The central government’s newly announced Unified Pension Scheme (UPS) may negatively affect state banks like State Bank of India, Bank of Baroda, Punjab National Bank and regional banks like Federal Bank, argues Nuvama institutional equities.

What Happened: Nuvama in its report said that while the UPS currently applies only to central government employees, the recent history and its channel check suggest it would cover state and regional banks, which are covered by bipartite settlement.

The report pointed out that like previous instances of changes in pension schemes, employee unions of banks will demand a shift to UPS due to higher pre-defined benefits.

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Nuvama expects a worse case impact of a 32% increase in the banks’ contribution to pensions, resulting in a 4%-6% impact on the profit before tax of the banks. But the impact won't be a one time impact as the UPS will lead to higher normalised cost to income for the banks, the research firm added. 

The central government had announced the UPS which will come into effect on April 1, 2025. UPS will provide definite benefits for the employees as opposed to market-linked benefits under the National Pension Scheme (NPS).

Under the UPS, the employers' contribution to pension increased from 14% to 18.5%, which is expected to add ₹6,250 crore of additional finance burden to the central government's coffers, PTI reported. Additionally the government also has to pay ₹800 crore for employees in the NPS scheme who will be retire before March 31, 2025 and opt for the UPS.

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