To soften the blow to the exchequer from the roll-out of an assured pension scheme for the staff recruited since 2004, the Centre may fund it through a pooling mechanism, and may not reset the basic pension after each Pay Commission award, as was the case under the old pension scheme (OPS), sources said.
With no additional burden on government employee subscribers even after additional benefits in terms of guarantees, it is expected that the new Unified Pension Scheme (UPS) would be implemented under a pooled mechanism without maintaining individual accounts, sources said. As people retire under UPS from 2036, and depending on deaths of the pensioners and family beneficiaries in the natural course, their pension capital amount would not be returned to the heirs. This would help augment the government’s resources to fund the assured pension without relying too much on the budget in future, the sources added.
In the extant National Pension System (NPS), individual accounts are maintained. A maximum of 60% of the accumulated NPS corpus from contributions during a person’s working years is allowed to be withdrawn tax-free at the time of retirement. The subscriber has to invest a minimum of 40% of the corpus in annuities for a regular pension. However, it is not a guaranteed pension as returns are linked to markets. Annuities could fetch around 7% return per annum. Depending on the choices made by the subscriber, the capital could be returned to the heirs of an employee after her and the family pensioner’s death.
There is also no word yet on whether the pension under UPS will be revised based on the pay commission award in future. The sources said that such revisions were given in OPS but may not be offered under UPS keeping the fiscal constraints in mind.
Yet, the UPS, to be effective from FY26, would be an attractive proposition as the pension would be guaranteed at 50% of the average last 12 months’ salaries, almost similar to OPS which offers 50% of last pay or the average of last ten months basic pay as pension. In addition, an assured family pension will be offered at 60% of pension of the employee immediately after her/his demise.
Inflation indexation is offered on assured pension, assured family pension and assured minimum pension of Rs 10,000 under UPS based by way of dearness relief based on the All India Consumer Price Index for Industrial Workers (AICPI-IW) as in the case of service employees.
To ensure that cost of running the UPS would not be borne by the future generations, the government would bear the entire additional cost of the guaranteed pension by increasing its contribution from 14% of pay to 18.5% in the first year (FY26).
Under OPS, the pension of retired staff is enhanced and reset based on two formulas including: the pension, as had been fixed at the time of implementation of the previous pay panel, may be multiplied by a factor (for example 2.57 in 7th Pay Commission) to arrive at an alternate value for the revised pension. Similarly, withdrawals if any by employees during the service period or at the time of retirement under UPS could impact her pensionary benefits.
“Assured pensions will add to the Government’s committed expenditure in the future, while reducing the uncertainty for employees. This will have to be built into the fiscal consolidation roadmap going ahead,” Icra chief economist Aditi Nayar said.
The government rolled out NPS from January 1, 2004, to contain the pension bill. So far, 26.51 lakh central government employees are enrolled under NPS. According to the FY25 Budget estimate, the Centre’s pension bill would be Rs 2.43 lakh crore or 5% of the total budget.