Andhra Pradesh’s semi-guaranteed pension with add-ons could set the template

The APGPS subscriber would be guaranteed certain benefits: 1. Top-up amount to ensure a monthly guaranteed pension at the rate of 50 per cent of the last drawn basic pay, in case of a shortfall in the annuity received by the retired APGPS subscriber. 2. Top-up amount to ensure a monthly spouse pension at the rate of 60 per cent of the guaranteed pension, in case of a shortfall in the annuity received by the spouse of the deceased APGPS subscriber. 3. Cost of Living Adjustment on the last drawn basic pay as per inflation adjusted dearness relief 4. Top-up amount to ensure a monthly minimum guaranteed pension of Rs 10,000 in case of shortfall in the annuity received by the APGPS subscriber. 5. Providing a healthcare scheme for the retired APGPS subscribers.

The Andhra template comes amid an ongoing clamour across states to revert back to the defined-benefit OPS, jettisoning the defined-contribution National Pension System (NPS) that was introduced in 2004. It is seen as striking a delicate balance while duly acknowledging the fiscally ruinous impact of the reversion to the OPS. And unlike the contributory NPS, which puts corpus accumulation and annuity risk entirely on the employee, the Andhra model guarantees an amount that seems sustainable from a fiscal perspective — a certain percentage of the last drawn salary assured as a fixed annuity pension, with the government bridging the gap, if any, between the guaranteed pension and the annuity.

Additionally, the guaranteed pension offered by Andhra Pradesh can be topped with additional benefits that are currently unavailable to NPS pensioners, including extending pension to the spouse, but with a lower annuity, and the promise of a minimum pension to cover for those with lower service tenures.

“Even though returns are not that bad under the NPS, there’s a view to provide an assured return to bridge the gap. Andhra Pradesh has notified its guaranteed pension scheme, which is being closely looked at,” a person aware of the discussions said.

The Andhra model also seeks to allay a concern that is learnt to have been flagged by some states earlier to the Centre-appointed committee to look into improving the NPS for government employees: of lower pensions payouts to employees with lower service tenures arising mainly from regularisation into government service mid-career, resulting in such workers making lower contributions compared with full-service government employees. Some states, such as Himachal Pradesh, Chhattisgarh are facing this issue as they have a large number of employees whose total years of service is around 10 years. The regularisation of employees, such as panchayat workers, teachers as regular government employees is seen to be the reason for a surge in the number of estimated beneficiaries from the pension scheme in the states. It is also being seen as one of the significant reasons for an inaccurate representation of the returns and pension payout from the NPS amid rest of the government employees, especially serving employees who are yet to retire.

The Andhra Pradesh government is learnt to have roped in actuarial consultants and government officials ran multiple models plotting different scenarios before veering to this middle path. And amid the multiple alarm bells that these modelling exercises triggered off, there were two broad takeaways: the demographic challenge that was looming large, given the post-retirement life span of the population could extend as long as the average service career; and the slide in interest rates is a clear trend (the nominal average annual returns in different countries were around 5 per cent or lower over a 5-15 year period as compared to double-digit returns in India currently). As indicated by an OECD Pensions Survey, India’s annual average returns are way higher than in any other country. And as it transitions out of the developing country status, the interest rates are slated to progressively come down. The 10 year government bond yields in India are far higher than the levels of emerging economies, a trend that again seems unsustainable as the country’s markets integrate further with the global financial market.

Though no deadline was outlined at the time of the constitution of the Centre-appointed committee earlier this year, it is expected that some announcement is likely after the ongoing state elections. As reported by The Indian Express earlier, a proposal before the Finance Secretary-led committee set up to review the NPS for government employees, some states have also proposed a middle path which entails a lower pension, but have specifically demanded an assured pension linked to the minimum of a pay level, and not the last-drawn salary as it is under the OPS. As per the proposal, the minimum assured pension need not be 50 per cent of the last drawn salary but 50 per cent of the lowest (entry-level pay) salary in the pay matrix.

From a macro perspective, the reversion from NPS to OPS could also deal a body blow to the country’s capital markets by weaning away one of the biggest sources of long-term capital. The fiscal impact of states reverting to OPS was flagged recently in September in a study by Reserve Bank of India (RBI) officials, which stated that it may put a cumulative fiscal burden on states as high as 4.5 times that of the NPS. By 2050, pension outgo under OPS is projected to touch over Rs 17 lakh crore as against Rs 4 lakh crore under NPS, it said.
Also, there is the challenge posed by demographics trends. As per the United Nations’ population pyramid, the ratio of 25-64 year-olds to above 64 year-olds will decline from 7.3 to 1.5 for India from 2020 to 2100, a near five-fold increase in dependency ratio. The World Health Organisation’s life expectancy simulations show that for people aged 60, life expectancy would increase from 18 to 27.9 years over the same period. Therefore, the usual pension support period is expected to go up by 55 per cent in this century, prolonging post-retirement life as long as a typical service career which will make reverting to the OPS as unsustainable.