States Propose Assured but Lower Pensions in New Pension System

• 05 Oct 2023

In a fresh proposal submitted to the Finance Secretary-led committee tasked with reviewing the New Pension System (NPS) for government employees, some states are advocating for a middle-ground approach that offers a guaranteed but reduced pension.

Key Points

• Reconsidering Pension Structure: Certain states are advocating for an assured pension linked to the minimum pay level, in contrast to the Old Pension Scheme (OPS) where pensions are based on the last-drawn salary.
• Minimum Pay Level: The proposal suggests that the minimum pension should be set at 50% of the lowest (entry-level pay) salary within the pay matrix.
• Pay Matrix Introduction: Under the Seventh Pay Commission, the pay bands and grade pay system was replaced with a pay matrix, consisting of 760 cells and 19 columns, signifying different pay levels for employees based on their role and career progression.
• OPS Adoption: Several states, including Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh, have already returned to the Old Pension Scheme (OPS) from NPS.
• Contributions: Under NPS, government contributions stand at 14%, with employees contributing 10% of their salary plus DA.
• Benefits: NPS offers defined contributions but benefits are market-dependent, unlike OPS, where government employees receive 50% of their last-drawn salary as monthly pension.
• Central Government Decision: The Central government previously stated it had no plans to restore OPS for employees recruited after January 1, 2004. However, a one-time option was allowed for certain government employees.
• Concerns Raised by Unions: Due to concerns raised by government employee unions regarding NPS and its returns, Union Finance Minister Nirmala Sitharaman formed a committee to review the pension system for government employees.
• Cumulative Fiscal Burden: The decision of some states to revert to OPS could impose a fiscal burden as much as 4.5 times greater than that of NPS, as indicated by a Reserve Bank of India (RBI) article in its September monthly bulletin.