Pakistan pension reforms lift Shariah AuM but diversification constraints persist

Provincial pension reforms in Pakistan are scaling assets into regulated structures with Shariah compliant options, but portfolios remain concentrated in low-risk instruments, limiting diversification and constraining risk-taking.

The shift is structural rather than market-led, with mandates driving allocations and shaping portfolio construction. It also reflects a fiscal imperative.

“The move toward Defined Contribution schemes is aimed at slowing the growth of government pension liabilities under legacy Defined Benefit structures,” Imtiaz Gadar, CEO of Al Meezan Investment Management, shared with IFN Investor.

Iffat Mankani, CEO of JS Investments, said growth is being driven by policy design rather than organic demand. “These frameworks are slowly scaling AuM by mandating deployment through regulated pension structures, with both conventional and Shariah compliant options,” she noted.

According to IFN Investor Funds Database, total Shariah compliant pension fund assets stand at approximately US$514 million.

In practice, portfolios remain skewed toward money market and short-duration instruments including Shariah compliant variants, supporting liquidity but limiting diversification. Employees are required to invest in low-risk money market funds for the first three years. Within these constraints, alpha generation is selective, focused on Sukuk duration strategies and targeted exposure to high-quality Shariah compliant equities. However, the thin supply of investable papers is a real challenge.

“The honest reality is that Pakistan's Sukuk market is still developing, the universe is largely government paper, corporate issuance is limited and secondary market liquidity remains thin,” explained Iffat.

Fund managers circumvent this by laddering maturities across the yield curve, maintaining adequate cash buffers and being selective about corporate exposure where it exists, rather than traditional cross-asset allocation.

Underlying demand for Shariah compliant investments remains strong. Over 65% of Pakistan’s private pension assets are already Shariah compliant, according to Imtiaz, suggesting a similar tilt as government-linked schemes expand.

Private sector participation is improving governance and performance accountability, with early signs of incremental return enhancement as active management replaces historically passive approaches.