The Union government on August 24 announced a revamped pension regime for central government employees with a fixed monthly pension and guaranteed minimum payment.

The Union Cabinet approved the Unified Pension Scheme, which will come into effect on April 1, 2025.

With this, the Narendra Modi-led National Democratic Alliance has taken away a major talking point of the Opposition parties ahead of assembly elections in three states and mollified simmering anger among government employees.

State elections will be held in Haryana and the Union Territory of Jammu and Kashmir in September and October. Maharashtra and Jharkhand elections will likely follow.

Finance Secretary TV Somanathan said on Saturday that the revamped scheme will benefit 23 lakh Central government employees and that states can also implement the model. “If state employees also join this, then this is expected to benefit 90 lakh employees,” he said.

The New Pension Scheme is currently applicable for all government employees who joined service on or after January 1, 2004. A major point of contention with the New Pension Scheme was that pension payments are linked to contributions made from the salaries of employees and by the government.

Under the Old Pension Scheme, government employees received a fixed pension of half their salaries at retirement. The switch to the New Pension Scheme had led to protests by public sector employees since there were no fixed payouts and they had to make contribution from their own salaries.

Opposition parties have leveraged this resentment as an election issue. Since the past decade, the Congress governments in Rajasthan, Chhattisgarh, Jharkhand, Karnataka and Himachal Pradesh and the Aam Aadmi Party government in Punjab have passed orders to restore the old regime to benefit state government employees.

The Centre’s decision to implement the Unified Pension Scheme, which essentially reverses some of the major changes introduced by the New Pension Scheme, also indicates how political winds have changed. In heeding the simmering resentment on the ground as well the potential that the Opposition could benefit electorally, the ruling coalition displayed a growing cautiousness following the reduced majority of the Bharatiya Janata Party in the 2024 Lok Sabha elections.

The Unified Pension Scheme

The fixed payout under the Unified Pension Scheme will be calculated at 50% of the average basic salary drawn by an employee over the last 12 months of her service. All employees who complete at least 25 years of service will receive pension based on this formula. The amount will reduce proportionately for a shorter service period, up to a minimum of 10 years of service. Once an employee crosses the 10-year threshold, they will be assured of a minimum pension of Rs 10,000. After the death of a retired employee, the family will be eligible for 60% of the pension last drawn.

With a fixed pension, the Unified Pension Scheme is a return to the Old Pension Scheme. However, on contributions to the pension fund, the Unified Pension Scheme draws from the New Pension Scheme – with the government sweetening the deal at its end.

Under the New Pension Scheme, employees contributed 10% of their basic pay and the government put in another 14%, to create a corpus for payouts after retirement. These contributions were invested in equities and other market-linked securities by fund managers regulated by the Pension Fund Regulatory and Development Authority.

The Unified Pension Scheme will continue to take a 10% contribution from the employee, but the government will now increase its share from 14% to 18.5% of the basic pay.

The Unified Pension Scheme will also pay a lump sum at the time of retirement, in addition to gratuity. The lump sum will be calculated at a tenth of monthly emoluments – basic pay and dearness allowance – for every six months of service.

Employees who retired after the New Pension Scheme was launched in 2004 will now have the option to choose between the two.

At the press conference, Finance Secretary Somanathan said the Unified Pension Scheme was expected to benefit “99% of the employees”. He said “almost nobody” will want to stay with the New Pension Scheme but there will be options for those who choose to do so.

Opposition plank

Reverting to the Old Pension Scheme has been one of the major poll planks of the Opposition parties in many state elections held in the past two to three years.

The Congress had not included it as a promise in its manifesto for the 2024 Lok Sabha polls. But P Chidambaram, the party’s manifesto committee chief, said that was because the Centre had formed a committee in April 2023 to review the pension system.

Ahead of the state elections in Haryana and Jammu and Kashmir, the promise was back. The Congress announced it would bring back the Old Pension Scheme if voted to power in Haryana, and the party’s ally, the National Conference, included the promise in its manifesto for Jammu and Kashmir.

