By Staff Reporter
ISLAMABAD: The government lowered its contribution to a new pension fund for federal workers while formalising the shift away from a traditional retirement system, aiming to curb soaring liabilities that have become a fiscal drag.
The Ministry of Finance on Friday published rules for the Federal Government Defined Contribution Pension Fund Scheme, under which new employees will pay 10% of their pensionable salary to qualify for a 12% match from the state. That sets the total contribution rate at 22%, replacing the old defined-benefit model for civil servants hired on or after July 1, 2024, and armed forces personnel starting July 1, 2025.
The move supersedes an August order that had pegged the government’s share at 20%. It comes as Islamabad grapples with pension costs that jumped nearly 29% over two years to an estimated 1.055 trillion rupees ($3.8 billion) in the current fiscal year from 821 billion rupees in 2023-24.
The overhaul was prompted by advice from international lenders including the World Bank, which have flagged rising pension obligations as a growing risk to public finances. The new scheme doesn’t affect existing staff but is designed to rein in future growth in liabilities.
Armed forces pensions alone are budgeted at Rs742 billion for 2025-26, up about 32% from Rs563 billion in 2023-24. Civilian outlays are seen at Rs243 billion this year, a 6.6% increase from Rs228 billion last year, incorporating some savings from earlier tweaks. To back the program, the government set aside Rs10 billion in the 2024-25 budget and Rs4.3 billion for the following year.
Under the rules, issued pursuant to the Public Finance Management Act of 2019 and aligned with the Voluntary Pension System Rules of 2005 and Non-Banking Finance Companies and Notified Entities Regulations of 2008, only authorised pension fund managers will handle the assets. The state, as employer, will channel its 12% contribution via the Accountant General’s office, which will verify accounts, maintain records and transfer funds to designated employer pension vehicles. Employees’ 10% deductions will be taken alongside regular salary withholdings.
Withdrawals are barred until retirement, when workers can pull up to 25% of their balance outright. The rest must stay invested under Voluntary Pension System guidelines for at least 20 years or until age 80, whichever arrives first. Pay stubs will break out employee and employer inputs along with running totals. The finance ministry will secure annual appropriations for its share and ink pacts with fund managers equipped for electronic transfers. Those deals must incorporate insurance for death and disability, sourced by the managers themselves. For oversight, the ministry intends to set up a non-banking finance company to monitor rollout, stepping in temporarily until the entity is fully established. In events like resignation, firing or early retirement, payouts from accounts will follow ad hoc government directives.
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