Islamabad, June 20, 2025: In a major move to secure its financial future, the Khyber Pakhtunkhwa government plans to shift to a funded pension scheme by 2045. This long-term strategy aims to ease the huge financial burden of pensions, according to official documents. The province began replacing its old, unfunded pension system with a new contributory one in 2022.
The cost of salaries and pensions has become a massive challenge for the provincial government. Their pay and pension bill is expected to reach a huge Rs875 billion in 2025-26, taking up 41% of the total budget. This leaves less money for important things like building roads, providing school textbooks, and supplying medicines to hospitals.
Official papers show that pension payments have become a major problem globally, and especially in Pakistan, where the system relies entirely on current funds. Many government departments are struggling, sometimes even unable to pay retirement benefits due to severe money problems.
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In 2020, KP’s pension debt was estimated at Rs3 trillion. Now, with over 600,000 active employees and 228,000 pensioners, that debt is likely over Rs3.5 trillion. The current year’s pension cost of Rs160 billion is expected to jump to Rs193 billion next year, putting a heavy and unsustainable load on the provincial budget.
To fix this, KP was the first province to move from an unfunded system to a funded one. They introduced a new “Defined Contribution (DC)” scheme only for new government employees. Since starting this new plan, 59,433 employees have joined the funded scheme. The government contributed Rs1.5 billion as its share for these employees this year, and it will be Rs2.4 billion next year.
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During this changeover period (until 2045), the government has to pay for both the old (Defined Benefit) and the new (Defined Contribution) pension schemes, creating a double burden. However, the budget document states that this dual system is a necessary step towards a stable future.
By 2045, the old pension scheme should be fully phased out, and the new DC scheme will take over completely, reducing the long-term pension debt and easing the financial pressure on the province. The government is also considering adjusting the existing pension rules, like retirement age, to reduce financial strain and possibly shorten the transition period before 2045.
