he global retirement income systems are under unprecedented pressure due to various emerging factors, including an ageing population, economic uncertainty and evolving work patterns. These challenges are compounded by declining birth rates, which directly impact the sustainability of pension arrangements reliant on the financial contributions of the next generation. Furthermore, high inflation rates have led to a loss of public trust in the long-term viability of pension programs, adding to the urgency of addressing these issues.

The government of Pakistan is under enormous pressure and the latest adjustments, recommended in the federal budget 2024-2025, including a policy of taxing pensions, have yet to be implemented.The approval of pension reforms by the government represents a critical step in ensuring fiscal discipline.

It is imperative to implement measures, such as banning multiple pensions to address the growing concerns surrounding the pension budget. There is an urgent need besides to tackle the system’s reliance on unsustainable financing sources and its incapacity to provide sufficient post-retirement income.

This disparity between pension responsibilities and available funds must be addressed promptly. Pension payments consume a significant percentage of the national budget, leaving little room for critical developmental efforts.

Inefficient disbursement processes have only exacerbated the hardships of the retiring workers, making their post-retirement life more challenging. Furthermore, the funded pension schemes like the Employees’ Old-Age Benefits Institution and the Voluntary Pension System, require assistance in providing adequate post-retirement income, emphasising the critical need for effective policy frameworks and management structures in pension reform.

According to some estimates, if we are unable to modify the pension system to make it more sustainable and trustworthy, we may face a crisis. Pension expenses are predicted to exceed state resources by 2030, putting the government under significant financial duress.

Policymakers face a fundamental problem in decreasing expanding pension costs for existing and future pensioners while simultaneously establishing the fiscal space required to meet the growing burden of state payments for new entrants. This is a critical issue that must be addressed urgently to preserve the long-term viability of the pension system.

Internationally, governments are transitioning from defined benefit to defined contribution arrangements. This transition offers the potential for a more secure and flexible income for the retiring. DC arrangements can provide them greater control over their pension funds, potentially leading to higher returns and a more comfortable retirement.

As it shifts investment risks, inflation and longevity considerations to individuals, this transition can empower the retiring work force to make informed decisions about their financial future, instilling a sense of optimism about the future of the pension system.

If we are unable to modify the pension system to make it more sustainable, we may face a crisis. Pension expenses are predicted to exceed available state resources by 2030, putting the government under financial duress. 

Including gig workers and those in the informal labour market poses an ongoing challenge for our pension system, where the traditional employer-employee relationship is less structured. In these scenarios, the need for a shift towards more individual focus and less reliance on third-party pension arrangements is paramount, emphasising the importance of personal responsibility in retirement planning.

It is imperative that we act swiftly to avert the impending pension crisis. By implementing measures to curb the surge in pension expenses due to current and imminent retirees, we can create the necessary financial leeway to accommodate the projected rise in state contributions to future pension plans and the revenue generated by pension funds.

Our aim is to cover a portion of pension costs within 10-20 years and eliminate them from the budget within 25-30 years, empowering individuals to take charge of their financial future.

While pension arrangements are crucial, technology’s role in improving pension coverage is also significant. Strong government leadership is essential for effectively implementing these measures. Additionally, we should examine whether the existing systems can withstand demographic and financial challenges to continue delivering the promised benefits.

Furthermore, it is essential to assess the regulatory framework of private pension plans to determine whether it effectively promotes long-term community confidence in the system.

Use of technology, such as secure online platforms, can enhance pension coverage by providing easy access to information and services, while also ensuring data privacy and security.This can encourage more people to invest in private pension funds that will provide more fiscal space not only to the government but also to the corporate sector. The development of the private pension scheme will fill the gap in the bond market and promote financial inclusion.

Promoting investment in private pension funds offers several benefits for the national economy. These funds, which amass substantial capital, can serve as a vital source of funding for businesses, particularly through the bond market. A robust private pension sector can also stimulate the growth of financial markets by boosting demand for various financial instruments, such as corporate bonds, equities, and real estate. The diversified portfolios that pension funds often seek can further bolster the demand for corporate bonds, thereby fostering a more mature and liquid bond market. Pension funds typically have a long-term investment horizon, which aligns well with the nature of bond investments and can enhance stability and depth in the bond market.

While Pakistan’s 2024 budget aims to tackle fiscal challenges through increased taxation, the unresolved pension mechanism continues to pose significant economic and social challenges. Effective policy measures and reforms are urgently needed to address these critical issues comprehensively.

The writer is a senior lecturer in finance and heads the Business Finance Programme at Birmingham City University, UK. His X handle is @HafizUsmanRana