Promising a return to the Old Pension Scheme has helped the Opposition parties electorally. In the December 2022 Himachal Pradesh elections that the Congress won, 70% of the voters supported restoring the Old Pension Scheme, according to a survey by the Centre for the Study of Developing Societies.

In the April-May Lok Sabha elections, too, an analysis of postal ballots by government employees in Uttar Pradesh showed that Opposition parties got more votes than the BJP in 45 of the 80 seats in the state. Anger over the New Pension Scheme was considered to be the primary reason for government employees voting against the BJP.

Government employee unions have also been targeting the Centre. In August 2023, the Centre had threatened government employees with disciplinary action and wage cuts if they attended a rally in Delhi demanding restoration of the Old Pension Scheme.

But the anger continued to brew.

In January, Railway union members went on a hunger strike demanding a return to the Old Pension Scheme. In February, an umbrella body of trade unions and associations of central government staff threatened an indefinite strike from May 1. The strike was deferred after discussions with government officials, including Finance Secretary Somanathan.

During the Unified Pension Scheme announcement on Saturday, Union Minister Ashwini Vaishnaw said the decision was based on recommendations made by a committee headed by Somanathan.

The committee was formed in April 2023, months after the Himachal Pradesh state elections where the New Pension Scheme had emerged as a major issue.

The change in the government’s stance can be gauged from the fact that just three months before the committee was formed, the finance ministry told Parliament in December 2022 that there was no proposal under consideration to restore the old pension scheme.

What about finances?

Speaking on August 24, Somanathan said the Unified Pension Scheme was “definitely fiscally more prudent”, but did not state whether that was in comparison to the New Pension Scheme or the old one.

Poor fiscal prudence was the main argument against the Old Pension Scheme when the Atal Bihari Vajpayee-led National Democratic Alliance government introduced the New Pension Scheme in 2004.

The Congress-led coalition that followed later in 2004 did not backtrack on the New Pension Scheme either. Under Prime Minister Manmohan Singh, a law was passed in 2013 establishing the Pension Fund Regulatory and Development Authority which regulates contributions under the New Pension Scheme.

The reason why both the Congress as well as BJP-led governments backed the New Pension Scheme was simple: the burden of payouts under the Old Pension Scheme was untenable for the exchequer.

Pensions under the old scheme were funded entirely by the government. This meant that the ballooning pension bill was footed by taxpayers due to an increase in salaries and greater lifespan, which translated to retired employees drawing pensions for longer periods of time.

The New Pension Scheme aimed to remedy this by creating a corpus fund for pension payouts that included contributions from the employees. In a study released in September 2023, the Reserve Bank of India cautioned against returning to the Old Pension Scheme, estimating that by 2050, its implementation will result in 4.5 times more financial burden on state governments compared to the New Pension Scheme.

Reserve Bank of India projection of pension outlay

But, for state governments, reverting to the Old Pension Scheme has short-term financial benefits in addition to the electoral gains.

Lekha Chakraborty, a professor at the National Institute of Public Finance and Policy, explained that under the Old Pension Scheme, the government does not have to contribute to the pension funds of employees who are still in service. So even if the overall burden is larger in the future, a state government has more fiscal space currently under the Old Pension Scheme.

Though state governments can opt for the Unified Pension Scheme, Chakraborty said that they might choose to do so if their finances do not allow for contribution towards the corpus fund where the government’s share has now been increased from 14% to 18.5%.

But what about the finances of the central government?

Somanathan said on Saturday that in the first year of its implementation, the Unified Pension Scheme will cost the Centre an additional Rs 6,250 crore.

On this, Chakraborty said that the unified scheme was a good move in terms of assimilating the fixed pension provision of the old scheme and the corpus fund model of the new one, but it remains to be seen whether the increased burden on the exchequer will impact funding for welfare schemes.