Centre Mulls Amendment to National Pension System

The Centre may introduce amendments to the National Pension System (NPS) by the year-end. This will ensure employees get about 40-45% of their last-drawn salary as retirement payout. This will be based on the recommendations of a high-level committee appointed to investigate the matter.

Under the NPS, pensioners are allowed to withdraw 60% of the corpus at the time of retirement, which is tax-free, and buy an annuity for the remaining 40%, payments from which remain taxable.

Launched in 2004, the current market-linked pension plan does not offer a guaranteed base amount as was offered by the Old Pension Scheme (OPS). This offered pensioners monthly benefits of 50% of their last drawn salary on retirement. 

The modified NPS will witness a few changes in ‘actuarial calculations’ to offer higher returns. At the same time, it may witness changes in the share of contributions made by the employee and the employer, in this case, the central and state governments.

As per the present NPS, about 87 lakh federal and state government employees contribute nearly 10% of their basic salary, while the government pays 14%. The final payout generally depends on returns on that particular fund, which is mostly invested in government debt investments.

The OPS guarantees a fixed pension of 50% of an employee’s last drawn salary without employees contributing anything. It is for this reason that it is considered to be an ‘unfunded’ retirement scheme.

The modified pension system will continue to be linked to market returns, but the government could work out a methodology to give a minimum of about 40% of an employee’s last drawn salary. 

This means that the government would have to intervene to address the issue of the shortfall in pensions in case the payouts are less than the base amount. At present, employees earn returns anywhere between 36%-38% on average.