AP’s semi-guaranteed pension with add-ons could set the template for new NPS

In a significant departure from its electoral pledge to revert to the Old Pension Scheme (OPS), the Andhra Pradesh government has unveiled the Andhra Pradesh Guaranteed Pension System (APGPS) Act, 2023, charting a new path for government employee pensions. This innovative model, tailored for employees recruited after September 1, 2004, combines a semi-guaranteed pension structure with supplementary benefits, presenting a financially viable solution that could serve as a blueprint for other states grappling with pension reforms.

Under the APGPS, employees are assured various benefits, including a top-up amount to guarantee a minimum monthly pension, provision for a spouse's pension, adjustments for the cost of living, and healthcare coverage. This hybrid approach seeks to strike a balance between fiscal sustainability and honouring commitments, effectively addressing concerns regarding the potentially detrimental fiscal impact of reverting to OPS.

Notably, the Andhra model tackles the issue of lower pension payouts for employees with shorter service tenures—a challenge faced by multiple states. The state government, in collaboration with actuarial consultants, meticulously devised this approach after conducting several modelling exercises. The deliberations factored in demographic challenges and the ongoing trend of declining interest rates, ensuring a pragmatic and sustainable solution.

The success of Andhra's innovative pension system has catalyzed discussions at the central level, aiming to find a middle ground between the defined-benefit OPS and the contributory National Pension System (NPS) for government employees. States are exploring proposals for a guaranteed minimum pension linked to entry-level pay rather than the last drawn salary, envisioning a sustainable long-term strategy.

Transitioning back to OPS from NPS could not only impact the country's capital markets but also create a substantial fiscal burden, as highlighted in a recent Reserve Bank of India study projecting significantly higher pension outlays under OPS compared to NPS by 2050.

Moreover, demographic shifts indicating a longer post-retirement life expectancy pose challenges to sustaining traditional pension systems. The proposed shift back to OPS might increasingly prove unsustainable due to failure to accommodate these demographic changes, making innovative models like Andhra's pension system an attractive template for future pension reforms across the nation.