The Union Cabinet on Saturday approved major changes to the way pension is to be provided to the central government staff by reintroducing the concept of assured pension, which was done away with for new recruits two decades ago.
The new Unified Pension Scheme (UPS), to be effective from April 1, 2025, will have most of the features of the Old Pension Scheme (OPS). It will provide assured pension of 50% of last drawn salary (average basic pay of last 12 months of service) upon superannuation for all employees completing minimum 25 years of service, with value of such deferred compensation fully indexed to inflation. Besides, there will be assured payouts to spouse of the pensioner after his/ her demise at 60% of the last pension drawn. Also, all employees with minimum 10 years of service will get assured pension of Rs 10,000 per month.
To fund the estimated shortfall in proceeds required for assured pension, the Union government will enhance its contribution from 14% of basic pay now to 18.5%. Employees’ contribution, however, would remain unchanged at 10%.
The decision would entail additional outgo of Rs 6,250 crore in FY26, the year of UPS’ launch, but the cost of the scheme would keep on changing over the coming years according to multiple variables, including the staff strength, life longevity of the pensioners/ their spouses, inflation and returns from pension corpus.
Experts reckon the cost to the exchequer could turn out to be much more substantial over the years, especially if state governments also choose to toe the line.
A Reserve Bank of India paper estimated a few months earlier that the fiscal cost of OPS to be four times that of NPS.
Employees of the Centre will be given an option to opt between National Pension System (NPS) and the proposed UPS, but experts reckon that vast majority would choose UPS, given the guarantees offered under it.
Addressing the media, information and broadcasting minister Ashwini Vaishnaw said about 2.3 million employees of the central government would benefit from the scheme. “The (government) employees wanted an assured amount, which was a logical requirement,” he said.
The Narendra Modi government’s move is in the wake of the rising demand for assured pension from government staff, and many Opposition-ruled states reverting to the OPS or planning to do so. What it basically aims at is to address the core concerns of employees about their pensionary benefits, including pension not being at the mercy of market fluctuations, and some compensation for inflation, and a minimum pension for those without full service.
The Modi 2.0 government had set up a panel headed by finance secretary TV Somanathan in March 2023 to suggest ways to increase pensionary benefits under NPS for government staff without reverting to the fiscally disastrous non-contributory OPS.
On assured pension, assured family pension and assured minimum pension dearness relief would be based on All India Consumer Price Index for Industrial Workers (AICPI-IW) as in case of serving employees. In addition to that employees would get lump-sum payment at superannuation in addition to gratuity. The lump-sum would be 1/10th of monthly emolument as on the date of superannuation for every completed six months of service. This payment will not reduce the quantum of assured pension.
Under UPS, the entire contribution of staff would also likely go for funding the pension. The government has made a provision of `800 crore that would be paid to employees who have retired or retiring by March 2025 under UPS after factoring any withdrawals they might have made from the accumulated NPS corpus.
“Every three years reassessment would be done to see whether the government’s contribution needs to be readjusted (based on actuarial calculations),” Somanathan said. He said over 99% of the central government employees under NPS would likely shift to UPS as they would benefit more than the extant NPS offerings.
Guaranteed pension to government staff under NPS would be the first key outreach by Modi in his third term as Prime Minister to the small but influential group of 9 million employed and enrolled by the Centre and states since 2004. Usually, states follow the pension model adopted by the Centre.
The NPS, which is based on the concept of defined contribution, was launched in 2004. The old pension scheme that allows defined benefits is still in vogue for sizeable sections of the retirees. With the OPS provision to raise the recurring benefit to 60% replacement upon completion of 80 years of age, and by 10% in every five years thenceforth, mitigation of OPS costs for the Centre have been slow.
Gopal Mishra, secretary (staff side) at National Council of Central Government Employees, welcomed the Cabinet decision.
Under the non-contributory OPS (for pre-2004 staff), a government employee is entitled to 50% of her last salary as a pension. Their pension gets inflation-adjusted twice a year.
According to extant NPS norms, a minimum of 40% of the accumulated NPS corpus from contributions during a person’s working years (the government and staff contribute 14% and 10% of pay, respectively) must be invested in annuities to generate a monthly pension, which is linked to annuity returns and not guaranteed. The balance of 60% can be withdrawn, which is tax-free.
The assets under management (AUM) under the National Pension System (NPS) may rise by a steep 28% on year to Rs 15 trillion by end of 2024-25, aided by fresh enrolment of private subscribers and a new “life cycle scheme,” Pension Fund and Regulatory Development Authority chairman Deepak Mohanty said recently.