Pakistan’s Pension Crisis: The Rs 1.5 Trillion Liability Nobody Is Talking About

Pakistan’s federal pension bill crossed Rs 1 trillion in FY2025 and is growing at 25% annually — nearly four times the rate of GDP growth. The unfunded liability behind that annual payment is measured in the tens of trillions. A reform launched in 2025 addresses future employees. It does nothing for the debt already accumulated.

By Mehmood ul Hasan Qadir
Economist & Financial Analyst | Dubai, UAE

Pakistan’s pension system is not technically insolvent. It pays its retirees every month, on time, from current government revenues. That is precisely the problem.

A pension system that pays today’s retirees from today’s tax receipts — rather than from a fund accumulated over their working careers — is not a pension system in any meaningful financial sense. It is a transfer payment disguised as a retirement benefit, and one that grows faster than the economy generating the revenues to fund it. Pakistan’s federal pension bill increased 5.2 times in the decade to FY2021 while tax revenues grew only 2.7 times over the same period, according to analysis by fiscal economist Hasaan Khawar cited in Global Village Space. Pension spending is growing at approximately 25% annually — a doubling rate of under four years. Pakistan’s GDP grows at roughly 3–4% in good years.

How the System Works — and Why It Doesn’t

Pakistan’s public pension architecture is a pay-as-you-go defined benefit system, a model that most middle-income countries have either reformed or are urgently reforming. Under this model, no pension fund exists. No contributions are made by employees or government during working years. When a civil servant retires, the government simply adds their pension to the annual expenditure budget and pays it from current revenues — indefinitely, until death, and in the case of family pensions, beyond.

The defined benefit formula has historically been generous. Federal civil servants received pensions based on their last drawn salary — the highest salary of their career — rather than an average of career earnings. Annual inflation adjustments were compounded on top of that base. Multiple pensions — for individuals holding more than one qualifying appointment — were permitted. The system had no actuarial anchor, no funded reserve, and no mechanism to limit its growth as the number of retirees expanded.

Punjab alone — the largest provincial government — has seen its pension expenditure rise 767% from Rs 36 billion in FY2010–11 to Rs 312 billion in FY2022–23, according to peer-reviewed research published in the Journal of Finance and Accounting in January 2025. Punjab’s accrued pension liability — the present value of all future pension payments already owed to current and retired employees — stands at Rs 6.5 trillion for that province alone. The federal government’s actuarial liability for civil servants, as assessed in a 2021 World Bank study, stood at Rs 2.9 trillion as of June 30, 2021. That figure has grown materially since.

The Scale of the Problem

The federal pension allocation in FY2024–25 crossed Rs 1.014 trillion — a figure Finance Minister Muhammad Aurangzeb acknowledged in his budget speech as representing an unfunded liability “amounting to trillions of rupees.” The FY2025–26 budget allocated Rs 1.055 trillion to pensions, an increase of 4%, even as the government simultaneously introduced reforms intended to slow future growth.

Military pensions constitute approximately 36% of the federal pension bill, reflecting earlier retirement ages in the armed forces and a larger active personnel base than most comparable militaries relative to GDP. The military contributory pension scheme, announced alongside civilian reforms, has not been implemented — contributions for armed forces personnel remain at zero as of mid-2026, according to Profit by Pakistan Today reporting from October 2025.

PIDE’s actuarial projections, cited in multiple institutional analyses, project that if pension spending continues growing at current rates, it will consume more than 50% of all government revenues by 2050. Business Recorder analysis from February 2025 uses identical figures. Hasaan Khawar’s earlier estimate, published before the recent acceleration, put the 2050 share at 56% of all current spending. The terminal trajectory is not ambiguous.

The 2025 Reforms: What Changed and What Did Not

The government has taken three distinct reform actions since January 2025, each addressing a different dimension of the crisis.

First: Benefit formula revision for existing pensioners. From January 1, 2025, pensions are now calculated on the average salary of the last 24 months rather than the last drawn salary. Annual inflation adjustments are maintained as separate line items rather than being compounded into the base. Multiple pensions have been discontinued. Retired public servants rejoining government service must now choose between their pension and their new salary. A 5% tax applies to high-income pensioners under 70 with annual pensions exceeding Rs 10 million. These measures, implementing recommendations of the Pay and Pension Committee 2020, apply to approximately 300,000 federal government employees and reduce the trajectory of future pension growth for existing retirees.

Second: Contributory scheme for new civilian employees. With effect from July 1, 2024 for civilians, the government introduced a defined contribution pension scheme. Under the scheme, the employer contributes 12% of pensionable pay monthly and the employee contributes 10%. These contributions are pooled into a dedicated pension fund, managed under international financial standards with World Bank technical support. The government has seeded the fund with an initial Rs 10 billion budgetary allocation. Eventual pension benefits will be determined by accumulated contributions and investment returns — not by a formula guaranteeing a fixed benefit regardless of fund performance.

Third: Military scheme deferred. The armed forces contributory scheme was announced but not implemented. Employer and employee contributions for military personnel remain at zero.

