Pakistan’s pension system has been a topic of debate for more than a decade, with questions being raised about policy decisions regarding funding and structural deficiencies in pension management.
The 2009 decision to include future retirees in pension increases has had a multiplier impact on the financial burden faced by the government, meaning that each new pension increase has been applied to an ever-larger group of beneficiaries.
While the magnitude of the problem is evident, the politicization of pensions, both civilian and military, poses significant obstacles to any debate on the issue and/or the implementation of necessary changes.
Today, the cost of pensions has risen to unsustainable levels and absorbs a considerable portion of tax revenues and government revenues. Over the past five years, the cost of federal pensions has quadrupled and reached a staggering Rs 1.01 trillion in fiscal year 2025, indicating a 26% increase over the previous year; at this rate, the annual growth rate is expected to be 22-25% for the next 35 years.
The pension system in its current form promises predetermined benefits upon retirement, without requiring contributions from employees during their years of service, which puts the entire burden of the pension system on the government.
Considering that the average life expectancy is 67 years and the retirement age is 60 years, a 30-year insured benefit with transfer of benefits to family members after the pensioner's death also creates an additional burden.
Key lessons from international experiences offer efficient solutions that can help build a reliable pension system that is financially sustainable and socially equitable. For example, in Sweden, a comprehensive multi-pillar model has been designed to provide financial security in retirement through a combination of public and private contributions.
The first pillar, called the income pension, works on a pay-as-you-go (PAYG) basis, with 18.5% of a person's income going towards their pension.
Benefits under this pillar are calculated by considering the individual's lifetime earnings together with a notional account value that is adjusted in line with economic growth, ensuring that the pension remains relevant to current economic conditions.
The second pillar, the premium pension, is a mandatory defined contribution plan. In this case, 2.5% of an individual’s income is allocated to private funds that the individual selects, allowing for personalised investment strategies. This pillar allows individuals to have a say in their investment choices, which can lead to higher returns depending on the performance of the funds chosen.
The third pillar consists of voluntary private pension savings, which are incentivised by tax benefits. This encourages people to supplement their mandatory pension contributions with private savings, further ensuring their financial stability after retirement.
The Netherlands also has a robust multi-pillar pension system designed to provide financial security during retirement. This system is underpinned by a universal pay-as-you-go pension scheme funded through payroll taxes, which guarantees a flat-rate benefit for all residents from the age of 67.
Complementing this is the mandatory occupational pension system, to which most employees contribute; it operates on a collectively defined contribution model, where contributions are pooled and invested collectively and benefits are then adjusted according to the performance of the fund.
In addition, the Dutch system encourages voluntary private pensions by offering tax incentives for personal savings. One of the strengths of this system is its broad coverage and generous benefits.
Finally, Singapore's Central Provident Fund (CPF) operates on a mandatory defined contribution system. It consists of three main accounts: the Ordinary Account (OA), which is used for housing, insurance and investment purposes; the Special Account (SA), which is primarily dedicated to retirement savings; and the MediSave Account (MA), which is intended for healthcare expenses.
Both employees and employers contribute to these accounts and funds are allocated accordingly. These contributions are then invested in a variety of instruments, giving members the autonomy to select their preferred investment options.
The CPF system is praised for encouraging significant national savings rates and ensuring coverage of housing, healthcare and retirement needs. It underscores the importance of individual responsibility and financial acumen, thus enabling citizens to skillfully manage their personal finances and effectively plan for their retirement.
These are some of the various interventions that Pakistan can consider in its effort to reform its growing pension bill. As things stand, the ever-increasing pension bill is financially unsustainable and absorbs a large part of the country’s total revenue.
The state should look at examples from around the world and find a solution that suits Pakistan's problems and should seek help from all stakeholders, including the government, private sector and civil society.
A gradual and phased approach should be adopted to allow for necessary adjustments and ensure that the rights and expectations of current and future retirees are respected and met.
Proactive and transparent risk management, along with a well-designed regulatory framework, are crucial to the health of any pension system. These elements, along with informed investment strategies that generate safe and robust asset growth, could form the backbone of a reformed and resilient pension system for Pakistan.
The author is an analyst with Karandaaz Pakistan.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the editorial policy of Geo.tv.
Originally published in The News
