Major Pension Reforms Introduced: What You Need to Know About the New Calculation Formula

The government has introduced significant reforms to the pension system, aimed at streamlining benefits and ensuring fiscal sustainability. These changes, based on the recommendations of the Pay and Pension Commission 2020 (PPC), will impact how pensions are calculated and disbursed.

Among the most notable revisions is the abolition of multiple pensions and the introduction of a new pension calculation formula, which shifts from the previous system of basing pensions on the last drawn salary to an average earnings modelover the final 24 months of service.

These changes, effective immediately, are expected to have a substantial impact on new pensioners, reducing their pension amounts compared to the previous system. Let’s break down these reforms and their implications.

Key Changes in the Pension System

1. New Pension Calculation Formula

Previously, pension amounts were determined based on the last drawn salary before retirement. Under the new system, pensions will now be calculated based on the average of pensionable earnings over the final 24 months of service.

Impact: This change is expected to reduce pension amounts for new retirees, especially those who received salary increments or promotions shortly before retirement. The new system smoothens earnings over two years, potentially lowering the final pensionable amount.

2. Abolition of Multiple Pensions

The government has also moved to eliminate multiple pensions, requiring individuals who were entitled to more than one pension to choose only one pension to receive.

Who Will Be Affected?

• Retired government employees who were drawing multiple pensions from different positions.
• Public sector officials who, after retiring from one position, took up another government role and became eligible for an additional pension.

Exceptions to the Rule:

• Spouses who are either pensioners or currently in-service government employees can still claim the pension of their deceased partner in addition to their own pension.

This move aims to reduce financial strain on the government while ensuring that pensions are distributed more fairly.

3. Changes in Pension Increases

The method of applying annual pension increaseshas also been revised. Under the new system, future increases will be based on a “baseline pension”, which is defined as the net pension amount at the time of retirement (i.e., gross pension minus the commuted portion).

How It Works:

• Each approved pension increase will now remain a separate fixed amountinstead of being added to the pension as a whole.
• The Pay and Pension Committee will review the baseline pension every three years to determine whether adjustments are necessary.

For existing pensioners, starting January 1, 2025, their current pension (including restored commuted portions) will serve as the new baselinefor future increases.

This change ensures greater control over pension increases, preventing rapid pension growth over time and reducing the burden on government finances.

Why These Reforms Were Introduced

Pakistan’s pension expenditure has been rising sharply, posing a significant challenge to the national budget. The Pay and Pension Commission 2020 highlighted that pension liabilities have grown unsustainably, with a large portion of the federal budget allocated to covering pensions.

Some key reasons behind these reforms include:

Financial Sustainability: The government aims to control excessive pension expenditures to allocate resources more efficiently across other sectors, such as healthcare, education, and infrastructure.

Fair Distribution of Benefits: By eliminating multiple pensions, the government seeks to reduce inequalities in pension benefits and ensure a fairer distribution of retirement funds.

Encouraging Private Pension Plans: These reforms may encourage public sector employees to consider alternative retirement savings plans, such as contributory pension schemes or private retirement funds, instead of relying entirely on state pensions.

Challenges and Concerns

While the government argues that these reforms are necessary for long-term financial stability, critics have raised concerns about their impact on new pensioners and retired employees.

Reduced Pension Amounts: With the shift to an average earnings model, pensioners may receive lower payouts than under the previous system. This could impact the financial security of retirees, especially those who depend solely on their pension income.

Loss of Multiple Pensions: Many public servants who served in multiple capacities throughout their careers will now receive only one pension, which could affect their standard of living post-retirement.

Uncertainty About Future Pension Increases: Since pension hikes will now be reviewed every three years, there is no guarantee of regular adjustments to keep up with inflation and rising living costs.

What’s Next?

The implementation of these reforms will be closely monitored by policymakers and stakeholders in the coming months. While the government has framed these changes as a necessary step toward economic stability, it remains to be seen how they will impact retired employees and future pensioners.

For those affected, financial planning and exploring alternative retirement savings options will become increasingly important. The government may also need to introduce additional measures to address concerns and mitigate the potential hardships faced by pensioners due to these reforms.

The recent pension reforms in Pakistan mark a major shift in the country’s retirement benefits system. By abolishing multiple pensions, changing the calculation formula, and revising pension increases, the government aims to ensure fiscal sustainability and a fairer distribution of pension benefits.

However, these changes may lead to lower pensions for new retirees and financial difficulties for those who relied on multiple pensions. As the new system takes effect, policymakers must remain open to feedback and adjustments to balance financial responsibility with the well-being of retirees.

For government employees, understanding these reforms and planning for alternative retirement income sources will be crucial to navigating the new pension landscape effectively.