Centre likely to amend National Pension Scheme by year-end to enhance retirement payouts

The NPS, introduced in 2004, operates on a market-linked model without guaranteed base amounts, unlike the OPS, which does not require employee contributions.

The Centre is likely to make amendments to the National Pension Scheme (NPS) by year-end with an aim to guarantee that employees receive a retirement payout of at least 40-45 percent of their last-drawn salary based on the recommendations of a high-level committee currently examining the matter, a newspaper report has said citing sources. The pension issue has become a point of contention, especially in states under opposition rule, where many have reverted to the old pension scheme (OPS). Under the OPS, pensioners receive monthly benefits equating to 50 percent of their salary at the time of retirement, the Mint reported on October 18.

Moneycontrol could not verify the report independently.

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The NPS, introduced in 2004, operates on a market-linked model without guaranteed base amounts, unlike the OPS, which does not require employee contributions. In the NPS, employees contribute 10 percent of their salary, while the government contributes 14 percent, fuelling the ongoing debate on the more favourable pension scheme. More significantly, the absence of a guaranteed base and the obligatory employee contribution form the crux of this ongoing discussion.

The proposed adjustments to the modified NPS are likely to include modifications in actuarial calculations, aiming to provide higher returns for the beneficiaries, the report said. Plus, these adjustments seek to ensure a more balanced and optimised distribution of contributions within the pension scheme, aiming to enhance the overall effectiveness and benefits for the stakeholders involved.

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“It is possible to assure a base amount as payout depending on how the actuarial framework is arrived at,” the financial daily quoted an official with knowledge of the matter as saying.

Under the NPS, retirees have the option to withdraw 60 percent of the accumulated corpus tax-free at the time of retirement, utilising the remaining 40 percent to purchase an annuity. The payments received from this annuity are subject to taxation.

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Several states governed by opposition parties, such as Rajasthan, Chhattisgarh, Jharkhand, Himachal Pradesh, and Punjab, have opted to return to the OPS. However, economists caution that this move could potentially strain state finances, possibly leading to financial challenges for state governments.

Fiscally unsustainable

In the current NPS, approximately 87 lakh federal and state government employees contribute 10 percent of their basic salary, while the government contributes 14 percent. The ultimate payout is based on the returns generated by the fund, primarily invested in government debt instruments.

The OPS has faced criticism for being fiscally unsustainable. Soumya Kanti Ghosh, the group chief economic adviser of the State Bank of India, India’s largest lender, has expressed concerns that reverting to the OPS could worsen the debt burden of state governments. The fiscal impact is a significant consideration, especially given the substantial pension budget of Rs 2.34 lakh crore allocated for the fiscal year 2023-24, according to the report.