States question new pension plan costs

Written by Surabhi Rastogi | Surabhi | Vikas Dhoot | New Delhi, August 27 | Updated: Aug 28 2008, 06:39am hrs
With the BJP deciding against supporting the government on key economic reform bills, the UPA may prefer not to place bills like the amended Pension Fund Regulatory and Development Authority (PFRDA) Bill in the monsoon session. But theres fresh trouble brewing on another front for the New Pension Scheme (NPS) for civil servants, with BJP-ruled Rajasthan seriously considering opting out of the system set up by the Centre citing its high costs.

In order to cut their soaring pension liabilities, 19 states have aligned their employees pension benefits in line with the Centre defined contribution NPS and are expected to join the architecture put in place by the interim PFRDA. Rajasthan Principal Secretary Subhash Garg told The Financial Express , We have not decided on appointing the fund manager and the CRA (and) we are considering alternatives to joining the Centres infrastructure. The state has over 45,000 employees who will join the new scheme.

While six to eight states, including BJP-ruled Madhya Pradesh and Chhattisgarh, are in at various stages of finalising contracts with the NPS central record-keeping agency (CRA), the National Securities Depository Limited (NSDL), many state governments have been raising the issue of costs with the Centre for a while now and have even sought that the Centre take care of the record keeping agency costs.

The NSDL is ready to roll out its services that would allow employees to keep track of their pension accounts. Finance minister P Chidambaram is slated to officially inaugurate the CRAs tried and tested systems in Mumbai on Friday.

The CRA is charging Rs 350 per employee per annum as account maintenance fees and Rs 10 for every transaction recorded. So the twelve monthly contributions to the pension scheme alongwith the arrear payments made twice in a year to government employees, translate into another Rs 140 per employee, taking the total recurring annual cost for employee accounts to Rs 490. NSDL is also charging a one-time account opening cost of Rs 50 per employee.

Back of the envelope calculations suggest that this will translate into a cost of nearly Rs 15 crore for the Centre in the first year of operations, followed by around Rs 13 crore annually. These calculations assume the number of employees under NPS at the current level of 2.85 lakh, but this number would keep rising going forward.

PFRDA chairman Dhirendra Swarup told FE , These costs would be paid by the government and not the employees. As a proportion of the lifetime accumulations, the CRA fees may not add up to more than 10 basis points. The CRA is the nerve centre of the NPS and there are capital costs for setting up the network, software, et al.

The NPS CRA would set up 24X7 call centres in due course and is expected to give T-PINs to employees in order to access their account status over the phone as is possible for banking customers currently. The CRA would also set up a grievance redressal mechanism to resolve basic record-keeping problems. States may not be accounting for these and other fixed costs appropriately, PFRDA officials stress and hope that states like Rajasthan will come around to their viewpoint when the benefits are visible to employees from other states.

Swarup also points to the fact that fresh negotiations with NSDL after their selection have led to an agreement that NSDL will reduce its account maintenance fees by about 20% , linking it to an increase in number of employees under the NPS. If the number of mployees goes over 10 lakh, NSDL will charge Rs 280. If it crosses 15 lakh, the costs will drop to Rs 210.

Though states would be required to sign separate contracts with the CRA, the volume discounts negotiated with NSDL would include their employees as well. A senior NSDL official points out that its in the interest of the states to sign up with the CRA soon as higher volumes will reduce the CRA costs for them right away.

There are two main issues which are a matter of concern for us. First, we feel the costs given by the CRA for record keeping is very high. Second, we also have doubts about the logistics to be provided by NSDL. We are unsure whether it would be able to implement the scheme in the state down to the tehsil level, Garg said.

Rajasthans concerns may be unique since it is also running the countrys first co-contribution pension scheme for unorganised sector workers in the state since last July and is considering having a common data system for the two pension schemes. Madhya Pradesh launched a similar co-contributory pension scheme this February, but has decided to join the NPS architecture

The agreement with the CRA has been given a final shape. We are also in the process of finalizing pacts with the NPS banker and the NPS trust, said Ashok Das, principal secretary (finance) Madhya Pradesh. 20,864 state employees would be joining the scheme, alongwith non-government employees from organizations like the Human Rights Commission and the power sector.

We did not feel the need to quibble over the costs as the number of our employees under the scheme is too small. We also do not have the kind of experience and architecture in the PF and the pension sector that Rajasthan has, so we had to accept the costing and the Central architecture, Das pointed out.

The lack of an option is driving other states to sign up with the CRA, albeit with a sense of reluctance and helplessness. The cost of maintaining the records has been an issue with most states and it has also been raised many times with the PFRDA. But since there is not much option, we have to accept their pricing structure. But we hope that as the years pass by and more employees join the scheme, the rates will go down. We will also raise this issue later on, next year, said Vasudha Mishra, secretary (finance), Andhra Pradesh.

AP has agreed to join the NPS and is in the process of finalising the agreement with the CRA, for the 35,000-odd employees from the state under the scheme. Other states have hinted that they may prefer going the Rajasthan way and consider setting up their own systems.

Meanwhile, the rest of the NPS architecture is in placethe interim PFRDA has appointed its banker (Bank of India); picked the fund managers and constituted an independent board to monitor their operations under former Rajya Sabha Secretary General Yogendra Narain.

The Rs 1,500-odd crore in contributions since the scheme began in January 1, 2004, have already been transferred to the three fund managersUTI, SBI and LICin April this year. Once the 19 states join in, the kitty is expected to swell to nearly Rs 5,000 crore.

Incidentally, after several hiccups, the Controller General of Accounts, the Centres accountant, has begun to transfer the legacy data to the CRA for the 2.85 lakh central government employees pension contributions under the NPS. An official told FE that the complete migration of these records is likely by the end of September.

In order to get all states on board, the PFRDA has been holding consultations and workshops across the country in the presence of key officials from the NPS fund managers, banker and CRA.

A workshop for the northern states, including Rajasthan, is scheduled to take place in New Delhi on Wednesday. While the seven north-eastern states, West Bengal and Kerala are yet to move the new pension regime, the actual transfer of funds and employees contribution records by the 19 states that are already on board, is unlikely to happen quickly, unless some of their concerns about CRA costs are quelled.