In a significant move aimed at pension reform and controlling public expenditure, the federal government of Pakistan has announced a new policy targeting retired government employees. According to a new notification, government employees rehired after retirement, whether on a contract or regular basis, must now opt for either drawing their pension or receiving a salary — they can no longer claim both simultaneously.
This decision marks a major shift in the federal pension policy and aligns with broader reforms aimed at meeting international financial commitments and managing the ever-increasing pension burden on the national exchequer.
Key Highlights of the New Policy
A notification issued by the Regulation Wing of the Ministry of Finance clearly stated that:
- If a retired federal government employee is re-employed in government service after the age of 60, they must choose between their pension or salary.
- This rule applies regardless of whether the re-employment is on a regular basis, contractual basis, or any other form of service arrangement.
- Employees cannot receive dual benefits (salary and pension) simultaneously during their re-employment tenure.
This marks a departure from the previous system where retirees were able to receive both pension benefits and salaries concurrently, sometimes even drawing multiple pensions.
Previous Practices: Dual Benefits and Their Impact
Before this reform, it was a common practice for retired government officials to enjoy dual financial benefits. Many re-employed retirees would draw a full pension while also receiving a handsome salary from their reappointment. In some rare cases, individuals even drew multiple pensions from different sources.
While financially rewarding for the individuals, this dual benefit system posed significant challenges:
- Financial Burden: It added an immense financial burden on the national treasury.
- Stifled Opportunities: It limited opportunities for younger or in-service employees to be promoted or appointed to higher positions.
- Inequity in Public Service: It created a perception of inequity among employees still serving and aspiring for career advancement.
The latest move is aimed at ensuring fairness, promoting merit-based opportunities for others, and making the pension system more sustainable in the long run.
A Step Toward Broader Pension Reforms
The decision to limit retired employees to either a salary or a pension is part of broader pension reforms initiated by the government. These reforms were initially proposed by former Finance Minister Ishaq Dar in the 2022-23 budget. However, the implementation was delayed until Finance Minister Muhammad Aurangzeb reintroduced the plan in the 2024 budget ahead of the new International Monetary Fund (IMF) program signing.
Contributory Pension Scheme Introduced
In September 2024, the government took another major step by introducing a contributory pension scheme. Under this system:
- Employee Contribution: New employees joining the federal government after July 1, 2024, would contribute 10% of their basic salary toward their pension fund.
- Government Contribution: The government would contribute an additional 20% of the employee’s basic salary.
- Armed Forces: Armed forces personnel deployed after July 1, 2025, will also be subject to this contributory scheme.
The Ministry of Finance allocated Rs10 billion for the pension fund in the 2024-25 budget to kickstart this reform.
The contributory pension model, advised strongly by international lenders such as the World Bank, is expected to gradually ease the government’s future pension liabilities. Importantly, this new scheme will not affect current government employees; it applies only to those recruited after the designated dates.
Growing Pension Expenditure: A Financial Challenge
The government’s urgency in reforming pension policies stems from the escalating pension liabilities. Some key statistics illustrate the gravity of the situation:
- Total Pension Expenditure (2025): The federal government’s pension bill has crossed Rs1,000 billion.
- Previous Fiscal Year: In comparison, it was Rs821 billion during fiscal year 2024, marking a sharp increase of 24% within a year.
- Armed Forces: Pension liabilities for the armed forces rose from Rs563 billion to Rs662 billion in the same period, showing an 18% jump.
- Civil Pension Liabilities: For civilian employees, pension spending is estimated at Rs220 billion for the current fiscal year — slightly less than Rs228 billion in the previous year.
Such rapid increases in pension spending without corresponding growth in revenues have put immense pressure on Pakistan’s already fragile fiscal situation.
Additional Pension Reforms Implemented
Besides restricting retirees from drawing salary and pension together, the government has introduced further reforms to rationalize pension costs:
Ending Multiple Pensions
- Policy Shift: Government employees who become eligible for more than one pension can now opt for only one pension.
- Notification: Issued in January 2025, the new rules prevent federal government servants from drawing multiple pensions simultaneously.
Change in Pension Calculation Method
- Previous Method: Pensions were traditionally calculated based on the last salary drawn before retirement.
- New Method: Pensions will now be calculated based on the average of the last 24 months’ salaries. This adjustment is intended to prevent “last-minute” salary hikes aimed at inflating pensions.
Both changes are designed to create a more sustainable pension system and to prevent potential manipulation that can burden future budgets.
IMF and World Bank Influence on Pension Reforms
The latest reforms are not merely domestic in their scope. They have strong ties to international agreements and economic restructuring initiatives spearheaded by global financial institutions:
- IMF Program: Pakistan’s commitments under the IMF program included pension reforms as a key condition for continued financial support.
- World Bank’s Advice: The introduction of the contributory pension system follows the World Bank’s advice to address Pakistan’s escalating unfunded pension liabilities.
Failing to implement these reforms could jeopardize future financial assistance from these institutions, putting additional strain on Pakistan’s economy.
Resistance to the New Policy
Despite the government’s firm stance, there are pockets of resistance to these reforms. Some lobbyists within the bureaucracy and political circles have been advocating for exceptions — suggesting that re-employed pensioners should at least be allowed to draw one pension alongside their salary.
However, so far, the government has resisted these pressures, citing the necessity of maintaining fiscal discipline and ensuring equity among all employees.
Conclusion: A Necessary but Tough Decision
The government’s decision to make retired employees choose between a salary or a pension reflects a broader commitment to fiscal discipline, equity, and sustainable economic practices. Although it may be unpopular among certain segments, it is a necessary step in addressing Pakistan’s growing pension crisis.
As pension costs continue to rise, these reforms are crucial to safeguarding the country’s financial stability while ensuring that opportunities within the civil service are made available to younger generations. With international scrutiny and domestic needs pressing hard, Pakistan’s pension reform journey is expected to continue evolving in the years ahead.
