Government Announces Sweeping Pension Reforms
The government of Pakistan has introduced significant reforms to the country’s pension system, focusing on abolishing multiple pensions and revising pension calculations. These reforms, approved by the Pay and Pension Commission – 2020 (PPC), were notified on the first day of 2025 and are effective immediately.
Revised Pension Calculation Methodology
A major change involves the calculation of pensions based on the average salary of the last 24 months of service, replacing the earlier system that used the last pay drawn before retirement. This change affects new pensioners, potentially lowering their retirement benefits compared to the previous model.
Abolition of Multiple Pensions
Under the new Pakistan pension reforms, individuals entitled to multiple pensions can now only opt to draw one pension. However, spouses will continue to be eligible for their own pensions in addition to their deceased partner’s pension, ensuring financial security for surviving spouses.
Baseline Pension Introduced
Future pension increases will now be based on a “baseline pension,” defined as the net pension (gross pension minus commuted portion) at the time of retirement. Each pension increase will be treated as a separate amount, and the baseline will be reviewed every three years by the pay and pension committee. Existing pensions as of January 1, 2025, will be treated as baseline pensions, including restored commuted portions.
Contributory Pension Scheme for Future Employees
The government has also implemented a contributory pension scheme starting July 1, 2024, for civilian employees, with armed forces personnel transitioning a year later. To support this initiative, a Rs10 billion pension fund has been established.
Penalties for Voluntary Retirement
New draft rules impose penalties for early retirement. Federal employees retiring after 25 years of service will face a 3% annual reduction in gross pension for each year before reaching superannuation, capped at a 20% maximum reduction. This penalty applies to armed forces and civil armed forces personnel as well.
Reducing Pension Costs Without Compromising Philosophy
The Ministry of Finance emphasized that the Pakistan pension reforms align with PPC-2020 recommendations and aim to control escalating pension costs while maintaining the government’s pension philosophy. Officials cited their authority under civil service regulations to amend pay and pension provisions.
These reforms mark a pivotal step in ensuring a sustainable pension system while addressing long-standing inefficiencies in the system.
