How much have pensions been reduced in Pakistan?

In a bid to reform Pakistan’s pension system, the government has introduced significant changes that will impact future pensions, reducing the benefits for many retirees. The new pension policy, notified on January 1, 2025, focuses on reducing the amount of pensions and limiting pension benefits for those entitled to multiple pensions.

The most significant change is in the way pensions are calculated. Previously, pensions were based on the last salary drawn before retirement. Now, they will be calculated based on the average salary over the last two years of service, which is expected to result in lower pension amounts for many workers.

Additionally, the new reforms prohibit federal government employees from drawing multiple pensions. If a person is entitled to more than one pension, they will only be allowed to choose one pension to receive, a change that affects many retirees who had been receiving benefits from more than one pension plan.

Furthermore, the reforms also include a slight reduction in pension increases. In the past, pensions could increase based on the last pay drawn at retirement, but now increases will be granted on a “baseline pension,” which will be calculated at the time of retirement. This baseline pension will be reviewed every three years by the Pay and Pension Commission.

For existing pensioners, the government has declared that their current pension as of January 1, 2025, will be treated as their baseline pension. Future pension increases will be calculated based on this baseline. The commuted portion of the pension, when restored, will also be included in this baseline.

The reforms are part of a broader strategy to curb the future rise in pension-related costs. Additionally, the government has introduced a contributory pension scheme for future employees, which will come into effect in July 2024 for civilian employees and in July 2025 for armed forces personnel.

The reforms also outline penalties for voluntary retirement. Employees who retire before the prescribed service time will face a reduction in their pensions, with a penalty of 3% for each year of early retirement. This penalty will be capped at a 20% reduction in gross pension.

These pension changes have raised concerns among retirees and employees, as the reforms will lower the benefits they would otherwise have received, leading to financial challenges for many who rely on pensions as their main source of income after retirement.