In a pivotal move under Budget 2025–26, the federal government has initiated sweeping pension reforms aimed at reducing the mounting fiscal pressure caused by Pakistan’s unsustainable pension liabilities. Announced by Finance Minister Muhammad Aurangzeb in his budget speech to the National Assembly, the reforms seek to rationalise public sector spending while creating a more equitable and sustainable pension framework.
A central feature of the new policy is the elimination of dual financial benefits for retired civil servants who re-enter government service. Going forward, such individuals must now choose between drawing a pension or receiving a new salary — a practice long criticised for enabling double-dipping into public funds.
To further rebalance the system, a 5% tax has been introduced on high-income pensioners under the age of 70 whose annual pension exceeds Rs10 million. The government has taken care to shield low- and middle-income pensioners from this tax, preserving relief for the most vulnerable segments.
Additional reforms include capping family pension benefits at 10 years following the death of the pensioner’s spouse and disallowing the drawing of multiple pensions. These measures are expected to significantly reduce long-term liabilities and address past inefficiencies in the system.
Aurangzeb noted that decades of ad hoc modifications through executive orders had distorted the pension structure, placing an undue strain on the national exchequer. The revised framework, he explained, introduces a more predictable and transparent mechanism by linking future pension adjustments to the Consumer Price Index (CPI), thus aligning benefits with inflation trends and ensuring long-term affordability.
In a further shift, the government aims to discourage premature retirements, which have previously contributed to higher pension outflows. This element of the reform underscores a broader effort to promote fiscal discipline and instil greater efficiency in public service employment practices.
Overall, while the reforms may face resistance from certain quarters, they mark a bold step toward correcting long-standing structural imbalances. If implemented effectively, these changes could set the foundation for a more sustainable and equitable pension system in Pakistan.
