By Amit Cowshish

Worried that the demand for restoration of the Old Pension Scheme (OPS) is nothing less than a steadily gathering storm, the ministry of finance set up a committee last week in a belated attempt to improve the current pension scheme and to diffuse the impending crisis it presents.

The committee, headed by the finance secretary, has three other members: Secretary Department of Personnel and Training, Special Secretary Department of Expenditure, and the Chairman of the Pension Fund Regulatory and Development Authority (PFRDA). No time limit has, however, been laid down for the committee to submit its recommendations.

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The OPS was replaced by the National Pension Scheme (NPS) on January 1, 2004, by the Vajpayee government, with a view to containing the ballooning pension pay-outs to the civilian employees of the Central Government. Subsequently, all states, except West Bengal and Tamil Nadu adopted the NPS for all their retiring employees. The armed forces were left untouched.

At the time there was hardly any opposition to the NPS, but nearly two decades later the demand to undo the decision is fast rising to a crescendo, gathering alongside a grim political storm. Five Opposition-ruled states -Himachal Pradesh, Punjab, Rajasthan, Chhattisgarh, and Jharkhand- have already reverted to the OPS. Given its likely impact on electoral politics, it is highly likely that the Central and other State governments which have persisted with the NPS, too will succumb, sooner or later.

The OPS was possibly the most generous pension scheme for a large section of employees in the organised sector. It guaranteed half the emoluments last drawn by an employee before retirement as pension, with inflation-related dearness relief every six months. It also offered a decennial enhancement of the basic pension based on the recommendations of Central Pay Commissions.

In contrast, the NPS which replaced the OPS is far less lucrative. Under this scheme, government employees contribute 10% of their salary and the government makes a matching contribution, which was later enhanced to 14% from April 1, 2019.

These combined contributions are pooled into a pension fund, managed by PFRDA as per the approved investment guidelines, which require the funds to be invested largely in diversified portfolios comprising government bonds, treasury bills, corporate debentures, and shares. Over time these contributions grow, depending on the returns earned on the investments.

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On retirement, a minimum of 40% of the NPS’s corpus is compulsorily utilised in buying a life-long annuity from a life insurance company, while the balance amount is paid out as lump sum to the retiring employee. However, unlike the guaranteed benefits under the OPS, there is an element of uncertainty in the NPS, as the returns are linked to the performance of financial markets. Hence, there is little wonder that retiring employees are rooting for the OPS, a move which has immense potential for fiscal disaster.

There has been much debate over the long-term fiscal unsustainability of the OPS, both for the centre and the states, and its adverse impact on developmental expenditure. Former Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia forthrightly declared earlier this year that the move by some states to revert to OPS was absurd and ‘a recipe for financial bankruptcy’ which would implode a decade later.

And, with five states having already thrown caution to the wind in restoring OPS, it seems that it is merely a matter of time before the centre too felt obligated to do something similar. It is doubtful if the aforementioned four-member committee can possibly suggest a viable and acceptable solution to this conundrum.

One of the solutions under review is to increase the government’s contribution to the NPS from 14% to 20%, with employees continuing to contribute 10% of their salary to their pension fund. While this would certainly result in higher returns when the employees retire or prematurely exit from the scheme, it is unlikely to satisfy heightened expectations, unless the returns under the revised NPS match the guaranteed returns under the OPS. Such an outcome seems virtually impossible.   

There is also no certainty that other states, especially those which are imminently facing elections will not revert to the OPS, as this decision squarely falls squarely within their executive domain. It will also be challenging for sundry political parties in these states to convince government employees- who form a significant proportion of the voting population- that while some states had no difficulty in restoring the OPS, it was fiscally not possible for them to follow suit.

What complicates the matter further is that the states which had recently restored OPS, are unlikely to make another U-turn and re-introduce even the improved version of the NPS, if recommended by the committee and implemented by the central government. The fact is that each state can plough its own furrow on this issue.

Besides, the Centre, under all this pressure, too cannot afford to outrightly refuse to restore OPS and convince its employees that higher contribution by the government under the NPS would yield comparable pensionary benefits. Having smelt financial blood, thanks to the fiscal imprudence of some states and the centre’s political vulnerability in next year’s general elections, it is safe to assume that government employees will not settle for anything short of OPS restoration.

Meanwhile, the armed forces, which never came under the NPS purview, remain unaffected, despite wider concerns about defence pensions also becoming increasingly unsustainable, having escalated from Rs 11,000 crore in 2003-04 to Rs 1,38,205 crore in 2023-24. Expectedly, this pension outlay could rise steeply in future due to the quinquennial increase in financial entitlement under the one-rank-one-pension scheme and decennial increase based on pay commission recommendations. 

This, in turn, can weakens the case for NPS in the current debate, for it cannot be argued that pension pay out to the civilian employees alone is fiscally unsustainable. In short, the committee has its work cut out for itself to stumble on a viable formula which meets universal acceptance and pull the centre out of the unenviable situation it seems to be in at the moment.

The irony in all this is that whatever the eventual outcome, it will have no effect whatsoever on the lives of some 80% of the labour force from the unorganised sector with little, or no, access to any kind of retirement benefits. Crores of them go about their daily job routines, defying the adage that deprivation is best tolerated when it is universal. 

The author is Former Financial Advisor (Acquisition), Ministry of Defence. 

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