The committee appointed by the Centre last week under the chairmanship of Union finance secretary TV Somanathan has a tough job ahead. It has to suggest improvements in the New Pension System (NPS) to address the concerns of government employees while keeping fiscal prudence in mind. The job has been made tougher in view of intense politicking over the issue—a few poll-bound states have already started making noises about reversion to the old pension system, forgetting that the consequences will be financially disastrous. After Rajasthan, Chhattisgarh, Jharkhand and Punjab, Himachal Pradesh has announced its intention to opt for OPS.
This is despite a recent report by Reserve Bank of India that said by postponing the current expenses to the future, states risk the accumulation of unfunded pension liabilities in the coming years. Under the old pension scheme, employees get a defined pension. An employee is entitled for a 50% amount of the last drawn salary as pension. However, the pension amount is contributory under the NPS, which is in effect from 2004. That this was required is evident from the fact that over the last three decades, pension liabilities for the Centre and states have jumped manifold. In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and the outgo for all states put together was Rs 3,131 crore. By 2020-21, the Centre’s bill had jumped 58 times to Rs 1.91 trillion; for states, it had shot up 125 times to Rs 3.86 trillion.
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There is no doubt that the NPS is superior to the old pension scheme both for employees and for the fisc. It has proved a good wealth creator for its subscribers with annual returns of 9-12% over a decade. This is reflected in the latest numbers which show that contributions to the NPS rose by 22.6% on year to Rs 6.57 trillion as on March 31, 2023, while assets under management (AUM) rose by 22% to Rs 8.98 trillion. Corporate sector subscribers grew by 20% on year in FY23 to 1.69 million while individual enrollments (other than the government-supported Atal Pension Yojana) grew by 29% on year to 2.96 million.
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However, the committee would do well to look at whether the NPS can be made more attractive by a few tweaks in its design. In this context, the model proposed by the Andhra Pradesh government is worth examining. Called the Guaranteed Pension Scheme, state government employees can get a guaranteed pension of 33% of their last drawn salary if they contribute 10% of their basic salary every month, which is matched by a 10% contribution by the state government. They can get a guaranteed pension of 40% of their last drawn salary, if they are willing to contribute a higher 14% of their salary every month, which will be matched by a 14% government contribution. Also, many employees have rightly suggested doing away with the annuity rule: The provision that employees have to use 40% of maturity proceeds to buy an approved annuity plan doesn’t make much sense. After all, annuity plans lock in hefty premiums for a lifetime and offer poor returns of 5-5.5% which are also taxable. Yet another irritant is the rather complicated onboarding and transaction process of NPS. The committee should look at whether the availability can go beyond the traditional banking and broker channels.