One-time UPS allocation won't have big impact on fiscal math

Assured pensions under the newly introduced Unified Pension Scheme (UPS) may require a significant one-time allocation in FY25, but that may not significantly impact the government's fiscal math in the years ahead, said economists.

The major budget impact of UPS will come from the increased monthly contribution by the government - 18.5% of the basic and dearness allowance (DA), compared with 14% at present.

"The union government's contribution is likely to increase by 32.1% from the NPS (National Pension System) and could be around ₹40,000-45,000 crore in FY25," said DK Pant, chief economist at India Ratings.

This increase is due to the government's commitment to paying arrears to employees who retired earlier.

"Pension liabilities in the union budget may increase by 20% from the FY25 budgeted amount of ₹2,43,296 crore. Going forward annual increase is likely to reduce to ₹10,000-15,000 crore," he added.

According to Aditi Nayar, chief economist at ICRA, the UPS will reduce the uncertainty for employees, but the fact that the government will provide an assured pension will add to the government's committed expenditures in the future.

"This will have to be built into the fiscal consolidation roadmap going ahead," she said.

The UPS is much like the Old Pension Scheme (OPS) in terms of benefits. However, in the case of OPS the liabilities were unfunded and paid out of the budget. In the case of UPS, two funds will be created to meet the future payouts.

The government's liability could, however, increase if the returns from the pension corpus are not sufficient to provide the minimum assured pension and the dearness relief.

The union cabinet gave its nod to the UPS Saturday, proposing an assured pension of 50% of the average basic salary drawn over the 12 months preceding superannuation for those completing at least 25 years of service.

The new scheme will offer a minimum pension of ₹10,000 a month and will be inflation-adjusted.

Pant from India Ratings, however, argued that there will be "nil or insignificant impact" on the government exchequer on account of the corpus increase required to meet the minimum 50% pension guaranteed under UPS.