The new National Democratic Alliance (NDA) government is considering a significant change to the National Pension System (NPS) for central government staff, potentially guaranteeing up to 50% of the last basic pay as a pension. This marks a departure from the current system, which is based on market returns. In March 2023, the Modi 2.0 government established a panel led by Finance Secretary TV Somanathan to explore ways to enhance pension benefits under the NPS without reverting to the fiscally burdensome non-contributory Old Pension System (OPS). According to sources, the committee submitted its report in May 2023, largely following the model implemented by Andhra Pradesh in 2023.
Under the proposed changes, the central government would guarantee a pension of 40-50% of the last pay, adjusted according to years of service and any withdrawals from the pension corpus. Any shortfall in the pension corpus needed to meet this guaranteed amount would be covered by the central budget for its employees. This move would be a key initiative by Prime Minister Modi in his third term, benefiting 8.7 million central and state employees enrolled in the NPS since 2004. States typically adopt the pension model used by the Centre. The decision to guarantee pensions comes in response to opposition-led states promising a return to the OPS, which is financially unsustainable. Some states, like Rajasthan and Chhattisgarh, which are now governed by the BJP, are expected to re-adopt the NPS soon.
Under the OPS, employees who joined before 2004 receive 50% of their last salary as a pension after 20 years of service, with pro-rata pensions for those with 10-20 years of service. These pensions are adjusted for inflation twice a year. Current NPS norms require that at least 40% of the accumulated corpus be invested in annuities to generate a monthly pension, which is not guaranteed and depends on annuity returns. The remaining 60% can be withdrawn tax-free. The guaranteed pension option under the NPS would change these features. The Somanathan panel considered various options for revamping the NPS, with the Andhra Pradesh Guaranteed Pension System (APGPS) Act, 2023 serving as a reference. This act ensures that if the annuity received by a retiree is insufficient, a top-up is provided to guarantee a monthly pension of 50% of the last drawn basic pay. Similarly, if a deceased subscriber’s spouse receives an inadequate annuity, a top-up ensures a monthly spouse pension of 60% of the guaranteed pension. Cost of living adjustments (COLA) based on inflation would also be provided, according to the rules specified under the Act. Withdrawals from the corpus would proportionally reduce the guaranteed pension.