Editorial. Sound compromise – The Hindu BusinessLine

The new Unified Pension Scheme (UPS) rolled out by the Centre is a good compromise between meeting government employees’ demands for guaranteed pensions post-retirement and not burdening the fisc with pension liabilities. The UPS, to be offered as an additional option under the National Pension System (NPS), will provide government employees with an assured inflation-adjusted pension at 50 per cent of their last-drawn basic pay, lifelong post-retirement. To fund the payout, the Centre will chip in with generous contributions at 18.5 per cent of the employee’s basic pay, while the employee will continue to contribute 10 per cent.

Employees opting for UPS will need to surrender 100 per cent of their maturity proceeds (currently, they need to surrender only 40 per cent). UPS, expected to benefit 23 lakh government employees, will be implemented from April 1 2025 for those who joined service after 2004. This scheme will entail an additional annual outgo of ₹6,250 crore for the Centre, with arrears pegged at ₹800 crore.

The UPS has several positives when compared with the Old Pension Scheme that employee unions were demanding. It is based on a contributory model where both employees and the government invest upfront to fund future pension payouts. This is superior to OPS’ pay-as-you-go model, where future generations of taxpayers will bear the pension liabilities of current and earlier generations. The requirement for government employees to invest 10 per cent of pay and give up their entire final corpus to fund the annuity, saves the scheme from turning into a dole. With the Committee which designed this scheme basing its recommendations on actuarial modelling of likely liabilities for the current workforce, the government has precise numbers on the likely outlays and the impact on the fisc — which is modest. State governments or other entities wishing to adopt this scheme can now use the same formula.

While going back to assured pensions was perhaps driven by realpolitik, there are some points that need to be kept in mind about UPS. For one, both the annual contribution amounting to 18.5 per cent of basic pay and the annual outlay of ₹6,250 crore are based on assumptions on the current size and age profile of the government workforce, longevity and inflation, apart from the likely returns that can be delivered by NPS managers and annuity providers. These are subject to change, and can leave the Centre with a higher or lower fiscal burden in future. Two, with the Centre rolling out this scheme, it will be difficult for the States not to emulate its example. The fiscal burden on individual States can be high.

With the overall workforce of the Central and State government entities estimated at over 90 lakh, the final outgo will be many times the estimated ₹6,250 crore for the Centre. Finally, sound scheme design does not change the fact that it is the taxpayer who will be footing the bill for a scheme which benefits only 2 per cent of India’s workforce.