Centre may tweak pension policy to give assured benefit
The issue of pension has been a hot-button political issue, with opposition parties promising a switch to the old pension scheme during state elections.
The Union government may tweak the National Pension Scheme to ensure employees will get at least 40% of their last-drawn salary as pension, even as it awaits the report of a committee examining the issue, two officials aware of the development said.
The move will require some changes to the current market-linked pension plan launched in 2004 and comes amid a switch by several opposition-ruled states to an old pension scheme that offered pensioners a monthly payout of 50% of their salary drawn at the time of retirement.
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The issue of pension has been a hot-button political issue, with opposition parties promising a switch to the old pension scheme during state elections. States ruled by opposition parties – Rajasthan, Chhattisgarh, Jharkhand, Himachal Pradesh and Punjab – have reverted to the old pension system.
The Bharatiya Janata Party-led central government, which faces a general election next year, aside from polls in five states this year, had set up a committee led by TV Somanathan in April to review the current pension system, which may recommend changes in the New Pension Scheme.
The altered pension scheme will continue to be linked to market returns, but the government could work out a methodology to give a minimum of 40% of an employee’s last drawn salary. This means the government would have to make good a shortfall in pension in case it is less than 40% of a person’s salary at retirement. The current pension system came into effect for those joining government services from January 1, 2004.
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Because it was an unfunded system, the old pension scheme was fiscally draining for the government, according to Soumya Kanti Ghosh, group chief economic adviser of State Bank of India, the country’s largest lender. In 2023-24, India’s federal pension budget was ₹2.34 lakh crore.
Under the current National Pension Scheme, employees contribute 10% of their basic salary and the government 14% towards a corpus of funds that is invested in equites and government debt instruments. The pension earned by an employee depends on market returns.
What makes the old pension scheme politically attractive is that it offers an assured benefit to the retiree, fixed at 50% of the last drawn basic pay. Also, like their salaries, pensions were routinely hiked to account for increase in inflation.
“Any return to the old scheme will not be fiscally viable,” Ghosh said. According to Ghosh’s research, pension liabilities of state governments over the long term showed a sharp increase. The compounded annual growth in pension liabilities for the 12-year period, ended 2021-22, was 34% for all state governments. As of 2020-21, the pension outgo as a percentage of revenue receipts stood at 13.2%, Ghosh said.
One of the officials cited in the first instance said the government had not taken any decision yet and would wait for the pension review committee’s recommendations.
