By Muhammad Luqman

Pension expenditure in Punjab has emerged as one of the fastest-growing components of current expenditure, underscoring the need for sustained reforms and prudent liability management.

According to the Punjab government’s White Paper for FY2026-27, pension expenditure increased from Rs36.4 billion in FY2010-11 to an estimated Rs452.16 billion in FY2025-26, representing a more than 12-fold rise over the past 15 years.

The provincial government operates a defined-benefit pension scheme for its permanent employees, under which pension payments are financed from current revenues on a pay-as-you-go basis.

The White Paper notes that pension expenditure has historically outpaced both current expenditure and revenue growth. However, recent reforms have helped moderate the pace of increase, with revenue growth beginning to outstrip pension expenditure growth.

According to the document, the implementation of pension reforms and other rationalisation measures is expected to improve this trend further and gradually reduce the pension burden. An actuarial evaluation of the Punjab Pension Fund (PPF) showed that the government's accrued pension liability declined from Rs11.883 trillion to Rs6.385 trillion, reflecting a 43 percent reduction.

To support the management of future pension obligations, the government established the PPF as a dedicated investment vehicle for accumulating resources to meet long-term pension liabilities. Despite fiscal constraints, the government has continued to prioritise the fund's capitalisation and has contributed Rs63.1 billion since its inception.

Budget documents reveal that PPF assets are expected to reach approximately Rs197 billion by June 30, 2026, comprising both government contributions and investment earnings. The fund has also contributed Rs19.8 billion towards meeting pension obligations.

Since its inception, the fund has generated a cumulative return of 14 percent, reflecting prudent investment management. The government believes ongoing pension reforms will strengthen the fund’s long-term sustainability and enhance the province’s capacity to meet future pension obligations.

Budget documents show that FY2025-26 marked the first full year of implementation of the Punjab government’s pension reform framework, a key component of its broader fiscal sustainability and public financial management agenda.

During the year, the government focused on operationalising the Defined Contribution Pension Scheme (DCPS) for new entrants, while the fiscal effects of parametric reforms introduced in the Defined Benefit Pension Scheme (DBPS) during FY2024-25 also began to materialise.

According to an independent actuarial assessment commissioned by the PPF, the reform measures have significantly strengthened the long-term sustainability of the pension system. The future service cost of the legacy DBPS declined substantially, with the contribution rate required to fund future pension accruals falling from 45.46 percent to 19.26 percent of pensionable payroll, a level considered consistent with global benchmarks for pension sustainability.

Implementation during FY2025-26 focused on establishing institutional readiness for the DCPS through extensive coordination with administrative departments, district administrations, drawing and disbursing officers (DDOs), and pension fund managers. These efforts facilitated the onboarding of new employees and the operationalisation of pension accounts across the province.

As a result, all employees appointed or regularised on or after January 8, 2024, are now enrolled under the DCPS, preventing the accumulation of additional unfunded liabilities under the legacy DBPS. Since January 2024, approximately 22,000 employees have been enrolled in the scheme.

With the government’s contribution fixed at 12 percent of basic pay under the DCPS, compared with 19.14 percent under the reformed DBPS, the new scheme is expected to reduce long-term pension costs and deliver progressively larger savings as membership expands.

The fiscal impact of the reforms has already begun to appear in the province’s expenditure profile. Pension expenditure for FY2026-27 has been budgeted at Rs505.8 billion. Official estimates suggest that, in the absence of these reforms, pension expenditure for the year could have reached Rs590.399 billion.

The reforms have therefore played a significant role in moderating expenditure growth and creating additional fiscal space for development priorities and essential public service delivery.

Credit: INP-WealthPk