Pakistan makes major changes to pension rules to cut ballooning expenses

Pakistan has made major changes to pension rules in efforts to reduce its rising fiscal expenditures as it seeks the International Monetary Fund's (IMF) Executive Board approval for a $7 billion loan program.

Pension liabilities have been on the government's radar for the last few years due to their exponential rise. They have surged to PKR 2 trillion in fiscal year 2024-2025, payable to retired federal government, provincial government and armed forces employees or their families.

Although the government has not made the number of pensioners public, sources in the Ministry of Finance said that the estimate is over three million.

These new rules have been notified on the recommendations of the Pay and Pension Commission which was established in 2020.

According to a notification issued by the Finance Division dated Sept 10, under the Ordinary Family Pension scheme, the family members will only be entitled to receive a pension for a maximum of 10 years after the death or ineligibility (following remarriage) of the entitled spouse.

If the retired employee has special or disabled children, they will be entitled to receive the Ordinary Family Pension for their lifetime.

Otherwise, the children will be entitled to receive it for a maximum of 10 years or until they reach the age of 21 years, whichever is later.

Prior to this, entitled family members were receiving the pension throughout their lifetime.

In a separate notification, the Finance Division stated that under the Special Family Pension, family members will be entitled to receive a pension for 25 years after the death or ineligibility of the entitled spouse.

If the retired employee has special or disabled children, they will be entitled to receive the Special Family Pension for their lifetime.

Moreover, the rate of such pension for eligible recipients has been enhanced to 50% of last drawn pension admissible to the first recipient for all ranks of armed forces/civil armed forces without limits and transferable to all eligible heirs as per order prescribed in Rule 12 of Pension Regulations Vol-1 (Armed Forces), 2010.

The government on the recommendations of the Pay and Pension Commission 2020 also notified penalties on voluntary retirement.

The notification states that a federal government employee may opt for retirement after 25 years of service. However, the employee shall be liable to a flat reduction rate of 3% per year in gross pension based on the number of completed months from the date of retirement to the date of superannuation. The flat reduction in gross pension shall be capped at 20%.

It added that in cases of armed forces and civil armed forces voluntary retirement, penalties will apply only if retirement is sought or granted prior to the prescribed rank service.

Prior to this, the government also announced that a Contributory Pension Scheme would be applicable to all federal government employees appointed after July 1, 2024 and all armed forces employees appointed after July 1, 2025. Under the scheme, employees would contribute 10% of their basic pay to the pension fund while the government would contribute 20%.