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Informist, Tuesday, Sep 3, 2024

 

By Sagar Sen and Priyasmita Dutta

 

NEW DELHI – The government will not have to break a sweat to ensure that a guaranteed pension is delivered under the Unified Pension Scheme, according to a senior official familiar with internal calculations.

 

As per government's calculations, the returns from the New Pension Scheme are not far from what will be required of the unified scheme, which will come into force from Apr 1, 2025.

 

The unified scheme ensures 50% of the average basic pay drawn in the last 12 months prior to the retirement of government employees who have worked for at least 25 years. For those with 10 to 25 years of service, the assured sum would be calculated on a pro-rata basis.

 

According to the government official, the return from the Centre's contribution of 14% and employees' contribution of 10% of basic salary and dearness allowance under the New Pension Scheme is generally more than 40% and sometimes close to 50% of the estimated average basic pay drawn in the last 12 months prior to retirement. This means any gap between the returns of the new and unified pension schemes will be 'narrow', the official said.

 

DEFAULT MODE

Under the defined contribution-based New Pension Scheme, the default mode allows for an allocation of up to 65% in government securities, 45% in debt instruments, 10% in short-term debt instruments, 15% in equity investments, and 5% in asset-backed, trust-structured, and miscellaneous investments. Depending on their age, government employees have the option to raise their equity investment to up to 50%.

 

The unified scheme will also allow employees these options. However, the guarantee of assured returns will only be based on the default mode of investment, with the government's top-up of 8.5% - on top of the matching contribution of 10% - going towards that, the official said.

 

"If the equity investment of employees who selected higher equity portion performs badly - worse than the benchmark - then also the government's top-up will be same amount whether he/she selected default mode or not. So, the final amount may be less than 50% also," the official added.

 

FLEXIBILITY TO STATES 

The origin of the unified scheme lies in the discontent among states, particularly those ruled by opposition parties, with the New Pension Scheme not having a 'defined benefit' feature like the Old Pension Scheme. This became a political hot potato and forced the Centre to set up a committee led by current Cabinet Secretary T.V. Somanathan to look into the matter.

 

On the other hand, the unfunded nature of the Old Pension Scheme has repeatedly been criticised by experts for being fiscally unsustainable. As such, the unified scheme is a hybrid of the old and new schemes.

 

For the Centre, the increased contribution of 18.5% from 14.0% in addition to the arrears will cost the exchequer around 70 bln rupees in 2025-26 (Apr-Mar), or around 0.02% of GDP – a sum the government thinks it is well positioned to absorb.

 

To predict the fiscal impact for states, the aforementioned official said, is difficult as they will have the option to tweak the framework of the Unified Pension Scheme as per their requirements.

 

"The Unified Pension System provides the framework. States are free to implement as it is or can make changes that suit their fiscal space. They can raise the government contribution or lower it based on what they feel is right," the official said.

 

According to ratings agency ICRA, estimating states' cost of moving to the unified scheme will be possible once its operational details are made public.

 

"Once such details are available and a fiscal estimation is possible, we expect a number of the 18 states (excluding those six states that have either reverted or planning to revert to Old Pension Scheme, Andhra Pradesh, and Maharashtra) currently following the NPS to consider switching to the UPS," ICRA analysts said.

 

While Andhra Pradesh put in place a hybrid pension model in 2023, the Maharashtra government implemented the Unified Pension Scheme for its employees on Aug 25, a day after the Union Cabinet approved the same.  End

 

Edited by Ashish Shirke

 

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