Unified pension scheme to add to states pension burden if adopted

The increase of contribution from the government to 18.5 percent from 14 percent earlier is expected to add to the bill

The new Unified Pension Scheme, which increases the contribution by the government and assures a guaranteed 50 percent of last 12 months pay to employees serving their full tenure, is likely to add further to states’ burden, according to a Moneycontrol analysis.

Pension spending is expected to increase further for states if they opt for the new scheme, with states paying around 13 percent of their revenues in pension, as per the Moneycontrol analysis.

As a share of their taxes, the spending is even higher with pensions accounting for nearly a quarter of their own tax revenue spending.

In FY24, analysis of RBI data on states finances shows that the states were likely to spend nearly 12 percent of their revenues on pensions.

The pension bill of states includes two components -- pensions paid under the old pension scheme as a large proportion of employees who are retiring still adhere to the old system and a 14 percent contribution to National Pension Scheme corpus of current employees.

While this is not expected to change the old pension scheme payouts, the increase of contribution from the government to 18.5 percent from 14 percent earlier is expected to add to the bill. Assuming a state was paying Rs 14 as pension contribution earlier, now it would have to pay 32 percent extra or Rs 18.5 as contribution each year.

A back of the envelope calculation shows that states roughly spend 10-14 percent of their total pension bill towards NPS contribution.

A 32 percent increase in state contribution is likely to add at least another 0.5 percentage points as a proportion of revenue to the bill. Payments to employees who retired under the NPS—albeit their proportion is likely to be lower—is also expected to add to the cost.

An earlier analysis by Moneycontrol had found that if 50 percent of basic income is set as pension, Centre and states will likely spend 269 percent more in current value terms, than if they would have adhered to the new pension scheme.

The Cabinet, on August 24, approved the unified pension scheme bridging the gap between the old pension scheme, which guaranteed 50 percent of basic pay as pension and the new pension.