Assured Pensions Under the Newly Introduced Unified Pension Scheme
The introduction of the Unified Pension Scheme (UPS) is expected to bring significant changes to government pension policies, with a notable financial impact in the fiscal year 2025 (FY25). However, economists suggest that while the initial one-time allocation may be substantial, it is unlikely to have a long-term adverse effect on the government’s fiscal health.
Government Contribution Increase
One of the most significant changes under the UPS is the increase in the government’s monthly contribution to employee pensions. Currently, the government contributes 14% of an employee’s basic salary and dearness allowance (DA) under the National Pension System (NPS). With the UPS, this contribution is set to rise to 18.5%. This 32.1% increase in government contribution could translate to an additional ₹40,000-₹45,000 crore in FY25 alone, according to DK Pant, the chief economist at India Ratings. This rise is partially due to the government’s obligation to pay arrears to employees who retired before the implementation of the UPS.
Impact on Pension Liabilities
The introduction of UPS is expected to increase pension liabilities in the union budget by approximately 20% from the budgeted ₹243,296 crore for FY25. However, the annual increase in pension liabilities is projected to stabilize, adding an estimated ₹10,000-₹15,000 crore in subsequent years.
Benefits of the Unified Pension Scheme
The UPS is designed to provide greater security for government employees by guaranteeing a pension, similar to the Old Pension Scheme (OPS). The assured pension under the UPS will be 50% of the average basic salary drawn during the 12 months preceding retirement, provided the employee has completed at least 25 years of service. The minimum pension amount is set at ₹10,000 per month and will be adjusted for inflation.
Fiscal Implications
While the UPS offers significant benefits to employees, it also increases the government’s long-term financial commitments. According to Aditi Nayar, chief economist at ICRA, the introduction of assured pensions under UPS will add to the government’s committed expenditures, necessitating careful planning within the broader fiscal consolidation strategy. Unlike the OPS, where liabilities were unfunded and paid directly from the budget, the UPS will establish two funds to manage future payouts. However, if the returns from the pension corpus fall short of expectations, the government may face increased liabilities to meet the minimum pension guarantees.
Despite these potential challenges, experts like Pant from India Ratings believe that the impact on the government’s exchequer will be minimal or insignificant, particularly in relation to the corpus increase required to ensure the guaranteed 50% pension under the UPS.
In conclusion, while the Unified Pension Scheme introduces a more robust and assured pension system for government employees, it also poses new challenges in terms of fiscal management. The government’s ability to balance these new expenditures within its broader fiscal strategy will be crucial in ensuring the long-term sustainability of the scheme.