What is the Andhra pension system?

The Andhra Pradesh Guaranteed Pension System Bill, 2023, passed by the state assembly on 27 September, is a mix of the Old Pension Scheme (OPS) and the New Pension Scheme (NPS) introduced in 2004. It is a contributory scheme that guarantees government employees a monthly pension of 50% of their last-drawn salary and includes dearness allowance relief. GPS was introduced by Andhra Pradesh to overcome opposition to NPS which many saw as inferior to the earlier scheme. A return to OPS, it felt, was fiscally unsustainable as it would have pushed the state’s fiscal deficit to 8% by 2050.

Why has this scheme generated interest?

After a struggle for more than a decade, India finally executed pension reforms that introduced NPS in 2004. Over time, people have come to feel that those who are receiving pension as part of the old scheme are better off than those under NPS. Political parties fed on this discontent and promised a return to the old scheme if elected to power. In fact, Rajasthan and Chhattisgarh have reverted to the old scheme while Himachal Pradesh, Jharkhand and Punjab are in the process of doing so. Andhra Pradesh’s pension scheme offers a middle path and prevents a return to the regressive old scheme.

How does the Andhra system work?

It makes it more attractive without adding much to the financial burden. The contributory scheme guarantees a pension of 50% of the last drawn salary. Any short- fall in the returns from NPS is funded by the government. Today, NPS pensions are around 40% of the employee’s last drawn salary. So, the government has to fund just the balance.

View Full Image

Why are people against NPS?

Unlike the old scheme, NPS is a contributory scheme where both employee and employer pay into a corpus that is invested to give returns. After retirement, the employee gets a monthly pension but, unlike in OPS, the amount is not guaranteed as it depends on the returns from the corpus. That, in turn, depends on market conditions. It also does not factor in inflation or pay commission recommendations. A fear of a further reduction triggered by adverse market conditions has fuelled opposition to NPS.

Why not just shift to the old scheme?

The pension was financed through the budget under OPS. The compound annual growth rate of pension liabilities for a 12-year period ended 2021-22 for all states was 34%. As of 2020-21, the pension outgo was 29.7% of states’ revenues. It became unsustainable as more people retired and lived longer. A shift to OPS will mean governments will not only have little funds to meet the development needs but struggle to finance their operations without hefty taxation. This will worsen India’s ease of doing business and make it uncompetitive.