Modi Approves New “Unified Pension Scheme”
Modi meets with delegation representing Central government employees, 2024
Last Friday (August 24), the Modi government approved a new “unified pension scheme (UPS),” which will offer a defined-benefit pension to 2.3 million government employees beginning April 1, 2025. The new scheme will function under the existing pension system, the National Pension System (NPS), a defined-contribution pension system that manages $110 billion to serve 63.5 million government employees
BTW: Defined-benefit pensions are employer-funded and promise a fixed payment amount to retirees; this was the typical corporate pension system in the 20th-century United States. Defined-contribution pensions accumulate a fixed contribution from the employee that will be paid back out in fluctuation amounts upon retirement. Defined-contribution plans have become more common since they are less likely to risk insolvency because they do not promise a specific payout.
UPS is opt-in for government employees and is likely to see high amounts of switching since it promises a payout of 50% of last year's salary for any employee with a tenure of 25 years or more. The plan will cover all retirees retroactively since 2004 costing an additional $750M in the first year of implementation compared to the NPS system. Pensions are expected to cost the government $27.9B out of the total budget at $575B for the 2024-25 FY.
Looking at NPS first, employees contribute 10% of their base salary with the government matching 14%; the eventual payout is market returns on the contributions that are put into government debt usually. Currently, NPS is managed heavily by the Indian government with asset managers needing licenses and being strictly regulated by EPFO: 45-65% in government securities, 20-45% in other fixed income, 5% in short-term debt, and the rest in equities. NPS was fully funded however had no guaranteed payout due to market performance, a demand of many federal employees and groups arguing for worker rights.
UPS sees government contribution being 18.5% compared to 14% which is leading to part of the higher government cost and the assured 50% payout. In terms of the additional $750M cost, part of the increase comes from arrears of already retired employees since 2004 who would benefit from UPS. UPS has similar fiscal management to NPS with government debt and other fixed income making up the majority of funding, and experts see both as well-funded with low chances of failing. This takes the best parts of the Old Pension System before 2004 with the NPS since employees get the assured payout of OPS plus being fully funded similar to NPS.
India is one of the only major economies in the world to switch back to a direct benefit plan after going with a direct-contribution system for 2 decades.
