The Indian government has firmly shut the door on the possibility of returning to the old pension scheme (OPS), which several states have embraced. This was declared in a statement to the Lok Sabha, accompanied by the clarification that accumulated contributions made by subscribers cannot be used by states to transition back to the older program.
This marks the first official rejection of the previous pension system by the central government. Additionally, it clarifies the issue of utilizing past contributions for a return to OPS, an unfunded program where the burden of retirement benefits rests solely on the state. Pankaj Chaudhary, Minister of State for Finance, stated in a written reply on Monday that the Pension Fund Regulatory & Development Authority Act prohibits such transfers.
Government employee pensions are a politically contentious topic, with numerous opposition-controlled states switching back to OPS, which guarantees retirees a monthly benefit equal to 50% of their final salary. In contrast, the current National Pension Scheme (NPS) is a market-linked plan launched in 2004 that offers no guaranteed minimum amount.
Following election promises, state governments in Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh have transitioned back to OPS for their state employees over the past two years. They achieved this by notifying both the central government and the Pension Fund Regulatory and Development Authority (PFRDA).
“No such suggestion to reinstate OPS for central government employees is currently being considered by the government,” the minister stated in his written response.
He continued, “A committee led by the Finance Secretary has been established to examine the issue of Pensions under the National Pension System (NPS) in respect of government employees and to, among other things, determine whether any changes are necessary given the current framework and structure of the National Pension System as it applies to government employees.”
This response was made in response to inquiries from lawmakers Naba Kumar Sarania (Independent), Deepak Baij (Congress), and Krupal Balaji Tumanu (Shiv Sena), who wished to know if the government intended to revert to the old scheme.
Under the new national pension scheme, roughly 8.7 million federal and state government employees contribute 10% of their basic salary to a pension fund, while the government contributes 14%. The final payout varies based on the returns of the fund, which are primarily invested in government debt instruments.
In October, HT reported that the government was considering amending the national pension scheme to guarantee that employees receive retirement payouts equivalent to at least 40-45% of their final salary, based on recommendations from a high-level committee.
“The government is not reverting to the unfunded old scheme, but a better model that provides a guaranteed basic amount adjusted for inflation may be implemented,” a source familiar with the situation told HT on Tuesday.
The central government, led by the Bharatiya Janata Party and facing general elections next year as well as elections in four states, established a committee led by Finance Secretary TV Somanathan in April of this year to review the current pension system.
The revised pension scheme will continue to be linked to market returns, but the government may develop a methodology to provide a minimum of, say, 40% of an employee’s final salary, according to the aforementioned source. This implies that if the payouts are less than the established base amount, the government will need to make up the difference in the pension. Currently, employees receive average returns of approximately 36%-38%.
According to Soumya Kanti Ghosh, Group Chief Economic Adviser of the State Bank of India, India’s largest lender, OPS is unsustainable and could exacerbate state government debt. In 2023-24, the federal pension budget was ₹2.34 lakh crore.
However, OPS is politically appealing because it guarantees retirees a fixed benefit of 50% of their final basic pay. Additionally, similar to salaries, pensions under the old scheme are routinely increased to account for inflation.
According to Ghosh’s research, state governments’ long-term pension liabilities have shown a substantial rise. The compounded annual growth rate of pension liabilities for all state governments from 2009-10 to 2020-21 was 34%. Research shows that as of 2020-21, pension outgo as a percentage of revenue receipts was 13.2%.
