New Delhi: Last Saturday, the Central Government announced the Unified Pension Scheme (UPS) for its employees. Now the ball is in the court of the states that they can also implement UPS along with the existing New Pension Scheme (NPS) for their employees.

The Maharashtra government has also taken this decision in its cabinet meeting on Sunday. There are indications that BJP ruled states may gradually start adopting UPS as per the decision of the central government.

In this case, under UPS, the states will not only have to provide additional funds from their revenue collection as per the increased share of the government in the total fund (increased from the current 14 per cent to 18.5 per cent), but will also have to think from now on about the arrangement of necessary funds as per the increased responsibility in future.

Decision to implement UPS or OPS

Congress has not yet revealed its cards in this regard, so what will be the decision of their states is still in the lap of the future. But it is certain that the decision to implement UPS or OPS will prove to have a very heavy impact on the financial treasury of the states.

According to the assessment that is coming out, the effect of implementing UPS will have a huge impact on the financial management of the states after the year 2037-38. The reason is that 20 percent of the state employees who joined service after the year 2004 and took NPS are going to retire by the year 2037. After this, 60 percent of such employees will retire in the next 15 years (between the years 2038-2052).

Under NPS, the pension of these employees is paid from the amount created from the fund created by the contribution of these employees and the government. But if the states implement the UPS scheme of the Center, then the retiring employees will have to be given a fixed amount as pension (50 percent of the average of 12 months of the last working year).

Later, it will also have to bear the combined burden of a lump sum amount in addition to the addition of dearness allowance every six months and gratuity. No estimate has been made yet as to how much financial burden this will put on the states. But the central government says that an additional 4.5 percent contribution (due to increasing it from 14 percent to 18.5 percent) to the fund created under UPS for its 23 lakh employees will cause an additional burden of Rs 6250 crore in the year 2025-26 alone.

Which states will be more affected?

Those states will be more affected where the maximum number of government employees have taken NPS. The five biggest states in this case are Uttar Pradesh, Rajasthan, Madhya Pradesh, Maharashtra and Chhattisgarh. UP and Rajasthan are two such states where the number of employees with NPS is more than 5 lakh each.

Obviously, these states will be more affected by going to UPS. According to an RBI report in September 2023, Uttar Pradesh spends 28 percent of its total revenue, Rajasthan 23 percent, Madhya Pradesh 18 percent, Maharashtra 13 percent and Chhattisgarh 18 percent only under pension payment (old pension scheme). This is being given to those who have retired or had joined the service before 2004.

Now these states will have to bear the burden of increased amount of UPS along with OPS. Tanvi Kanchan, Head (Business and Strategy) of Anand Rathi Share and Stock Brokers says, “In the long term, I think the states will have to prepare from now to raise additional resources.

"I believe states will gradually accept UPS. There will definitely be an impact on the finances of states. States with a larger number of pensioners are likely to face a greater burden. But this is yet to be assessed," says D K Joshi, chief economist at Crisil.