruited from the start of the current fiscal year.
Follow Republic Policy on Facebook
The reform was not purely voluntary. It came amid consistent pressure from multilateral lenders, particularly the IMF and World Bank, to control Pakistan’s unsustainable pension expenditures — now recognized as one of the gravest fiscal risks. Federal pension costs alone surged by 29 percent in just two years, from Rs821 billion in FY2022–23 to an estimated Rs1.055 trillion in FY2024–25. Within this, military pensions grew 32 percent, reaching Rs742 billion, while civilian pensions rose 6.6 percent to Rs228 billion.
Follow Republic Policy on TikTok
Given these dynamics, the real fiscal benefit will only materialize once the new scheme fully replaces the old one. Since it applies only to new entrants, the existing pension liabilities — massive, open-ended, and unfunded — remain untouched. The savings will emerge gradually over decades, once older liabilities are phased out and the contributory mechanism matures. In the meantime, the government will continue to shoulder the enormous cost of existing retirees.
Follow Republic Policy on Instagram
The military’s share of the pension bill complicates the equation further. Reports suggest that implementation for defence personnel was delayed following the May skirmish with India, reflecting the sensitivities around altering military entitlements during periods of heightened security tensions. Yet without inclusion of military pensions, fiscal savings will remain partial and symbolic.
Follow Republic Policy on WhatsApp Channel
Left unchecked, pension obligations would continue to crowd out development and welfare spending. Already, the federal government spends more on pensions than on higher education or public health. The reform, therefore, is not merely a financial adjustment but a necessary structural correction. However, for the reform to truly succeed, the state must ensure transparency, actuarial soundness, and institutional trust in how pension funds are managed. Employees should know that their contributions are invested safely, professionally, and ethically.
Ultimately, Pakistan’s new pension model offers a chance to break from fiscal complacency. While it may not please every stakeholder today, it holds the promise of sustainability tomorrow. The challenge now is not only to maintain this balance but also to replicate it across provinces — creating a truly national framework for retirement security grounded in both justice and prudence.
