Panel proposes up to 50% assured pension under NPS, reports Financial Express

The new Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government is poised to introduce a substantial improvement in pension benefits for central government employees enrolled in the National Pension System (NPS), as per a report by the Financial Express. This move marks a departure from the current market-based returns system, promising up to 50 per cent of the last basic pay as pension.

In March 2023, the Narendra Modi government established a committee, led by Finance Secretary T V Somanathan, tasked with exploring avenues to enhance pension benefits under NPS while steering clear of reverting to the non-contributory Old Pension System (OPS), which has been labeled fiscally unsustainable. This initiative was prompted by several states abandoning NPS in favor of OPS.

The committee, comprising members such as Radha Chauhan, Annie Matthew, and Deepak Mohanty, chairman of Pension Fund Regulatory and Development Authority, submitted its report in May. According to the Financial Express, the recommendations closely resemble the Andhra Pradesh NPS model introduced in 2023.

Under the Andhra Pradesh Guaranteed Pension System (APGPS) Act, 2023, a top-up ensures a monthly pension of 50 per cent of the last drawn basic pay in cases where the annuity falls short. Additionally, spouses of deceased subscribers are guaranteed a monthly pension at 60 per cent of the assured amount, with cost of living adjustments based on inflation applied to the last drawn basic pay. Part and final withdrawals proportionately reduce the guaranteed pension to maintain sustainability.

The proposed NPS scheme would guarantee a pension of 40-50 per cent of the last pay, with adjustments based on years of service and withdrawals from the pension corpus. Any shortfall in the pension corpus needed to meet the guaranteed amount would be covered by the central government's budget.

The government's initiative towards guaranteed pension comes in response to several states, particularly those under Opposition rule, enticing voters by reverting to the financially unsustainable OPS. Notably, some of these states, including Rajasthan and Chhattisgarh, now governed by the BJP, are anticipated to rejoin the NPS framework in the near future.

As per existing NPS regulations, a minimum of 40% of the accumulated corpus, comprising contributions from both the government (14% of pay) and staff (10% of pay) during their working years, must be allocated to annuities. This portion is intended to generate a monthly pension, which is contingent upon annuity returns and is not guaranteed. The remaining 60% can be withdrawn tax-free.

However, these provisions would undergo modifications under the proposed guaranteed pension option within the NPS framework.

The Somanathan panel conducted thorough consultations to overhaul the NPS and is reported to have presented various options with different permutations and combinations, along with their respective implications.

If implemented, this could benefit approximately 8.7 million central and state government employees enrolled in NPS since 2004. While the exact cost of the guaranteed pension remains undetermined, investing the accumulated corpus in annuities or similar products could potentially yield returns sufficient to provide a pension amounting to 50 per cent of the last drawn salary.

Comparatively, under OPS, pre-2004 government employees are entitled to 50 per cent of their last salary as pension, provided they have at least 20 years of uninterrupted service. Employees with 10-20 years of service receive a pro-rata pension, adjusted for inflation semi-annually. Currently, NPS mandates a minimum of 40 per cent of accumulated contributions to be invested in annuities for generating a monthly pension, which is not guaranteed and subject to annuity returns, while the remaining 60 per cent can be withdrawn tax-free.

The proposed guaranteed pension option under NPS would amend these existing norms, potentially offering a more secure retirement plan for government employees.