Govt likely to offer assured base pensions in compromise with states

India’s federal government will likely assure its employees a minimum pension of 40%-45% of their last drawn salary by altering the current market-linked pension scheme to assuage some holdout states, two government officials told Reuters.
 

The move comes after the government set up a committee in April to review the pension system in a year peppered with state elections, leading up to the national elections in 2024, when Prime Minister Narendra Modi will seek a rare third term.

 

Modi has been forced to re-look at the current pension system, adopted after a significant fiscal reform in 2004, as some states switched back to the older, fiscally straining system of fully funding a guaranteed pension.
 

The current National Pension Scheme requires employees to contribute 10% of their basic salary and the government 14%. The eventual payout depends on the market returns on that corpus, which is mostly invested in federal debt.

 

In contrast, the old pension system guarantees a fixed pension of 50% of an employee’s last drawn salary, without requiring them to contribute anything during their working life.
 

The government is planning to amend the current scheme so that while both employees and the government still make contributions, employees get an assured 40%-45% of their last drawn salary as pension, the two officials said.

 

But, “we will not go back to the old pension system,” said one senior government official.
 

The officials did not want to be named as the discussions are private. The federal finance ministry did not immediately respond to Reuters’ emailed queries.

 

This compromise, the government believes, will assuage the concerns of states that went back to the old pension system and cover the whole country with one fiscally sustainable pension scheme, both the sources said.
 

Recently, states including Rajasthan, Jharkhand, Chhattisgarh, Himachal Pradesh and Punjab have opted to move back to the old pension system.

 

Pensions are one of the big spending heads in the federal budget.
 

The government officials said that the amended pension scheme will not stress the budget math as much.

 

Current returns show employees get around 38% of their last salary as pension.
 

If, say, the government guarantees a 40% return, it will have to cover a shortfall of just 2%, the second official said.

 

However, the outgo will increase if the market returns on pension corpus decline.
 

“This option is still fiscally viable than moving to the old pension system as employees continue to contribute and most of the pension is funded through market returns,” the official said.