Many States May Consider Switching To UPS Once Operational Details Are Available

While talking about Indian states' finances, the rating Icra in a report has said that several states may consider switching to the Unified Pension Scheme (UPS) once operational details are available. The report added that the combined pension outgo of the 28 state governments is pegged at Rs. 5.7 trillion in the FY2025 budget estimates (BE) or 1.7 per cent of gross domestic product (GDP).

This is more than double the outgo of Rs. 2.4 trillion on pensions (0.7 per cent of GDP) expected by the central government in its FY2025 BE. The funding of pension liabilities by state governments is relatively more onerous than the burden on the Centre, the report added.

Following apprehensions expressed by some government employees over the outcome of the New Pension Scheme (NPS) compared to the more certain pension promised under the Old Pension Scheme (OPS), four states have reverted to the OPS from NPS in recent years. Andhra Pradesh (AP) implemented a hybrid pension model in 2023.

This hybrid model, which includes contributions by the employees, assures a formula-linked guaranteed amount of pension to the state government employees, similar to the mechanism of determining pension under the OPS. Moreover, the AP pension model permits the monthly pension to exceed the guaranteed amount set by the state government.

This feature is a positive for the pensioners and at the same time restricts the state’s liability to the monthly contribution and the shortfall. On somewhat similar lines, the Cabinet has approved the Unified Pension Scheme (UPS), combining the features of the OPS and the NPS, although many operational details are awaited.

From the fiscal standpoint, the NPS remains the most prudent and sustainable pension system for the state/union governments as it limits their liability to the contribution to the designated fund. However, employees would prefer the assurance offered by the UPS. 

Notably, several operational details are awaited, which would aid in calculating the cost to the state governments, of switching to the UPS. Once such details are available and a fiscal estimation is possible, we expect a number of the 18 states (excluding those six states that have either reverted or planning to revert to OPS, AP and Maharashtra) currently following the NPS to consider switching to the UPS.