Unified Pension Scheme: Why UPS could be negative for PSU banks

Last week, the central government announced a new pension scheme for government employees, called the Unified Pension Scheme (UPS), which will come into effect from April 1, 2025. The scheme will provide benefits to government employees, who joined after January 1, 2004, against market-linked returns under the New Pension System (NPS). Under the UPS, employers’ contribution increases by 32%, from 14% to 18.5%.

The UPS is estimated to cost the central government ₹6,250 crore for 2.3 million employees and an additional ₹800 crore to clear arrears, amounting to ₹7,050 crore, as per media report. If the states take this route as well, a total of 9 million employees could benefit, who are currently under the NPS. Maharashtra has already implemented this pension scheme, while all other BJP-ruled states are expected to adopt the UPS soon.

According to Nuvama Institutional Equities, it is tough to quantify the actual impact till the scheme is notified. However the “worst-case” impact would be a surge in banks’ contribution of 32%, which is negative for state-owned banks and Federal Bank. This may result in impact of 4-6% on profit before tax (PBT) of state-owned banks. Contribution to employee benefits, including pension, accounts for 13–15% of banks’ PBT.

The agency believes that it would be not just a one-time top-up impact. “The UPS will also lead to higher normalised cost-to-income for affected banks since it is based on defined benefits. When rates fall, the banks will need a higher top-up.” 

“While the UPS is applicable to only central government employees for now, our channel checks, not to mention history, suggest that it would eventually cover state and regional banks, which are covered by bipartite settlement,” the report notes.

“Much like what has happened in past, even employee unions of banks that are under the bipartite settlement shall demand a shift to UPS given higher pre-defined benefits,” it adds.

The report highlights that public sector banks and regional lenders such as Federal Bank are covered by the bipartite wage agreement; other private banks are not. “Mathematical calculation suggests an increase of 32% (difference between 14% and 18.5%) for banks’ contribution, but there has been never been a like-to-like match for bank and central government employees, with bank employees getting marginally lower benefits.”

Employees benefit under UPS

The UPS guarantees a pension equivalent to 50% of the average basic pay drawn over the last 12 months before retirement. Employees with 25 years of service shall receive this full amount while those with at least 10 years of service will get a proportionate pension, with a minimum guaranteed amount of ₹10,000.

As of now, there are two pension schemes: Old Pension Scheme (OPS), which is applicable to employees that joined before 2004; and National Pension System (NPS), which is applicable to employees that joined post-2004. The OPS offers defined benefits, whereas the NPS offers market-linked returns. Now the government has approved the UPS, which will give employees benefits similar to the OPS and much better than the NPS. 

How OPS, NPS and UPS differ

• A central government employee will have to contribute 10% under the UPS. This was not the case under the OPS as the Centre bore the entire amount, but this 10% was introduced under the NPS.

• There will be an assured pension amount under the UPS like under the OPS. Also, the pension amount will increase as per inflation index like under the OPS. The pension amount is not dependent on market vagaries as it is in case of the NPS.

• Government contribution under the NPS was 14%. Now, under the UPS, it has been hiked to 18.5%. So, the government is taking on the extra burden.

• The main difference in the UPS is that it is both a funded and a contributory scheme, plus offers an assurance on pension amount.

• The move will benefit 2.3 million central government employees. If the states take this route as well, a total of 9 millionemployees could benefit, who are currently under the NPS. All BJP-led states would likely adopt the UPS soon.

• Employees have been offered the option to switch to UPS by April 1, 2025, like those who were under the NPS since 2004. Arrears will be paid to them as well.

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