Pension outgo of states to be double that of Centre in FY25

As per the Budget estimates of the states, the pension outgo will be 1.7 per cent of the GDP. The total outgo of Rs 5.7 trillion by the states will more than double that of the Centre at Rs 2.4 trillion. The pension outgo would be 0.7 per cent of the GDP, as per Budget estimates. The funding of the pension liabilities by state governments is relatively more onerous than the burden on the Centre, finds ICRA.

Following apprehensions expressed by some Government employees over the outcome of the New Pension Scheme (NPS) compared to the more certain pension promised under the Old Pension Scheme (OPS), four states had reverted to the OPS from NPS in recent years.

Andhra Pradesh had implemented a hybrid pension model in 2023. This hybrid model, which includes contributions by the employees, assures a formula-linked guaranteed amount of pension to the state government employees, similar to the mechanism of determining pension under the OPS. Moreover, the AP pension model permits the monthly pension to exceed the guaranteed amount set by the state government. This feature is a positive for the pensioners and at the same time restricts the state’s liability to the monthly contribution and the shortfall.

The Central Cabinet has approved the Unified Pension Scheme (UPS), combining the features of the OPS and the NPS, although many operational details are awaited.

From the fiscal standpoint, the NPS remains the most prudent and sustainable pension system for the state/union governments as it limits their liability to the contribution to the designated fund.

However, employees would prefer the assurance offered by the UPS. Several operational details are awaited, which would aid in calculating the cost to the state governments of switching to the UPS. Once such details are available and a fiscal estimation is possible, ICRA expects 18 states currently following the NPS to consider switching to the UPS.

This will exclude six states that have either reverted or planning to revert to OPS, as well as AP and Maharashtra.