Even though some Opposition-ruled states have announced plans to restore the old pension scheme (OPS) ahead of the respective assembly elections, the Pension Fund Regulatory and Development Authority (PFRDA) has rejected their demand for custody of the accumulated corpus under the National Pension System (NPS), saying the funds belong to employees, state government sources told FE.
The NPS corpus is overseen by the pension regulator and managed by various fund managers. Also, withdrawals from NPS by state government employees won’t be possible fully, according to PFRDA regulations that specify that though a subscriber can prematurely withdraw from NPS after five years of enrollment, she can only withdraw 20% of the corpus. The balance 80% has to be invested in an annuity scheme. Upon superannuation, 60% of the accumulated corpus from contributions during a person’s working years is allowed to be withdrawn at the time of retirement. Such a withdrawal is also tax-free. The balance 40% is invested in annuities to generate a monthly pension.
Ahead of the upcoming Gujarat and Himachal Pradesh Assembly elections by December, some political parties have announced that they will implement the OPS if they are voted to power.
However, there is scepticism among officials, that the states that are announcing they will revert to the OPS may not actually do so, given the precarious state of their finances, even though some of them have stopped fresh contributions to NPS (employees, 10% of their pay and 10-14% by state governments).
Tamil Nadu, where the ruling DMK had announced ahead of Assembly polls in early 2021 that it would restore the OPS, has not done so. Tamil Nadu manages its NPS corpus independently and indications are that it may join the NPS.
So far four states — Chhattisgarh, Rajasthan, Jharkhand and Punjab — have announced their plan to revert to the OPS (defined benefits scheme) from the NPS (defined contribution scheme). 15th Finance Commission chairman NK Singh had said the OPS was regressive.
“The pension and salary revenues of Rajasthan amount to 56% of its tax and non-tax revenues. Thus, the 6% of the population which is made up of civil servants stands to benefit largely from this 56% of the state’s revenues,” Singh had said.
Debt-GSDP of Punjab was estimated to be the highest at 53.3% of GSDP among states, followed by Rajasthan at 39.5%. According to a recent RBI report, if contingent liabilities are fully invoked, Rajashtan will see an additional 8.6% debt-GSDP, followed by Punjab (5.3%).
Incidentally, Rajashthan was one of the states whose request to the PFRDA to withdraw the NPS corpus was rejected by the PFRDA, people in the know said.
To contain unsustainable defined benefit pension scheme (which was to be paid from current government revenues in a year as no corpus was built for such purpose), the Centre rolled out the NPS for all its new employees from January 1, 2004.
Most big states made it mandatory for their employees in 2004 or 2005, with Rajasthan joining on January 1, 2004, and Chhattisgarh on November 1, 2004. Rajasthan has enrolled about 568,000 employees with assets under management (AUM) of Rs 40,000 crore, while Chhatisgarh has 319,000 employees with AUM of Rs 17,500 crore as on March 2022.
According to a report by Old Age Social and Income Security Project, the implicit pension debt (IPD) of the country — central (civil) employees, state government employees and the funding gap of the Employees’ Pension Scheme, 1995 — worked out to be 64.51% of GDP in nominal terms in 2004. Of course, the actual IPD or the net present value of these future promises would be much higher if defence pension liability was included.