The Andhra Pradesh government’s recent decision to introduce a guaranteed pension scheme (GPS) appears to be a viable middle path between the current Contributory Pension Scheme (CPS) and the Old Pension Scheme (OPS).

After the scrapping of the OPS in 2004 and the introduction of the New Pension Scheme (NPS), the CPS was brought in by State governments. There have been demands in many states for the reintroduction of OPS. Some states, including Chhattisgarh, Rajasthan, Himachal Pradesh Punjab and Delhi, have even announced a rethink on reverting to OPS.

It is in this context that the YSR CP government in Andhra Pradesh has come out with its new GPS, under which 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) twice a year, which will increase the quantum of pension.

An analysis of the new system brings out its merits over CPS in certain areas. First, a pensioner under CPS is uncertain about his/her annuity. As per 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, thereby lowering the pension annuity payouts.

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It would also be wise to compare the percentage of the basic pay that a new employee would get as pension at retirement down the line and the amount promised under the new GPS.

As per estimates, 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 GPS would ensure 50 per cent of the last drawn pay.

Further, it will guarantee an inflation-adjusted pension of 50 per cent of last drawn basic pay containing an inflation-adjusted DR. Compared to CPS, which will not factor in the 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 Rs 20,000 will get a pension of Rs 10,000 (at 50 per cent of basic pay), which will increase every year at the rate of Rs 500 for a DR of 5 per cent.

Similarly, if an employee retires at 62 with a monthly pension of Rs 50,000 underGPS, he would draw almost Rs 1.20 lakh pension when he attains 82 years,

The projected cost burden for the State government under GPS in 2060 is Rs 1.19 lakh crore, excluding the Rs 14,000 crore from the contributory corpus fund.

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When compared to OPS, GPS has the added contribution component and, further, 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 OPS is not desirable, warn economists. The Reserve Bank of India (RBI), too, has been cautioning over the fragile fiscal situation of state governments.

In the absence of any employer and employee contributions, the current workers and other taxpayers would need to finance OPS for the retired. The PRC is another grey area as the dearness allowance (DA) and fitment would need to be adjusted 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, the pension doubles without compounding and rises by 148 per cent if the DA is readjusted every five years.

However, if the base is revised with 4 per cent DA and fitment of 10 per cent, then 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 estimates.

Thus, while a reversal to OPS is not feasible, a viable middle path is the new GPS. Given the current modalities of the CPS, the new system is a win-win 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 pension system reforms, AP’s new system can provide leads.

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