UPS rollout sparks debate: Will the fiscal math add up or fizzle out?

In a move that will cover over 2.3 million employees, the Centre has announced a fresh pension scheme to quell concerns about the uncertainties of retirement incomes under the existing National Pension System or NPS, originally known as the New Pension Scheme.

The Union Cabinet, on August 24, approved the Unified Pension Scheme (UPS) that would provide an assured pension of 50% of the average basic salary drawn over the last 12 months before retirement, for employees with 25 years of service. A minimum monthly pension of Rs 10,000 is assured for those who serve the government for at least 10 years.

The scheme, which will kick in from April 1, 2025, would see increased contribution from the Centre at 18.5% of the employee’s basic salary and dearness allowance, as against 14% under the NPS. Employees would continue to contribute 10% of their salary and dearness allowance, as is the case for those who joined service after January 1, 2004, and are covered by the NPS.

The UPS also includes a lump sum superannuation payout along with gratuity benefits at the time of retirement. Former Finance Secretary and current Cabinet Secretary T.V. Somanathan, who also headed a committee to review the NPS, said that over 99% of employees would prefer to switch to the UPS from the NPS as it would prove to be more beneficial. Those part of the NPS since 2004 will also have the option to switch to the UPS.

Finance Minister Nirmala Sitharaman has underlined that the UPS is a new scheme and should not be viewed as a ‘rollback’ to the Old Pension Scheme (effective for those who joined service before 2004), seen as a burden on the exchequer. The OPS also assured 50% of last drawn salary as pension for civil servants but was unfunded, and liabilities were paid from the exchequer as they arose.

Sitharaman has expressed hope that states would also take up the UPS. Maharashtra was the first one to announce the switch within hours of the Cabinet decision. In a scenario where all states adopt it, the number of beneficiaries could rise to 9 million. Five states, including Himachal Pradesh and Rajasthan, had previously decided to move their employees out of the NPS and back to the OPS.

UPS has seen mixed reactions so far, and more details of the scheme are awaited by analysts as well as employees. Central government employees’ representatives have broadly welcomed the UPS as it acknowledges the lacunae in the NPS. However, they are not very happy with the contributory nature of the UPS that requires deductions from their salary, and are still pining for a reversion to the OPS.

Meanwhile, trade unions are divided. While the RSS-affiliated Bharatiya Mazdoor Sangh has welcomed the scheme, it awaits further clarity before deciding its course of action. Other central trade unions under the Centre of Indian Trade Unions have rejected the scheme.

Economists, who generally fret about rising pension bills’ impact on the fiscal math, have, surprisingly, welcomed the UPS as they believe it may not be as fiscally profligate as the OPS. They have, however, questioned the timing of the decision, coming just before a slew of state assembly elections.

The UPS is expected to warrant an additional spending of Rs 6,250 crore by the Centre every year along with a one-time outgo of Rs 800 crore on arrears this year. The Centre’s pension bill is estimated at Rs 2.43 lakh crore in financial year 2024-25 or FY25, at almost the same level as Rs 2.38 lakh crore in FY24, and Rs 2.41 lakh crore in FY23.

“In the near term, the fiscal impact is likely to be minimal (0.02% of GDP in FY25). As more states adopt the UPS, they will have to bear an additional fiscal burden. The medium-term impact is likely to be higher than the NPS, but lower than the OPS,” said a note by financial services group Nomura, adding that the roll-out seems to be aimed at addressing the disenchantment against the NPS at a time when key states—Haryana, Jharkhand, and Maharashtra, and the Union territory of Jammu and Kashmir—are scheduled to go to polls.

Currently, the Centre spends about 0.75% of GDP on pensions, with the outlay moderating in recent years. State governments saw a sharp rise in the pension burden to almost 1.9% of GDP in FY21, and in the past few years, it has remained between 1.7% and 1.8% of the GDP. The Reserve Bank of India has warned of the perils of states adopting the OPS, the Nomura note pointed out.

A Macquarie report, however, said that while this scheme is not a complete reversal to the OPS, it will still drain the exchequer. “Most states are already on NPS (close to 25) and there is pressure to shift now to the new UPS scheme which will further burden states’ fiscal deficit,” it cautioned, adding, the fiscal deficit of the states is already above the 3% target set by the central government at 3.2%, and this scheme could make matters worse. Macquarie also highlighted that populism seems to be the emerging narrative to win elections, and that is a worrying sign. This could keep India stuck in a ‘middle-income trap’.

The UPS aims to provide a more secure retirement outcome for the Centre’s own employees. For now, its influence on voters in the short term will be closely watched.

@surabhi_prasad