The central government is considering revising the current market-linked National Pension Scheme (NPS) to provide its employees with a minimum pension of 40 per cent to 45 per cent of their last drawn salary, reported news agency Reuters citing two government officials. This report comes as the government in April set up a committee to review the pension system.
A number of states and government unions have been demanding the government revert back to Old Pension Scheme (OPS). Multiple protests and strikes have been held by government employees demanding the same.
According to the report, the government’s reevaluation of the pension system is prompted by states reverting to the older and financially burdensome practice of fully funding a guaranteed pension. The current National Pension Scheme (NPS) was implemented after a significant fiscal reform in 2004. Pensions are one of the big spending heads in the Union Budgets.
Under the current National Pension Scheme, employees are required to contribute 10 per cent of their basic salary, while the government contributes 14 per cent. The final pension payout is determined by the market returns on the invested corpus, which is predominantly allocated to Union debt.
In contrast, the previous Old pension system guaranteed a fixed pension amounting to 50 per cent of the employee’s last drawn salary, without any contribution required during their working years.
Two government officials told Reuters, under the proposed amendment, both employees and the government will continue to make contributions, and employees will receive a guaranteed pension ranging from 40 per cent to 45 per cent of their last drawn salary. However, the official added that the government “will not go back to the old pension system.”
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The report noted that the move may coincide with state elections leading up to the national elections in 2024, where Prime Minister Narendra Modi aims to secure a rare third term.
According to the report, the government believes that this compromise will address the concerns of states that have reverted to the old pension system and establish a unified and financially viable pension scheme across the entire country. Notably, states such as Rajasthan, Jharkhand, Chhattisgarh, Himachal Pradesh, and Punjab have recently chosen to return to the old pension system.
According to the report, currently, employees receive about 38 per cent of their last salary as pension. If the government promises a 40 per cent return, it will only need to cover a small difference of 2 per cent. However, if the investment returns on the pension fund decrease, the government will have to spend more on pensions.
“This option is still fiscally viable than moving to the old pension system as employees continue to contribute and most of the pension is funded through market returns,” the official said.