Rising pension outgo worries RBI

Written by fe Bureau | New Delhi | Updated: Jun 29 2013, 05:52am hrs
The Reserve Bank of India (RBI) has flagged concerns over lack of proper assessment of the pension liability of the government on defined benefit schemes, which could result in a major source of fiscal stress in coming years amid rising life expectancy.

The outgo for Central government employees alone is estimated to rise 10.8% to R70,726 crore in 2013-14 as the cohort of recruits between 1970s and 1980s retire, RBIs financial stability report said. In the case of several defined benefit schemes, currently under implementation and newly announced (mostly in the government sector), lack of liability computation especially in a world of rising life expectancy can be a potential source of fiscal stress in years when there are large payouts, the report said.

The pension outgo for 2013-14 works out to 4.25% of the total expenditure of the government and 0.6% of GDP during 2013-14, rising from R18,300 crore or 3.7% of total spending in 2004-05. Pension along with interest payments and some other non-plan expenditures cannot be reduced even though the government is trying to rein in its fiscal deficit to 4.8% of GDP in 2013-14 from 4.9% last year.

Though RBI does not make any mention of pension liabilities of other bodies, the governments liabilities may rise if it has to bail out state-run EPFO in case the fund fails to bridge the deficit of over R50,000 crore on its Employees Pension Scheme.

The rising pension liability had prompted government to switch from the defined benefit scheme to defined contribution scheme for new recruits through the launch of new pension system (NPS) in 2004. However, the liabilities for older staff remains.

While mounting liabilities are reducing the returns from such schemes, the defined contribution-based NPS has been able to generate hefty returns ranging from 8.4% to 14.2% in 2012-13. Between March 2010 and March 2013, the subscriber base of NPS grew 522.9%, and the corpus rose 538%, indicating a steep growth pattern in the subscriber base and corpus during the short time, RBI report said.

NPS subscriber base rose to 48.58 lakh in March 2013 from just 7.8 lakh in March 2010 while the corpus increased to R29,852 crore from R8,585 crore.