Government Likely To Guarantee Employees A 40-45% Pension Under NPS vs. Old Pension Scheme

According to a Reuters story citing two government officials, the central government is expected to guarantee its workers a minimum pension of 40%–45% of their last-drawn income by changing the present market-linked pension program to appease certain recalcitrant states.

The action was taken after the government established a committee in April to evaluate the pension system in the year running up to the national elections in 2024, when Prime Minister Narendra Modi would seek an unusual third term. The year will be filled with state elections.

Employees must pay 10% of their base income to the National Pension Scheme, while the government must contribute 14%. The final payment is based on how well that corpus, which is mostly invested in debt, performs in the market.

In contrast, the earlier pension system did not require workers to make any contributions throughout their working lives and guaranteed a set annuity of 50% of their last-drawn pay.

The two officials were reported in a Reuters story as stating that the administration intends to change the present system such that although both workers and the government continue to pay contributions, employees are guaranteed a pension equal to 40–45% of their most recent wage.

However, “we will not go back to the old pension system,” a senior government official was quoted as saying by Reuters.

States like Rajasthan, Jharkhand, Chhattisgarh, Himachal Pradesh, and Punjab have made the decision to return to the previous pension system. The revised pension plan, according to government authorities, would lessen the burden on budgetary calculations.

According to recent reports, workers get a pension equal to around 38% of their last wage.

According to the second official, if the government, for example, pledges a 40% return, it will only be responsible for making up a 2% deficit. However, if market returns on pension corpus fall, the outlay would rise.

As long as workers continue to make contributions and the pension is mostly supported by market returns, this alternative is still more financially feasible than switching to the old pension system, the official added.

The Defined Benefit Pension System (DBPS), the previous pension program, is based on the employee’s most recent paycheck. The NPS is known as the Defined Contribution Pension System (DCPS), in which both the employer and employee make contributions to create a pension fund that is payable at retirement by means of an annuity or lump sum withdrawal in accordance with regulations.

After retiring, the employee might take 50% of their last-drawn wage as a pension under the OPS.

In accordance with the NPS, an individual is permitted to take 60% of the total corpus accrued over his or her working years at the time of retirement, which is tax-free. The remaining 40% is transformed into an annuitized product, which at this time might provide the individual a pension equal to 35% of their most recent paycheck.

All new workers who join the central government’s workforce on or after January 1, 2004, including those joining central autonomous entities (apart from the armed forces), are subject to the NPS. Numerous state governments have also embraced NPS architecture and implemented NPS as a requirement for hires made on or after a deadline.