Eighth Pay Commission: Higher Fitment Factor May Increase Centre's NPS and UPS Burden

Government Faces Substantial Expenditure Burden with 8th Central Pay Commission Review

The 8th Central Pay Commission is set to review pay and pension structures for 50.14 lakh central government employees and around 69 lakh pensioners. However, questions are being raised over whether the government can accommodate the steep fitment factors sought by employee organisations. Employee unions have demanded fitment factors ranging from 3 to over 5, but pension experts argue that such demands may not align with fiscal realities, especially given the government's growing obligations under the contributory pension schemes.

According to pension expert Manjeet Singh Patel, President of the All India NPS Employees Federation, the Central government's biggest challenge is not merely funding higher salaries but also meeting the associated increase in pension-related contributions. Even if the government were to provide a fitment factor close to 2, the increase in overall salary outgo could still be substantial.

For instance, considering an employee with a basic pay of Rs 100 who currently receives Rs 160 per month, after including 60 percent dearness allowance. When the basic pay is doubled to Rs 200 through a revised fitment factor, the employee's pay would rise by Rs 40 over the existing Rs 160, implying an effective increase of about 25 percent. This suggests that even a fitment factor that is significantly lower than the figures demanded by employee associations could result in a substantial increase in government expenditure.

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The estimated burden of the 8th Central Pay Commission's recommendations is over Rs 2 lakh crore, according to Singh. The 7th CPC raised the minimum basic salary pay of employees to Rs 18,000 per month, and the government currently contributes roughly Rs 3,000 crore every month to NPS accounts.

The Central government also contributes to retirement schemes for millions of employees, which increases the challenge for the 8th CPC. Singh estimates that among serving central government employees, around 32-33 lakh are covered under the NPS, wherein they contribute 10 percent of their basic pay and DA, while the government contributes 14 percent. For UPS employees, the government provides 18.5 percent contribution, which adds Rs 6,660 extra to the Rs 40,000 basic pay.

The impact of the 8th CPC could differ significantly depending on whether an employee remains under NPS or opts for UPS. Singh illustrates this through a hypothetical example of an employee retiring after 20 years of employment, earning a current basic salary of Rs 80,000, DA of 60 percent, and a retirement corpus of Rs 50 lakh.

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Under the NPS, a retiree can withdraw up to 60 percent of the accumulated corpus, which would be Rs 30 lakh in this example. The remaining Rs 20 lakh must be used to purchase an annuity, and the monthly pension received from the annuity depends on prevailing annuity rates.

In contrast, under UPS, the employee would be eligible for a one-time lump-sum benefit calculated as one-tenth of the last drawn emoluments (basic pay + DA) for every completed six-month period of service. In this example, the lump-sum payout would work out to Rs 5.12 lakh, resulting in a pension of Rs 51,200 per month.

Singh suggests that the Central government should offer employees the option to choose between NPS and UPS at the time of their retirement or voluntary retirement. This would allow employees to carefully assess their financial position, health condition, life expectancy, and family circumstances before making an informed choice between the two schemes.