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New Delhi: The Union government is likely to amend the national pension scheme (NPS) by the year-end to ensure employees get at least 40-45% of their last-drawn salary as retirement payout based on recommendations of a high-level panel currently looking into the matter, two people familiar with the developments said.
The issue of pension is currently a politically polarising issue, with several Opposition-ruled states switching to the old pension scheme (OPS) which offered pensioners monthly benefits of 50% of their salary drawn at the time of retirement. The current market-linked pension plan, launched in 2004, offers no such guaranteed base amounts. The other point of contention is that the NPS is based on an employee contribution of 10% (of their salary), with the government contributing 14%; there is no employee contribution in OPS.
The modified new pension scheme will see some changes in “actuarial calculations” to offer higher returns, one of the officials said. It is also likely to see changes in the share of contributions made by the employee and the employer, in this case, the central government and states.
“It is possible to assure a base amount as payout depending on how the actuarial framework is arrived at,” the first official said.
NPS allows pensioners to withdraw 60% of the corpus at the time of retirement (tax free), and buy an annuity for the remaining 40%, payments from which are taxable.
States ruled by Opposition parties, including Rajasthan, Chhattisgarh, Jharkhand, Himachal Pradesh and Punjab, have reverted to the old pension system, which some economists say could push state governments into bankruptcy.
Under the current national pension scheme, nearly 8.7 million federal and state-government employees contribute 10% of their basic salary, while the government pays 14%. The final payout depends on returns on that fund, which is mostly invested in government debt instruments.
The old pension system guarantees a fixed pension of 50% of an employee’s last drawn salary, without employees contributing anything. Therefore, it is considered to be an “unfunded” retirement scheme.
“The government is not going back to the unfunded old scheme but a better model can be put in place that gives an assured basic amount, which will be indexed to inflation,” the second official said.
The ruling Bharatiya Janata Party-led central government, which faces a general election next year, aside from polls in four states, had set up a committee led by TV Somanathan in April this year to review the current pension system.
The altered pension scheme will continue to be linked to market returns, but the government could work out a methodology to give a minimum of, say, 40% of an employee’s last drawn salary. Ultimately, this means that the government would have to intervene to make good the shortfall in pension in case the payouts are less than whatever the base amount is. Currently, employees earn returns of between 36%-38% on average.
The old pension scheme is fiscally unsustainbale and could worsen the debt of state governments, according to Soumya Kanti Ghosh, group chief economic adviser of State Bank of India, the country’s largest lender. In 2023-24, India’s federal pension budget was ₹2.34 lakh crore.
What makes the old pension scheme adopted by many states politically attractive is that it offers an assured benefit to the retiree, fixed at 50% of the last drawn basic pay. Also, like their salaries, pensions under the old scheme are routinely hiked to account for an increase in inflation.
According to Ghosh’s research, pension liabilities of state governments over the long term has showed a sharp increase. The compounded annual growth in pension liabilities for the 12-year period, ended 2021-22, was 34% for all state governments. As of 2020-21, the pension outgo as a percentage of revenue receipts stood at 13.2%, Ghosh’s research showed.
Zia Haq reports on public policy, economy and agriculture. Particularly interested in development economics and growth theories.