Pakistan Pension Reform: KP by 2045
- PESHAWAR, Pakistan - The Khyber Pakhtunkhwa (KP) government is set to fully transition to a funded pension scheme by 2045.
- In 2022, KP replaced its unfunded pension scheme with a contributory pension system.
- documents indicate that salaries and pensions constitute the largest portion of the government's expenditure, limiting fiscal space for development projects and essential services.
Khyber Pakhtunkhwa (KP) is revolutionizing its financial strategy, with a complete transition to a funded pension scheme by 2045. Discover how the KP government intends to alleviate the strain of pension obligations on its provincial budget.Rising pension costs have spurred major reforms, including a shift to a contributory pension system and a Defined Contribution scheme for new employees, influencing crucial sectors like infrastructure and education. Explore the financial implications, including the Rs3 trillion accrued pension liability, and the enrollment of 59,433 employees in the new scheme. News Directory 3 is closely monitoring these developments. Learn about the government’s long-term goals. Discover what’s next …
Khyber Pakhtunkhwa government Transitions to Funded Pension Scheme by 2045
Updated June 20, 2025
PESHAWAR, Pakistan – The Khyber Pakhtunkhwa (KP) government is set to fully transition to a funded pension scheme by 2045. Official documents reveal this shift aims to alleviate the growing financial burden of pension obligations on the provincial budget. The rising cost of pensions has been impacting the province’s ability to fund other crucial sectors.
In 2022, KP replaced its unfunded pension scheme with a contributory pension system. More recently, the provincial government announced a 10% pay raise for current employees and a 7% pension increase for retirees in the 2025-26 budget. this will bring the province’s total pay and pension expenditure to Rs875 billion, comprising Rs680.39 billion for salaries and Rs194.97 billion for pensions. This accounts for 41% of the total budget of Rs2.12 trillion.
documents indicate that salaries and pensions constitute the largest portion of the government’s expenditure, limiting fiscal space for development projects and essential services. Infrastructure upgrades, school textbooks, and medicine supplies are facing funding constraints due to thes rising costs. The province’s effort to create fiscal space for development spending includes setting the pension increase at 7% for the upcoming financial year, compared to 17.5% in the current fiscal year.
Pension obligations have become a global fiscal challenge, particularly in countries with unfunded systems. KP’s accrued pension liability was projected at Rs3 trillion as of June 2020, covering 540,000 employees and 170,000 pensioners. These figures have as increased to over 600,000 active employees and 228,000 pensioners,potentially raising the liability to over Rs3.5 trillion. The current financial year’s pension expenditure is Rs160 billion and is expected to rise to Rs193 billion in the next fiscal year.
To mitigate this, KP initiated a Defined Contribution (DC) scheme for new government employees, transitioning from the unfunded system. So far, 59,433 employees have enrolled under the funded scheme. The government contributed Rs1.5 billion as the employer’s share this financial year, with plans to increase it to Rs2.4 billion next year. During the transition, the government will manage both the old defined Benefit (DB) and the new DC schemes, bearing a dual pension burden. Despite the short-term strains, this is considered a necessary step toward long-term sustainability and responsible financial management. The ultimate goal is to contain long-term pension liabilities and ease the burden on the provincial exchequer.
Pay, pensions dominate govt expenditure
What’s next
The government is also considering parametric pension reforms, such as adjusting retirement age and pension indexation, to further reduce fiscal pressure and potentially accelerate the transition to a fully-funded DC system well before 2045. The government’s role in managing the pension system is evolving to ensure long-term financial stability.