Pakistan’s pension challenges have grown more urgent in recent years, reflecting a global trend in which increasing life expectancies, shrinking birth rates, and evolving employment patterns have placed considerable strain on retirement systems.
According to demographic projections by the United Nations, the proportion of Pakistan’s population aged 60 and above is set to double by 2050, intensifying the need for a financially robust pension structure.
Under the existing unfunded pay-as-you-go pension model, much of the burden rests on government revenues, creating a fiscal drag that could ultimately crowd out essential spending on healthcare, education, and infrastructure if not adequately contained.
Recent fiscal data paints a stark picture. Pension spending in Pakistan has been rising at about 25 per cent annually, outstripping the pace of GDP growth. Some estimates suggest that if these trends continue, pension liabilities could consume more than 50 per cent of government revenues by 2050, leaving little room for other priorities.
Already, Punjab’s pension obligations reportedly absorb a significant portion of the province’s revenue, while the national railway system devotes around 70 per cent of its income to pensions. These figures underscore the unsustainability of the status quo and illustrate why the International Monetary Fund (IMF) has repeatedly called for bold structural reforms.
Encouragingly, the Government of Pakistan has taken several steps in recent years to address these vulnerabilities, adhering to prudent financial oversight and ethical governance. New rules cap multiple pensions, recalculate benefits based on a 24-month average salary rather than the final salary, and impose penalties for early retirements.
A contributory pension scheme, introduced for employees hired from July 2024 onwards, marks a particularly significant policy shift. These measures, which blend fiscal responsibility with a forward-looking perspective, merit recognition for striking a balance between immediate budgetary constraints and the long-term imperative of safeguarding public servants’ retirement security.
Global precedents further show how pension reforms can be both financially prudent and equitable for retirees. OECD countries that have instituted well-funded pension systems such as Canada, the Netherlands, and Sweden tend to enjoy more predictable fiscal outcomes and often higher returns on retirement contributions.
Canada’s pension fund, for instance, manages assets exceeding 500 billion Canadian dollars, yielding substantial investment income that mitigates strain on public finances.
Meanwhile, Chile’s private retirement account model spurred notable capital market growth, although it also prompted debates around ensuring adequate protection for lower-income retirees.
Within Pakistan, smaller-scale experiments offer lessons that could be replicated nationally. The Punjab government established the Punjab Pension Fund Authority, which aims to invest contributions in a diversified pool of government securities, corporate bonds, mutual funds, and Shariah-compliant assets.
However, the extent to which these initiatives will be fully realised remains uncertain, as to date only a modest sum has actually been invested, despite the enabling legislation having been enacted in 2007.
Nevertheless, in Rahimyar Khan, the Deputy Commissioner who also chairs the Board of Directors for Shaikh Zayed and Shaikh Khalifa Schools, has introduced a voluntary pension system where the staff of Sheikh Khalifa and Sheikh Zayed Public Schools contribute to the Capital Markets-based Pension Fund, thereby building individual retirement savings while easing the financial burden on public institutions.
Transitioning to a funded system brings several key advantages. It reduces reliance on government revenues, unlocks new capital for investment, thereby supporting domestic financial markets and promotes transparency and accountability through professional fund management.
While market volatility is a legitimate concern, a balanced approach that blends equities with lower-risk vehicles such as money market funds can offer both security and growth potential.
Over the long term, diversified portfolios typically outperform purely fixed income assets, helping retirees safeguard their savings from inflation.
If Pakistan is to build on the momentum initiated by the government’s recent reforms, it would benefit from a more comprehensive strategy aimed at extending contributory schemes beyond newly hired employees to include current civil servants.
Such a transition would require stronger legislation, rigorous auditing, and the engagement of skilled professionals in fund management. Public-private partnerships could also mobilise both local and international financial expertise, particularly with respect to asset allocation and risk management.
In addition, a well-designed financial literacy programme could help citizens better understand pension mechanisms, encouraging voluntary contributions and minimising political opposition to reforms.
The benefits of effective pension reform are substantial. It shields retirees from the precariousness of unfunded liabilities, fosters a culture of saving and investment, and frees the government from allocating an ever-growing share of its budget to pension expenditures. This realignment of public finances could allow for increased investment in vital sectors such as healthcare, education, and infrastructure crucial cornerstones of Pakistan’s long-term development.
Conversely, any delay or half-hearted approach risks worsening a looming fiscal crisis. Demographic shifts will only gather pace, making it increasingly challenging to sustain the current system.
By committing to a transparent, well-regulated funded model, Pakistan can uphold the ideals of good governance championed by both domestic policymakers and international stakeholders. This path necessitates embracing innovative financial solutions, strengthening institutional capacities, and cultivating public trust through openness and accountability.
Ultimately, a robust pension framework goes beyond merely safeguarding retirees; it also underpins broader economic resilience. As Pakistan navigates a global environment of rapid change and an ageing demographic profile, the government’s recent reforms are a promising start. Embedding these measures in a larger vision of funded and professionally managed schemes can reinforce the nation’s fiscal foundation and secure a dignified retirement for future generations.
Copyright Business Recorder, 2025
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