Editorial: Repackaging pension scheme

Striking a balance between employees’ aspirations and fiscal prudence must be the guiding principle of UPS

The climbdown on the pension scheme adds to the long list of policy reversals by the NDA government in its third term in the face of an emboldened opposition, with an increased strength in the Lok Sabha, and more assertive coalition partners. In a welcome move to address the concerns of the employees, the Centre has unveiled the Unified Pension Scheme (UPS), a repackaged guaranteed version that is almost similar to the Old Pension Scheme (OPS), promising a pension of 50% of the average basic pay of the last 12 months before retirement and a minimum pension of Rs 10,000 for those who worked for at least 10 years. The Centre’s share towards the scheme has been increased from 14% under the National Pension Scheme (NPS) to 18.5%. Obviously, the backtracking on NPS, introduced in 2004, is a political response to the growing nationwide demand to revert to the OPS. The government has sought to strike a balance by integrating the features of the OPS and NPS in the modified scheme. The Centre’s argument is that the UPS, to benefit over 23 lakh employees, is fiscally more prudent as it is a funded, contributory scheme, unlike the OPS. A committee, led by former Finance Secretary TV Somanathan, devised a middle path that involves employee contributions and enhanced share from the Centre. The likely additional strain on the Centre and the States now has official sanction. Striking a balance between the employees’ aspirations and fiscal prudence must be the guiding principle.

The implementation of the new pension scheme will mean that the Centre needs to earmark a higher proportion of its annual budget to create a corpus for UPS. In addition, a guaranteed pension payout means that the budget will always carry the risk of additional funds being earmarked to cover shortfalls in pension commitments. It also adds to the risks that future governments have to confront. The UPS is an improvement over the OPS in terms of funding because it puts a defined amount into an investment corpus every month. But there could be fiscal stress. The new scheme will entail an additional outgo of Rs 6,250 crore in the first year and Rs 800 crore as arrears for the employees who have retired since the introduction of NPS. The total outgo will increase further if State government employees are onboard — as of March 2023, NPS had 23.8 lakh central and 60.7 lakh State government subscribers. The share of pension commitment is already a sizable portion of the central and State budgets. In 2023-24, the central and State governments had allocated Rs 2.3 lakh crore and Rs 5.2 lakh crore respectively for pensions, accounting for 12% of their revenue expenditure. A return to defined benefits for a tiny section of the labour force could further restrict the space for spending on other avenues.

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