Key Data

What the 2025 Reforms Do Not Solve

The reforms introduced since January 2025 address the future accumulation of pension liability. They do not address the liability already accumulated. This distinction is fundamental and is frequently obscured in official communications about the reform programme.

Pakistan’s pension system carries two distinct problems. The flow problem — the annual payment growing faster than revenues — is what the benefit formula revision and the contributory scheme for new employees address. Both measures slow the rate at which the liability grows. Neither eliminates the liability already on the government’s books: the Rs 2.9 trillion federal civil servant obligation assessed in 2021, the Rs 6.5 trillion Punjab liability, and the equivalent unliquidated obligations of Sindh, Khyber Pakhtunkhwa, and Balochistan, which have not been comprehensively actuarially assessed.

The stock problem — the accumulated unfunded obligation — is not addressed by any current reform. It sits off-balance-sheet, unquantified in aggregate at the national level, and growing with every year that passes without a funded transition mechanism. CDPR’s October 2025 analysis of Pakistan’s pension crisis is direct on the point: the reforms of 2025 are a necessary beginning, but “a lot of ground still needs to be covered before we can call the reforms of 2025 a contemporary, strong pension system.”

The military pension gap is the most significant unresolved dimension. Military pensions account for over a third of the federal bill, involve earlier retirement ages than the civil service, and carry longer projected payout periods. A contributory reform that applies to civilian new entrants but leaves the armed forces on the old pay-as-you-go model does not constitute a systemic solution.

Conclusion

Pakistan introduced a contributory pension scheme in 2025 and framed it as a structural reform. In actuarial terms, it is the right direction applied to the wrong population. The employees who will contribute under the new scheme will not retire for 25 to 35 years. The fiscal pressure from pensions — the pressure that is already consuming Rs 1 trillion annually and growing at 25% — comes from employees who retired under the old system and will be paid under it for decades more. Managing that liability requires either a funded transition mechanism — seeding a sovereign pension reserve large enough to cover projected obligations — or an explicit renegotiation of benefit terms for existing pensioners that goes further than the January 2025 formula adjustments. Both options require political capital that successive Pakistani governments have preferred to spend elsewhere. The Rs 10 billion seed fund established for the new scheme, measured against a known provincial liability of Rs 6.5 trillion in Punjab alone, suggests the distance between the reform announced and the reform required.

Sources

• Ministry of Finance, Government of Pakistan. Federal Budget in Brief FY2025–26. Islamabad: Finance Division, June 2025. https://www.finance.gov.pk/budget/budget_2025_26/budget_in_brief_10062025.pdf
• Ministry of Finance, Government of Pakistan. Budget Speech FY2024–25. Islamabad: Finance Division, June 2024.
• Ministry of Finance, Government of Pakistan. SRO 1728(I)/2025 — Contributory Pension Scheme Notification. Islamabad: Finance Division, August 27, 2025.
• Ministry of Finance, Government of Pakistan. Pension Increase Circular, July 7, 2025. https://www.finance.gov.pk/circulars/pension_increase_2025.pdf
• Ghazi, Aqsa and Umar Farooq Salamat. “Effective Management of Provincial Pension Liability.” Journal of Finance and Accounting, Vol. 13, No. 1 (2025): 1–13. https://doi.org/10.11648/j.jfa.20251301.11
• World Bank. Pakistan Assessment of Civil Service Pensions. Report AUS0001350. Islamabad: World Bank, 2020.
• CDPR. “Deferred Dreams: Navigating Pakistan’s Public Sector Pension Crisis.” October 14, 2025. https://www.cdpr.org.pk/insights-for-change/deferred-dreamsnavigating-pakistans-public-sector-pension-crisis
• PIDE. “Pensions Crisis in Pakistan: A Failure of Public Policy Reforms.” Islamabad: Pakistan Institute of Development Economics, June 2025. https://pide.org.pk/research/pensions-crisis-in-pakistan-a-failure-of-public-policy-reforms
• PIDE. “The Pension Bomb and Possible Solutions.” Islamabad: PIDE, 2020. https://pide.org.pk/research/the-pension-bomb-and-possible-solutions
• Business Recorder. “Reforming Pension Funds in Pakistan: A Sustainable Approach.” February 15, 2025. https://www.brecorder.com/news/40347733
• Dawn. “Govt Notifies Pension Reforms to Cut Expenses.” January 2, 2025. https://www.dawn.com/news/1882580
• Profit by Pakistan Today. “Federal Govt Introduces New Contributory Pension Model.” October 4, 2025. https://profit.pakistantoday.com.pk/2025/10/04/federal-govt-introduces-new-contributory-pension-model-for-pensioners
• Express Tribune. “Govt Introduces Significant Pension Reforms to Reduce Burden.” June 11, 2025. https://tribune.com.pk/story/2550262/govt-introduces-significant-pension-reforms-to-reduce-burden
• Global Village Space. “Pakistan’s Unsustainable Public Pension System.” August 2021. https://www.globalvillagespace.com/pakistans-unsustainable-public-pension-system