Government Notifies New Pension Rules: Shift to Defined Contribution Scheme Marks Historic Reform

ISLAMABAD | October 4, 2025 – The federal government has formally notified the Federal Government Defined Contribution Pension Fund Scheme Rules, 2024, marking a major structural shift in Pakistan’s pension framework — from the traditional non-contributory defined benefit system to a contributory model aimed at long-term fiscal sustainability.

The notification (SRO 1728(I)/2025) was issued by the Ministry of Finance (MoF) on August 27, 2025, and circulated to all major ministries, divisions, and institutions for immediate implementation. The reform is described as one of the most significant financial governance changes in recent decades, targeting unsustainable pension liabilities and aligning the system with international best practices.

Key Highlights

• Employees contribute 10%, and the government contributes 12% of pensionable pay.
• Total contribution rate: 22%, replacing the old pension system for new entrants.
• The scheme will apply to civil employees as of July 1, 2024, and to armed forces personnel as of July 1, 2025 (implementation pending).
• Pension liabilities surged to Rs 1.055 trillion in FY25, up 29% in two years.
• Armed forces pensions: Rs742bn in FY26, up 32% from FY24.
• Government allocated Rs10bn in FY25 and Rs4.3bn in FY26 to support the fund.
• No withdrawals allowed before retirement; 25% can be withdrawn on retirement, rest must stay invested per pension rules.
• Only authorised Pension Fund Managers will manage funds, with strict oversight and insurance requirements.

A New Pension Architecture

Under the scheme, federal government employees will contribute 10% of their pensionable pay, while the government will contribute 12% through the Accountant General’s office, which will maintain records and ensure timely fund transfers.

Initially, in August 2024, the government had planned to contribute 20%, but the final rules revised this to 12%. The Federal Government Defined Contribution (FGDC) Pension Fund Scheme Rules 2024, notified under the Public Finance Management Act 2019, supersede previous MoF orders.

The scheme applies to new civil service entrants from July 1, 2024, including civilian defence employees, while armed forces personnel joining after July 1, 2025, will be included in a subsequent phase.

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Managing Liabilities and Aligning with Global Standards

Officials stated that the move aims to alleviate fiscal pressures, mitigate rapidly growing pension liabilities, and align Pakistan’s pension system with international standards, including the Voluntary Pension System Rules 2005 and the Non-Banking Finance Companies and Notified Entities Regulations 2008.

Federal pension expenditure reached Rs 1.055 trillion in 2024–25, up from Rs 821 billion in 2023–24. Armed forces pensions alone account for Rs 742 bn in FY26, reflecting structural imbalances that the new scheme aims to address.

The government has excluded existing employees from the scheme; it will apply only to new entrants to slow future liability growth rather than replace existing obligations.

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Administration and Oversight

The Accountant General will verify pension account details before salary disbursement and collect both employee and employer contributions.

Employees cannot withdraw pension funds before retirement. Upon retirement, they may withdraw up to 25% of their accumulated balance, while the remainder will stay invested for at least 20 years or until age 80, in line with pension rules.

The MoF will select Pension Fund Managers, establish electronic transfer systems, and include insurance coverage for death and disability within the pension agreements.

To oversee implementation, the MoF plans to set up a Non-Banking Finance Company (NBFC) to act as a regulatory and administrative body until a permanent entity is created.

A Major Step in Fiscal Reform

The shift to a defined contribution pension structure — introduced on the advice of international lenders, including the World Bank — is viewed as a critical step towards fiscal sustainability, reducing long-term liabilities while ensuring retirement security for future government employees.

The notification has been shared with the Auditor General of Pakistan, AGPR, State Bank of Pakistan, and all major federal ministries, including Defence, Education, Railways, Energy, IT, and Climate Change, for compliance and operational rollout.

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