PensionsSeptember 23, 2024

India Creates Hybrid Government Employee Pension Fund

The Unified Pension Scheme will be a combination of a defined benefit and defined contribution pension plan.

Reported by Michael Katz

India has created a new pension plan for 2.3 million federal government employees that is a hybrid of a defined benefit and defined contribution pension plan. The Unified Pension Scheme, scheduled to launch on April 1, 2025, is intended to “enhance” the National Pension Scheme and could extend to another 9 million state government workers if states elect to join, according to the administration of Prime Minister Narendra Modi.

According to Modi’s government, the plan will ensure a pension of half of the average basic pay drawn over the last 12 months prior to retirement for employees with a minimum of 25 years of service. The pension is proportionate for those who retire after 10 to 25 years of service.

According to the Modi administration, the plan guarantees a minimum pension of 10,000 rupees ($119) per month at retirement for employees who have worked for the government for at least 10 years. The plan also includes inflation indexation and a lump-sum payment at retirement.

Analysts at financial services firm Nomura Holdings Inc. wrote in a research summary that what makes the new pension plan a combination of DB and DC plans is that it “guarantees a defined amount of inflation-indexed pension, but supported by increased contributions by the government and continued contributions by the employee.”

Nomura said the fiscal impact on the Indian government in the near term is likely to be minimal but added that as more states adopt the UPS, the government will have to deal with an additional fiscal burden in the medium term.

“The rollout seems aimed at addressing the disenchantment against the NPS scheme at a time when key states are scheduled to go to the polls in Q4,” Nomura analysts wrote.