The government would not have to incur any additional expenditure of guaranteeing 50 percent of the last 12-month average basic pay as a pension if it can ensure an 11.5 percent return on its corpus, which comprises contributions from both the government and employees, over a 30-year period, according to a Moneycontrol analysis.

On August 24, the cabinet approved a new Unified Pension Scheme combining the benefits of the Old Pension Scheme and the contributory aspect of the New Pension Scheme.

The UPS guarantees 50 percent of the last 12-month average basic pay as income to the central government employees compared with no defined benefit under the New Pension Scheme.

While making the announcement, the government also noted that it has increased its contribution to the NPS corpus to 18.5 percent of the employees’ salary, compared with 14 percent earlier.

Assuming that an employee joins service in 2025 and serves till 2054, increasing her income at a compounded annual growth rate of 11.9 percent during these 30 years, the government should easily be able to pay 50 percent salary if the average return is over around 11.5 percent.

However, a lower rate of return puts an additional burden on the government.

If the EPF rate of return is considered, which stands at 8.25 percent, then the government will have to pay 50 percent extra per employee to bridge the gap between what UPS returns as a pension and what the government has guaranteed.

A 9 percent rate of return -- a benchmark for schemes with government securities investment over a 10-year period -- is considered then a shortfall of 40 percent would need to be met by the government.

The equity schemes under NPS have a 10-year benchmark return of over 13 percent.

“If UPS is unviable today, it is not going to turn viable tomorrow. Either the contribution rate must increase or the rate of return must increase if you have to stick to that 50 percent of last drawn pay that the UPS guarantees,” said Mukesh Anand, assistant professor, NIPFP.

The analysis assumes that the employee retires at the age of 60 and has a life expectancy of 78 years, as per UN projections and thirty years of service.

It considers salary increases based on the average salary earned per employee in FY94, which was Rs 16,812 per annum to Rs 4,88,867 per annum in FY23.

However, it does not consider the one-month salary payment that the government has guaranteed for every five years of service. It also does not consider the additional burden of paying 18.5 percent as a contribution by the government. It contributed 14 percent of employees’ salary in 2019.

“This is not a reform. Reforms should encompass all workers and pensioners. The government needs to consider a much longer period, which should not be less than 10 years, for consideration of pension. The minimum age of drawing pension also needs to be set higher,” Anand highlighted as reforms that were needed in the system,” Anand noted.

UPS assures a minimum Rs 10,000 per month payout for anyone giving at least 10 years of service.

It also does not take into consideration the impact of inflation-linked pensions.

Experts argue that the government may have to cave into other demands as well, like increasing pensions commensurate with the pay commission, which provides a review of pensions under OPS and salaries for government employees every 10 years.

The next pay commission is due in 2026.

“If the contribution is increasing and people in OPS remain grandfathered, there is no other way but for the trajectory (of pensions) to rise further in the foreseeable future, at least for the next three of four decades,” said Anand.

“The system is showing a complete drift back to the old pension scheme. It is old wine in an old bottle again,” Anand added.

However, experts argue that the returns may not fall by much as time progresses.

“Returns may not fall. Inflation at 5 percent will keep nominal returns up,” said Madan Sabnavis, chief economist, Bank of Baroda.