India Overhauls Government Employee Pension System with Fixed Payout Structure

On Saturday, the Indian government approved a new pension scheme that will guarantee federal employees 50% of their base salary as a pension, moving away from the current system where payouts are tied to market returns. This shift comes as the Modi administration reassesses the pension system introduced after a major fiscal reform in 2004, following a trend where some states have reverted to the older system that fully funds guaranteed pensions.

The Unified Pension Scheme (UPS) for India's over two million federal employees will take effect from April 1, 2025, as announced by Cabinet Minister Ashwini Vaishnaw. Under this scheme, government employees who complete at least 25 years of service will receive a pension equal to 50% of their base salary from the last 12 months before retirement. Currently, the National Pension Scheme requires employees to contribute 10% of their base salary, with the government contributing 14%, and the final payout depends on market returns on this investment, largely in federal debt.

Trade unions and opposition parties have long pushed for a guaranteed minimum pension, making it a significant issue in the recent general elections. The financial impact of the UPS on the government’s budget is projected to be around 62.5 billion rupees (£745 million) for the fiscal year 2024-25, though costs will fluctuate annually based on the number of retirees.

Given this substantial financial commitment, can the government sustainably support this new scheme without compromising other critical areas of public spending?