The Future of Retirement in Pakistan: Comparing Old and New Pension Schemes

The New Contributory Pension scheme applies to civil employees from 1 July 2024, and armed forces from 2025.

The Finance Division of Pakistan has recently announced a new pension fund scheme for new employees. According to the Cabinet’s decision on June 27, 2024, a Contributory Pension Fund Scheme will be introduced for all federal civil employees, including civilians paid from defence estimates appointed on or after July 1, 2024. This scheme will also apply to Armed Forces members appointed on or after July 1, 2025.

In Pakistan, pensions for employees are governed by several laws. The Civil Servants Act of 1973 applies to public sector workers, while the Employees’ Old-Age Benefits Act of 1976 covers private sector employees.The Pensions Act of 1871 sets out pension rules for government employees.

Article 38 of the Constitution of Pakistan ensures that the state provides social security for all citizens. Together, these laws aim to provide financial security for employees in retirement.

Defined Benefit Pension Scheme (Old Pension Scheme)

Employees did not need to pay anything from their salaries for their pensions. The government covered all the costs.

Contributory Pension Scheme (New Pension Scheme)

Both employees and the government will contribute to the pension fund. Employees pay 10% of their basic salary, and the government adds 20%.

Guaranteed Retirement Income (Old Pension Scheme)

Employees were promised a fixed pension amount based on their last salary and years of service. This was usually a large percentage of their final salary.

Variable Retirement Income (New Pension Scheme)

The pension amount depends on how much is contributed by both sides employees and the Government and the investment returns of the pension fund. There is no guaranteed fixed amount, which means it can vary and is uncertain.

Financial Predictability for Retired Employees (Old Pension Scheme)

This scheme provided financial security for retirees with a predictable pension. It was especially helpful for employees in lower grades who might have limited savings.

Shared Financial Responsibility (New Pension Scheme)

The new contributory Pension scheme reduces the government’s pension costs by having employees share the funding. This helps ease the pressure on the state budget.

High Government Costs (Old Pension Scheme)

The scheme put a heavy financial burden on the government because of rising pension costs and a developing workforce. Over time, it became less sustainable, leading to the need for reforms.

Lower Government Costs (New Pension Scheme)

The new contributory pension scheme reduces the government’s burden by shifting part of the pension cost to employees, ensuring sustainable funding and lowering long-term fiscal liabilities. This approach helps manage future financial obligations more effectively.

As Pakistan moves from a defined benefit pension scheme to a new contributory model, it brings both opportunities and challenges. This shift aims to make pensions more sustainable and reduce government costs, but it also creates uncertainty for employees, as their pension income will now depend on their contributions and investment returns.

The success of this change will depend on how well the government manages the new system and addresses any concerns, ensuring it provides financial security for retired employees while remaining sustainable for the country. The results will greatly impact the future of retirement in Pakistan.