New proposal: States say will settle for lower, but an assured pension

Under the Seventh Pay Commission, the earlier system of pay bands and grade pay was replaced with a pay matrix, with an employee’s status being determined by their level within the pay matrix. The 7th Pay Matrix consists of 760 cells, with 19 columns and 40 rows signifying different pay levels for various functional roles of employees and the salary increments they may earn through their career.

So far, Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh have already reverted to the Old Pension Scheme from NPS. In March, even the BJP-Sena (Shinde faction) government in Maharashtra gave an approval in principle to extend monetary benefits of OPS to those under the NPS, with the state government likely to increase its share towards pension to 20 per cent of the basic salary plus dearness allowance from 14 per cent now.

At present, while the government contribution is 14 per cent under NPS, an employee contributes 10 per cent of his salary plus DA.

Under the OPS, government employees get defined benefits post retirement – 50 per cent of their last drawn salary as monthly pension. Under the NPS, which covers employees who joined service post January 2004, contributions are defined but benefits depend on the market.

In March this year, the Central government had informed Parliament it is not considering any proposal to restore OPS in respect of its employees recruited after January 1, 2004. The Centre, however, allowed a one-time option to a section of government employees to shift to OPS whose posts were advertised before the notification of the NPS in December 2003.

With government employee unions raising concerns about NPS and its returns, Union Finance Minister Nirmala Sitharaman announced the formation of a panel to review the pension system for government employees, following which a four-member committee headed by Finance Secretary T V Somanathan was set up in April.

As per its terms of reference, the committee will suggest whether any changes are warranted given the existing framework and structure of the NPS, as applicable to government employees along with suggesting changes with a view to improve the pensionary benefits of government employees covered under NPS ensuring that fiscal prudence is maintained to protect common citizens.

Earlier this year, discussions over the guaranteed pension had featured around exploring a model that combines elements of OPS and NPS, proposed by the YSR-CP government in Andhra Pradesh. As per the proposed pension model in Andhra Pradesh, called the Guaranteed Pension Scheme or GPS, employees can get a guaranteed pension of 33 per cent of their last drawn salary if they contribute 10 per cent of their basic salary every month which is matched by a 10 per cent contribution by the state government. They can get a guaranteed pension of 40 per cent of their last drawn salary, if they are willing to contribute a higher 14 percent of their salary every month, which will be matched by a 14 per cent government contribution.

The decision by some of the states to revert to the OPS may put a cumulative fiscal burden on them as high as 4.5 times that of the NPS, the Reserve Bank of India (RBI) officials said in an article – Fiscal Cost of Reverting to the Old Pension Scheme by the Indian States – in its latest monthly bulletin for September.

By 2050, pension outgo under OPS is projected to touch over Rs 17 lakh crore as against Rs 4 lakh crore under NPS and the shift to OPS by states would be a major step backwards and can increase their fiscal stress to unsustainable levels in the medium to long-term, it said.