Qudsia Bano

The government has announced a major shift in its pension policy by transitioning new civil servants to a Defined Contribution (DC) pension scheme starting July 1, 2025. This move marks a significant reform aimed at improving long-term fiscal sustainability and reducing the burden of unfunded pension liabilities, which have now exceeded one trillion rupees, outpacing the federal development budget.

Recently, the Securities and Exchange Commission of Pakistan (SECP) organised a national workshop, where key stakeholders from the federal and provincial governments, the financial sector, and development institutions discussed the future of pension reforms in Pakistan. The new DC scheme will replace the traditional Defined Benefit (DB) system for all new entrants in the civil service.

Under the DC model, employees and the government will both contribute to individual pension accounts, which will be invested to generate returns. Upon retirement, employees will receive benefits based on the contributions they have made and the investment growth. This approach aligns public sector pensions more closely with global practices and helps limit fiscal exposure. Waqas Ahmed, Head of Retirement Solutions at Habib Asset Management, said this transition was long overdue.

“Pakistan’s pension system has become financially unsustainable. Shifting to a DC model gives the government better control over future liabilities while offering employees more transparency and ownership of their retirement savings,” he explained.  According to official data, pension payments have increased sharply in recent years, with little or no corresponding funding mechanisms in place. Experts believe that without such reforms, pension obligations would continue to crowd out essential development spending.

Dr Samina Baloch, Senior Research Economist at the Pakistan Institute of Development Economics (PIDE), supported the policy shift. “The challenge is not just financial, it’s also about fairness and efficiency. A DC system offers portability, individual control, and encourages long-term savings. If implemented properly, it could be transformative for Pakistan’s public finance and labour markets,” she said. The SECP, meanwhile, is developing a comprehensive regulatory framework for DC pension schemes, with an emphasis on digital access, transparency, and investor education.

Relevant officials have emphasised that reforms will be carried out in phases and in consultation with all stakeholders to ensure a smooth transition. As Pakistan seeks to manage its growing fiscal pressures and promote financial inclusion, the introduction of a sustainable and modern pension framework could play a pivotal role in reshaping the country’s public finance landscape for future generations.

Credit: INP-WealthPk