The new Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government is set to offer a significant enhancement to the pension benefits for central government employees under the National Pension System (NPS), according to a report by the Financial Express. The proposal guarantees up to 50 per cent of the last basic pay as a pension, a notable shift from the current market-based returns system.
T V Somanathan pension scheme committee
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 NPS without reverting to the non-contributory Old Pension System (OPS), which has been deemed fiscally unsustainable. This came as many states began abandoning the NPS and reverting to OPS.
The panel was given no deadline on this task, and comprised Radha Chauhan, special secretary in Finance Ministry’s Expenditure Department; Annie Matthew, and Deepak Mohanty, chairman of Pension Fund Regulatory and Development Authority.
According to FE, the committee’s report, submitted in May, aligns closely with the Andhra Pradesh NPS model introduced in 2023.
What is the Andhra Pradesh NPS model?
Under the Andhra Pradesh Guaranteed Pension System (APGPS) Act, 2023, in cases where the annuity falls short, a top-up ensures a monthly pension of 50 per cent of the last drawn basic pay.
Additionally, the spouse of a deceased subscriber is guaranteed a monthly pension at 60 per cent of the guaranteed amount. Cost of living adjustments based on inflation would also be applied to the last drawn basic pay, as specified in the Act.
The APGPS Act also stipulates that part and final withdrawals will proportionately reduce the guaranteed pension, ensuring that the system remains sustainable while providing enhanced benefits to retired employees.
What does this NPS proposal say?
The proposed scheme would guarantee a pension of 40-50 per cent of the last pay, with adjustments based on years of service and any withdrawals from the pension corpus. Any shortfall in the pension corpus required to meet the guaranteed pension amount would be covered by the central government’s budget.
If implemented, this could benefit around 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 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 per cent of the last drawn salary.
Old Pension Scheme (OPS) vs National Pension Scheme (NPS)
Under the OPS, pre-2004 government employees are entitled to 50 per cent of their last salary as pension, provided they have at least 20 years of uninterrupted service. Employees with 10-20 years of service receive a pro-rata pension, adjusted for inflation twice a year.
In contrast, the current NPS requires that a minimum of 40 per cent of the accumulated contributions be invested in annuities to generate a monthly pension, which is not guaranteed and is subject to annuity returns. The remaining 60 per cent can be withdrawn tax-free.
The proposed guaranteed pension option under NPS would modify these existing norms.
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