Government to amend national pension scheme

Based on the recommendations of a high-level panel, the Union government is likely to amend the national pension scheme (NPS) by the end of the year to ensure employees receive at least 40–45% of their last-drawn salary as retirement payout, according to two people acquainted with the changes.

The government contributes 14% of the total cost of the salary, whereas the employee is only required to contribute 10% (of their pay) in the OPS. This is the other subject of conflict.

According to one of the authorities, the modified new pension plan will make certain alterations to the “actuarial calculations” to provide larger returns. Changes in employee and employer contributions—in this example, the federal government and the states—are also likely to occur.

Depending on how the actuarial framework is developed, it may be possible to guarantee a base payout amount, the first official stated.

Old Pension Scheme vs. the new one

Pensioners under the NPS are permitted to purchase an annuity for the remaining 40% of the collections, the payments from which are taxed, and to withdraw 60% of the corpus tax-free at the time of retirement.

The topic of pensions is currently dividing political opinion, as certain states held by the opposition have returned to the old pension system (OPS), which provided retirees with monthly payments equal to 50% of the wage they had at the time of retirement. There are no such fixed basic amounts available under the current market-linked pension plan, introduced in 2004.

The old pension system has been restored in states controlled by opposition parties, including Rajasthan, Chhattisgarh, Jharkhand, Himachal Pradesh, and Punjab. Some analysts fear that this could force these states into bankruptcy.

In accordance with the nation’s present pension plan, the government pays 14% and almost 8.7 million federal and state employees contribute 10% of their base income. Returns on that fund, which is primarily invested in government debt instruments, will determine the final payout.

Without any employee contributions, the former pension system ensured a set pension of 50% of an employee’s last drawn wage. As a result, it is seen as an “unfunded” retirement plan.

“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 stated.

In addition to elections in four states, the central government, led by the governing Bharatiya Janata Party, established a committee in April of this year to review the current pension system.

The modified pension plan will still be based on market returns, but the government might devise a formula to guarantee at least 40% of a worker’s last drawn income.

In the long run, this means that if the pension payouts are less than the base amount, the government would have to step in to make up the difference. Employee returns currently range from 36% to 38% on average.

According to Soumya Kanti Ghosh, group chief economic adviser of State Bank of India, the largest lender in the nation, the previous pension plan is financially unsustainable and may increase the debt owed by state governments. The government pension budget for India was Rs. 2.34 lakh crore in 2023–24.

The fact that the old pension plan, which many states have embraced, provides a retiree with a secured payout fixed at 50% of the last received basic pay, makes it politically appealing. The old system also routinely increased pensions to reflect inflation increases, just like it did with their incomes.

According to Ghosh’s analysis, state governments’ pension liabilities have significantly increased over time. For the 12-year period ending in 2021–2022, the compound annual growth rate of state government pension liabilities was 34%. According to Ghosh’s analysis, as of 2020–21, the pension outlay as a percentage of revenue receipts was 13.2%.

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