Archive · 14 Sep 2026
IIM Indore Study Finds NPS Gaps, UPS Shifts Pension Costs
India changed from a pension system that promised government employees half of their final salary to systems based partly on savings.
The National Pension System requires workers and the government to put money into retirement accounts.
People who start government jobs later may not have enough time to build large savings.
The study found that, with a 3% real investment return, only workers joining by age 23 or younger reached the old 50% pension benchmark.
The Unified Pension Scheme promises a pension of up to half of a worker’s final average salary.
However, some workers may contribute more than needed while others may contribute too little, so the government may have to cover the difference.
Working longer until age 62 or 65 can improve the finances of both systems.
The study says India should consider additional reforms to make pensions more secure and fair.
An IIM Indore study says the National Pension System may not provide adequate retirement income to employees who join government service later.
Under the NPS, employees contribute 10% of wages and the government contributes 14% to individual retirement accounts.
At a 3% real investment return, the NPS meets the Old Pension Scheme’s 50% replacement benchmark only for employees joining by age 23.
The Unified Pension Scheme guarantees a pension of up to 50% of final average salary but can shift additional costs to the government.
The study recommends wider reforms, including mandatory annuitisation, a higher Employees’ Provident Fund wage ceiling and targeted state support for informal workers.
- Who
- The study was conducted by Prof Deepak Sethia of IIM Indore and concerns Indian government employees, the government and informal workers.
- What
- The study compared the actuarial and fiscal effects of the Old Pension Scheme, National Pension System and Unified Pension Scheme.
- When
- The National Pension System replaced the Old Pension Scheme in 2004, while the Unified Pension Scheme was introduced in 2025.
- Where
- The study concerns India and was conducted at IIM Indore in Indore, Madhya Pradesh.
- Why
- It examined whether contributory pension systems can provide retirement benefits comparable to the Old Pension Scheme while controlling government pension liabilities.
NPS Fiscal Relief
UPS Retirement Guarantee
Who bears pension risk
NPS Fiscal Relief
The NPS reduces the government’s long-term pension liability but places investment and longevity risks on employees.
UPS Retirement Guarantee
The UPS protects employees with a guaranteed pension, but the government may bear more of the cost when contributions are insufficient.
Treatment of different entry ages
NPS Fiscal Relief
The NPS can leave late entrants with retirement income deficits because they have less time to accumulate and compound savings.
UPS Retirement Guarantee
The UPS addresses the shortfall for late entrants through its 50% pension guarantee, with surpluses from some earlier entrants transferred to a government-managed pooled fund.
Effect of delayed retirement
NPS Fiscal Relief
Under the NPS, higher returns and later retirement directly increase employees’ replacement rates.
UPS Retirement Guarantee
Under the UPS, higher returns and later retirement mainly reduce the government’s fiscal exposure by funding more of the guaranteed pension through contributions.
- NPS contributions
- Employees contribute 10% of wages and the government contributes 14% to individual retirement accounts.
- UPS contribution
- The Unified Pension Scheme requires a statutory combined contribution of 28.5% of wages.
- Pension guarantee
- The UPS guarantees a pension capped at 50% of an employee’s final average salary.
- NPS finding
- At a 3% real investment return, the NPS meets or exceeds the 50% replacement benchmark only for employees joining by age 23.
- Investment assumptions
- The study modeled real investment returns ranging from 2% to 4% and projected real wage growth of 3%.
- Retirement age
- Raising retirement to age 62 or 65 improves the financial viability of both systems.
- Proposed reforms
- The study recommends a higher Employees’ Provident Fund wage ceiling of Rs 15,000, mandatory annuitisation and targeted means-tested state contributions.