According to a report by the Financial Express, the new Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government is planning to introduce significant enhancements to the pension benefits for central government employees under the National Pension System (NPS). This proposal aims to guarantee up to 50% of the last basic pay as a pension, which is a notable departure from the current market-based returns system.
Background and Committee Establishment
In March 2023, the Narendra Modi government established a committee led by Finance Secretary T V Somanathan to explore ways to improve pension benefits under the NPS. The objective was to find alternatives that would not require a return to the non-contributory Old Pension System (OPS), which has been deemed fiscally unsustainable. This decision was made in response to several states abandoning the NPS and reverting to OPS.
The committee, which included Radha Chauhan, special secretary in the Finance Ministry’s Expenditure Department; Annie Matthew; and Deepak Mohanty, chairman of the Pension Fund Regulatory and Development Authority, was given no specific deadline to complete their task.
Committee’s Report and Andhra Pradesh NPS Model
The committee’s report, submitted in May, aligns closely with the Andhra Pradesh NPS model introduced in 2023. Under the Andhra Pradesh Guaranteed Pension System (APGPS) Act, individuals receive a monthly pension of 50% of the last drawn basic pay, with a top-up provision in cases where the annuity falls short. The spouse of a deceased subscriber is guaranteed a monthly pension at 60% of the guaranteed amount, and cost-of-living adjustments based on inflation are applied to the last drawn basic pay.
The APGPS Act also ensures that part and final withdrawals proportionately reduce the guaranteed pension, ensuring the sustainability of the system while providing enhanced benefits to retired employees.
Proposed Scheme and Potential Impact
The proposed scheme under the NPS would guarantee a pension of 40-50% of the last pay, taking into account years of service and any withdrawals from the pension corpus. Any shortfall in the pension corpus required to fulfill the guaranteed pension amount would be covered by the central government’s budget.
If implemented, this scheme could benefit approximately 8.7 million central and state government employees who have been enrolled in the NPS since 2004. While the exact cost of the guaranteed pension has not yet been determined, the Financial Express report suggests that investing the entire accumulated corpus in annuities or similar products could generate returns sufficient to provide a pension amounting to 50% of the last drawn salary.
Comparison with the Current NPS and OPS
Currently, the NPS requires a minimum of 40% of the accumulated contributions to be invested in annuities to generate a monthly pension. However, this pension is not guaranteed and is subject to annuity returns. The remaining 60% can be withdrawn tax-free.
In contrast, the proposed guaranteed pension option under the NPS would modify these existing norms and provide a more secure retirement plan for government employees.
Under the OPS, pre-2004 government employees are entitled to 50% of their last salary as a pension, provided they have at least 20 years of uninterrupted service. Those with 10-20 years of service receive a pro-rata pension, adjusted for inflation twice a year.
The new proposal aims to strike a balance between the OPS and the current NPS, ensuring improved benefits for employees while maintaining fiscal sustainability.
Should be extended for retired employees of Nationalized Banks too immediately.
Yes