AP’s new pension scheme is attractive and viable

The Andhra Pradesh Government’s recent decision to introduce a Guaranteed Pension Scheme (GPS) appears to be a viable middle path between the present Contributory Pension Scheme (CPS) and the Old Pension Scheme (OPS).

After the scrapping of the OPS in 2004 and introduction of New Pension Scheme (NPS), the present CPS has been brought in by State Governments. Under these circumstances, there have been demands in many States for the introduction of the OPS. This trend has got a boost with some States including Chhattisgarh, Rajasthan, Himachal Pradesh, Punjab and Delhi considering reversion to the OPS.

It is in this context that the YSRCP Government in Andhra Pradesh has come out with its new GPS. Andhra Pradesh is the first State to introduce this system. As per the new scheme, all State government employees will be eligible for a guaranteed monthly pension of 50 per cent of their last drawn basic salary. There will be an addition of dearness relief (DR) two times a year, which will increase the quantum of pension.

An analysis of the modalities of the new systems points to its merits over CPS in certain areas. Firstly, a pensioner under CPS is uncertain about his/her annuity. As per the calculation, the pension is lower than the 50 per cent of the last drawn salary. It is market-linked and hence one has to factor in market vagaries. In a regime of declining interest rates, there could be a dip in the corpus growth of pension contributions and, thereby, lower the pension annuity payouts.

It would also be wise to compare the percentage of the basic pay a new employee gets as pension at his retirement down the line and the amount he/or she gets under new GPS. As per the estimates worked out there is no guarantee that a new employee would get even 20 per cent of his/her basic pay as pension at retirement under CPS while under GPS, 50 per cent of the last drawn pay is ensured.

Further, it will guarantee an inflation-adjusted pension of 50 per cent of last drawn basic pay containing an inflation-adjusted Dearness Relief (DR). Compared to CPS, which will not factor inflationary impact, GPS will protect the pensioner’s salary at the date of retirement in real terms. For example, a pensioner retiring with a basic pay of ₹20,000 will get a pension of ₹10,000 (at 50 per cent of basic pay) that will increase every year at the rate of ₹500 for a DR of 5 per cent.

Similarly, if an employee retires at 62 with a monthly pension of ₹50,000 in the GPS, he would draw almost ₹1.20 lakh pension when he attains 82 years.

The projected cost burden for the State Government under GPS in 2060 is ₹1.19-lakh crore excluding the ₹14,000 crore from the contributory corpus fund. In relation to OPS, GPS has the contribution component which was absent in the old pension, and also will not have any relation to the Pay Revision Commission (PRC).

OPS: Fiscally unwise

While GPS appears to be better than CPS, a complete reversal to the Old Pension Scheme is not desirable, warn economists. The Reserve Bank of India has also been cautioning of the fragile fiscal situation of State governments of late.

In the absence of any employer and employee contributions, the present workers and other taxpayers would need to finance the OPS for the retired. The PRC is another grey area as there is the DA and fitment getting rebased to create a new base for pension calculation with every PRC.

For example, consider a 25-year post-retirement life. Assuming a DA of 4 per cent, without compounding the pension doubles; and rises by 148 per cent if DA is rebased every five years. However, if the base is revised with 4 per cent DA and fitment of 10 per cent, the pension rises by 243 per cent and with 5 per cent and 15 per cent, the rise will be 411 per cent, as per the estimates.

Cost to Govt

The GPS is surely going to be a costly affair to the Government despite a contribution of 10 per cent of the basic from the employees. As per the Government estimate, the government gap financing after excluding employee contribution would cross ₹1-lakh crore by 2070. Apparently, this has to be borne from the State finances. The intention to fulfil the pre-election mandate of the ruling party in the State and an attempt to find a better deal than CPS appears to be the intention of the Government in introducing the new scheme.

Thus, while a reversal to OPS is not feasible, a viable middle path is the new GPS. Given the current modalities of CPS, the new system is a win-win proposition for all stakeholders. The feedback from a majority of employee associations is positive and there is a view that it’s almost like OPS.

As many other States are currently examining the pension system reforms, AP’s new system can attract attention and provide leads.

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