Unified Pension Scheme promises a guaranteed pension for long-serving employees, but at a significant fiscal cost to the exchequer

The old pension scheme (OPS) has been a big burden on the union and states’ budget of the country. In one of the economic reforms, it was shelved for employees joining government services in 2004 and later. The new scheme was called the National Pension Scheme (NPS), where the employee had to contribute 10% of the salary during the entire period of service. Initially, the government too was to make a matching contribution of 10%, which was later increased to 14%. The corpus generated for pension this way was invested in government securities, shares and corporate bonds, which had daily net asset value like mutual funds. At the time of retirement, at least 40% of the corpus is to be used for purchasing an annuity. The NPS scheme does not guarantee a monthly pension equivalent to 50% of the last salary drawn.

This led to resentment among the government employees and opposition parties especially Congress saw an opportunity to keep the BJP-led central government in the dock. Among several freebies, Congress also promised in the election manifesto to revert to OPS in states they came to power. Montek Singh Ahluwalia has gone on record to bring home the point that the economy of the country will be ruined if OPS is revived for employees who joined service in and after 2004. Many experts have also concurred with the views. Congress won the Himachal Pradesh Assembly election on the promise to revert to OPS but did not implement it. Subsequently in the Telangana election and also in the Lok Sabha 2024 election, the revival of OPS was not again brought up in the manifesto.

BJP having disappointed with the Lok Sabha results in Maharashtra, Rajasthan, Haryana and Uttar Pradesh had to make a tightrope walk and find a middle ground between OPS and NPS.    The central government now proposes a United Pension Scheme (UPS) for employees whose service lasts for 25 years or more to get a pension of 50% of the average of the preceding twelve months' salary before the super annulation. The pension amount will be inflation-adjusted in dearness allowance twice a year. It has also a provision for a 60% family pension, for all diseased employees. The scheme does not benefit those who served for less than ten years. However, a monthly pension of Rs 10,000 has been guaranteed for employees who retired after serving for at least ten years. An additional sweetener has also been brought in the provision for the payment of a lump sum amount linking it with the duration of service in the government.

The scheme will come into effect from 1st April 2025 and will benefit 23 lakh employees of the central Government if they opt for it. Further, if all states also opt for the scheme, 90 lakh employees will be benefitted in the country. The Maharashtra government, where the Assembly election is due shortly, has already opted for the scheme. UPS is also a contributory scheme like NPS, where employees' contributions remain unchanged at 10% and the government matching contribution is increased from 14% to 18.5%.

If the monthly salary of the employee is Rs 50,000, the annual increase in the corpus is 3%, equivalent to a compound annual growth of 8%. SBI, LIC and UTI ate three managers of corpus for employees’ pensions. SBI offers 9.75% and LIC 9.56% interest on the fund. Currently, in NPS, government employee has three options for investment and 95% of subscribers allow 65% investment in government securities, 15% in equities and the remaining 20% in corporate debt. Since the corpus is not large enough to earn 50% of the average of the last twelve months' salary, the government’s matching contribution has been increased from 14% to 18.5%. Cabinet Secretary TV Somanathan on UPS said, “definitely fiscally more prudent.” “It remains within the same architecture of contributory funded scheme.

This is the critical difference. The OPS is unfunded, non-contributory scheme, this is funded, contributory scheme. The only difference in the changes made is to give an assurance and not leave things to the vagaries of market forces.

But otherwise the structure of UPS has best elements of both (OPS and NPS)”, he said. Economists think that UPS  balances the fiscal cost and the aspiration of the employee. The increased cost of living will be taken care of because the real pension would not change as it is indexed to inflation. In NPS, if inflation goes up real pension comes down. Nevertheless, the scheme would put an extra burden of Rs 6250 crores on the government in the first year.

This has been done to satisfy 23 lakh beneficiaries, who are vocal political constituencies and no political party would easily ignore their demand.  It is expected that most states would adopt UPS, without bothering for additional financial burden.

With the announcement of UPS, opposition parties are stepping up their demand for restoration of OPS. Economists have been consistently warning against the restoration; it has the potential to make the growth sluggish and hamper the progress of the nation. It also impacts the lives of the poor. Economic Advisory Council to the Prime Minister has suggested that reverting to OPS will be catastrophic for poor populations and would crowd out private investments in states that revert to it. Reserve Bank of India in January 2023 had flagged concerns about the government finances for states opting to revert to OPS last year.

RBI had already cautioned that the move would lead to accumulation of liabilities, which can become a major risk in future. RBI had also said that states were expected to incur a 16% rise in pension expenditure at Rs 4,63,436 Crores as against Rs 3,99, 813 crores in the previous year. Pension outgo under NPS is Rs 4 lakh crores, which would be Rs 17 lakh crores if OPS is reverted. At present Rajasthan, Chhattisgarh and Punjab have reverted to OPS. Since then BJP has come back to power in Rajasthan and Chhattisgarh and it is hoped that both governments will continue with NPS and opt for UPS with effect from 1st April 2025. Punjab is governed by AAP and their main agenda is to remain in power and not to be concerned about the state’s finances.

UPS itself is causing a financial burden on the Central government of Rs 6250 crores in the first year. If all the states opt for it, the total economic burden on central and all state governments would be of the order of Rs 25,000 crores in the first year. Let there be no politics and political parties be conscious of maintaining fiscal discipline.

(The writer is a retired Principal Chief Conservator of Forests-Head of Forest Force-Karnataka; views are personal)