The new National Democratic Alliance (NDA) government may guarantee up to 50% of the last basic pay as pension to central government staff under the National Pension System (NPS) as against the current market-based returns.

The Narendra 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 old pension system (OPS).

Sources said the committee in its report submitted to the government in May, has largely toed the Andhra Pradesh NPS model enacted in 2023.

Accordingly, the Centre will give 40-50% of last pay as guaranteed pension subject to adjustments linked to the number of years in service and withdrawals from corpus if any, sources said. Any shortfall in pension corpus for the guaranteed pension amount would be funded from the budget by the Centre for its staff, sources added.

If implemented this would be the first key outreach by Modi in his third term as Prime Minister to the small but influential group of 8.7 million people employed and enrolled by the Centre and states since 2004. Usually, states follow the pension model adopted by the Centre.

The fiscal cost of the guaranteed pension estimated by the panel could not be immediately ascertained.

But official sources had earlier told FE that if the entire corpus of a subscriber accumulated over the full service period is invested in annuities or similar products, the returns could be enough to provide pension of 50% of last drawn salary.
The government’s move on guaranteed pension follows many Opposition-ruled states luring voters by returning to the fiscally unsustainable OPS. Some of these states such as Rajasthan and Chattisgarh, which are now ruled by the BJP, are likely to come back to the NPS fold soon.

Under the non-contributory OPS (for pre-2004 staff), a government employee is entitled to 50% of her last salary as a pension if she has completed at least 20 years of uninterrupted service. Employees with uninterrupted service of more than 10 years and less than 20 years are entitled to pension on a pro rata basis. 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.

These features would change under the guaranteed pension option in NPS.

The Somanathan panel held extensive consultations on revamping NPS and is understood to have given options with various permutations and combinations and their implications.

The Andhra Pradesh Guaranteed Pension System (APGPS) Act, 2023 provides that in case of a shortfall in the annuity received by the retired subscriber, a top-up amount will be provided to ensure a monthly guaranteed pension at the rate of 50% of the last drawn basic pay. In case of a shortfall in the annuity received by the spouse of the deceased APGPS subscriber, a top-up amount will be provided to ensure a monthly spouse pension at the rate of 60% of the guaranteed pension.

Cost of living adjustment (COLA) on the last drawn basic pay would be provided as per inflation-adjusted dearness relief, by the rules notified under the Act.

The APGPS Act also said part withdrawals and the final withdrawal made by a subscriber would result in a proportional reduction in the guaranteed pension.

Correction: Responding to the report “Panel proposes up to 50% assured pension,” published on June 10, the finance ministry has said the information is “factually incorrect and misleading.” We regret the error.