The Securities and Exchange Commission of Pakistan (SECP) has introduced a Passive Equity Sub-Fund under the Voluntary Pension Scheme (VPS), creating a new investment option for individuals saving for retirement. The new sub-fund will be offered by pension fund managers from January 1, 2027, and will be required alongside the existing equity, debt and money market sub-funds. The regulatory change is intended to give pension savers greater flexibility in choosing how their retirement contributions are invested while providing an alternative to actively managed equity funds.
Under the new framework, savers will be able to choose between actively managed equity investments and a passive strategy designed to follow a specified market index. Instead of relying primarily on investment managers to select individual securities and adjust portfolios according to their market views, a passive equity sub-fund will seek to replicate the performance of a selected index. This approach can provide investors with broad exposure to the equity market while keeping the investment strategy more closely aligned with the performance of the underlying benchmark.
Pension fund managers will have two routes for managing the Passive Equity Sub-Fund. They may directly track a market index or use Exchange Traded Funds (ETFs) to provide the required equity exposure. Under the ETF-based approach, managers will be permitted to invest in equity ETFs listed on the Pakistan Stock Exchange (PSX). This mechanism can allow pension portfolios to gain diversified exposure to listed companies through investment vehicles that already track a defined market segment or index, giving retirement savers another route into Pakistan’s capital markets.
The SECP has also established a limit on management fees for ETF-based Passive Equity Sub-Funds. The management fee will be capped at 0.75% per annum, supporting the regulator’s objective of making the new investment option more cost-efficient for long-term savers. The framework also addresses the possibility of pension fund managers investing in ETFs operated by their own asset management companies. In such cases, no additional management fee will be charged, preventing investors from bearing two layers of management fees on the same underlying investment.
SECP Chairman Dr Kabir Ahmed Sidhu said the introduction of Passive Equity Sub-Funds would provide pension savers with greater choice in managing their retirement savings while offering a cost-efficient way to participate in the stock market. He also said the reform would support broader participation in the voluntary pension system and strengthen long-term retirement savings. The comments underline the regulator’s focus on expanding investment choices while keeping costs under consideration for individuals building retirement portfolios over an extended period.
The introduction of the passive option represents a further development in Pakistan’s voluntary pension framework, particularly by bringing index-based and ETF-based investment strategies into pension products. The availability of a lower-cost passive structure could make equity market participation more accessible to savers who prefer diversified exposure rather than actively managed portfolios. At the same time, the mandatory availability of the sub-fund means pension fund managers will need to incorporate the new option into their product offerings from the start of 2027.
The measure is ultimately aimed at strengthening the role of the Voluntary Pension Scheme in long-term retirement planning by widening the range of investment strategies available to contributors. With equity, debt, money market and now passive equity options available within the framework, pension savers will have greater scope to select an approach based on their investment preferences and retirement objectives. The ETF-based structure and 0.75% annual management fee ceiling also position the new sub-fund as a cost-conscious option for individuals seeking long-term exposure to Pakistan’s equity market.
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