The Centre’s pension bill, which is estimated at Rs 2.43 lakh crore in the current fiscal, is not expected to be impacted significantly from the roll out of the Unified Pension Scheme (UPS).
According to sources, while there will be some impact from the new pension scheme that would also be reflected in the fiscal deficit, the pension bill is now at one the lowest levels ever at about 5% of the overall Union Budget size.
It is also unlikely that the basic pension under the UPS will be reviewed as part of the award of the next Pay Commission, sources indicated; adding that this too will ensure that it does not have too much impact on the fisc. Such a move would be significant as expectations are that the Eighth Pay Commission would be set up soon and its recommendations would be effective from January 1, 2026. The UPS may also run as a pooled fund that would also to some extent offset the impact on the Exchequer.
Effective from April 1, 2025, the UPS is expected to be adopted by over 99% of the 2.3 million central government employees and will lead to an additional spending of Rs 6,250 crore by the Centre every year. Arrears for past employees are estimated to result in a onetime spending of Rs 800 crore.
According to the Budget documents, the Centre’s pension bill is estimate at Rs 2.43 lakh crore in FY25, almost at the same level as Rs 2.38 lakh crore in FY24 and Rs 2.41 lakh crore in FY25.
Experts believe that the impact on the fiscal deficit may not be too high as it is not a full return to the Old Pension Scheme but await further details of the scheme to get a clearer picture of new scheme.
“While the UPS will affect the fisc, its impact will not be so high,” said Madan Sabnavis, chief economist, Bank of Baroda. He pointed out that while the employees’ contribution to the scheme would remain at 10% of the basic salary and dearness allowance, the government’s contribution will increase only marginally to 18.5% from the current 14% under the National Pension System. “So this is not a major increase in the government’s contribution,” he said, adding that as new employees join the UPS, the size of the fund will increase payments will be made on a rolling basis that will keep costs lower.
With the economic growth also seen to sustain at a healthy pace, more revenue sources will also come up, offsetting the impact of the UPS in coming years.
A Macquarie report, however, said that while this scheme is not a complete reversal to the OPS (old pension scheme) which was entirely defined benefit scheme from the current NPS (national pension scheme) which was defined contribution scheme, it will still drain the exchequer.
Noting that Maharashtra is the first state to move to the UPS, it further said, “Most states now are already on NPS (close to 25 states) and there is pressure to shift now to the new UPS scheme which will further burden the state's fiscal deficit. The fiscal deficit of the states in India is already beyond 3% at 3.2%; 3% is the target set by the central government and these schemes could make matters worse.”
The Reserve Bank of India had also previously expressed concerns about moving back to the Old Pension Scheme that a number of states have announced in the past.