The central and the state government employees and their brethren and sisters working in their autonomous institutions have been unhappy with the New Pension Scheme of the National Pension System (NPS). They want the Old Pension Scheme (OPS) that has been in vogue since Independence to be restored.
Chhattisgarh, Himachal Pradesh, Jharkhand and Rajasthan have already announced the implementation of OPS. Punjab also seems committed and is working out the financial implications. In the meantime, Andhra Pradesh has come up with a modified NPS to ensure that retirees get a guaranteed pension. The central government seems to be in a dilemma about the restoration of the OPS but there have been hints that it too is contemplating providing a certain minimum guaranteed pension to its employees. A Parliamentary panel is already ceased with the matter.
The demand for the revival and restoration of OPS raises some pertinent questions. How do these two pension schemes differ? How do they impinge upon employee welfare? Why didn’t the employees protest as vehemently when the old pension was being shelved about two decades ago? Why did every state move to NPS with little regard for the interests of their employees? How come they are now quite agreeable to revert to OPS? Is it populism, political compulsions or something more than meets the eye? What would be the implications of returning back to OPS on the fiscal management of the centre and states? And finally, could there be a way to strike a balance between fiscal prudence and employee welfare?
The General Provident Fund cum Pension plan has been the favourite of government employees. The provident fund part of this plan comprised contributions by the employees and interest earned on the accumulated funds. Employees were required to contribute 6.5% of their pay or any sum up to their total emoluments. The contribution has now been limited to a maximum of Rs. 5 Lakhs a year.
The pension part of this plan was borne solely by the government. Popularly known as the Old Pension Scheme (OPS), it provided for a predefined monthly pension equivalent to half of the last pay drawn by the employees. Further, the amount was increased to cover inflation and enhanced periodically as per the recommendations of the pay commissions.
Unfunded and unprovided for as the governments created no corpus for meeting the pension liabilities in future. Pay-As-You-Go (PAYG) type, the pension was paid out of their current revenues. Being a perennial drain on current resources, it was declared fiscally imprudent and was replaced by NPS in 2003 and made mandatory for all employees who joined the job on or after 1st January 2004. Even those who were already in governments job were deprived of OPS if they moved to such government institutions, which came into existence after this cut-off date.
NPS is a funded plan with a predefined contribution by employers and employees. Initially, they both were required to contribute 10% of the employee’s salary each month throughout their service. Recently, the central government has enhanced its contribution to 14% of an employee’s salary.
Employees are promised to get a portion of the maturity amount on their retirement and the rest to remain invested in a pension fund for payment of monthly pension to them. Unlike OPS which promised a guaranteed payment, the NPS proceeds and pension depend on market return which in turn is guided by a variety of factors including the acumen of the pension fund managers.
Why did NPS go unopposed when it was introduced, even though it was common knowledge that the scheme was subject to market risk and could have variable returns? Simply because the market was then doing quite well and offering a high rate of return on investments. A quick calculation then indicated that NPS would provide higher pensions to employees than OPS. They least realised that markets go up and come down and are susceptible to various kinds of manipulation.
Few challenged NPS because it did not affect them. It applied to those who would join in future. They were not on the scene when the scheme was announced and had no option but to sign for NPS when they joined. Gradually, their numbers, as of November 2022, have grown to 82.7 lakh comprising 23.43 lakh central government and 59.29 lakh state government employees. The numbers are poised to grow further as new appointments take place. In the meantime, employees experienced that their colleagues with NPS received a paltry sum of money and pensions on their retirement.
OPS, being an unfunded pension plan, suffers on the counts of economic expediency and financial feasibility. A welfare state can ill afford to leave its employees, who have given their entire productive lives to their jobs, in the lurch. Once it is proven that the NPS does not offer the kind of social security that OPS used to, it becomes incumbent upon the government to take necessary corrective and remedial measures. Going by the present rate of return, even the enhanced contribution of 14% by the government to the NPS is likely to provide no more pension to employees than about 20% of their last pay drawn.
No wonder the demand for OPS has been gaining traction and getting support. Yet, the pension liability under OPS may seriously upset the fiscal cart. Quick estimates suggest that the implementation of OPS in just three states, Chhattisgarh, Jharkhand and Rajasthan, would entail a liability of Rs 3 trillion. A study by the State Bank of India (SBI) indicates that the total liabilities would cross Rs 31.04 trillion, if OPS is implemented nationwide.
Looked a little differently, going back to OPS might help the governments in mitigating their fiscal distress in the immediate terms, as it would free Rs 5.87 trillion being the Assets Under Management (AUM) due to contributions created on account of the central (Rs 2.18 trillion) and the state government (Rs 3.69 trillion) employees. This short-term gain may, however, prove catastrophic in the long term and may not be advisable.
But that must not mean that the central state government should jeopardise the welfare and social security of their employees. There could, in fact, be more than one possibility of striking a balance between employee welfare and fiscal prudence. The government could predefine and guarantee the NPS benefit at par with OPS and agree to foot the difference between the return generated by AUM and the guaranteed sum. This would be akin to the viability gap funding which governments have been using in many Public Private Partnership (PPP) projects.
No denying that there would still be a drain on current resources due to the difference between what is available for pension and what is required to meet the guaranteed payments. To overcome this, we propose a Modified New Pension Scheme (MNPS). In this scheme, the employees could be allowed to contribute as much a proportion of their salary to their provident fund as may be permissible to GPF subscribers. This will bring them to par with the OPS as far as PF is concerned.
The pensionary benefits could also be benchmarked with OPS. In order to ensure that adequate funds are generated to meet the guaranteed pension liabilities, the government could model and modulate its annuity contribution. A quick calculation indicates that keeping in view the market returns and forecast, a monthly contribution of about 24% of the employees’ salaries throughout their service would generate the required resources to meet the pension obligation. India has no dearth of actuaries who would be able to provide a more precise estimate.
Furqan Qamar, a former adviser for education in the Planning Commission, is a professor of management at Jamia Millia Islamia.
Taufeeque Ahmad Siddiqui is a faculty in the finance area in the Department of Management Studies of Jamia Millia Islamia. Views are personal.