In March 2023, the Government of India had set up a committee to look into ways to improve the benefits of the National Pension System or NPS. The committee has proposed changes such that employees of the Central government are assured a pension of up to 50 per cent of their last basic salary(with adjustments on the basis of the years of service and any withdrawals from the pension corpus). In case the pension corpus falls short of the sum needed to provide the guaranteed pension amount, the Central government will step in to fill the gap.
Presently, a market-based returns system is being followed.
If the proposed changes are implemented, about 8.7 million Central and state government employees who subscribe to the NPS (since 2004) could stand to gain.
The report submitted by the committee led by Finance Secretary T V Somanathan is similar to the NPS model implemented by the state of Andhra Pradesh last year. As per this model, the pension amount is equivalent to half of the last basic pay of the retired employee plus dearness allowance (DA) at the time of retirement.
The employees as well as the state government make a contribution equal to 10 per cent of the employee’s basic pay. Therefore, the risks association with market fluctuations are mitigated and employees enjoy more social security. Therefore, the model, under Section 3 of the Andhra Pradesh Guaranteed Pension System (APGPS) Act, 2023, ensures a stable income after retirement.
As per the old pension system, government staff employed before 2004 were entitled to 50 per cent of their last drawn salary as pension, provided they have completed an uninterrupted tenure of 20 years of service. Those who have completed 10-20 years of service will get a pro-rata pension, adjusted for inflation twice a year.
On the other hand, the current NPS demands a minimum investment of 40 per cent of the accumulated contributions in annuities for a monthly pension, which is not guaranteed and is subject to annuity returns. The 60 per cent that remains can be withdrawn free of tax. These norms will be amended in the proposed guaranteed pension scheme under NPS so that there is more stable and predictable income for those who retire.
