THE federal government has finally implemented several parametric reforms introduced in the last two budgets to reduce its annual pension payout, which is estimated to have soared to more than Rs1tr for the current fiscal year and become the fourth largest expense on the shrinking financial resources. These changes in the retirement income system will also slow down the pace of accumulation of the future pension liability. The notifications issued by the finance ministry discontinue multiple pensions, reduce both the first take-home (the lump-sum payments after commutation received upon retirement) and monthly pension, and lower the base for determining future increase in the retirement benefits.

In addition to these changes, the reforms revise the pension calculation methods, ending annual compounding of the benefits by restricting application of increments to the primary pension received by an employee. More significantly, all future pensions will be calculated on the basis of the retiring employee’s salary during their last 24 months of service. This change affects the calculation of any subsequent pensions an individual might receive. There’s no doubt that these measures will significantly slash the retirement incomes of the current federal civil and military employees retiring from Jan 1, but these changes are crucial for future budget stability given the quadrupling of the liability from Rs245bn in 2019. However, the reforms provide for a periodic review of the baseline pension — the net pension (gross pension minus commuted portion of pension) calculated at the time of retirement — every three years by the Pay and Pension Commission to protect the pensioners from the rising cost of living due to inflation and changing economic conditions. Further, digitisation of the pension system for over 300,000 government employees will improve the accuracy and transparency in pension calculations and disbursements, cutting the red tape, delays and corruption. With a contributory pension fund already announced for the employees hired from July 1 this year, the rationalisation of defined pension benefits for those already in the employment of the federal government, especially military personnel, was necessary for the management of the liability in future.

Published in Dawn, January 3rd, 2025