Pakistan has introduced a new contributory pension system for all new federal government employees, including military personnel, starting from July 1, 2024. This major policy shift is designed to address the country's rapidly growing pension liabilities, which currently surpass Rs 1.05 trillion annually.
The reform, part of broader fiscal discipline measures under an International Monetary Fund (IMF) program, moves away from a defined-benefit model to a shared contribution system. However, experts have raised concerns that delaying the full inclusion of armed forces personnel for one year could undermine the scheme's effectiveness, as they account for the majority of pension expenses.
Key Takeaways
- A new contributory pension scheme is mandatory for all new Pakistani federal government hires from July 1, 2024.
- Employees will contribute 10% of their basic salary, and the government will contribute 12%.
- The reform aims to control a national pension bill that has grown to over Rs 1.05 trillion.
- Armed forces personnel are included, but their full integration is set for a year later, a point of concern for analysts.
- The new system shifts retirement benefits from a guaranteed payout to one based on investment performance.
Understanding the New Contributory Pension Model
The new framework fundamentally changes how retirement benefits are funded for future public sector employees. It applies to all civil servants and armed forces personnel appointed on or after July 1, 2024. Employees already in service before this date will remain under the old defined-benefit system.
Under the new rules, an employee is required to contribute 10% of their basic monthly salary into a personal pension account. The federal government will supplement this with a 12% contribution, bringing the total monthly investment to 22% of the employee's basic pay.
These funds will not be managed directly by the government. Instead, they will be handled by professional fund managers licensed and regulated by the Securities and Exchange Commission of Pakistan (SECP). This structure is intended to ensure professional oversight and transparent investment practices.
From Defined Benefit to Defined Contribution
The previous system was a 'defined-benefit' plan, where the government guaranteed a specific pension amount to retirees for life, regardless of market conditions. The new 'defined-contribution' model guarantees only the contribution amounts (10% from the employee, 12% from the government), while the final pension payout depends on the investment returns of the managed fund.
Retirement and Withdrawal Rules
The system is designed for long-term savings, and early withdrawals from the pension fund will not be permitted. Upon reaching the age of retirement, employees will have limited immediate access to their accumulated capital.
An individual can withdraw up to 25% of the total fund value as a lump sum. The remaining 75% must be reinvested into an approved income plan. This plan will provide regular payments to the retiree for a period of 20 years or until they reach the age of 80, whichever comes first.
The Fiscal Imperative Behind Pension Reform
The Pakistani government's decision to overhaul its pension system stems from severe fiscal pressure. The national pension bill has been increasing at an alarming rate of 20% to 30% annually, creating an unsustainable burden on the national budget.
Pakistan's Pension Bill Breakdown
For the 2025-26 fiscal year, the total pension allocation is projected to be Rs 1.055 trillion. This includes:
- Rs 742 billion for military retirees.
- Rs 243 billion for retired civil servants.
These figures highlight the scale of the liability. The finance ministry projects that without this reform, the pension bill would continue to grow uncontrollably, potentially doubling again within a decade. The move to a contributory system is a key structural reform supported by international financial institutions like the IMF and the World Bank.
"With pension liabilities growing faster than tax revenue, Pakistan had little choice but to adopt a funded pension model," stated an Islamabad-based economist. "This will not yield immediate savings but will prevent the pension bill from doubling again within a decade."
To support the launch of the new system, the government has allocated seed money to the Federal Pension Fund. This includes Rs 10 billion for the 2024-25 fiscal year and an additional Rs 4.3 billion for 2025-26 to manage the initial contributions and administrative oversight.
Expert Analysis and Potential Challenges
While analysts agree that fiscal correction is necessary, the design and implementation of the new scheme have drawn scrutiny. The most significant point of contention is the phased inclusion of the armed forces.
The Armed Forces' Critical Role
Military pensions constitute approximately 70% of Pakistan's total pension expenditure. The government's plan includes armed forces personnel recruited after July 1, 2024, but their full integration into the scheme is scheduled to occur after one year.
Experts warn that this piecemeal approach could be a critical flaw. They argue that for the reform to be truly effective in controlling fiscal deficits, the largest component of the pension bill must be included from the outset and without exception.
"For the government, it's a relief from unchecked pension growth; for future employees, it's a move toward personalised, investment-based retirement security," another expert noted. They added that the scheme's ultimate success "depends on extending it to armed forces personnel," who represent the vast majority of the expenditure.
Shift in Risk and Need for Safeguards
The new model also represents a significant transfer of risk from the state to the individual. Future retirees' income will no longer be a fixed government guarantee but will instead be subject to market fluctuations and the performance of their pension fund investments.
Critics argue that this shift requires robust institutional safeguards to protect contributors from market volatility and mismanagement. They point out that unless the new scheme addresses underlying structural weaknesses in Pakistan's pension governance, it risks repeating the failures of past reforms.
The success of this landmark reform will depend not only on its implementation but also on the government's ability to establish a transparent, well-regulated, and trustworthy fund management ecosystem to secure the financial futures of millions of public servants.
