With demand growing for the old pension system (OPS) with assured benefits, the Centre on Friday announced to set up a committee headed by finance secretary TV Somanathan to explore ways to salvage pension reforms, by treading a middle path between the fiscally-imprudent OPS and the reform-oriented National Pension System (NPS).
“Representations have been received that the NPS for government employees needs to be improved. I propose to set up a committee under the finance secretary to look into the issue of pensions and evolve an approach, which addresses the needs of employees, while maintaining fiscal prudence to protect common citizens,” finance minister Nirmala Sitharaman told the Lok Sabha. “The approach will be designed for adoption by both the central government and state governments.”
Later, Somanathan said the panel would try to address all stakeholders’ concerns and look into issues being raised by all quarters. The formation of the panel, its members, and terms of reference are yet to be notified.
Sources indicate that one possible option could be to offer guaranteed pension to government staff at around 50% of the last pay drawn under the NPS, by tweaking the existing scheme without burdening the exchequer too much. However, it may be graded: 40% pension for those with a service period of at least 20 years and around 50% for those completing at least 30 years.
While the OPS is based on the concept of defined benefits, the principle that underlies the NPS is defined contribution.
While ruling out reversing the pension reforms and going back to the fiscally-disastrous unfunded OPS, which entails 50% of the last pay drawn as pension from the budget to the pre-2004 staff, the Centre is conscious of the increasing resonance of demand for the OPS amid a spate of state/general elections in 2023-2024.
Many Opposition-ruled states — Rajasthan, Chhattisgarh, Jharkhand and Punjab — have announced a return to the OPS. Around 1.7 million employees of the BJP
Currently, under the NPS, 60% of the accumulated corpus from contributions during a person’s working years is allowed to be withdrawn at the time of retirement. Such withdrawal is also tax-free. The balance 40% is invested in annuities, which according to an estimate, could provide a pension equivalent of about 35% of the last pay drawn. However, it is not a guaranteed pension as returns are linked to markets.
Officials reckon that the NPS could be revised in such a way that at the time of retirement, an employee gets back her contribution of roughly 41.7% (built from a contribution of 10% of pay) as a lump sum amount.
An analysis showed that if the balance 58.3% corpus built from the Central/state government contribution (14%) is annualised, the pension in NPS could be around 50% of the last drawn salary. If actual returns work out to be less than the guaranteed amount, the gap could be bridged by the government concerned by contributing a little more to the NPS.