AP GPS AP Guaranteed Pension Scheme Proposals PPT on Proposal for AP Guaranteed Pension Scheme AP GPS
Note on the AP GPS (25.04.2022)
The government recognises that the employees have a justifiable concern with CPS. Therefore, the idea is to present a fiscally sustainable proposal for pension reforms that address this concern. The result is the Andhra Pradesh Guaranteed Pension Scheme (AP GPS).
The analysis done to arrive at the AP GPS proposal is based on a rigorous statistical model of pension pay-out and corpus returns which used actuarial calculations based on existing CPS employees profile. Many leading experts on pension reform from across the country have been consulted in arriving at the AP GPS proposal.
Before we examine the reform proposal, it’s important to keep in mind the state’s current employee numbers and expenditures on salaries and pensions. Already the expenditure on salaries and pensions form a disproportionately high share of state own revenues. Further, the dependency ratio, the number of working employees per pensioner, is an already unsustainable number at 1.55.
It’s also important to understand the challenges associated with any such reform. For a start, for several years now it has become a consensus globally that OPS-like defined benefit schemes are fundamentally unsustainable. In recognition of this reality, NPS-like defined contribution schemes have become the global norm. All private sector and most public sector pension plans globally for new employees are of the defined contribution type. Accordingly, in India too almost all states have moved to CPS.
There are two problems with any pension reform effort — demographics and low interest rates.
The most important reason for a shift to OPS becoming unsustainable is demographics. As people live longer, the share of pensioners, by both numbers and expenditure, in the total personnel expenditure of the government rises sharply. This imposes a prohibitive burden on governments in any pay as you go pension system (like OPS).
This problem on the expenditure side is compounded on the revenues side. The downward trend in interest rates has been a global phenomenon for the last fifty years and more. As interest rates trend downwards, the growth rates of GDP and state revenues too decline, This also makes even a contributory defined benefit pension scheme difficult to sustain since it lowers the returns on any contributory corpus.
This analysis, which draws from research by reputed experts and empirical evidence of trends, show that an effective interest rate of 4% would be a realistic assumption for the long period from 2022 to 2100.
In the circumstances, a restoration of OPS to the existing CPS employees is not sustainable. In fact, the numbers in the model reveal that restoration of OPS in any form is completely unsustainable
If CPS is inadequate and OPS is not possible, what’s the alternative?
Ifs in this context that the proposal for the Andhra Pradesh Guaranteed Pension Scheme (AP GPS) is put forward.
It seeks to replace the uncertainty of not knowing what one would receive as pension from a fully market-linked CPS with a AP GPS where the pension is known during the employee’s service period, is guaranteed, and is fully funded from contributions. The AP GPS would offer a guaranteed fixed pension at 33% of basic pay drawn at the time of retirement, compared to the current fluctuating CPS of 20%, thereby leading to an atleast 63% increase in the pension annuity.
While the AP GPS too will seriously strain the budget, given the genuine concerns of the employees about the CPS, it is the best that can be offered without seriously damaging the economic prospects of the future generations of the state’s population.
The AP Government is replacing the uncertainty of not knowing what one would receive as pension from a fully market-based CPS with an AP GPS (Defined Benefit pension scheme)
AP GPS Scheme Features
Current estimated value of 20% of last basic pay in CPS – Guaranteed Fixed Pension @ 33% of Basic Pay
