NPS May Fall Short For Late Entrants, UPS Shifts Pension Burden To Government: IIM Indore Study

Indore (Madhya Pradesh): India’s pension reforms may have strengthened the government’s fiscal position, but they have also created a fresh dilemma over who ultimately bears the cost of guaranteeing an adequate retirement income, a new study by IIM Indore has found.

The study by Prof Deepak Sethia, published in the Review of Income and Wealth, examined the actuarial and fiscal implications of the country’s shift from the traditional Old Pension Scheme (OPS) to contributory pension systems and found significant differences in how the National Pension System (NPS) and the Unified Pension Scheme (UPS) distribute pension risks and costs.

Under the OPS, government employees were assured an inflation-indexed pension equal to 50% of their final salary.

The Centre replaced it with the NPS in 2004, under which employees contribute 10% of wages and the government 14% towards individual retirement accounts.

While the NPS reduced the government’s long-term pension liability, it shifted investment and longevity risks to employees.

The UPS, introduced in 2025, seeks to combine the two approaches. It requires a statutory combined contribution of 28.5% of wages while guaranteeing a pension capped at 50% of an employee’s final average salary.

To test whether the contributory systems can deliver retirement benefits comparable to the OPS, Sethia used a cohort-based actuarial framework incorporating the Indian Individual Annuitant’s Mortality Table, 3% projected real wage growth and real investment returns ranging from 2% to 4%.

The findings show that the NPS does not provide the same level of retirement security to employees entering service at different ages.

At a retirement age of 60 and a 3% real investment yield, the NPS meets or exceeds the 50% replacement-rate benchmark only for employees joining government service at age 23 or younger.

Those entering service later face significant retirement income deficits because they have less time to accumulate and compound their pension savings.

The UPS addresses this shortfall by guaranteeing the 50% replacement rate. However, the study flags an actuarial fairness issue arising from the scheme’s uniform contribution rate and pension guarantee.

Under a 4% real investment yield, employees entering service at age 26 or younger can accumulate assets that exceed the actuarial cost of their capped pension.

Their accumulated surplus is transferred to a government-managed pooled fund, where it can be used to subsidise late-career entrants whose contributions are insufficient to finance their guaranteed pension.

The study also found that raising the retirement age to 62 or 65 improves the financial viability of both systems by allowing contributions to compound for longer while reducing the pension payout period. But the gains accrue differently.

Under the NPS, higher returns and delayed retirement directly raise employees’ replacement rates. Under the UPS, they primarily reduce the government’s fiscal exposure by allowing a greater portion of the guaranteed pension to be funded from accumulated contributions.

Drawing lessons from pension systems in Chile, China and Brazil, the study calls for wider reforms, including raising the statutory Employees’ Provident Fund wage ceiling to Rs 15,000, mandating annuitisation and providing targeted, means-tested state contributions to protect informal workers.